UBS House View Monthly

The UBS House View Monthly presents the latest version of the UBS Investment House View, assessing the impact of current economic trends on asset classes and portfolio allocation.

Volatility is back. Are you prepared?

Former CIA Director and commander of US forces in Afghanistan, David Petraeus, recently spoke with some of our clients about the strategic importance of “getting the big things right.” He made a powerful point. But while nobody would disagree with his idea, implementing it is far from straightforward. First, you have to know what the big things are. Then you also have to know which ones you stand a chance of getting right before planning your work and working your plan.

After many years of a bull market, many clients are asking about timing their exit from equities. Some have already done so. While I agree that market timing is a “big thing,” I always question if, realistically, these clients are focusing on the most effective way to protect and grow their wealth.

What if you had a crystal ball and knew with 100% certainty that the bull market would end in the next 12 months? Would you still be skilled enough to achieve higher returns than a buy-and-hold investor? Markets are volatile around turning points, so the risk of a costly mistake by exiting them too early is high. Since 1928, average returns in the final year of a bull market have been 22%. Average annualized drawdowns in a bear market have been 30%. And the average rally in the first year of a bull market has been 40%. Since 1936, an investor with relatively good market timing, able to consistently sell 10 months before a market peak and buy back 10 months after a trough, would still have ended up worse off than the investor who remained invested throughout the period, even before taxes and trading costs.

Over the course of a lifetime of financial cycles, I don’t think that market timing is the “big thing” that investors should attempt, given the risks of getting it wrong. Staying invested pays off in the long term. Furthermore, we believe that global economic expansion, strong corporate profit growth, and reasonable valuations should support equities over the shorter term. But, as I discuss in greater detail in this letter, there are a number of “big things” that investors can implement right now, which stand a good chance of helping prepare portfolios for a more volatile investment environment.

Mark Haefele
Global Chief Investment Officer Wealth Management

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