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How to invest and plan ahead
How to plan ahead
Developing a strategic plan that links goals with strategies can improve investors鈥� chance of success and help them stay focused on the bigger picture amid potential market turbulence.
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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鈥� 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鈥檚 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鈥檚 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.
*Time frames may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.
Stocks (S&P 500) have beaten cash (Treasury bills) in 86% and 100% of all 10- and 20-year holding periods, respectively, and by more than 200x overall since 1926. While cash rates look likely to remain elevated in the near term, we recommend moving cash into high-quality fixed income or equity income strategies to improve portfolio diversification and secure more durable income. Elevated long-term yields and rising longevity mean that annuities can also meaningfully enhance income durability and stability.
Equity income strategies can also provide enduring returns and increase the likelihood of beating inflation over the long term, especially in economies with low interest rates and bond yields. Including equity options strategies and diversifying across stock, bond, and derivatives approaches can potentially generate a resilient income stream of 5-7% each year through the market cycle.
As we approach potential further market volatility, we recommend that investors implement a "core" component in their wealth management strategy. A core, diversified portfolio can help investors grow wealth and stay on course with their goals, even as markets get more volatile. This core should be a well-diversified portfolio across asset classes, geographies, and sectors, designed to grow wealth steadily over the long term.
Doing so has borne fruit over the past 125 years, according to the Global Investment Returns Yearbook. Historical data show that over the long term, a 60:40 US-blended portfolio of US stocks and Treasury bonds has historically delivered an annualized real return of 5.1% in local currency terms (versus 6.6% for stocks and 1.6% for bonds), with lower volatility at 13.4% compared to stocks alone at 19.8% and 10.7% for bonds. The study also finds the volatility (standard deviation) of US dollar after-inflation returns for a typical single-country equity investment is 29.1%, falling to 17.2% for a capitalization-weighted 21-country index.
More uncertain markets are making diversification even more critical. This includes portfolio diversification into alternative assets, but also diversification within alternative assets, which we think can represent up to 40% of an overall portfolio for suitable risk and illiquidity-tolerant investors.
Investors should consider core exposure to diversified perpetual capital approaches, complemented by satellites that address income and capital growth needs. In hedge funds, we favor low net equity long/short strategies, macro, and multi-strategy. Within private markets, we like private credit, value-oriented buyout, and secondaries, including infrastructure. Thematically, we favor software, health, and climate sectors. We also see a bright outlook for quality assets in global residential and commercial real estate investments, particularly in logistics, data centers, and multifamily housing.
Hedge funds
Both first-time and experienced alternative investors can consider hedge funds to generate returns and diversify portfolios, mitigating potential risks in an uncertain second quarter. The聽negative correlation between equities and bonds, a key aspect of portfolio allocation, remains inconsistent due to ongoing inflation and interest rate uncertainties.
With limited diversification options, hedge funds stand out as an attractive alternative. They have demonstrated the ability to limit losses during market downturns, with certain strategies specifically crafted as tail hedges.
Hedge funds have historically provided attractive riskadjusted returns, with the HFRI Fund Weighted Index showing net-of-fee returns of 6.7% over the past 27 years. This performance is comparable to the MSCI World Index but with less pronounced volatility. We particularly favor global macro funds for their ability to navigate central bank policy shifts and geopolitical tensions, low net equity market neutral strategies to capitalize on stock dispersion, and multistrategy funds to spread risk across multiple approaches, enhancing portfolio resilience.
CIO analysis from 1997 to 2024 indicates that adding a 20% allocation to hedge funds, funded equally from stocks and bonds in a balanced portfolio of 50% equities and 50% bonds, would have increased annualized returns from 5.7% to 5.9% and reduced volatility from 9.2% to 8.5%*.
Inexperienced investors might consider core fund of funds strategies (FoHF) and potentially build exposure to聽single-strategy, single-manager approaches. FoHFs offer diversification across various styles and sub-strategies, providing a professional approach to hedge fund investments. They benefit from scale, negotiating fees and terms, and securing capacity from hedge funds closed to new investments.
For sophisticated investors with sufficient capital, direct investment in hedge funds allows for customized portfolios, retaining control over concentration, strategy weighting, and manager selection. A core/satellite approach can combine both methods, pairing a core allocation in a multi-manager vehicle with satellite investments to express periodic style and manager preferences.
Private assets
Investing in private markets offers further opportunities for diversification, portfolio returns, and yield generation.
- Private infrastructure: Infrastructure investments, including transportation, energy, and communication, provide stability and resilience. They offer inflation-linked cash flows and are less correlated with traditional asset classes, with return correlation ranging from -0.2 to +0.6. Infrastructure-linked assets returned 8.8% in the 12 months to mid-2024, according to Cambridge Associates.
- Private equity: We see value in value-oriented buyout and thematic investing in software, health, and climate. Perpetual capital funds in the secondary market can offer accessible gateways to private markets, exposure to diverse managers and strategies, steady cash flow, and enhanced diversification. Secondary funds buy stakes in private market funds at a discount, potentially leading to immediate performance uplift.
- Private credit: Private credit may offer attractive yields and lower sensitivity to interest rates than public bonds. In the first three quarters of 2024, private loans generated 8.5% total returns, compared to 6.5% for US leveraged loans and 8.0% for US high yield. Current yields are around 10% as of January 2025, with anticipated high-single- to low-double-digit returns. We focus on senior upper-middle-market sponsor-backed loans, which tend to exhibit lower sensitivity to the business cycle.
- Private real estate: Private real estate can provide diversification and attractive returns, particularly in logistics, data centers, and multifamily housing. Logistics and technology assets benefit from limited supply and strong demand, while multifamily housing offers stable income and inflation-linked cash flows in our view.
- Private real estate strategies: (as measured by the Cambridge Associates Real Estate Median IRR) have outperformed public markets in 13 of 21 vintage years between 1999 and 2019, delivering median annualized returns that were approximately 640 basis points higher than the FTSE NAREIT All Equity REITs Index (a measure of listed real estate) when adjusting performance for differences in computation between public and non-public assets.
Investors should be willing and able to bear the unique risks of alternative investments, including illiquidity, strategy complexity, and potential lock-up periods on invested capital.
*Using the MSCI World Total Return Index for developed market stocks, Barclays Global Aggregate Bond Total Return Index for global bonds and the HFRI Fund Weighted Index for hedge funds. Past performance is no guarantee of future results.
We expect further major central bank rate cuts in the second quarter, building on the European Central Bank and Swiss National Bank decisions earlier in 2025. Falling interest rates make it harder to generate income, but potentially increase the opportunity to use borrowing strategies.
In an environment of lingering uncertainty and volatility, borrowing for a "bridge loan" to avoid selling assets at distressed prices may support long-term goals and wealth聽generation. Investors can also borrow against concentrated illiquid assets to fund diversified portfolios, improving riskadjusted returns and raising exposure to less-correlated assets. Securities-backed loans can also help investors respond to private asset capital calls and preserve liquidity during fund lifetimes.
Borrowing can also be used to increase return potential by tapping into borrowing capacity for spending or investment, assuming expected returns exceed borrowing costs. Widening the scope of collateral to include real estate or luxury assets can free up capital for investment, while borrowing in low-rate currencies like the Swiss franc to invest in higher-yielding assets may offer opportunities, though it involves currency risk.
Borrowing carries risks that must be managed assiduously. Market risk and margin calls can force asset sales if collateral values fall, breaching loan-to-value ratios. Investors should assess historical maximum peak-to-trough losses and ensure liquidity capacity to avoid asset fire sales. Spending plans should be considered, ensuring assets hold enough value to avoid margin calls after planned expenses. Robust borrowing strategies involve stress testing portfolios and ensuring borrowing costs are lower than expected returns.
Mixing index-tracking and more active approaches may help balance costs, access fewer liquid markets, and potentially generate alpha in a risk-controlled way. Active investing can also allow investors to capitalize on equity volatility. In bonds, active management can provide superior risk management for complexities like duration and credit risk. For alternatives, returns can vary significantly among managers, making it important to seek the right ones.
Pockets of market volatility, sharp shifts in market leadership, and wide return dispersion between and within asset classes may support the performance of more active investment strategies. Combining a core allocation to a diversified portfolio with satellite building blocks may provide greater agility, flexibility to invest beyond stocks and bonds, and outperformance potential.
Sentiment on many sustainable investment strategies is currently bearish owing to concerns about the US policy backdrop. While some sustainability-related policies may be rolled back in the years ahead, we do not anticipate wholesale changes and continue to see attractive growth opportunities. For example, we believe investing in the energy transition presents a significant opportunity in both private and public markets.
We recommend a diversified portfolio approach across sustainable equities, bonds, hedge funds, and private markets. ESG leaders' strategies, which are theme and sector agnostic, have demonstrated consistent performance against non-ESG benchmarks, and we believe they remain attractive options for investors.
