Investors Shouldn’t Fear All-Time Highs: UBS By Investing.com

Investing.com — It is approaching the record high of 5,667 reached on July 16th. Investors are experiencing mixed emotions.

Investors already invested in the market are reaping the rewards of its strong performance, while those on the sidelines waiting for a decline may be growing concerned.

UBS analysts say investors should not fear the all-time highs. The risks of investing at these levels may not be as great as people think.

UBS found that investing in the S&P 500 isn’t as risky as people think. Historical data shows that in 28% of cases, investors would not have lost money, including dividends.

“In just over half of the cases, an investor would never have seen a greater than 5% reduction in their investment, and in only 19% of cases would they have experienced a ‘personal bear market’ of a value greater than 5%. -20% loss on new US equity investment,” analysts said.

Interestingly, the downside risk is actually lower when you invest at an all-time high. UBS notes that 32% of investments made at a record high would not have made a loss at any point in the future.

Furthermore, only 15% of these investments would have experienced a discount greater than 20%, a lower rate than the 19% associated with random starting points.

That might seem counterintuitive, but UBS analysts point out that record highs don’t always signal imminent market tops. Historically, periods of new highs have frequently been followed by new gains.

For example, investments in periods such as 1982, 1992, 1995, 2013, 2016, mid-2020 and early 2024 have often been rewarding for investors. While there have been cases like 2000 and 2007 where investing at record levels looked disadvantageous, these are the exceptions rather than the rule.

Analysts point out that balanced portfolios, which include both stocks and bonds, are less likely to suffer significant losses compared to portfolios made up entirely of stocks. For example, a portfolio comprising 60% stocks and 40% bonds would typically avoid a loss of more than 5% two-thirds of the time.

Only 5% of the time, such a portfolio would suffer a loss of more than 20%. This shows that balanced portfolios can provide a smoother investment experience, especially when the market is volatile, and can help protect against large losses.

UBS suggests a systematic approach to investing rather than trying to predict market fluctuations. They recommend investing the cash immediately because past data indicates that waiting out market declines often brings lower returns.

To mitigate the risk of investing at market peaks, investors can use techniques such as dollar cost averaging or phased investment plans.

UBS recommends reallocating excess cash or money market funds into high-quality corporate bonds to prepare for a potential drop in interest rates.

This move can help investors take advantage of rising bond prices and mitigate the risk of missing out on investment opportunities when interest rates fall.

The current economic backdrop, including the latest July PCE price index data showing a slowdown in inflation, supports expectations for rate cuts from the Federal Reserve. This is likely to create a favorable environment for both stocks and bonds.

Despite ongoing economic challenges in China, UBS expects stabilization through infrastructure spending and other policy measures, recommending a focus on defensive sectors in Chinese stocks.