When markets are like this, it’s tempting to keep you powder dry and wait for that perfect time to put your cash to work, but that strategy is risky too and could lose you money, argues this top investor.
Sitting on the sidelines can be riskier than investing right away, a leading bank has told its clients after research highlighted the benefits of a “buy-and-hold” strategy.
Investors often try to reconcile a positive long-term view and a more challenging short-term outlook by simply waiting. But UBS Global Wealth Management said the risk-reward associated with waiting to invest deteriorates notably over time.
Using research going back to 1960, UBS said a strategy that waited for a 10% correction before buying the S&P 500 and then sold at a new all-time high would have underperformed a “buy-and-hold” approach by 80 times.
Over that same time period, a strategy of investing immediately after a 20% drop would have delivered an average one-year return of 15.6%.
It added that staying in cash for a year after a 20% drop comes at a significant opportunity cost, with the gap in performance widening over time with the effect of compounding.
UBS said the costs associated with attempted market timing are also evident in real-world investor performance data.
It points to recent analysis by Dalbar showing that the average mutual fund investor has underperformed the S&P 500 by 3.5% over the past 30 years, including more than 10 percentage points of underperformance in 2021 alone.
Mark Haefele, UBS Global Wealth Management’s chief investment officer, said: “For many investors, the more work, time, and stress they add to their lives with market timing, the worse their performance.”
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In the near-term UBS Global Wealth Management thinks that risk-reward will be muted as markets have been pricing in a “soft landing” whereas the risk of a deeper “slump” in economic activity is elevated.
But for investors holding a longer-term view, UBS is encouraged by a combination of below-average equity valuations, above-average yields, and a post-peak for private equity investments.
Having derated by 26% over the past 12 months, the S&P 500 trades at a trailing price-to-earnings (PE) ratio of 18.3 times. Since 1960 that level has been consistent with annualised returns in a 7%–9% range over the following decade.
The MSCI All Country World Index, meanwhile, trades at a trailing PE of 15.5 times, which since 1988 has been consistent with annualised returns of 6–8% over the next 10 years.
Haefele added: “The potential savings from waiting tend to be limited, but the potential opportunity costs can be much larger.
“And, while the near-term outlook for equities might be uncertain, we believe diversified portfolios should deliver more stable outcomes over the coming months, given the potential market scenarios we face.”
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