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A new approach to manage your wealth
IN the past couple of months, many among us would have made resolutions, looking to improve our well-being. Yet too often, we start out with big dreams and great intentions only to revert to old (and potentially bad) habits before long.
It's no different for investors. Even the most unflappable people often let their hearts rule their heads during turbulent times. So UBS has devised a unique wealth management approach - Liquidity.Longevity.Legacy or the "3Ls"* - to help investors navigate a more volatile investment landscape in 2019.
What is the "3Ls" framework?
The "3Ls" help investors to plan for their long-term financial goals. The framework asks you to look at your financial objectives, group them into three buckets, and create a dedicated investment strategy for each bucket.
The first bucket, a Liquidity strategy, aims to fund your expenses and service your debts over the next two to five years. Such a short investment timeframe means this part of your wealth should be held in assets the value of which is less sensitive to market swings - examples include cash or highly-rated bonds.
The second bucket, a Longevity strategy, looks to fund your financial goals following your retirement. Many investors use pensions or retirement savings vehicles in their Longevity strategy. But the "3Ls" framework also considers other personal needs for later life, such as paying off your mortgage, disability insurance, and long-term healthcare needs.
The third bucket, a Legacy strategy, invests any surplus funds once you've met your own needs. It's designed to help improve the lives of others beyond your lifetime - whether supporting your children or grandchildren financially or improving the outlook for our planet and its inhabitants through sustainable giving or investing.
How can it help investors in 2019?
Using the "3Ls" framework to create a disciplined investment plan can help investors navigate a more challenging investment environment in the year ahead and still gain from the expected rise in global equity markets that we forecast for 2019.
First, the "3Ls" framework can help investors to stick to their plans and avoid emotional biases. A study conducted by business school professors Brad Barber and Terrance Odean found that households with the highest portfolio turnover (frequent trading in choppy markets, for
example) underperformed low-turnover investors by almost 7 per cent per year. Using a Liquidity strategy of lower-volatility assets to fund expenses over the next two to five years can help investors to avoid selling assets in turbulent times and locking in poor performance.
Second, it allows investors to reframe risk in terms that really matter to them. Investors fear swings in financial asset prices because they worry they may fail to reach goals such as securing a comfortable retirement or funding their children's college fees. The "3Ls" framework speaks to investors' personal ambitions by framing risk with a probability of success and a surplus or a deficit - will you have enough money to meet your goal or are you set to fall short?
Let's take a concrete example of retirement planning. A 2018 survey by UBS's Client Strategy Office found that 59 per cent of participants in Hong Kong and 46 per cent in Singapore expect to live to 100. Planning for a multi-decade retirement requires investors to think about risk differently. In turbulent markets, the appeal of cash seems greater as it holds value compared to gyrating stock prices. Yet, US data over nearly a century shows that equities beat cash in terms of delivering inflation-adjusted returns. And while past performance cannot predict future returns, our analysis shows that US equity investors have always experienced positive inflation-adjusted returns over 20-year investment periods.
PUTTING "3LS" INTO PRACTICE
Every investor's circumstances are unique. But there are a few universal principles:
Create your own balance sheet
List all your assets and liabilities for both pre- and post-retirement periods. These need not be numbers in a bank account or heirlooms you can touch. Working-age investors may find their greatest asset is their human capital, making it important to consider education costs as a way to boost wealth, or disability insurance in the worst case of your career being cut short.
Meet near-term liabilities with a Liquidity strategy
Consider funding the next two to five years of spending via a portfolio of cash or highly-rated debt instruments. Working-age investors may fund this out of labour earnings, while retirees could use pension or annuity income. This strategy's role as a stable source of income can allow investors to bear market risk elsewhere, even in volatile market conditions.
Regularly rebalance across strategies
With near-term expenses covered by the Liquidity bucket, investors can focus on growing their retirement funds (Longevity strategy) through a portfolio diversified across assets and geographies. Meanwhile, surplus funds invested in a Legacy portfolio can be invested in longer term assets with the greatest growth potential as the goals to be funded are multi-generational.
If unexpected market conditions reduce the likelihood of you having enough to fund your preferred retirement lifestyle, you could also review your Longevity and Legacy strategies and switch funds from the latter to the former. Equally, investors approaching retirement will gradually increase their Liquidity funds while also running down their Longevity balance.
We expect financial market uncertainty to persist in 2019, potentially unsettling investors and their long-term plans. The "3Ls" framework can guide investors in turbulent times and move them closer towards meeting their personal objectives. That's one resolution worth keeping for the months and years to come.
- The writer is head, Chief Investment Office Asia Pacific, UBS Global Wealth Management