Discipline is the most important virtue

The situation is difficult for many investors due the current environment, and also because of the losses they have suffered. A portfolio is not a collection of investment ideas, but a long-term plan.

You don’t really need to know any more than this: "Buy low and sell high." As a behavioral pattern, this is enough to make money on the stock market. Unfortunately though, things are not quite so easy in real life. The financial crisis shocked many investors. It is no exaggeration to describe the current state of affairs, with interest rates at historic lows, as an exceptional situation. According to Daniel Kalt, chief economist for Switzerland at UBS, many private investors have lost their sense of direction. This is understandable: if you lost half your assets during the crisis, it's no surprise if you're traumatized for some time afterwards. Kalt comments that all those who sold out of sheer panic when stock markets were low, who then missed the markets' recovery and who still have large cash holdings today, currently find themselves in a difficult situation.

The importance of perseverance
 

For this reason it is important to always remain invested – or, to put it in even more fundamental terms: the question of whether to invest in equities is not something you should rethink whenever the next crisis comes along. On the contrary, once you have opted in favor of equities because these suit your personal risk profile and investment horizon, there should be no major tinkering with this decision, even if losses happen on a temporary basis.

If you haven't taken this advice to heart and have missed the upswing, you must currently be asking yourself whether you should buy equities when stock markets are reaching highs. This is a question that Kalt hears quite often. He says that it has already been the case for a hundred years that equity indices are constantly breaking new records. This is an inevitable consequence of economic growth and inflation. The important thing is not the level of an index, but how expensive a market's valuation is. Measured by the standard valuation metric, the price/earnings ratio (PER), and also its modified form, the Shiller PER, equity market valuations are not excessively high at present, but merely above average.

In principle, those who delegate decisions regarding their assets to a bank or wealth manager don't have much more to worry about. According to one wealth manager, his most important task is to slow down his clients and stop them from taking excessively large risks when markets are on the way up. Conversely, he says that he has to console clients and dissuade them from turning their backs on the markets when there’s a downtrend. The thought process by which a bank makes its investment decisions should also serve as a useful inspiration for clients who make their own decisions. UBS, for example, distinguishes between strategic and tactical asset allocation. One is the long-term plan over a horizon of five to seven years that makes fundamental decisions; the other is a short-term (lasting six months) adjustment of the plan to current circumstances.

A rookie error in investing is to pay too much attention to what is going on at the moment without focusing on a firm basic structure, i.e. not having a strategy worthy of the name Those who allow themselves to be driven by some idea or other, who buy a particular stock today, gold tomorrow, and something else the following day, are unlikely to be proven right in the long term.

Don't invest on a whim
 

For example, strategy involves stipulating that the equity allocation in a balanced portfolio should be 42%. Kalt explains that this weighting would only change (up or down) by a few percentage points in the case of a tactical adjustment. This may also entail slightly overweighting European and Japanese equities, as UBS is doing at present. For those who do not have much investment discipline and who oscillate between euphoria (100% equities) and panic (100% cash), the cost of an investment management mandate is money well spent. At UBS, a standard mandate does not include either real estate or gold. The strategic allocation of commodities was also reduced to zero in early 2014.

The issue that determines portfolio orientation at present is the difference in the monetary policy directions being pursued by Europe and the US. Interest rates will likely rise again in the US, as they have generally fallen since 1979 (oil crisis). Conversely, the low interest rate environment in Switzerland looks set to remain for another four or five years in the opinion of Anja Hochberg, chief investment strategist at Credit Suisse. She describes this as a bitter reality from the investor's point of view. Admittedly, equities therefore look more attractive than bonds at present. However, Hochberg advises against turning your back on bonds completely. A portfolio should be the result of a structured process, and – irrespective of the current situation – bonds have the job of cushioning fluctuations in value. Indeed, she argues that investors must try to increase risk and return in a controlled way. What she means by this, for example, is buying (European) corporate bonds instead of government bonds.

Pay attention to valuations
 

While interest rates in Switzerland remain low, high-dividend stocks will still be attractive for some time. This also supports their valuations, as there is a lack of alternatives. However, as far as Swiss equities are concerned, there are certainly differences in valuations. In view of their favorable valuations, Hochberg considers small and mid caps to be a promising investment theme. It is evident that corporate earnings still have room for improvement in Europe at least, though not in the US to any significant degree.

Seven years may be a long time in which a lot can happen. Yet this is the sort of time frame that strategic investors should keep in mind.