Building Optimized Portfolios Using J.P. Morgan’s 2020 Forecasts

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Effective investment strategies rely on coherent forecasts of long-term investment expectations. Choosing not to make a forecast is still a forecast. J.P. Morgan annually publishes long-term capital market assumptions that are useful in building optimized portfolios. Using its 2020 edition, here are a selection of optimal portfolios that can be used by investors of different risk affinities.

In developing a long-range investment strategy, investors conduct strategic asset allocation (SAA) in pursuit of the portfolio that optimally balances risk and return. SAA relies on coherent forecasts (i.e., capital market assumptions) of long-term investment returns, variability and correlation. Such forecasts are usually presented in a standard mean-variance framework:

  • Expected return – Average annual return over the long-range horizon
  • Volatility – The standard deviation of annual returns
  • Correlation – How closely associated returns of various investments are

Over the years, investors have come to rely on J.P. Morgan’s long-term capital market assumptions (LTCMA) to inform their strategic asset allocation work, build optimal portfolios and establish coherent forecasts for risk and return over a 10- to 15-year time frame. J.P. Morgan’s team of more than 50 economists and strategists recalibrates its forecasts annually to incorporate new information presented by markets, policymakers and the economy itself.

For 2020, the J.P. Morgan forecasts considered the trade-offs and complications of late-cycle investing, in particular the challenges to portfolio construction from zero or negative bond yields. Over the investment horizon, they see modest global growth and constrained returns in many asset classes, yet continue to see the prospect for “reasonable” investor returns. Investors should compare the optimized portfolios that I present here with their existing allocations (and with their own personal market outlook) and reconcile accordingly.