Cash vs. Traditional Portfolios: A Risky Proposition

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Investors who have poured their money into cash investments may be missing out on significant gains in the stock and bond markets, warns J.P. Morgan Asset Management. David Kelly, the Chief Global Market Strategist at J.P. Morgan Asset Management, cautions that “cash is a trap” and urges investors to adopt a long-term perspective.

According to J.P. Morgan’s 2024 Long-Term Capital Market Assumptions report, a traditional portfolio consisting of 60% stocks and 40% bonds could generate an annual return of 7% over the next 10-15 years. In contrast, cash investments have been attracting investors due to Treasury bills offering yields exceeding 5%. However, Monica Issar, Global Head of Multi-Asset and Portfolio Solutions at J.P. Morgan Global Wealth Management, reminds us that “cash doesn’t rally.”

Although the equity market experienced losses in the third quarter due to soaring Treasury yields, U.S. stocks have rebounded and are currently up around 13% in 2023. Meanwhile, long-term bonds have suffered from the spike in yields, with the iShares 20+ Year Treasury Bond ETF (TLT) recording a 12.2% loss this year.

On Tuesday, Ten-year Treasury rates reached 4.846%, the highest level since July 2007, while the yield on 30-year Treasurys rose to 4.951%, reaching its highest rate since August 2007.

While cash-like Treasury bills have performed relatively well, with the iShares 0-3 Month Treasury Bond ETF (SGOV) showing a total return of approximately 4% this year, they still pale in comparison to the potential gains in stock and bond investments.

It is essential for investors to consider the long-term benefits of diversifying their portfolios beyond cash holdings. By embracing a balanced approach with stocks and bonds, investors can position themselves to capitalize on future market rallies and secure more substantial returns in the years to come.

Read: Bonds look ‘cheap’ to top JPMorgan strategist getting defensive amid Israel-Hamas war

For instance, as of Wednesday morning, three-month Treasury bills were yielding 5.5% in New York, according to FactSet data.

Remember, while cash may provide a sense of comfort, it carries the risk of missing out on the potential growth offered by stocks and bonds. Instead of lingering on the sidelines, investors should consider revisiting their investment strategies with a long-term perspective in mind.

Diversifying Assets: A Long-Term Strategy

When it comes to diversifying assets under a long-term strategy, Kelly emphasizes the importance of “owning the stuff you hate.” This encouragement to explore new opportunities is key to successful asset management.

Exploring Equities Beyond the U.S.

JPMorgan’s report asserts that even if U.S. margins remain strong, there are attractive returns available in other developed markets. The dominant market position enjoyed by U.S. firms in the 2010s now faces competition from Europe and Japan, creating new possibilities for investors.

Moderated Outlook for Emerging-Market Stocks

JPMorgan acknowledges that the outlook for emerging-market stocks has slightly moderated. Investors have become increasingly skeptical about China’s future and are hesitant to pay high multiples for emerging-market stocks.

International Stocks Rising

The iShares MSCI ACWI ex U.S. ETF ACWX, which excludes U.S. stocks and tracks an index of international stocks in developed and emerging markets, has seen a 3.5% increase this year after a significant decline of 18.2% last year according to FactSet data. This highlights the resilience and potential of international markets.

Recovering from a Challenging Year

In the U.S., the S&P 500 is slowly recovering from a 19.4% drop last year, which represented its worst annual performance since the global financial crisis of 2008. While the index has demonstrated positive growth this year, recent data from FactSet shows a 2% slump over the past month, signaling some volatility.

Historical Perspective on Market Downturns

The report draws attention to rare instances when both stocks and bonds sold off in the past half-century: in 1969 due to inflation doubling in two years, in 1974 amidst an energy crisis with inflation reaching a record 12%, and in 2022 when the longest period of disinflation in modern history came to an end. These occurrences provide valuable insights into the market’s behavior.

The 60/40 Portfolio Balancing Act

According to J.P. Morgan Asset Management, the 60/40 portfolio remains a strong foundation for investors looking to venture beyond cash and seize new opportunities. This balanced approach ensures a diversified investment strategy.

Market Update

On Wednesday morning, the U.S. stock market experienced some downward movement as investors assessed third-quarter earnings results, including those from Morgan Stanley. Additionally, long-term Treasury yields showed a slight upward trend. The Dow Jones Industrial Average was down 0.5%, while the S&P 500 fell 0.7%, and the Nasdaq Composite dropped 0.9% according to FactSet data, at last check.

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