Investing High liquidity reduces returns

Anyone who wants to achieve positive returns on assets in 2021 should think about investing, as interest rates will barely change.

byDaniel Kalt 25 Jan 2021
Image: UBS

Stock markets anticipate economic trends. For example, the 30 to 40 percent plunge in the stock market in the spring of 2020 was an early sign of the global economic downturn. In contrast, at the end of 2020, the announcements and approvals of various vaccines, government support for the economy and the outcome of the U.S. elections were received by the stock market as clear messages of more stable conditions to come. UBS Investment Research expects the economic and stock market recovery to continue in 2021, and to do so fairly simultaneously around the world.

The speed of recovery and whether there will be any short-term slumps will depend on how well vaccinations and other measures succeed in combating the pandemic on the one hand, and on the development of other risks on the other. Uncertainty about the effects of virus mutation or the trade dispute between the USA and China could also lead to market fluctuations in the short term. Significant inflation remains fairly unlikely in 2021.

Historic low interest rates remain stable

In all probability, key interest rates in Europe will remain at their historic low in 2021 – i.e. in negative territory. This is what the latest announcements by the major central banks suggest: they want to keep interest rates low until the economy recovers and full employment is achieved again. In fact, the US Federal Reserve has clearly stated that it will not adjust interest rates until inflation has risen well above 2 percent.

If clients have invested a large part of their assets in cash and savings accounts, and are therefore not earning any interest, any inflation that may arise will hit savings even harder. Assuming that inflation is 2 percent higher than the savings interest rate on average over the longer term, the saver’s assets will lose around one fifth of their purchasing power over a period of ten years. This contrasts with the average dividend yield on the Swiss stock market, which for many years has remained fairly stable at 3 percent per year.

Anyone holding a high liquidity cushion in the form of cash and savings accounts which bear virtually no interest in 2021 and the subsequent years will pay more and more via inflation and possibly via negative interest rates. The optimal level of liquidity as a proportion of total assets also depends on the sources of income and other factors. However, it is now more worthwhile than ever to rethink your personal liquidity strategy and to invest any surplus liquidity profitably.

Your personal liquidity strategy

Do you want to rethink your liquidity strategy and calculate your potential returns after converting liquidity into investments? Our cash calculator will help you.

Investment strategy comes before investment timing

Anyone who invested in equities in the spring of 2020 will no doubt have been pleased by the resulting price gains. And anyone who only thought about it, but didn’t actually go through with it, may be quite annoyed. But you’re always smarter in hindsight. There are very few savvy investors with a sense of good timing. And it’s impossible to guess the absolutely perfect time to invest.

UBS’s recommendation is therefore to establish a clear investment strategy, including a risk profile and time horizon. The latter is crucial for determining your choice of investments, because if some of your assets are not needed for 10, 20 or 30 years, equities usually generate the best returns. Once you have decided on the equity component in your strategy, the portfolio can be put together step by step. And don’t forget to regularly rebalance your investments, i.e. regularly reorganize your portfolio according to the long-term strategy you have defined.

The timing is always right if you stagger your investments

The question of whether there is a right time to invest is closely related to the question of the wrong time to invest. This is a particularly common question among newcomers to the system. The strategic approach is also better suited to answering it than an emotional one. According to the average cost effect, anyone who invests regularly, for example by setting aside monthly amounts, won’t miss the right moment to invest and won’t have to worry about timing if they have a sufficiently long investment horizon. This means that the timing for staggered investments is actually always right, even in 2021.

If you want to get started, the easiest way to do so is with an investment fund account. This allows you to select the investment fund or funds that best fit your risk profile and investment horizon – most investors obtain advice before making a decision. The investment funds are actively managed by a portfolio manager from UBS, who constantly optimizes the fund. Ideally, an investment fund account should be combined with a standing order, because this way you benefit both from the above-mentioned average cost effect and, from a monthly investment amount of 50 francs, from a lower administration price.

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Seizing market opportunities in 2021

For investors who invest a substantial portion of their assets in equities and have a long investment horizon, the turn of the year brings new market opportunities. There is great potential for efficiency gains and innovative solutions in the FinTech, healthcare technology, greentech, 5G and sustainable investment sectors. Equities of companies operating in these sectors also offer better prospects for above-average performance than U.S. Mega Caps, i.e. stock corporations with large market capitalizations, such as those in the technology sector. The above-mentioned investment themes are therefore recommended as additions to a portfolio – of course always assuming that you have a sufficiently long time horizon and sufficiently broad diversification.

Sustainability is also a topic that will gain ground around the world again as a result of the change of government in the USA: it is to be expected that the USA will once again give greater weighting to its environmental policy and join the Europeans, Japanese and Chinese, who have committed to establishing a CO2-neutral economy by the middle of this century. This makes sustainability an even more exciting topic for investors than before that should offer good potential returns.