Key Fundamentals to Consider When Building Your Investment Portfolio

Sharmin Mossavar-Rahmani, head of the Investment Strategy Group & chief investment officer of Wealth Management, Goldman Sachs

Amal Alibair, head of U.S. Institutional Client Solutions, Goldman Sachs

Whether you are a seasoned investor or thinking about investing for the first time, there are multiple options to consider. What do you want to invest in? Equities, fixed income or commodities? Which regions? Are you considering developed or emerging markets? Seeking clarity on your investment options and asking fundamental questions can set you up for success.

What is your time horizon and risk tolerance? How should you think about market volatility?

Sharmin Mossavar-Rahmani and Amal Alibair emphasized the importance of aligning your time horizon with your risk tolerance and being prepared to ride out market troughs.

Consider your own appetite for risk by being honest with yourself and thinking about your behavioral tendencies. Interconnected factors such as your personal comfort levels with market fluctuations, your investment goals and your age play a role in determining this.

Market ups and downs are inevitable, but a long-term approach can help you focus on the bigger picture.

“When people panic, they sell and may incur a loss they can never get back,” Amal said. “Having a long-term investment horizon could help you emerge from those moments of volatility or crises in better shape.”

Sharmin pointed out that U.S. equities have historically followed an upward trajectory. This is because they are driven by earnings in the U.S. economy, which have been upward-trending except for recessions.

Keep in mind that the market’s subsequent returns typically outperform long-term averages after a period of large declines. In the post-WWII period, the total return of a 50/50 stock/bond portfolio was 10.6% in the 12 months following a negative return, compared to the average annual return of 8.9%. See more details on this in our Investment Strategy Group’s Outlook report, Caution: Heavy Fog.

Ultimately, the markets turn around and portfolios recover. It’s prudent to take a longer-term perspective and be prepared to ride out periods of market downturns and volatility. Sharmin added it’s important to make sure to have enough assets, whether it’s cash or bonds, to have the ability to withstand volatility.

How do you distinguish investment fads from trends?

It’s always helpful to follow investment trends and forgo the fads. But what’s the difference between trends and fads?

Fads are usually surrounded by hype and headlines, and do not necessarily have a proven track record. Investment trends refer to broader, longer-term shifts in the investment landscape driven by fundamental changes in the economy, markets or societal factors, and are typically supported by careful analysis and research.

Fear of missing out can often drive people to jump on the latest investment bandwagon. Before making drastic moves or leaping into the next buzzy investment opportunity, take a step back and ask yourself if the underlying asset adds value in the real world. If you aren’t sure, talk to your advisor about it.

Typically, assets that add value are based on fundamentals and meet a need by offering a real-world solution to an existing problem. These assets are scalable and can slowly appreciate over time.

When it comes to investing in something with substance, Sharmin and the Investment Strategy Group have long-standing conviction in the investment theme of ‘U.S. preeminence’ and maintain a strategic overweight to U.S. equities, while meaningfully underweighting emerging market assets. Since March 9, 2009, the trough of the global financial crisis, U.S. equities have outperformed other regions with an annualized return of 16% compared to 10% and 8% for euro area and emerging market equities, respectively*.

Every asset class will perform a different role in your portfolio. Talk to your private wealth advisor about an approach that aligns with you and your values.

*Data as of May 19, 2023. Source: Investment Strategy Group, ICI, Bloomberg, EPFR.