Investing.com -- The S&P 500 is close to its record high of 5,667 reached on July 16. Investors are grappling with mixed emotions.
Investors who have already invested in the market are reaping the rewards of its strong performance, while those on the sidelines waiting for a dip may be growing increasingly concerned.
UBS analysts say that investors should not be afraid of all-time highs. The risks of investing at these levels may not be as high as people think.
UBS found that investing in the S&P 500 isn't as risky as people think. Historical data shows that 28% of the time, investors wouldn't have lost money, including dividends.
“In just over half of cases, an investor would at no point have seen their investment suffer a greater-than-5% drawdown, and in only 19% of instances would they have experienced a “personal bear market” of a greater-than-20% loss on their newly made US equity investment,” the analysts said.
Interestingly, the risk of drawdowns is actually lower when investing at an all-time high. UBS notes that 32% of investments made at an all-time high would not have seen a loss at any future point.
Additionally, only 15% of these investments would have suffered a drawdown greater than 20%, a lower rate compared to the 19% associated with random starting points.
This might seem counterintuitive, but UBS analysts point out that record highs do not always signal imminent market peaks. Historically, periods of new highs have frequently been followed by further gains.
For example, investing during times such as 1982, 1992, 1995, 2013, 2016, mid-2020, and early 2024 has often been rewarding for investors. While there have been instances like 2000 and 2007 where investing at record highs seemed disadvantageous, these are 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 that is 60% stocks and 40% bonds would typically avoid a loss of more than 5% in two-thirds of cases.
Only 5% of the time would such a portfolio experience a loss larger 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 investment approach rather than trying to predict market fluctuations. They advise immediate investment of cash, as past data indicates that waiting for market declines often yields lower returns.
To mitigate the risk of investing at market peaks, investors can use techniques like dollar-cost-averaging or gradual investment plans.
UBS recommends reallocating excess cash or money market funds into high-quality corporate bonds to prepare for a potential decline in interest rates.
This move can help investors capitalize on rising bond prices and mitigate the risk of missing out on investment opportunities when interest rates decrease.
The current economic context, including the latest July PCE price index data showing declining inflation, supports expectations for Federal Reserve rate cuts. This is likely to create a favorable environment for both equities and bonds.
Despite ongoing economic challenges in China, UBS expects stabilization through infrastructure spending and other policy measures, recommending a focus on defensive sectors within Chinese equities.