Investing principles: Steering the boat through choppy seas

Acceptance: volatility is par for the course

In our previous publication, U.S. Market Correction: What’s next?, we noted the heightened uncertainty around trade, fiscal, and immigration policy under the Trump administration. The U.S. Economic Policy Uncertainty Index is higher now than during the global financial crisis and the 2018/19 trade tensions (Exhibit 1). The anticipation of some growth drag from U.S. trade policies has left investors on edge and the U.S. S&P 500 corrected by 11.3% between February 19 and March 13. The stretched valuations in a subset of stocks added to the selling pressure. Meanwhile, other U.S. asset classes and international equity markets have fared comparatively better.

Policy uncertainty is likely to linger as further announcements regarding trade and fiscal policy from the U.S. are expected over the coming months. As such, market volatility will likely remain elevated for the foreseeable future. While volatility can be unnerving to investors, it is also quite normal. Since 1988, the S&P 500 has experienced an average intra-year decline of 14% each year but has ended the full calendar year in positive territory 75% of the time. While history only serves as a guide, the U.S. economy is fundamentally resilient; however, the risk is that the interaction of disruptive policies could undermine business and consumer sentiment, weakening the growth momentum. This note serves as a refresher of investing principles to navigate through what will arguably be a couple of volatile quarters for long-term investors.

Solution: stay invested (but maybe not in cash)

The combination of trade policy uncertainty and high asset valuations may see investors seek capital preservation by increasing cash holdings. This may be tempting given the >4% cash rate, but even that rate has not generated market-beating returns. With a 0.9% return YTD, cash (as represented by U.S. 1–3-month Treasury bills) has underperformed both stocks and bonds, except for U.S. equities. For example, U.S. investment grade (IG) bonds have returned 2.3%, emerging market debt is up 2.8%, Asia ex-Japan equities are up 3.9%, and emerging markets ex-Asia are up 10.3%, all outperforming cash.

Cash can be viewed as a defensive holding, but comes with an opportunity cost, regardless of the potential macro-economic scenario. If global growth remains resilient, equities can outperform cash, as was the case in the past two years. In times of slowing growth or potential recession, bonds with longer duration can outperform. For example, the 10-year U.S. Treasury yield has fallen over 50 basis points, from the 2025 mid-January peak, causing bond prices to rise amidst economic growth concerns.

In fact, in Exhibit 2, we can see that in times of crises, which are periods when investors typically think cash would outperform, the classic 60/40 portfolio outperforms cash on a 1-year or 3-year basis. There are exceptions, notably the dot-com crisis and the 2008 financial crisis, but a recession of those magnitudes is not in our base case, given we are not seeing a similar level of leverage and irrational exuberance. 

Staying diversified and balanced across equities and bonds in times of uncertainty can be a better strategy, especially for an upside capture from any subsequent market recovery. Not to mention, with sticky inflation, the real return on cash is likely to be pressured and will take time to return to acceptable levels. For example, cash outperformed during periods of high inflation in 2022, but lost value in real terms.

Diversify, diversify, diversify

For long-term investors, maintaining a diversified portfolio is pivotal to weathering stormy markets. A balanced portfolio is one that is diversified across asset classes, both public and private, investing styles (growth and value), and geographies (U.S. and international). Volatility can also create opportunities; active selection remains key to uncovering mispriced assets and markets.

Equities: The correction in U.S. equities was a rotation from highly valued mega-caps to the broader market. Defensive sectors such as healthcare and utilities actually outperformed the broader market. While the U.S. markets underperformed, international equity markets, where valuations are arguably more in line with historical averages, have delivered comparatively higher returns in U.S. dollar terms.

Fixed Income: Fixed income assets serve as ballast to a portfolio by delivering a steady income stream, particularly across high-quality bonds, where yields are higher than the historical median. Investors can take this opportunity not only lock in the high all-in yields but also to hedge against an unexpected weakening in the global economy.

Alternatives: In times of uncertainties around growth and inflation, interest rate volatility could be high, and fixed income should not be the only source of reliable diversification.  As was the case in 2022 where the stock-bond correlation turned positive, alternative assets may solve for income, diversification, and return-enhancement as outlined in our Guide to Alternatives. Private equity can provide access to return-enhancing opportunities. Meanwhile, real estate and real assets, like infrastructure, can provide stable income and diversification, as mentioned in our previous note, The evolving tide: the present and future of maritime transport.

Option strategies: In an environment of elevated volatility, instead of predicting policy turns and macro-outcomes, some investors can explore defensive strategies such as option overlays to capitalize on heightened volatility while maintaining exposure to equity markets, as detailed in our previous publication, Rethinking equity income as market uncertainties rise. Although they sacrifice partial upside, such strategies can provide investors with an additional income stream and enhanced downside protection. 

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