The Potential Reward of Staying Invested

These are unsettled times for the world. Among the many conflicts raging globally, the Russia-Ukraine and Israel-Hamas wars receive intensive media coverage. Then there is the ongoing standoff between the US and China, the world’s two foremost powers. And against a backdrop of high interest rates, a packed calendar of elections lies ahead: In 2024, countries making up 68% of world equity market capitalization will go to the polls.

For investors, all this poses considerable uncertainty. In such an environment, there can be an understandable urge to retreat from risk assets and into the perceived safety of cash. The logic here is often that there will be an opportunity to buy back in at lower levels after a future selloff. But in its Wealth Outlook 2024, Citi Wealth makes the case for staying fully invested despite the troubled geopolitical landscape and occasional predictions of an economic contraction.

“We need to differentiate between the perceived environment and what’s really going on in the economy,” says Steven Wieting, Chief Investment Strategist and Chief Economist at Citi Wealth. “The economy has been resilient, inflation has fallen, earnings are rising faster than people think and many more sectors in the US economy will be profitable this year. That’s the financial reality, and it’s not really connected to the political reality right now.”

Return of the balanced portfolio

Many investors are still scarred by the experience of 2022, when the Federal Reserve’s monetary tightening crushed both stocks and bonds. But the economy stayed strong, inflation has moderated and interest rates are set to fall. “The US economy is currently emerging from a handful of little-noticed rolling recessions in manufacturing, real estate and health care that occurred in 2023,” says Wieting. “What’s more, consumer confidence remains strong.”

Citi Wealth believes the traditional “balanced” portfolio—so named because it balances stocks and bonds—is poised for potential growth over the next decade due to positive signs for both asset classes.

With the economy going strong, investors will look beyond the stocks of big US tech firms that led global market growth last year, and look more closely at smaller and midsized companies, both in the US and globally.

Higher interest rates have caused bond yields to triple, and with inflation declining, real yields are higher than they have been since the 1990s.

Geopolitics’ impact on markets is less than you think

Could a geopolitical storm wreak havoc on Citi Wealth’s positive prognosis? Here, Wieting emphasizes that some historical perspective is useful, and he notes a recent Citi Wealth analysis showing that 90% of geopolitical events since 1941 have not changed the trajectory of the world economy and have had only short-term impacts on global asset prices.

Reviewing historical data from the S&P 500 and other global indexes, this analysis found that major events, including the Korean War, the Gulf War, the 1993 World Trade Center bombing, 9/11 and Brexit, had little or no lasting impact on returns. Even major regional economic crises, such as the 1997 Asian financial crisis, did not infect the global economy.

For a geopolitical event to produce a global shock, “it must disrupt supply chains and buying habits at the same time,” says Wieting. This may explain why the OPEC oil embargo of 1973 had a big impact.

While the global economy has not yet taken a big hit from the war in Ukraine, the situation remains uncertain. Wieting is also closely watching Taiwan, the global semiconductor hub that is being menaced by China.

While the risk of global shocks is low, the Wealth Outlook describes two investment areas that may help hedge against that risk: cybersecurity software and Western energy supplies.

The folly of market timing

Investing across stocks and bonds may also help diversify a portfolio against various risks, including economic downturns. The two asset classes tend to offset one another, with stocks historically performing better in years when bonds tend to struggle.

In fact, the simultaneous selloff of stocks and bonds that occurred in 2022 has occurred only two other times in the past century: in 1931 (during the Great Depression) and 1969. In both cases, a 60/40 portfolio would have rebounded within two years, according to data contained in the Wealth Outlook. In 2023, a 60/40 portfolio of U.S. stocks and bonds would have gained about 18%, according to investment research firm Morningstar.

Geopolitical turbulence tends to produce volatile markets, increasing the temptation to time the market or wait for a clear recovery. But a Citi analysis demonstrates the cost of timing the market and the impact it has on long-term returns.

The authors compare two illustrative case studies of investors who started investing in the S&P 500 stock index on the last day of 1999, near the peak of the dot-com bubble. The “Market Timer” cashes out after 10% declines and reinvests after two quarters of positive returns, while the “Consistent Investor” simply stays invested, earning 175% higher total returns between the end of 1999 and the end of 2022.

Wieting suggests working with a professional to build a portfolio with investment allocations that fit your risk tolerance—and then sticking with it, with periodic rebalancing to ensure that allocations don’t fall too far out of line. “The most important thing about investing is to stay invested in a disciplined strategy,” he says.

In its Wealth Outlook, Citi Wealth also shares unstoppable investment trends that are changing the world, delving into their impact on various sectors and subsectors. Among them are the rise of generative AI, the accelerating pace of health care innovation and the polarization of the technology industry driven by the rivalry between the US and China.

Citi Wealth’s Private Banking division provides advice to ultra-high-net-worth families and investors who wish to achieve sustained, long-term portfolio growth and avoid the negative impact of a market timing or a “wait and see” approach. If you’re interested in having Citi Private Bank review your investments, get in touch here.

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