Opportunities on the Horizon: Investing Through a Slowing Economy

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 21 Reducing portfolio drawdowns in times of stress Volatility is not an investor’s sole concern. It can be very challenging to hold on to investments when a portfolio plummets in value by 20%, 40% or more. Emotional investors may feel relieved by cutting losses and getting out of the market. But this can be damaging to their long-term returns. Markets tend to recover before economies do and over longer time horizons choosing when to get in and out of markets efficiently becomes nearly impossible. By diversifying portfolios and rebalancing themwith discipline, a strategic asset allocation can potentially reduce portfolio drawdowns and get to recovery faster – FIGURE 2 . During the dot-com bubble, the S&P 500 lost 47.4% of its value from the previous peak, while our asset allocation recorded a more contained drawdown of 32.8% net of fees (25.9% for a gross of fee). During the Global Financial Crisis, one of the most extreme events in the past several decades, the S&P 500more than halved in value (-55.4%). Although our asset allocation reached the prior high eight months after the S&P 500 did, its drawdown was 15% (-41.5%) lower than the S&P. To further test the validity of our strategic asset allocation approach, we extended our analysis to consider the 10most severe selloffs in the S&P 500 since the dot-com bubble ( FIGURE 3 and 4) . As shown, on average our asset allocation registered less than half the volatility of the S&P 500 and had an average drawdown rate that was a third less. FIGURE 1 : Annualized Volatility During Periods of Market Stress 22.9% 37.3% 79.8% 9.7% 9.6% 17.1% 17.1% 35.3% 35.3% 0 10% 20 30 40 50 60 70 80 90 Dot-Com Bubble Global Financial Crisis COVID-19 Recession S&P 500 AVS L3 (Net of fee) AVS L3 (Gross of fee) Source: Citi Global Wealth Investments and Bloomberg, as of May 1, 2023. Dot-ComBubble event looks at the annualized volume frompeak date of S&P 500 on Sep 1, 2000, to trough date on Oct 9, 2002; GFC frompeak date on Oct 9, 2007, to trough date onMar 9, 2009; COVID-19 episode from peak date on Feb 19, 2020, to trough date onMar 23, 2020. The figures refer to the realized volatility of the S&P 500 Index and the AVS Risk Level 3 allocation. The performance of the AVS Level 3 Portfolio was calculated on an asset class level using indexes to proxy for each asset class. Gross of fees returns do not reflect the deduction of advisory fees. Net performance results reflect a deduction of 2.5%annual maximum fee that can be charged in connection with advisory services that covers advisory fees and transaction costs. All performance information shown above is hypothetical not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection of securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income or commodities markets in general which cannot be, and have not been, accounted for in the preparation of hypothetical performance information, all of which can affect actual performance. The returns shown above are for indexes and do not represent the result of actual trading of investable assets/securities. The asset classes used to populate the allocationmodel may underperform their respective indexes and lead to lower performance than the model anticipates.