Respond to Today’s Volatile Economic Environment with Smart Investment Strategies


By: Mark B. Wimmer, UBS, Financial Advisor

Today’s global economic environment is a mixed bag of opportunity and risk that will leave even the most seasoned investor pondering what direction to take in 2012.

Encouraging news, such as a decline in the U.S. unemployment rate or rising corporate profits, is often immediately eclipsed by sobering news, such as credit rating downgrades for European countries and the slow recovery of the U.S. housing market.

While it might be difficult for most investors to gauge just how challenging the remainder of this year and beyond might be, there are ways to position your portfolio and other investments for solid performance in a low-growth, high-volatility environment.

One way to position your portfolio for the long haul is to take steps to counter the effects of “deleveraging,” the process of raising capital by selling assets, which is currently being undertaken by households, banks and governments to lower the portion of their balance sheets that come from debt.

The deleveraging trend was analyzed in detail by UBS’s Chief Investment Strategist office and covered extensively in the UBS Wealth Management report “The Great Deleveraging.”

Solidifying your portfolio

The first critical step to iron-clad your investments is to determine your true level of risk – that is, the level of loss your portfolios might sustain in major and unexpected negative market movements. This process is also a good time to consider whether your investment goals are attainable and what changes, if any, need to be made in light of the current investment environment.

In resetting your financial goals, you might also want to leverage a number of powerful techniques that minimize the burden of servicing your existing liabilities.

One way to reduce your liabilities is by taking advantage of historically low interest rates and refinancing your mortgage at a lower rate. This technique has the potential to enhance cash flows and allow for more money to be dedicated toward your investment goals.

Securities-based loans might be a path to take for investors who are in need of liquidity, but are not prepared to realize losses at the current time. Given the low interest rate environment, securities-based lending can help increase your savings rate by consolidating other higher-interest rate loans or debt to a more favorable rate to enhance your cash flow.

Finding the right opportunities to pursue

There are also other investment strategies to consider when seeking to leverage potential opportunities in 2012. One strategy might be to limit your exposure to risk assets, such as below-benchmark equities, and to overweight on fixed income and cash.

Particularly, within fixed income there is a preference among some investors for corporate bonds, including high-yield corporates, which offer a yield pickup relative to government bonds and should benefit from the balance sheet strength and solid ratings of corporate America.

Additional opportunities might also be seen in the alternative investments space, particularly within hedge funds. Despite a challenging environment in 2011, some hedge fund strategies outperformed traditional equity investments on a risk adjusted basis. Last year, hedge funds initially saw positive performance and capital inflows. However, that trend was reversed mid-year by a number of factors, such as deteriorating economic conditions and the eurozone crisis.

Despite the last year’s challenges, macro, systematic and relative value strategies are the most promising broad-based hedge fund strategies performance-wise, as hedge fund managers are expected to remain cautious, and focus on preserving capital and managing risk.

Today’s environment of unprecedented deleveraging presents no shortage of challenges; but it also contains ample opportunities to prosper. Please speak to a Financial Advisor, who can help you explore strategies that can best position your portfolio now to both preserve your wealth and capitalize on the potential for positive performance that may lie ahead. Past performance is no guarantee of future results.

Mark Wimmer’s training and background in financial risk management provides small business owners, doctors, attorneys and other professionals—and their families—with a unique perspective that can better inform their financial and investment decisions. Supporting Mark’s practice is the full range and depth of expertise provided by UBS Financial Services Inc. Contact Mark directly at: mark.wimmer@ubs.com.

The information in this discussion has been prepared by, and reflects the opinions and various investment views of, the speaker. UBS Financial Services Inc. has not independently verified such information and does not guarantee its accuracy or completeness. This information is being provided to you for your information purposes only and does not constitute a recommendation or an endorsement by UBS Financial Services Inc. of the author, the securities or views stated herein. Any specific securities discussed should not be considered a recommendation or solicitation to buy or sell any particular security. You should not assume that any investment in any of the securities was or will be profitable.  Neither UBS Financial Services Inc. nor any of its employees provide legal or tax advice. You should consult with your personal legal or tax advisor regarding your personal circumstances.

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