Beyond ‘stay invested’: Managing uncertainty with systematic strategies

March 2025

This article was written for the Business Post.

Uncertainty is a constant in markets. But while uncertainty is always present, its intensity varies. Today, that uncertainty feels particularly high, creating an acute challenge for investors.

Initially, markets welcomed Trump 2.0 but concerns have crept in. Tariffs are on, then off. Inflation was falling, now it’s proving sticky. Bond markets have become volatile, and long-standing norms in international relations are shifting.

Indices that measure economic and policy uncertainty are at multi-year highs. In response, equities have corrected, and the Vix — Wall Street’s “fear gauge” — recently hit its highest level in over a year.

In environments like this, pessimism flourishes. Last year, Ray Dalio warned that the US could be heading toward a debt crisis. Concerns about recession, elevated equity valuations, and policy mistakes dominate market discussions.

Investors are left wondering: what’s the right way to respond?

The long-term perspective

The default advice from financial advisors is simple: ignore the noise, focus on the long term, and stay invested. And there’s a case for this approach.

According to UBS’s latest global investment returns yearbook, US equities have delivered

annualised returns of just under 10 per cent over the past 125 years.

Even over the past five years— despite a pandemic, surge in inflation, and one of the fastest rate-hiking cycles in history — the S&P 500 has returned 14.5 per cent per year.

In hindsight, staying fully invested in equities appears to have been the right decision. But that’s the problem with hindsight — it tempts us to judge decisions solely by their outcomes. As decision-making expert Annie Duke calls it, this is “resulting”.

A useful analogy comes from rugby. Suppose a team earns a penalty and decides to kick for the corner instead of taking an easy three points. If they go on to score a try, it’s hailed as the right call. But perhaps they simply got lucky?

Markets work the same way. We only ever see one version of history. The equity rally of the past five years was not predetermined; it may have been driven by an unusually favourable confluence of events—massive fiscal stimulus, accommodative monetary policy and resilient corporate earnings.

As Daniel Kahneman put it: “The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

The case for diversification — but what kind?

Yes, equities have delivered over the long run, but history reminds us that prolonged downturns are real. Investors who placed blind faith in stocks in the early 2000s endured a lost decade bookended by the dot-com crash and the global financial crisis.

When the authors of the UBS Yearbook first published their findings in 2000, they titled their study, The Triumph of the Optimists. Investors who remain 100 per cent in equities may be acting more out of optimism than prudence.

This is why diversification is essential. Historically, bonds served this role but 2022 exposed the limitations of this approach — high inflation and rising interest rates dragged down both stocks and bonds simultaneously, leaving investors exposed.

The increasing correlation between stocks and bonds has fuelled growing interest in alternative investments and strategies.

One set of alternative investments that deserves attention is systematic or rules-based strategies. Historically, these strategies have been the preserve of institutional investors but are increasingly available in Ucits products.

The role of systematic investing

Many investors find systematic strategies intimidating, often lumping them under “quant” investing and assuming they rely on opaque, black-box algorithms. But some systematic strategies are intuitive and grounded in simple, well-established principles.

Trend-following, for example, buys assets that are rising, sells those that are falling. That’s it. It doesn’t try to predict macro events; it simply reacts to price movements.

The strength of this approach is that it is at once agnostic and reactive to macro events – using sustained price trends to identify signals within the noise.

For investors, this means that if market conditions remain favourable, trend-following strategies maintain exposure to equities. But if conditions deteriorate, these strategies systematically reduce equity exposure and reallocate capital to assets that are trending positively.

Notably, some of the strongest performances from trend-following strategies have occurred during periods of major market stress such as 2022, 2008 and during the dot.com bust.

Of course, no strategy is perfect. Trend-following struggles in choppy, directionless markets, where false breakouts and sudden reversals can erode returns.

Navigating the unpredictable

At its core, investing isn’t about eliminating uncertainty — it’s about managing it intelligently.

Investors must ask themselves: Do they want to anchor their portfolios to a single long-term bet on equities, or adopt a framework that adapts to changing market conditions?

While equities will likely continue to deliver strong returns over the long term, the path forward will be unpredictable. Systematic strategies provide a disciplined, rules-based alternative — removing emotional bias, sidestepping macro speculation, and dynamically adjusting to market shifts.

With traditional diversification facing new challenges, investors may benefit from approaches that are more responsive to changing market conditions.

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