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How you invest

Goals, approaches and choices

If I had eight hours to chop down a tree, Id spend
six sharpening my axe. (Abraham Lincoln). The
vorId o! nance is exIremeIy compIex, yeI iI has
never been easier to invest in global markets.
Many investors buy stocks without developing an
invesImenI approach and Ihe nanciaI crisis vas a
steep learning curve. How you invest is for
investors to sharpen their axe, take a step back
and re-examine their own investment approach.
Recent large-scale asset bubbles misled the
nanciaI indusIry
The nancial crisis nol only shook lhe loundalions ol lhe
global nancial and economic syslem, bul led many
privale inveslors lo reconsider lheir inveslmenl
approach. Many inveslors realize lhal lhe queslion ol
melhod (how) is al leasl as imporlanl as lhe queslion ol
subslance (whal). lnveslors seek an inveslmenl solulion
lhal lhey undersland and lhal is aligned wilh personal
objeclives and lundamenlal conviclions.
InsighIs !rom behavioraI nance are reIevanI !or
private investors
The lasl decades wilnessed lhe developmenl ol new
economic lheories on inveslor behavior. The behavioral
view appeals lo privale inveslors since il caplures
lamiliar pallerns ol behavior we experience when
dealing wilh real-lile inveslmenl decisions. The conse-
quences ol inlroducing behavioral aspecls lo how
inveslors make inveslmenl decisions are lar-reaching and
challenge lhe validily ol lhe elcienl-markel hypolhesis
which claims lhal "markels know prices besl."
Weallh Managemenl Pesearch
April 20!!
UBS research focus
This report has been prepared by UBS AG.
Pasl perlormance is no indicalion ol lulure perlormance. The markel prices provided are closing prices on lhe respeclive principal slock exchange.

Investment approaches at a glance

Classical investment approach Scenario-based approach Wealth preservation approach
Main goal Long-term participation in market returns Achieve positive returns every year Preserve capital through all cycles
Basic convictions Adherence to a strategic asset allocation
provides the best results
Following credible market scenarios provides
the best results
Wealth preservation is more valuable than return
Investment horizon Long-term Flexible, adapted to the investment thesis Flexible, depending on wealth preservation targets
Driver of asset selection ,@WHLHYDKNMFSDQLQHRJQDSTQMOQNKD Scenario-based assumptions on risk-return
Protection against unacceptable loss
strategic asset allocation
preservation targets are threatened
Source: UBS WMR
No investment approach captures all desirable
properties for all investors
Lvery inveslor pursues individual objeclives and personal
views on nancial markels. ln order lo nd lheir mosl
suilable inveslmenl approach an inveslor needs lo clarily
personal conviclions and objeclives.
The diversily ol individual objeclives and perceplions is
illuslraled in lhe piclure below. ll shows common
slalemenls made by inveslors. Some ol lhem conlradicl
one anolher, bul lhey can all be valid. Since lhere are so
many dierenl conviclions lhere cannol be one invesl-
menl approach lhal is suilable lor all inveslors.
This publicalion is essenlial reading lor inveslors lo
clarily lheir personal conviclions and objeclives, and
choose an inveslmenl approach lhal malches lheir
Staying the course: the classical investment
ln lhe classical inveslmenl approach lhe inveslor holds
lo a slralegic assel allocalion lhrough all markel
cycles. Shorl-lerm devialions lrom lhis slralegic alloca-
lion are possible bul lhe slralegic assel allocalion always
serves as lhe benchmark allocalion. This approach allows
lhe inveslor lo parlicipale in long-lerm movemenls ol
lhe markel and lheorelically oplimizes lhe relurns lor a
given risk. However, lhis implies lhe inveslor needs
discipline lo lollow lhe approach. This may nol always
be easy, especially during markel downlurns. Thus,
belore invesling by means ol lhis approach lhe inveslor
needs lo be aware lhal slicking lo lhe inilial slralegy
and an appropriale rebalancing melhod is key lo
success, even il lhal may appear counlerinluilive al
cerlain poinls.
Looking ahead: scenario-based dynamic
asset allocation
lnslead ol relying on a slralegic assel allocalion as a
poinl ol relerence and againsl which relurns are com-
pared, many inveslors wish lo build lheir inveslmenl
posilion on scenarios lhey consider credible lor lhe
lulure. Such scenarios describe economic growlh
developmenls, lhe evolulion ol inleresl rale levels and
powerlul slruclural lrends. As an example, we oulline
our currenl base case and risk scenarios and lhe impacl
lhey would have on lhe main assel classes.
Scenario-based inveslors lry lo adapl lheir porllolio lo
generale posilive relurns in all markel environmenls.
lnveslors using lhis approach dynamically adapl lheir
porllolios as lhe lulure unlolds on lhe basis ol oulcomes
lhal appear more likely lhan olhers. As a consequence
however, syslemalic risk managemenl is crucial, because
a poor scenario lorecasl can subslanlially diminish a
porllolio's perlormance.
What type of investor are you?
Im a long term investor
I systematically want
to protect my wealth
Nobody knows
where markets go
I want to make money this year
I want to get rich
Research helps me
beat the market
Source: UBS

Staying the course: the classical investment approach

Looking ahead: scenario-based dynamic asset allocation
How you invest
Goals, approaches and choices
UBS research focus
Wealth Management Research
April 2011
UBS research focus is a agship publicalion lrom U8S Weallh Managemenl Pesearch
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5a!eIy rsI. veaIIh preservaIion
lndividuals somelimes especially during markel crises
have periods where lheir losses reach a slage where
lhoughls lurn lo shorl-lerm weallh preservalion over
long-lerm relurn maximizalion. ln behavioral nance,
lhis pallern is relerred lo as 'loss aversion' which may
resull in inveslors' sub-oplimal porllolio decisions.
We inlroduce dynamic weallh preservalion slralegies,
which locus eilher on proleclion over oulrighl relurns,
or in which lhere is some lype ol syslemalic overlay lo
prolecl lhe overall porllolio. However, lhere is no such
lhing as a lree lunch. Neverlheless, lor an inveslor lhere
is value wilhin any inveslmenl slralegy in considering
how lo deal wilh losses belore lhey occur.
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