Building resilient portfolios through diversification

Equities

U.S. equities have contributed to much of the overall market performance since the global financial crisis in 2008–2009. The low interest rate environment, rising stock valuations, and high earnings in the U.S. allowed a broadly diversified U.S. stock portfolio to return almost twice as much as a comparable international portfolio over the past decade.

U.S. equities continue to be a strong performer, but the drivers of that outperformance over the last decade have likely sown the seeds for more muted performance over the coming one. With stretched valuations and a slowdown in earnings growth, we’re forecasting annualized returns of 3.7%–5.7% in the U.S. equity market over the next decade. Investors should be cautious with U.S. equities, considering the expensive valuations and lower expected growth. By comparison, we anticipate returns of 6.9%–8.9% annualized over the next decade for international equities because of the multidimensional growth opportunities given lower volatility, cheaper valuations, and higher potential for growth.

Cash

Investors should think of cash as the tool to manage liquidity risk—it can be a strategic allocation for day-to-day needs, for emergency savings, or for those with a very low risk tolerance. Cash should not be considered a substitute for stocks or bonds in any market environment, even in the current high interest rate environment, where investors have been able to get a real return on cash.

On the face of it, shifting your portfolio to cash seems like a good idea in this environment: There is no risk in cash and you’re getting the same return you might from bonds—for now. But cash is limited in its ability to keep up with inflation and investing in cash means forgoing risk premium. Investors must also consider the durability of the yield, which is anchored to monetary policy. If central banks cut interest rates, the yield on cash decreases, and you’ll miss out on the income you would have earned if you had maintained your target bond allocation.

The current economic and market environment is primed to tempt investors to consider forgoing their strategy in order to chase returns. But across and within asset classes, we can’t account for everything, such as how an AI-led productivity boom or geopolitical events could affect returns. Market leadership is not guaranteed, and chasing returns can leave investors exposed to unnecessary volatility and risk. Our research shows that a balanced mix of diversified assets, combined with a disciplined, cost-conscious approach to investing, can help improve investors’ chances of achieving their long-term investment goals, as long as they stay the course.