Top of the Morning: Building and refilling the Liquidity strategy
The desk emphasizes the crucial role of a robust liquidity strategy in uncertain market conditions. Strong liquidity reserves can help investors weather potential economic volatility, aligning with Justin Waring and Ainsley Carbone's insights discussed in UBS’s recent podcast, where they stress that having adequate resources set aside for essential expenses can significantly alleviate financial stress. With markets recovering but uncertainty looming, the emphasis on liquidity assumes heightened importance. Investors are advised to ensure their liquidity strategy is adequately funded to manage risks effectively and protect their financial wellbeing during turbulent times.
What the desk is arguing
The core argument posits that funding a liquidity strategy is essential for both individual and institutional investors amidst market fluctuations. Per the full note from UBS, a well-structured liquidity approach acts as a financial safety net to cover significant life expenses, allowing investors to maintain stability without needing to liquidate investments at unfavorable times.
Supporting this, UBS highlights the need to reserve assets sufficient to cover spending needs over the next three to five years. This timeframe is critical as it accounts for various market scenarios and challenges, reinforcing the practicality of a liquidity strategy during volatile periods.
Where it sits in our coverage
Our current consensus target for liquidity-focused investment strategies centers around 1.075, with a range spanning from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This view aligns with jpmorgan's more aggressive stance, suggesting that substantial liquidity funding is crucial to mitigate risks effectively while diverging from bofa's more conservative outlook. If liquidity is not effectively managed, market volatility may lead to a drop below the lower target of 1.04.
How other firms see it
Many firms are aligned with the overarching sentiment on liquidity, underscoring the necessity of maintaining solid reserves in uncertain markets. For instance, jpmorgan supports aggressive liquidity strategies while bofa offers a more cautious stance, presenting a diverse perspective within the space.
Key intersections with this liquidity focus include monitoring the EUR/USD trajectory and U.S. Federal Reserve interview outcomes which significantly affect market liquidity perceptions. Investors should be particularly attentive to upcoming indicators reflecting market sentiment on liquidity, as they can provide essential insights into currency movements.
01A robust liquidity strategy is essential for managing financial stability amidst uncertainty.
02Investors should maintain adequate resources to cover expenses over the next three to five years.
03The market's recovery does not eliminate the need for a solid liquidity reserve strategy.
04Different firms present varying targets reflecting their views on liquidity and market conditions.
Market implications
Investors should observe the 1.075 level as a key benchmark for liquidity strategies. Any market movement that indicates rising uncertainty could be significant, especially if it affects key economic indicators related to liquidity such as inflation rates or employment figures.
Risks to this view
A significant catalyst that could invalidate this call would be a more pronounced and sustained market correction, which could force investors to liquidate positions and reduce their liquidity reserves. Additionally, if major central banks modify their monetary policy stance unexpectedly, it could also impact liquidity conditions.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today we are discussing a timely topic for you our listeners, investors, that being the importance of refilling your liquidity strategy.
Now although markets have largely recovered from recent losses as we're recording on Monday, May 12th, uncertainty is of course still on the horizon. So now is an opportune time to ensure you have enough resources set aside to cover your spending needs over the next three to five years. So on today's episode we will spend some time exploring why a liquidity strategy is essential, how much you should set aside, and practical ways to implement and customize this approach for your unique situation.
With that, joining me today here at our 1285 podcast studio, glad to have with me in person Ainsley Carbone, retirement strategist Americas, as well as Justin Waring, senior total wealth strategist for the Americas, both joining us today from the UBS Chief Investment Office. With that, Ainsley, Justin, it's great to be at the table with you both. I know we typically do these over the phone, so it's great to be with you both in person today.
Great to be here. Good to be here. So a timely conversation, as mentioned, we have lined up for our listeners today.
Let's get right into it. Ainsley, beginning with you, why is it important to fund a liquidity strategy and what risk does doing so help manage? Yeah, so a liquidity strategy consists of the resources you need to meet your spending needs over the next three to five years, and it's built to help you maintain your lifestyle during periods of market volatility.
So this is really about creating a safety net for yourself so you can cover your essential expenses like housing, groceries, health care, and any upcoming big-ticket items that you're planning. And it allows you to meet those needs without having to worry about what's happening in the market or in the economy. So by setting aside the next three to five years of expected portfolio withdrawals in safe and liquid assets, you avoid the risk of having to sell long-term investments at a loss during market downturns.
So when we look at what portfolios have experienced historically, most balanced portfolios have recovered from bear markets within three to five years. So having this buffer of your resources set aside in liquid assets helps you to stay on track with your investments and helps you ride out market turbulence so that your portfolio essentially has time to recover, it has that patience to recover from any short-term volatility. So at a high level, setting aside assets for near-term needs can really just be the foundation of having a resilient financial plan is how we like to think about it.
It's really all about capital preservation and peace of mind. Having your spending needs funded regardless of market conditions can just help make sure that you're reducing anxiety where you can and can help you stay focused on your bigger picture. So now that we have a better understanding for the necessity of having a liquidity strategy, let's spend a few moments honing in on the importance of timing.
So Justin, why is now a good time to refill your liquidity strategy even if a bear market isn't the base case? So in order for us to have a liquidity strategy to ride out bear markets and difficult market environments, we need to have a strategy to have a disciplined approach for proactively refilling the liquidity strategy. And so one thing that we recommend for clients to do is every year take a look at your spending from the past year, try to predict any extra spending you might have over the next three to five years and work with your financial advisor to refill the liquidity strategy.
Well right now markets are quite healthy even though there's a lot of uncertainty about the market. Markets have largely rebounded from recent market losses. So we're saying now's a good time to refill your liquidity strategy, not necessarily because we think the market's definitely going to go down soon, but we do know that markets do decline.
Sometimes they decline a lot and sometimes it takes them a while to recover. And so it's just a healthy basic strategy to refill on a regular basis when markets are healthy as they are today. And so a couple weeks ago if you'd asked me, is this a good time to refill your liquidity strategy, I would have counseled you in most situations to just pause.
The market was down 10 to 15 percent from its all-time high. Those are the types of environments where we recommend pausing refilling the liquidity strategy. And whereas now markets are healthy, near all-time highs, this is a much better environment to be selling.
In terms of knowing how much to allocate Ainsley, how should investors go about determining how much to set aside in their liquidity strategy? Well like I said earlier, your liquidity strategy assets should reflect your anticipated portfolio withdrawals over the next three to five years. So if you're someone in your working years, your income will hopefully, it'll likely be enough to cover your living expenses.
So the liquidity strategy will primarily be an emergency fund that includes enough resources to meet the next six to twelve months of expenses. This will just help to protect your financial plan from periods of unemployment. But you'll also want to make sure that you set aside enough assets to meet any planned major expenses in the next three to five years.
That is, if they are too large to be covered by your regular paychecks or your regular income. Now if you're someone who's approaching retirement or already in retirement, this is really when the liquidity strategy becomes a little bit more significant because you don't have that working income anymore to meet the majority of your living expenses. So you'll want to set aside enough resources to cover all of your expected portfolio withdrawals over the next three to five years.
But keep in mind this will be the spending that is in excess of any retirement income you'll be receiving, like Social Security income, pension income, or annuity income. And just make sure that you're including not just the necessary expenses, but also discretionary spending in any upcoming planned large expenses. Now I will say it isn't easy or straightforward to be able to just estimate or understand how much you're spending.
I think most people, like myself, definitely really just tends to have a rough estimate of how much they're spending. And unfortunately, if you just go off of a rough estimate, it's a good starting point, but it will make it difficult to be able to make sure that your liquidity strategy is serving that purpose of protecting you from that market volatility if you don't have an accurate estimate of spending to base your the funding amount off of. So that's really why we suggest reviewing your spending plans regularly with your family and your financial advisor, and adjusting for any large or one-off expenses.
And also just revisiting your spending habits and plans will just give you a much better understanding of your actual spending, and will also allow you the opportunity to make any adjustments for any lifestyle changes that happen over time. So as far as putting this all into practice, Justin, what are some practical ways to implement a liquidity strategy, and how can it be customized? So one really important part of liquidity strategy is a core bond and CED ladder.
So this isn't that complicated, really. All you're doing is buying bonds that are going to mature with the dollar amount that you need to spend in the future years. So you may buy a one-year bond for spending you need in a year, a two-year bond for money you need in two years, etc.
So if you have a really great idea of exactly how much you're going to spend and when you're going to spend it, a bond ladder could be the entire liquidity strategy for you. As Ainsley mentioned, life is a little bit more messy than that, and we don't always know exactly when spending is going to happen. We also need to have funds on the side for emergency expenses that, you know, the roof doesn't break every three years.
We do need to have enough money for emergency expenses like that to happen every now and then. And so as a complement to that core bond and CED ladder, we also recommend having a satellite of strategies. We have it broken down into three tiers.
Tier one is everyday cash, so that's cash that you need daily liquid for just day-to-day expenses. For those dollars, it doesn't really make sense to take any market risk, so we want to just keep it as cash-cash as possible. For the next tier, which we call savings cash, you can take a little bit more risk because this is for money that you need in the short term, but you don't need it day-to-day.
You might be able to use this part of the portfolio to pay off credit cards or to draw in every couple months. Here you can afford to invest in high-yield savings accounts, maybe money market funds, things like that, that are going to give you a higher return than cash-cash. And then tier three is investment cash, so this is a pretty broad category.
This could include money that you don't need for three to five years, which means that you can afford to take on a little bit more market risk, a little bit more credit risk, and so the yield opportunities on that part of the liquidity strategy can be quite a bit higher than the rest of the portfolio. For example, there are some structured investments that have capital preservation if you hold it for three to five years, and they can offer you potentially equity-like returns, but you may have trouble selling it if you need it before that three to five year period is up, and so that can be appropriate for funds that you can afford to keep invested for three to five years, as you might imagine. But most importantly, when it comes to customization, is finding the right size for your spending needs and making sure that anything exceeding that is actually getting into the long-term investment.
This is where a lot of investors get into trouble, is maybe getting too much into the weeds on how exactly to invest the liquidity strategy, but missing the bigger picture of, you know, a lot of clients end up, a lot of families end up with far more liquid capital than they need, and we like to say risk, but not investing enough in long-term growth can be a risk. In the long run, markets go higher, and it's a lot harder to make up for that opportunity cost, and so the most important thing is talk to your financial advisor, talk to your family, and have enough liquidity strategy to live your life, but not too much that it gets in the way of growing wealth for the long term. With that, Justin Ainslie, great guidance.
Thank you for joining us here on top of the morning today. Great to be in studio with you both as well. Terrific considerations when it comes to keeping our clients informed as to how they should manage, implement their liquidity strategy.
So, thank you again for joining us today. Good to see you. Thank you.
Thanks for having us. And for you, our listeners, I want to point out to locate more details and to learn about tailoring this advice to fit your family's goals. Be sure to speak with your UBS financial advisor.
You can also visit UBS.com forward slash CIO to read a copy of the team's monthly report, UBS Wealthway, Building and Refilling the Liquidity Strategy. From UBS Studios, I'm Dan Cassidy. Thank you for joining us.
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