A JPMorgan strategist shares the best ways to invest for the long-term
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- These portfolios should be kept simple, and focus on higher-risk assets to get the best return.
- Ignore thematic and alternative investing, and be on the lookout for financial "regime" shifts.
A JPMorgan analyst has some advice for how to invest for a longer time horizon.
As with any investment, the goal of a long-term strategy should be to earn the best return over risk, but to see a positive outcome, new investors will need to have a markedly different mind set compared to investing for the short-term, JPMorgan's Jan Loeys wrote on Tuesday.
"I have learned that longer-term portfolio risk, which is the odds and magnitude of being wrong on your return expectations, is different from and much lower than short-term price volatility," Loeys wrote. "This is because knowing the price you pay for an asset class gives you a clear advantage to gauge its future long-term return and thus lowers the risk of disappointment on the eventual value of your portfolio."
Here are Loeys' key pieces of advice for those putting money to work on a lengthy timeline.
Keep it simple
When building a long-term portfolio, investors should limit themselves to two diversified funds, focusing on those with easy to foresee risk, low fees, and high liquidity.
For instance, a global equity fund and a broad credit fund hedged in the investor's home currency should provide the best starting strategy when investing for old age, Loeys said. That's as long as investors limit in-and-out trading and add a few strategic overweights.
How much risk to take?
The big risk of long-term investing is putting money into a low-return asset. Therefore, investors should be taking more risk in return for a bigger return.
Younger investors should focus more on higher-yielding assets such as equities, and generally stay out of safer, lower-yielding assets. Short-term volatility should not play a role in investing decisions, and investors should have the patience to weather and price declines.
"If you have a lot of money, are not levered, and can absorb significant falls in your savings/wealth, then you should be primarily in equities and not bother too much with bonds. That is, go for 80/20, or 90/10," Loeys wrote.
The opposite is true for older investors, whose investment horizon has shrunk.
Regime change
Macroeconomic fundamentals may seem to be important drivers of where assets are headed in the long-term, but any correlation they may have with prices tends to be limited to the short-term.
That said, investors should be open to big, global transitions that may make an impact on their investments. For the future, this may include de-globalization, de-dollarization, and structurally higher interest rates.
If such a "regime change" appears to be coming, investors should act on it quickly, before it becomes obvious and priced in.
What to ignore
Avoid thematic investing, such as investing based on trends in things like digitalization, fintech, and emerging market consumers. These tend to badly underperform the broader market.
"Better to start on a theme that is not yet consensus and can only be judged a serious risk rather than a done deal," Loeys wrote.
Alternatives, such as loans on businesses and infrastructure, may also sound appealing, but they are not that different from typical bonds and equities.