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UBS House View Weekly — 3 February 2020Regional view - United StatesHow to maximize growthJustin WaringRisk management is important, but over the longterm missing out on potential growth can causefar more damage than market volatility. Hereare some tools for tapping into the power ofcompounding to help you build significant wealth.Investment Strategist AmericasIf you invest USD 100 and it grows 7.2%a year, how much will it be worth after10 years? How about after 20 years, or30 years?This isn't a trick question, but there isa trick to answering it without openinga spreadsheet or calling your financialadvisor: a shortcut called The Rule of 72.Here's how it works: Take the number72 and divide it by your expected return,and it will tell you about how many yearsit will take for your wealth to double. Inthis example, 72 divided by 7.2% givesa "doubling time" of 10 years. So after10 years, the USD 100 investment wouldgrow to USD 200, and then USD 400 byYear 20, USD 800 by Year 30, and so on.This demonstrates a concept calledcompounding, which works—and defiesmental arithmetic—because it operateson a feedback loop. Growth in Year 1 isjust USD 7.20 (7.2% of USD 100), but inYear 2 the first year's growth also grows,resulting in a Year 2 appreciation of USD7.72 (7.2% of USD 100 plus 7.2% ofUSD 7.20), which then contributes toYear 3 growth, and so on.Even after years of researching marketsand calculating performance figures,I still need to rely on The Rule of 72or grab my calculator. That's true formost people, partly because exponentialgrowth is a type of trend that we rarelyencounter in everyday life—which is alittle ironic, since it is literally the mathof life. For example, cells divide bydoubling: 1, 2, 4, 8, 16, and so on—butI digress.for your lifetime—it might be spent in 40or 50 years. If you've already fully fundedyour Longevity strategy, the dollar mightnot be spent until decades after you'regone; it might even live a longer life thanyou do.The life of a dollarWe spend a lot of time thinking aboutrisk management and addressingpossible dangers to our financial wellbeing. Those are valuable conversations,but they aren't equally relevant foreach dollar in our portfolios. This isone of the key reasons why we viewinvestment decisions through the lens ofan investor's timeline of financial goals,using the Liquidity. Longevity. Legacy.(3L) framework.Tips for getting rich less slowlyOf course, dollars are fungible, so this isa matter of perspective. In addition, lifeis bumpy, so you might need to tap intoyour portfolio contributions earlier thanthis. On the other hand, it's also truethat much of your retirement spendingwill likely be funded out of "growthdollars," not the original saved dollars.As a thought experiment, think aboutthe first dollar you were able to save, andthen the last dollar you will spend duringyour lifetime. If that is the same dollar,it probably has "life expectancy" of 60years, or even 80 years, from the timeit is born (saved) until it dies (is spent).Eighty years allows for a lot of doublingtimes. At a 7.2% average rate of return—and this a 10-year doubling time—thisworks out to USD 256 per USD 1 saved.Now think about the last dollar thatyou will save just before you retire. Ifthat dollar is going into your Longevitystrategy—the funds you've earmarkedThis report has been prepared by UBS Financial Services Inc. (UBS FS).Please see important disclaimers and disclosures at the end of the document.The bulk of investment success—and theratio or your earned versus grown dollars—is determined by three main variables:1. The dollars you are able to saveSaving is the opposite of spending, anddeveloping a habit of frugality—stayingoff of what economists call "the hedonictreadmill"—means that you're likely tomaintain a more affordable lifestyle laterin life. This reduces the amount that youwill need to fund retirement spending,giving you the option of either retiringearlier or investing capital in your Legacystrategy—building wealth for futuregenerations and your philanthropic goals—instead.1
As we discuss in Doubling time and theRule of 72, the math of compoundingcan be supercharged when we considera "living portfolio." If you are able tosave an increasing amount each year,you can effectively boost your portfolio'sgrowth rate. Saving enough to add2% to your portfolio's value each yearbecomes harder later in life—as yourinvestment returns begin to competewith your salary—but if you can manageit, you can effectively add another 2% toyour investment return.3L disclaimer: Timeframes may vary. Strategiesare subject to individual client goals, objectives,and suitability. This approach is not a promise orguarantee that wealth, or any financial results, canor will be achieved.This report has been prepared by UBS Financial Services Inc. (UBS FS).Please see important disclaimers and disclosures at the end of the document.2
2. How early you begin investingIt's a cliché, but starting to save early isan immensely powerful step. By savingearly, you increase the "life expectancy"of your earned dollars, begin populatingyour portfolio with growth dollars, andstart the magic of compounding.3. The growth rate of yourinvestmentsWhen it comes to maximizing the longterm growth of your investments, thebest place to start is to consider anall-equity strategy. If a dollar in yourportfolio has a "life expectancy" of morethan 30 years, there's historically beenno more consistent way to maximize itsexpected growth than investing in a welldiversified stock index.On the other hand, all-equity strategiesare prone to periods of drastic lossesand increase the risk of bad timing. Inaddition, starting with the maximumlevel of risk robs you of the potential totake advantage of market corrections,or to add value through portfoliomanagement strategies like rebalancingand tax-loss harvesting, which canthemselves improve returns and enhanceafter-tax growth potential. A welldiversified portfolio of stocks, especiallythose with exposure to secular trends—like our Longer Term Investment (LTI)themes—can be essential in providingmore consistent and robust returns.Adding fixed income might not soundlike a way to boost growth, but it canenhance results substantially. In the last50 years, an 80% stock, 20% bondportfolio would have delivered 95%of an all-equity portfolio's annualizedreturn, with 20% less realized volatilityand significantly milder and more shortlived losses during bear markets (seeFig. 4 of the Bear market guidebook).Adding potential rebalancing and lossharvesting opportunities, an 80/20portfolio should outperform an all-equityportfolio often—especially in difficultmarket environments—thus improvingthe likelihood of significant wealthcreation.We would also recommend harnessingthe illiquidity premium by addingalternative investments—especiallyprivate equity—to the portfolio. Inexchange for accepting the additionalcomplexity, time horizon, and illiquidityof private markets, we expect investorsto earn, on average, about 1-3% peryear more than they would receive inpublic markets.3L disclaimer: Timeframes may vary. Strategiesare subject to individual client goals, objectives,and suitability. This approach is not a promise orguarantee that wealth, or any financial results, canor will be achieved.Last, but not least, you can boostportfolio growth by incorporatingleverage into their investment strategy.As we discuss in Why borrow if you'realready wealthy?, debt and leveragehave a bad reputation, but when usedprudently they can enhance returns. Thisapplies at the portfolio level, but canalso be considered when implementingindividual asset classes; utilizing optionsstrategies and structured investments canbe a useful tool for enhancing returns,especially when markets are pricing inbad news, selling you upside exposure ata discount.These return-enhancement strategiesare especially relevant for your Legacystrategy assets that aren't earmarkedfor specific spending or bequest goals.They will also often be appropriate foryour Longevity strategy dollars, especiallyif you are still in your working years,or if you've fully funded your Liquiditystrategy—cash, bonds, and borrowingcapacity—with enough resources to paythe bills for three to five years in the caseof a bear market.At the end of the day, even if these stepsonly provide a 1% boost to the 7.2%expected return that we used as anexample, it would cut the doubling timefrom 10 years to 8.8 years, increasing thenumber of doubling times for that "80year dollar" from 8 to 9.1—and thus itsfuture value from USD 256 to USD 547!This report has been prepared by UBS Financial Services Inc. (UBS FS).Please see important disclaimers and disclosures at the end of the document.3
Strategy and performanceTAA and market returns–8 –6 –4–202468Asset classTacticalDeviationin %*CashAnnualized total return in %Total return in %1–week 1–month0.0YTD1–Year0.020.130.132.335–Year 10–Year**1.180.66Barclays Capital US Treasury –Bills [1–3 M]BenchmarkBarCap US Agg GovernmentFixed Income–3.0US Gov't FI–5.00.922.422.428.902.343.12US 10 year Treasury0.01.493.713.7112.132.134.34US Treasuries (long)0.02.247.077.0722.473.707.83 2.00.882.102.109.232.403.41US Municipal FI0.00.371.801.808.653.534.47BarCap Municipal BondUS IG Corp FI0.00.582.342.3413.994.295.39BarCap US Agg CreditUS HY Corp FI0.0–0.260.030.039.405.997.43BarCap US Agg Corp HYInt'l Developed FI0.01.010.760.763.952.151.61BarCap Global Agg xUSUS TIPSBloomberg Barclays US TreasuryBellwethers 10 YearICE U.S. Treasury 20 YearsBond IndexBarclays US Treasury InflationNotes IndexEM FI30.0–0.120.560.568.234.245.0450% BarCap EM Gov and 50%BarCap Global EM (USD)EM FI - Local Currency0.0–0.66–0.43–0.435.152.433.38BarCap EM GovEM FI - Hard Currency0.00.421.541.5411.316.056.70BarCap Global EM (USD)Equity 3.0Global Equity0.0–2.54–1.10–1.1016.048.509.14MSCI ACWIUS All cap0.0–2.10–0.11–0.1120.5311.8313.80Russell 3000US Large cap Growth0.0–1.812.242.2427.9415.4715.97Russell 1000 GrowthUS Large cap Value0.0–2.32–2.15–2.1514.888.6911.86Russell 1000 ValueUS Mid cap0.0–2.42–0.80–0.8016.899.4913.47Russell Mid CapUS Small cap0.0–2.89–3.21–3.219.218.2211.87Russell 2000Int'l Developed Markets0.0–2.50–2.09–2.0912.105.125.75MSCI EAFEJapan0.0–1.58–1.36–1.3611.206.916.23MSCI Japan 3.0–5.09–4.66–4.663.814.483.77MSCI 73N/ABlooomberg Commodity IndexYield Assets0.0Senior –10.70–7.493.53US Real Estate0.0–1.601.211.2114.116.0712.66EM Equity*Tactical deviation is for moderate nontaxable without alternative investments model, see House View Investment Strategy Guide for details.**As of last month end***EM FI refers to a 50%/50% blend of local and hard currency bondsSource: UBS, as of 31 January 2020S&P 500 forecastCIO GWMJune 2020 price targetUSD 3400December 2020 price targetUSD 34002019E earnings per share estimateUSD 164.02020E earnings per share estimateUSD 174.0Source: UBS, as of 31 January 2020S&P/LSTA U.S. Leveraged Loan100 IndexBofA Merrill Lynch Fixed RatePreferred Securities IndexAlerian MLP Total ReturnFTSE NAREIT Equity REIT Index
Strategy and performanceTAA and market returns: US equity sectorsTotal return in %–3–2–10123Annualized total return in unication Services 1.0–2.990.920.9221.338.3410.68S5TELS IndexConsumer Discretionary 1.00.150.630.6316.7313.9517.57S5COND IndexConsumer Staples0.0–0.780.360.3621.758.6212.27S5CONS 172.57S5ENRS 2.07S5FINL IndexHealth Care0.0–3.24–2.72–2.7212.119.4314.37S5HLTH 13.49S5INDU Index–1.0–2.163.963.9646.0722.0618.97S5INFT 0S5MATR IndexReal Estate0.0–1.821.421.4218.106.5311.95S5RLST Index–1.00.856.656.6530.2911.1813.08S5UTIL Index–2.10–0.04–0.0421.6712.3513.95SPX IndexSectorInformation TechnologyUtilitiesS&P 5005–Year 10–Year**BenchmarkNote: Tactical deviations are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.**As of last month endSource: UBS, as of 31 January 2020Market movesS&P 500DJIANasdaqNikkei 225Level1–w chg3,226–2.10%YTD %23,205–2.60%–1.90%Eurostoxx 503,641–3.66%–2.62%MSCI EM1,062–5.09%–4.66%MSCI World2,342–2.19%–0.58%MSCI EAFE1,994–2.50%–2.07%DXY97–0.47%1.04%Gold 1589/oz1.12%4.74%Brent crude oil 58.2/bbl–4.17%–11.88%US 10-year yieldVIX1.51%–18 bps–41 bps18.8 4.3 pts 5.1 ptsSource: Bloomberg, as of 31 January 2020Note: All returns are in local currency* As of intraday 30 January 2020Tactical time horizon is approximately six months.Total return market performance is from Bloomberg as of close of business on source date, using representative indices, and is provided for information only.Past performance is no indication of future performance. –Indicates /– changeTerms and abbreviationsYTD year-to-date.TAA tactical asset allocation.
Earnings calendarThe Earnings Calendar provides publicly announced reporting dates and times of companies covered by Chief Investment OfficeGWM. Reporting dates and times are subject to change by the reporting 0Alexandria Real Estate Equities, Inc.AREAlphabet, Inc.GOOGL04-Feb-2020Cummins, Inc.CMIEQM Midstream Partners LPEQMLennox International, Inc.LII04-Feb-2020Simon Property Group, Inc.SPGConocoPhillipsCOPThe Walt Disney Co.DIS04-Feb-2020Plains All American Pipeline LPPAAPlains All American Pipeline LPPAAZayo Group Holdings, Inc.ZAYO05-Feb-2020AvalonBay Communities, Inc.AVBCognizant Technology Solutions Corp.CTSHFMC Corp.FMC05-Feb-2020MetLife, Inc.METQUALCOMM, Inc.QCOMSuncor Energy, Inc.SU06-Feb-2020Macerich Co.MACThe Est (R)e Lauder Companies, Inc.ELPhilip Morris International, Inc.PM06-Feb-2020Yum! Brands, Inc.YUMIntercontinental Exchange, Inc.ICELions Gate Entertainment Corp.LGF.A06-Feb-2020Take-Two Interactive Software, Inc.TTWOFortinet, Inc.FTNT07-Feb-2020Cboe Global Markets, Inc.CBOESource: FactSet, UBS, as of 31 January 2020Key economic indicatorsDateIndicatorPeriodTime (ET)UnitConsensusPrevious3-Feb-20Construction SpendingDec10:00 AMm/m0.4%0.6%3-Feb-20ISM ManufacturingJan10:00 AMlevel48.047.24-Feb-20Factory OrdersDec10:00 AMm/m0.7%–0.7%5-Feb-20ADP Employment ChangeJan08:15 AMlevel155k202k5-Feb-20Trade BalanceDec08:30 AMlevel– 46.0b– 43.1b5-Feb-20ISM Non-ManufacturingJan10:00 AMlevel55.055.06-Feb-20Unit Labor Costs4Q P08:30 AMq/q0.9%2.5%6-Feb-20Nonfarm Productivity4Q P08:30 AMq/q1.7%–0.2%7-Feb-20Nonfarm PayrollsJan08:30 AMlevel153k145k7-Feb-20Private PayrollsJan08:30 AMlevel150k139k7-Feb-20Unemployment RateJan08:30 AMlevel3.5%3.5%7-Feb-20Average Hourly EarningsJan08:30 AMm/m0.3%0.1%7-Feb-20Average Weekly Hours All EmployeesJan08:30 AMlevel34.334.3Source: Bloomberg, UBS, as of 31 January 2020UBS forecast estimates are published on Friday evenings in Economic Perspectives by economists employed by UBS Investment Research, a part of UBS Investment Bank.m/m month–over–month. q/q quarter–over–quarter. y/y year–over–year. k thousand. mn million. b billion. P preliminary. F Final.
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are some tools for tapping into the power of compounding to help you build significant wealth. This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures at the end of the document. 1 If you invest USD 100 and it grows 7.2% a year, how much will it be worth after 10 years?
