Investment Strategy
5 ways to build a resilient portfolio
After a stellar year for most portfolios in 2024, we are focused on building on strength in 2025. While we think markets will move higher over the next year, we believe a renewed focus on portfolio resilience can help preserve your household’s wealth and manage macroeconomic volatility. The focus can be part of an overall “wealth check,” ensuring that asset allocation still aligns to your goals and risk tolerance, and is as tax-efficient as possible.
Here are five approaches that may bolster portfolio resilience:
1. Rebalance
You may not appreciate how equity market gains over the past few years have skewed your portfolio’s stock-bond balance. For example, if you were allocated to a 60/40 stock-bond portfolio in early 2020 and didn’t rebalance, the portfolio would have drifted to an 80/20 allocation. In other words, you may be in a position to take some gains out of your equity portfolio.
A 60/40 portfolio and an 80/20 portfolio have very different risk characteristics and long-term return expectations. From a macroeconomic perspective, we think risks today are broadly balanced between recession and inflation. Portfolios should be attuned to both risks. Within asset classes, rebalancing is also essential to maintain the proper balance between sectors, factors, styles and regions.
2. Manage concentrated positions
This is crucial for portfolio resilience. Our research indicates that nearly half of all publicly traded companies experience a catastrophic loss in value (a 70% peak-to-trough decline that is not recovered), and nearly two-thirds underperform the index. Additionally, holding a concentrated cash position can hinder achieving your long-term goals and even erode purchasing power.
Several tax-efficient strategies can help manage concentrated positions, for example, gifting long-term appreciated positions to charity, or using techniques such as variable prepaid forwards or exchange funds to monetize and diversify.
3. Rely on income
Increasing the share of total return driven by income can enhance your portfolio’s resilience. As yields decline on cash and Treasury bills, many investors will seek new income sources. If history is any guide, between USD 600 billion and USD 2.2 trillion of money market fund assets will move to find new homes. Within fixed income, consider allocating to various market subsectors (including municipal bonds, asset-backed securities, high yield credit and preferred equities) can be a prudent way to diversify income sources.
Quality dividend-paying equities trade at a discount relative to the market and tend to exhibit only 80% of equity volatility. Investing in/allocating to direct lending, real estate debt, equity and infrastructure offer additional ways to enhance income in exchange for liquidity.
Yield will become more valuable as policy rates fall
Pre-tax yields across asset classes, %
Sources: BAML, Bloomberg Finance L.P., Clarkson, Cliffwater, Drewry Maritime Consultants, Federal Reserve, FTSE, MSCI, NCREIF, FactSet, Wells Fargo, J.P. Morgan Asset Management. Data as of August 31, 2024.
4. Defend against inflation
Core fixed income remains a critical diversifier in investment portfolios. However, adding other types of assets that could mitigate inflation threats can potentially enhance portfolio resilience. Traditionally diversified portfolios have faced challenges over the last four years, as stocks and bonds often moved in the same direction, showing positive correlation. We see a strong case for owning assets that provide diversification both to equities and fixed income.
Historically, real estate, commodities and infrastructure have had low correlations to stocks and bonds. Additionally, diversified hedge fund strategies have proven their worth in the post-COVID period, with composite hedge funds outperforming core fixed income by 20 percentage points cumulatively since the end of 2020. Looking ahead, we anticipate hedge funds can potentially capture over 80% of the upside of a traditional 60/40 portfolio while experiencing approximately half the volatility.
Reduced diversification benefits to owning fixed income
Source: Bloomberg Finance L.P. Data as of November 27, 2024.
5. Reconfigure returns
We believe investors could consider strategies that reconfigure returns to embed downside protection while maintaining upside exposure in 2025. Consider using tools such as options to alter the risk and return profile of underlying assets. This strategy can potentially offer downside protection while preserving the possibility of some upside gains. Options can safeguard capital, provide niche exposure and generate income. Similarly, active exchange-traded funds (ETFs) can employ option strategies to generate income from an underlying asset class, or deliver reduced volatility compared to outright equity exposure. Structured notes can achieve similar outcomes and can be customized with greater individual specificity.
Historically, equity-linked structured notes have delivered two-thirds of the return of broad equity markets while generating positive returns in down equity markets. They have also outperformed preferred equity and high yield bonds in both up and down markets.
Bonus: Consider joining the gold rush
Gold can play a significant role in building resilient portfolios. We expect gold prices to find continued support from central banks, particularly in emerging markets. The People’s Bank of China still holds only 5% of its reserves in gold, compared with the European Central Bank at 60% and the Federal Reserve at 73%. Critically, gold—the original safe-haven asset—can serve as an attractive hedge against both geopolitical risk and uncertainty around sovereign debt and deficits.
An opportune time for a wealth check
We are optimistic about market returns in 2025. As you think through your investing decisions, the past year’s gains have put you in a position of strength.
How can you best harness that strength? When you make, or reassess your wealth plan, understand the choices you now have. Take into account the relevant complexities and tradeoffs. Consider how your goals might have changed. Aim to deepen your portfolio’s resilience and rebalance your asset base where needed. Whatever markets have in store, a comprehensive wealth plan can give you greater confidence that your investment decisions align with your intentions.
We can help
Your J.P. Morgan team can help you through a collaborative process to organize your wealth plan and give you the information you need whatever the future may hold.
To preserve the past year’s market gains—and prepare for unexpected shocks in 2025—here’s how you can consider building a resilient portfolio.
Jacob Manoukian
U.S. Head of Investment Strategy
Christopher Kelly, CFP®
U.S. Head of Wealth Strategy
Published Dec 16, 2024
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