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How to invest and plan ahead
Developing a strategic plan that links goals with strategies can improve investors’ chance of success and help them stay focused on the bigger picture amid potential market turbulence.
Review your plan
Our Liquidity. Longevity. Legacy.* approach can help investors pursue wealth goals over different time frames:
- Liquidity: We recommend holding sufficient funds to cover the next three to five years’ worth of short-term expenses, liabilities, and spending plans in a Liquidity strategy mainly using cash and short-term bonds. This can offer peace of mind during market volatility, and a disciplined process of drawing on, and refilling, the strategy during bear markets can help generate performance over time.
- Longevity: Funds needed to meet financial goals throughout an investor’s life should be in a Longevity strategy. We believe this is best invested in a well-diversified global portfolio, with the objective of balancing long-term returns with diversification to reduce volatility and manage withdrawal risks.
- Legacy: Excess funds beyond Liquidity and Longevity needs can be in a Legacy strategy, focusing on goals beyond an investor’s lifetime, like bequests or philanthropy. With immediate needs covered, this strategy can focus on aiming to maximize growth through equity or illiquid strategies or impact investing. Effective legacy planning can help maximize wealth transfers, impact, and supports philanthropy.
Put cash to work and secure durable income
Cash’s long-term underperformance compared to other asset classes is a structural phenomenon. Stocks have beaten cash in 86% and 100% of all 10- and 20-year holding periods, respectively, and by more than 200x overall since 1945.
The imperative to put cash to work is likely to grow in 2025: With interest rates likely to fall further, investors will earn progressively lower returns and will need to find alternative, more durable sources of income.
Switching cash into high-quality fixed income can lock in yields and help dampen portfolio volatility.
Deploying excess cash into equity income or balanced strategies can provide a more long-lasting source of return and increase the likelihood of beating inflation over the long term.
Annuities should also be considered, as they can play an important role in providing greater stability and predictability to income streams.
Strengthen your core
Investors can build an effective portfolio with a variety of individual investments. But there is a risk that portfolio complexity can lead investors to lose sight of their overarching goals, particularly when markets become more volatile or when financial news headlines seem pressing.
To tackle this, we believe that investors should implement a “core” component in their wealth management strategy. The core should be a portfolio diversified effectively across asset classes, geographies, and sectors, and left alone to grow wealth consistently for the long term.
Establishing such a core and letting it deliver compounded returns over time can provide investors with the confidence that their financial goals are accounted for while freeing up time and mental energy to pursue other passions or to seek tactical satellite opportunities.
Diversify with alternatives
By including an allocation to private equity, private debt, private infrastructure, and/or private real estate into portfolios, investors can diversify sources of return and potentially enhance portfolio growth. We believe that investors can consider replacing around 30% of their public equity exposure with private markets, depending on their tolerance for illiquidity.
In private markets, we like private credit, value-oriented buyout, and secondaries including infrastructure; and thematically, we favor software, health, and climate.
Meanwhile, exposure to select hedge funds can play various roles in a portfolio, acting either as a pure diversifier or as a substitute for other assets. Our analysis indicates that global discretionary macro hedge funds have historically shown an average correlation of 0.2-0.4 with various bond indexes since 1997, and exhibit negative downside correlation during periods of financial stress. We believe investors should consider having around 10% in hedge funds, funded by a combination of bonds and equities.
In hedge funds, we favor low net equity long/short strategies, macro, and multi-strategy, and select alternative credit.
Optimize your leverage
Borrowing is risky, but we believe that proactive, prudent, and strategic borrowing can enhance an investor’s financial plan, especially as interest rates fall.
If managed correctly, borrowing can help with:
- Managing liquidity: A flexible line of credit can provide immediate access to funds without the need to sell assets, reducing the necessity of holding excess cash. This can be beneficial for handling tax bills, capital calls, or retaining the flexibility to make larger investments.
- Improving diversification: Borrowing against existing assets to invest in less correlated assets may help smooth portfolio fluctuations and broaden return sources, with future cash flows used to gradually reduce debt.
- Currency management: Borrowing in foreign currencies can help manage exchange rate risks associated with future foreign income and offer additional funds for domestic investments.
- Boosting return potential: For those with a high risk tolerance, borrowing could potentially lead to higher long-term gains if returns exceed borrowing costs, particularly as interest rates decline. However, this strategy is risky, as leverage can amplify both losses and gains.
Investors should carefully compare loan rates with expected returns, consider refinancing and interest rate risks, and be aware of the potential for margin calls during market fluctuations.
Be active
The investment industry has undergone a passive revolution in recent years. In 2023, assets held in global passive equity funds (USD 15.1 trillion) overtook assets in active funds (USD 14.3 trillion) for the first time, according to LSEG Lipper. But investors need to ensure they are balancing their exposure to passive and active strategies effectively.
In equities, passive investing can be a good way to quickly and cheaply add exposure to broad markets. But for investors looking to add exposure to new or less prominent markets, including small caps, emergent growth themes, or emerging markets, passive investments may be too broad to navigate fast-evolving industries or companies that are not as well covered. An active approach to investing can also enable investors to take advantage of changing volatility conditions, generating yield when volatility is high, or hedging portfolios when volatility is low.
In bonds, the complexities of managing weights, maturities, cash flows, duration risk, interest rate risk, and credit risk mean that actively managed funds can often offer greater convenience and superior risk management than investors trying to manage single bond exposure themselves.
Generating alpha is also a core aim of alternative investment managers.
Go sustainable
All major asset classes, including equities, bonds, hedge funds, and private markets, offer sustainable options, which have shown similar risk and return characteristics to traditional investments. With the return of President Trump to the White House, we expect volatility but believe that the longer-term performance of diversified sustainable investing strategies will be driven more by investment fundamentals and the macro environment than by politics.
In stocks, we think investors can consider the equities of companies that are demonstrating improvements or leadership in ESG principles; or in fixed income; bonds issued by multilateral development banks or those with stated green intentions; or credit strategies with an active approach.
In alternatives, consider sustainable hedge funds. Such funds incorporate ESG factors into their investment processes, aiming to exploit market inefficiencies related to ESG issues. They thus may offer differentiated investment opportunities.
And in private markets, sustainable strategies focus on sectors such as renewable energy and sustainable agriculture, and aim to achieve positive environmental and social outcomes while providing diversification and potential for competitive returns.
Returns of global indices
Index | Index | 1-year | 1-year | 5-year | 5-year |
---|---|---|---|---|---|
Index | MSCI ACWI | 1-year | 33% | 5-year | 11.1% |
Index | MSCI ACWI ESG Leaders Index | 1-year | 33% | 5-year | 11.1% |
Index | Bloomberg US Treasury 5-10 | 1-year | 9% | 5-year | -0.7% |
Index | Solactive Global MDB Bond USD 5-10 | 1-year | 9% | 5-year | -0.7% |
Index | MSCI USA | 1-year | 38% | 5-year | 14.7% |
Index | MSCI USA ESG Leaders | 1-year | 38% | 5-year | 15.1% |
Philanthropy and blended finance
We see a growing opportunity set in investments that support sustainability and impact goals while aiming for competitive returns. However, some social and environmental issues cannot be easily addressed by investors seeking market-rate returns owing to factors like size, development stage, location, or business model. Philanthropic or concessionary funding can help attract commercial investors to these areas by reducing risks and encouraging more investment through structures like blended finance. While promising, blended finance deals are complex and need thorough assessment to meet investor expectations.
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Disclaimers
Disclaimers
Year Ahead 2025 – UBS House View
Chief Investment Office GWM | Investment Research
This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.