Back to school: 3 principles for your portfolio

School is back in session. The S&P 500 has added another +6% after an eventful summer, and is now up +17% year-to-date. Federal Reserve Chair Powell’s comments at the annual Jackson Hole Symposium ought to send us into a fall defined by lower interest rates.

Over the last year, markets have consistently reflected a brighter outlook ahead. Optimism around a “soft landing” for the U.S. economy is intact, inflation is no longer threatening, corporate earnings have been solid, and consumers still have gas in the tank. 

Nonetheless, the volatility we saw earlier this month reminds us that both risks and uncertainty remain. How low will interest rates have to go to support the labor market? Who will win the U.S. presidential election? Is it already “make or break” for AI investment? 

So after a summer of big swings and even bigger questions, it’s important for investors to remain focused on what matters. 

In the spirit of back to school, we want to step back and share three of our favorite investing principles to prepare portfolios for the start of the school year and beyond—so sharpen those pencils and crack open a fresh notebook.

3 principles to consider for your portfolio 

1. Know your toolkit: Each asset has a role to play. If you’re looking to get top marks this year, having the right school supplies is likely the first step. From the trusty pencil to the elegant protractor, to the almighty graphing calculator, each item has a purpose. Your portfolio is no different. Whether it’s cash, stocks, bonds or alternative investments, each asset has a distinct role to play—and they work together to achieve your long-term goals.

• Cash: Everyone needs cash. From filling up your car at the pump to your down payment on a house, cash is king. Many also think of cash as a safe haven or even a source of income when interest rates are high. But cash isn’t designed to beat inflation. This means it is equally important to think about how much you really need to hold, and how much, if any, can be redirected to other types of investments in order to achieve your goals.
• Bonds: Fixed income can provide stability. Because bonds offer you coupon payments over time, in addition to returning your initial loan amount, they help reduce uncertainty and volatility in your portfolio. The central risk when it comes to bonds is that the issuer does not pay you back. That said, defaults have been exceedingly rare for investment grade debt (for corporate bonds, default rates have been around 2.5% since the Great Financial Crisis, and less than 0.1% for municipal bonds). Fixed income should outperform both cash and inflation. It also tends to be less volatile than equities. 
• Stocks: When you own a stock, it means owning a stake in a company and its future performance—the good and the bad. Stockholders tend to benefit from earnings growth and the dividends companies pay to reward shareholders. Since 1991, earnings and dividends have contributed almost all of the 3,205% total return for the S&P 500. Changes in valuation drove less than 5% of the total return. Over time, equities are typically the engine of capital appreciation for portfolios, and they can provide the highest expected return. It just comes with higher volatility. 
• Alternatives and real assets: Hedge funds, private equity, private credit and other real assets, such as real estate and commodities, can provide unique exposures to portfolios and allow investors to tap into more targeted exposures. Doing so can potentially increase returns while reducing volatility—but it also might come with the cost of locking your money up for longer. 

Remember, while each has a distinct role to play, the ultimate key to notching consistent returns over the long haul is diversification across asset classes and, of course, staying invested.

2. Maintain a long-run mindset. Beyond having the right supplies, the next step to being teacher’s pet is having the right mindset. For investors, a long-run mindset, in particular, can help pave the way for success. 

Recent volatility is a prime example that over the short term, different assets can have a wide range of possible outcomes. That said, history tells us that over the long term, the possibilities can be much more certain. 

For example: While rolling 12-month stock returns have varied widely since 1950 (as high as +60% to as low as -41%), a blend of stocks and bonds has not suffered an annualized negative return over any five-year rolling period over the past 70 years. Remember, past performance doesn’t promise future results, but that’s a compelling track record.

So even though markets can always have a bad day, week, month or even year, history suggests investors are less likely to experience losses over longer periods—especially in a diversified portfolio. Above all, keep the time horizon of your goals in mind. A bucketing approach can be helpful to determine how and where to invest your money over various time periods.