- US stocks may struggle to achieve the same gains that they enjoyed in the past decade.
- JPMorgan Asset Management recently released a report about profitable alternative investments.
- JPMAM strategist David Lebovitz shared six asset classes to look at outside of US indexes and bonds.
The years of easy gains for US stocks are likely over, so investors must get creative to score the sizable returns they’ve gotten used to, experts at JPMorgan Asset Management (JPMAM) say.
The S&P 500 and Nasdaq are falling back to earth in 2022 after rising at least 16% and 21% per year, respectively, from 2019 to 2021. Concerns about inflation, tightening monetary policy, and conflict in Ukraine have sent the two indexes down 6% and 10.7%, respectively, for the year. And while each index is still up from 12 months ago, their returns have either been cut in half or wiped away altogether after adjusting for inflation.
But some analysts think that the worst is yet to come.
In recent months, both Bank of America’s Jill Carey Hall and Stifel’s Barry Bannister have warned that another “lost decade” for US stocks may be here. Carey Hall told Insider in November that US large caps in particular will see minimal returns, but Bannister didn’t make that distinction. Instead, he told Insider last week that he expects US stocks to return 0% through 2031.
JPMAM global market strategist David Lebovitz isn’t ready to go that far, but he does see an increasingly challenging environment for US stock indexes and bonds in the next decade. That’s why he and his colleagues at JPMAM compiled a guide to alternative investments in Q1 2022.
“Expected returns from equities and fixed income from publicly traded stocks and bonds are going to remain under pressure going forward over the course of the next 10 to 15 years,” Lebovitz told Insider in a recent interview.
Lebovitz continued: “We think that equity returns will be positive. But we don’t necessarily think that the average return — call it 9% a year — over the past couple of decades is necessarily in the cards going forward.”
Steadily rising interest rates will complicate the investing landscape, Lebovitz said. When rates are low and the cost of money is cheap, investors are more willing to take chances on risky investments.
But investors shouldn’t simply store their savings under a mattress now that rates are rising. There are other ways to achieve the returns and steady payouts that stocks and bonds have historically offered but may no longer be able to deliver, Lebovitz said.
“Investors need alternatives going forward because the traditional opportunity set is not going to be sufficient for allowing them or for helping them to accomplish their long-term financial goals,” Lebovitz said, adding: “We’re big believers that there is an opportunity in alternative assets.”
Think outside the public markets: 6 top alternative investments
Most individual investors have been taught that a two-pronged approach is the smartest way to invest. To baby boomers, that’s likely the traditional 60-40 stock-bond portfolio. Millennials and Gen Zers, on the other hand, may split their money between stocks and cryptocurrencies.
But JPMAM strategists caution that the 60-40 paradigm is outdated and overly simplistic.
Betting on just two asset classes is risky, especially given the concerns facing stocks, bonds, and cryptos. Stock indexes are trading at historically high valuations and could slide further, bonds tend to provide either “protection without income” or “income without protection,” in Lebovitz’s words, and cryptos don’t have a long track record and are highly volatile.
These concerns are why institutional investors have branched out from public markets for years, Lebovitz said. Diversifying away from stocks and bonds and into alternative assets strengthens a portfolio by providing what Lebovitz called “uncorrelated sources of income.”
And there’s no reason why retail investors can’t follow in the footsteps of their institutional peers.
Lebovitz shared six alternative investments with Insider to combat what he said will be “insufficient” returns from stock indexes and bonds in the next decade: real estate, commodities, infrastructure & transport, private credit, private equity, and hedge funds.
Below is Lebovitz’s thesis for each, along with ways to play the trend that were compiled by Insider. The JPMAM strategist said he can only speak to ideas, not products, but he encourages investors to search for a wide variety of opportunities across the spectrum for each alternative investment. Along with each is a chart from JPMAM’s report that shows a relevant trend for the asset class.