This chart shows the bear market drawdown and time to full recovery for various asset allocation mixes (US large-cap stocks and intermediate US gov’t bonds). (UBS)

1. Tax-loss harvesting: If you haven't already signed up for an automated tax-loss harvesting program, this is a great time to enroll in one—or to manually harvest capital losses in your portfolio.


Over time, investments in your taxable accounts (your savings outside your IRA, 401(k), and other tax-advantaged accounts) will accumulate significant capital gains. When you transition from your working years into retirement and begin to tap into your portfolio growth to finance your spending, it will likely trigger capital gains taxes. Tax loss harvesting involves realizing capital losses today, which will help you defer capital gains taxes into the future—and possibly avoid them altogether.


As irrational as it may be (this is an example of “anchoring bias”), tax loss harvesting can help you to refocus your attention on the progress that you've made in your long-term investing journey, which is far more important than a short-term snapshot of recent (and temporary) losses. This change of perspective can help to instill additional confidence, and reinforce the fact that you’re continuing to make forward progress on meeting your goals, even when short-term performance has been challenging.


2. Rebalance your portfolio: You should also check to see if your asset allocation has drifted from your allocation target, and rebalance your portfolio accordingly so that it remains well-positioned for a potential inflection in markets. Asset allocation drift is pro-cyclical, which means that your portfolio tends to become more heavily weighted to recent winners, while asset classes that have underperformed recently make up a shrinking share of the portfolio.


For example, US large-cap growth stocks were huge losers last year, underperforming the S&P 500 by 11%. Without rebalancing, this would have lead to a smaller-than-intended portfolio allocation to this part of the market, reducing the portfolio's exposure to these stocks' 11% outperformance so far in 2023.


By contrast, a rebalancing strategy buys low and sells high, resulting in a more consistent level of portfolio risk. Consistency helps us set better risk and return expectations (key to maintaining patience in difficult markets) and is also key if we're trying to model portfolio returns in our financial planning analysis. Perhaps most importantly, if you sign up for a 60%-40% stock/bond portfolio, you might be dismayed when you experience the gain of a 40%-60% portfolio, or the loss of an 80%-20% portfolio.


For more CIO recommendations on how investors can continue to exercise caution before the end of the bear market, read the original blog A new bull? 8 June 2023.


Main contributor: Justin Waring


This content is a product of the UBS Chief Investment Office.