How to build a smart strategy for the long termContributor Michael Feser
Volatile markets can be distracting; the latest statistical release, report on China or reading of the Federal Reserve tea leaves can cause the markets to fluctuate—and send investors scurrying for cover or to seize perceived opportunity. Staying on top of market developments is important, but having a long-term, cohesive view of the global economy and markets is essential for reaching ultimate investment objectives. A comprehensive 10-to-15-year perspective can help investors build resilient portfolios and remain focused on their long-term goals, whether that is a secure retirement, a child’s education, a new home or other targeted outcomes.
For two decades, investors and their advisors have relied on J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs) when defining and analyzing strategic portfolio allocations and to gain a realistic view of what the markets are likely to deliver over the long term.
A globally divergent macro outlook
The backdrop for this year’s Assumptions is an environment characterized by steady inflation, subdued long-term growth and diverging regional dynamics. Long-term growth in developed markets will be tempered by the adverse impact of an aging population while short-term growth prospects in emerging markets will be dampened by the need for financial deleveraging, slow developed market growth and more modest commodity prices. Monetary policies are also expected to diverge as the Federal Reserve’s policy-setting committee begins to raise interest rates while Japanese and euro area policymakers are likely to ease even further before considering steps toward interest normalization.
A cohesive multi-asset class perspective
Those foundational assumptions, along with the best thinking of our global network of asset class specialists, are carried through a building block approach we use to formulate our estimates at the asset class level—now encompassing returns, volatilities and correlations for over 50 asset classes.
Traditional market returns over the next 10 to 15 years will remain generally below historical long-term averages. Exhibits 1A-1B illustrate this point for U.S. markets. Investors should ensure that they are saving enough to reach their long-term goals, given realistic return expectations.
OVERALL, TRADITIONAL MARKET EXPECTED RETURNS ARE NOT INSPIRATIONAL, RELATIVE TO THE PAST.
Although the U.S. business cycle is in its sixth year of expansion, many individual investors are still reluctant to invest in the stock market.