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Cash’s long-term underperformance compared to other asset classes is a structural phenomenon. Stocks (S&P 500) have beaten cash (Treasury Bills) in 86% and 100% of all 10- and 20-year holding periods, respectively, and by more than 200 times overall since 1926.

Yet, investors may be reluctant to put cash to work in today's environment of tariff and US policy uncertainty and volatile markets. After an extended period of US asset outperformance, the S&P 500 Index stands around 10% lower year to date, lagging other major stock markets. Implied US equity volatility, as measured by the VIX Index, stands at around 27, above the long-run average of 20 and pricing for sizable daily swings in US stocks. And market behavior has been atypical, with longer-dated US Treasury yields and the US dollar rising and falling respectively on days of declining stocks rather than acting as "safe havens."

On balance, we believe investors should seek to put cash to work systematically for potential long-term gains, rather than try to time the market to maximize near-term profits. History shows that forward returns are typically strong after periods of market turbulence. When the VIX exceeds 30, the S&P 500’s average 12-month forward return has been over 15%. Balanced portfolios (60/40) have delivered positive returns in 88% of rolling five-year periods in the US, and since 2003, in 85% and 87% of periods for Europe and Switzerland, respectively.

We therefore recommend phasing into diversified portfolios over time by adhering to a disciplined, phased approach that puts cash into portfolio building blocks of stocks, bonds, commodities, and alternative assets that match an investor's objectives and reflect their constraints. This may help manage the risk of poor timing, reduces the influence of emotion, and provides more opportunities to benefit from market dips and rebounds in our view. While it is not possible to predict how long the current period of uncertainty will last,there are proven strategies to manage it. By phasing in, maintaining diversification, and sticking to a long-term plan, investors can position portfolios to benefit from future market recovery and growth.

For investors who have already built robust core portfolios, switching cash into high-quality fixed income and diversified fixed income portfolios can still be useful. Doing so can lock in yields, provide robust income, and help dampen portfolio volatility. While we cannot rule out periods of market volatility where bond yields climb on fresh US policy announcements, the steepening of many sovereign yield curves generally means that bonds can beat cash over a tactical investment horizon. In a portfolio context, we think that complementing government and investment grade bonds with diversified, risk-controlled exposure to riskier credits (including high yield debt, emerging market bonds, and senior loans) can improve diversification and increase returns.

Equity income strategies can also provide enduring returns and increase the likelihood of beating inflation over the long term, especially in economies with low interest rates and bond yields. Including equity options strategies and diversifying across stock, bond, and derivatives approaches can potentially generate a resilient income stream of 5-7% each year through the market cycle.

Annuities could also be considered, as they can help investors manage the risks of a market decline or overspending that impairs retirement assets (sequence of returns risk) and of investors outliving their wealth (longevity risk).

Allocating a portion of a portfolio to annuities can allow investors to lock in higher yields and secure a reliable stream of income that can last for the rest of their lives. Similar to a bond, an annuity becomes more valuable if interest rates fall in the future (because it would be more expensive to replace this stream of income when interest rates are lower). By the same token, existing annuities may become less valuable if interest rates rise. Unlike a bond (or any other investment), a lifetime stream of annuity income also appreciates in value if an investor's life expectancy increases due to good health and medical advances that improve longevity.

Investors always have to contend with uncertainty. It may be around geopolitics, the implications of national tax and spending plans, or the path for interest rates. Uncertainty can drive market volatility. And when markets fluctuate, investors risk flocking to "less risky" assets like cash. While steadier in the near term, overexposure to cash can lead investors to miss out on returns and jeopardize their long-term goals.

To avoid letting uncertainty and volatility derail financial plans, we believe that investors should implement a “core” component in their wealth management strategy. The core should be a portfolio diversified effectively across asset classes, geographies, and sectors, and left alone to grow wealth consistently for the long term.

Following sharp market volatility in the wake of President Trump's "Liberation Day" tariffs and their temporary pause, markets have recovered some poise on signs of progress in trade negotiations with select nations. But at the time of writing, the US's major trading partners of the European Union and China have found little or limited common ground on a trade agreement. With scope for further potential volatility ahead, we therefore recommend that investors implement a "core" component in their wealth management strategy. A core, diversified portfolio can help investors grow wealth and stay on course with their goals, even as markets get more volatile.

This core should be a well-diversified portfolio across asset classes, geographies, and sectors, designed to grow wealth steadily over the long term.

Doing so has borne fruit over the past 125 years according to the Global Investment Returns Yearbook. Historical data show that over the long term, a 60:40 US-blended portfolio of US stocks and Treasury bonds has historically delivered an annualized real return of 5.1% in local currency terms (versus 6.6% for stocks and 1.6% for bonds), with lower volatility at 13.4% compared to stocks alone at 19.8% and 10.7% for bonds. The study also finds the volatility (standard deviation) of US dollar after-inflation returns for a typical single-country equity investment is 29.1%, falling to 17.2% for a capitalization-weighted 21-country equity index.

We believe the benefits of a core diversified portfolio are threefold:

It can maximize the chances of consistently growing wealth. Historically, no asset class has consistently outperformed others year after year. For instance, while equities may deliver the highest returns in one decade, commodities or real estate might take the lead in another. Looking at the annual returns of 14 major asset class returns since 1999, the best-performing asset class in one year has had a roughly 40% chance of experiencing a loss in the year after, versus 27% for a randomly chosen asset class and 31% for a well-diversified portfolio.

By diversifying, investors do not need to try to predict which asset will perform best; instead, they can benefit from the potential gains of multiple assets, which helps to smooth out returns over time. Diversifying also helps investors gain exposure to the small number of securities that historically drive stock gains. Indeed, a study by Arizona State University professor Hendrik Bessembinder showed that just 0.3% of firms accounted for half of US stock market wealth creation between 1926 and 2019.

Building a core portfolio can help investors stay in the market through volatility. Investing in a core portfolio helps investors remain committed to their long-term financial goals, even during periods of market volatility. A well-structured core portfolio is designed to weather the ups and downs of financial markets, providing a stable foundation for wealth growth. This approach allows investors to focus on their long-term objectives without being swayed by short-term market fluctuations. By maintaining a diversified core, investors can benefit from the compounding of returns over time, which is crucial for achieving financial security and growth. Indeed, while markets can be volatile in the short term, they generally grow over the long term. Looking at the S&P 500 index and different holding periods since 1926, we observe that the chance of making a positive total return over any monthly timeframe is 63%, but climbs to 75% for any 12-month window and 100% for any 20-year period.

Investing in a core portfolio can free up capital and time for other opportunities. Building a core portfolio allows investors to delegate the complexities of investment management to professionals, freeing up time and money to pursue other opportunities. This approach not only reduces the burden of managing individual investments but also should ensure that the portfolio is continuously optimized to meet income and growth targets. For example, investors with a well-diversified portfolio satisfying their income objectives for today and their lifetime may have greater scope to focus on strategic investment opportunities to grow capital for spending beyond their lifetime, including alternative investments in fields such as private markets.

*Using the MSCI World Total Return Index for developed market stocks, Barclays Global Aggregate Bond Total Return Index for global bonds and the HFRI Fund Weighted Index for hedge funds. Past performance is no guarantee of future results.

The investment industry has undergone a passive revolution in recent years. In 2023, assets held in global passive equity funds (USD 15.1 trillion) overtook assets in active funds (USD 14.3 trillion) for the first time, according to LSEG Lipper.

Our view is that long-term investors need to strike the right balance between passive and active investment tools to achieve their long-term financial goals. But it can seem daunting to understand which type of approach may work best—and overly simplistic ideas like just focusing on costs may lead investors to miss out on returns and carry excess risk.

Recent market volatility has been particularly challenging for self-directed investors. Large day-to-day and intraday swings in stocks have made it harder for investors that generally seek to pick their own stocks to enter and exit the market. Just one example is that 10 April marked the fifth consecutive day with an intra-day trading range of more than 6% for the S&P 500 Index, the third-longest streak in around 100 years of market data. The performance gap between winning and losing stocks has also been exceptionally wide due to elevated return dispersion.

Bond investors have faced elevated swings in yields that have spilled into sharp performance differences by geography, credit risk, and across different bond durations. In early April, the 30-year US Treasury yield experienced its largest weekly increase (+46bps) since 1987 and the difference between the 10-year Treasury and German Bunds widened by the largest amount in a single week ever recorded since German reunification.

And investors who choose their own instruments in a globally diversified way have faced significant currency volatility. For bond investors especially (where swings in bond returns are generally less volatile than currencies) managing FX risk has become increasingly challenging to do alone.

Active investing may help even the most engaged investors in today's volatile environment, as part of a well-diversified portfolio and as a complement to stock picking. In equities, active managers can capitalize on high return dispersion and low intra-stock correlation, using strategies like long/ short equity hedge funds to potentially enhance returns and reduce volatility.

In fixed income, active management can navigate complexities like duration and credit risks, particularly in markets with high volatility and wide performance differences. Active managers can adjust portfolios dynamically, taking advantage of opportunities in less liquid markets, managing risks more effectively than passive strategies, and having the agility to trade in markets where liquidity may be scarcer.

In alternatives, active strategies can provide diversification and resilience, in our view. Hedge funds, for instance, can adapt to macroeconomic shifts, using discretionary macro or equity-market neutral strategies to cushion portfolios in volatile markets. Active management's flexibility may allow investors to harness volatility, generating additional income or hedging against potential losses.

We believe a balanced approach combining active, passive, and single-security investing can enhance portfolio resilience over the long term. Passive strategies offer cost-effective broad market exposure, while active strategies can capitalize on market dislocations and structural trends. Investors should consider their risk appetite, investment horizon, and market efficiency when deciding the mix. For instance, passive investing may suit short-term trades in efficient markets, while active management can add value in less efficient or volatile markets. By blending these approaches, we believe investors can build a diversified, cost-effective portfolio that is well-prepared for future opportunities and resilient enough to endure today’s volatility and uncertainty.

While there is no one-size-fits-all approach, here are six key signposts that can guide investors in choosing between active or passive investment approaches:

Is broad investor risk appetite high or low? Generally, periods of high investor risk appetite arise from factors like robust economic growth, lower interest rates, easier financial conditions for companies (evidenced by lower credit spreads), and low expected or actual swings in market prices (low implied or realized volatility). In such circumstances, investors may prefer to capture positive broad-market movements through passive investing in, for example, equity indexes, and use selective active management to use volatility for hedging purposes. Conversely, investor risk-aversion, when accompanied by high market volatility and elevated uncertainty (for example, due to uncertainty about the Trump administration's next policy steps), may favor active management, more judicious security selection, and using ways to harness volatility in order to generate additional portfolio income or hedge against potential losses.

How long is the intended investment period? Investors looking for a short-term trade in a particular part of the market (albeit one wider than a single stock, bond, or commodity) may consider passive investment for ease of buying and selling, relatively low costs, and for exposure that closely matches the performance of a specific industry, region, or index. Active management may be beneficial for investors with a long-term horizon, allowing them to capitalize on market dislocations and structural trends that may not be replicable purely through index investing. Blending active managers with passive and less market-directional approaches (such as equity long/short or equity market neutral hedge funds) can provide diversification benefits, enhancing portfolio resilience against style-investing shifts or wider market downturns.

How efficient is the market? Active management is often preferred in less liquid assets or markets, such as small-caps or emerging markets. In particular, active managers have more flexibility on what securities to trade when market liquidity is low and when to trade securities—whereas passive instruments may have to follow changes in their benchmark closely (even if this is less advantageous to performance in low-liquidity markets) to avoid deviating too far from the reference index. In technical terms, passive approaches try to minimize tracking error as a primary concern.

Active manager outperformance may be more persistent in less efficient markets. For example, a 2024 article from Wilmington Trust found that between December 1999 and December 2023, a majority of emerging market fund managers outperformed on a 12-month rolling basis for 75% of the time versus the MSCI EM Index and 65% of the time for US small-cap managers versus the Russell 1000. However, this figure falls to 38% for US large-cap managers, given the greater efficiency of this market.

Market liquidity is just one form of market efficiency. Others include the availability of investment research on a particular company—which tends to rise the more analysts cover it —and the share of professional, institutional investors in a market.

How closely (together) are returns moving in a particular market? Active management tends to perform better in environments where returns between instruments with an asset class move in different directions rather than in tandem (low intra-stock correlation) and where the return differences between the “winners” and “losers” are greatest (high return dispersion). When the return difference between stocks within an index like the S&P 500 increases, active managers can capitalize on these conditions through strategies like long/short equity hedge funds, potentially reducing volatility and enhancing returns.

Is the cost versus potential outperformance outlook favorable? While passive investing can offer cost-effective exposure to broad markets, active investing can potentially generate alpha (returns in excess of broad market movements), especially in markets with high dispersion and volatility. Investors should weigh the cost of active strategies against the potential for outperformance, particularly in niche or emerging sectors. Reviewing an active strategy’s tracking error versus a passive strategy as well as the overlap in portfolios is a good starting point to gauge the outperformance potential

How does investor type affect market movements? Market segmentation and behavioral patterns can create inefficiencies that active managers exploit. Segmentation arises from institutional constraints, while behavioral biases like overconfidence and conservatism can lead to market momentum. Active managers can take advantage of these inefficiencies, especially in less efficient markets like corporate credit and emerging market debt, where information asymmetries exist. The law of active investing suggests that outperformance depends on skill and breadth, with skill being harder to acquire but crucial for success. Expanding investment mandates and focusing on diverse instruments can enhance active management's effectiveness.

How investors chose to allocate between active and passive investment approaches depends on a number of factors, including their specific financial goals and plans. Nevertheless, we believe that many investors would do well to consider blending passive approaches with more active ones—whether long-only funds, hedge funds, or structured strategies—as a means of building a cost-effective, well-diversified portfolio that is best prepared for the opportunities and challenges of the years ahead.

CIO identifies a number of transformational innovations that look set to shape global equity markets in the years to come. Each is inextricably linked to sustainability. Artificial intelligence, Power and resources, and Longevity, which represent CIO's three transformational innovation opportunities (TRIOs), center on issues ranging from resource efficiency and food and water security to rising clean energy demand. These topics are shaping the priorities driving the global sustainability transition. We therefore believe the secular case for investing in a diversified sustainable portfolio approach across equities, bonds, hedge funds, and private markets remains firm.

Nevertheless, greater investor caution on how the Trump administration's policies may affect sustainable investing has been augmented by tariff-induced broad market volatility in recent times. While some sustainability-related policies may be rolled back in the years ahead—and we cannot rule out further trade-related volatility as negotiations evolve—we do not anticipate wholesale changes to the fundamental case for sustainable investing and continue to see attractive growth opportunities.

All major asset classes, including equities, bonds, hedge funds, and private markets, offer sustainable options, which historically have shown similar return characteristics to traditional investments, though risk characteristics differ particularly for alternatives. With the return of President Trump to the White House, we expect volatility but believe that the longer-term performance of diversified sustainable investing strategies will be driven more by investment fundamentals and the economic environment than by politics.

In stocks, we believe investors can consider the equities of companies that are demonstrating improvements or leadership in environmental, social, and governance (ESG) principles, as well as ESG engagement strategies. Despite the US withdrawal from the Paris Agreement, climate remains a viable investment area, in our view. Despite US policy shifts, renewable energy makes growing economic sense, with solar and wind cost competitive with gas in many US regions. We believe investment opportunities still exist in energy efficiency and infrastructure, especially in transmission and distribution linked to CIO’s "Power and resources" portfolio.

ESG leader strategies aim to be sector-neutral, meaning global performance isn’t driven by sector or country tilts. This may help navigate a US political environment where the performance difference between perceived policy winners and losers widens. ESG leaders have shown resilience through less favorable policy periods in the past. Recent market volatility may also provide appealing entry points, in our view. For example, at the end of March the valuation premium of ESG leaders versus the MSCI AC World Index of global stocks plumbed a 10-year trough. This was heavily influenced by performance in the US and Europe. ESG leaders, as an investment screen, correlate with growth and quality equity factors. As such, they typically enjoy a valuation premium compared to benchmarks. This is also justified by consistent empirical research that shows a positive relationship between companies' management of sustainability issues and their financial performance (Friede, et al. 2015, Whelan, et al. 2021). We expect the valuation differential to recover from here.

ESG improvers are companies that are demonstrating positive momentum in addressing ESG risks and opportunities. They are not yet "leaders" but their performance on various ESG criteria shows signs that they could become leaders in the future. Momentum is a well-known strategy in the investment industry. It consists of buying stocks that have an upward trending price and selling those that have had poor returns in recent months, based on the tendency of the price to move in the direction of the trend.

Within engagement strategies, we believe investors should diversify into sectors beyond climate that exhibit strong economic fundamentals and have a proven ability for engagement on sustainability to drive higher profits and real-world change. While we acknowledge that this approach has faced challenges from shifting regulations and a bias towards small- and mid-cap companies (the MSCI ACWI SMID Cap Index delivered a 10-year annualized gross return of 7% as of March 2025, compared to 9.39% for MSCI ACWI), we reiterate that this remains the only public market strategy with impact investing potential. As the practice broadens in the industry, investors explicitly seeking impact investing goals should remain critical of manager selection, ensuring engagement is targeted, investment-integrated, and accountable.

In fixed income, we like bonds issued by multilateral development banks (MDBs) or those with stated green intentions, as well as credit strategies with an active approach.

MDBs are supranational financial institutions backed by multiple sovereign governments, with the purpose of supporting economic, social, and environmental development, mostly in emerging countries. Many, especially those issued by the World Bank, have the US as the largest guarantor or capital contributor. As such, the country has the largest voting power on new projects or developments.

However, even the withdrawal of the US from multilateral institutions to focus on domestic or bilateral relationships should not derail MDB bonds. They have strong fundamentals, appealing yields, and resilience to weakening in the credit quality of their member countries, so they do not trade at a credit risk premium over benchmark government bonds like US Treasuries in USD or German Bunds in EUR. They do, however, offer some extra yield over government debt given lower market liquidity for the largest institutional investors. This ranges from 5 to 30 basis points (bps) across the cycle depending on the bond tenor and overall market volatility. Year to date, Multilateral Development Bank Bonds have offered a similar risk-return profile to US Treasuries. Investors can continue to benefit from MDB bonds' stability and diversification effects in their portfolios, in our view.

In alternatives, risk-tolerant investors can consider sustainable hedge funds. Such funds incorporate ESG factors into their investment processes, aiming to exploit market inefficiencies related to ESG issues. They thus may offer differentiated investment opportunities.

And in private markets, we believe impact investments in climate technology that aim to help companies meet their decarbonization commitments, reduce overall greenhouse gas emissions, and drive the overall transition to a low-carbon economy represent a significant investment opportunity, with clean energy solutions alone representing a market of USD 650bn annually by 2030, according to our estimates. We see the most attractive commercial opportunities in technologies that serve sectors that are hardest to decarbonize: electricity and heat, industry, buildings, transportation, and agriculture. These sectors are critical to the economy and major contributors to emissions.

Nonetheless, private market investors need to consider risk factors like leverage, potential defaults, and concentration risks. Investing in private market vehicles also requires a tolerance for illiquidity and comes with limited disclosure and control over holdings.

For those looking to invest in climate tech, CIO sees opportunities in funds focusing on early-stage and growth-stage companies, providing the capital needed to scale their technologies and bring them to market. We believe such funds have the potential to deliver venture-like returns, while also generating measurable environmental impact.

Moreover, investors can explore co-investment opportunities, which allow them to invest alongside experienced fund managers in specific deals. This approach provides access to high-quality assets and the ability of seasoned investors, enhancing the potential for strong returns. Additionally, secondary markets offer liquidity options for investors looking to exit their positions or rebalance their portfolios.