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Enhancing liquidity strategies | UBS Trending for Thursday, April 15, 2021 - YouTube
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welcome to UBS trending I鈥檓 your
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host Wendy Mock interest rates
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are at exceptionally low levels
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now and it looks like that will
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remain the case for quite
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awhile this can pose a problem
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for some investors in terms of
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generating additional return
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while also maintaining capital
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preservation joining us to
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discuss how investors can
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address this challenge is
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Justin Waring investment
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strategist with the UBS chief
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investment office welcome
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Justin. Thank for having me.
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Sure great to see you for
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investors with cash in their
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portfolio what are some of the
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challenges with generating
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income. Well like you said
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right now cash and bond yields
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are incredibly low levels and
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generally you know if you want
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to invest cash for five years
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you can get about 1% on- sort
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of money market funds bond
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funds or CD's- and if you want
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to get a little bit more than
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that. You're gonna end up
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having to risk some of your
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initial investment and so- it's
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a current environment where if
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you've got money that you want
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to set aside for spending the
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next few years the idea of a
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loss on your investment isn't
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very appealing. And so the
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moving beyond the traditional
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debt instruments- and taking on
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that risk of a loss is
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something that you might not
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want to do. So you your team
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want to do. So you your team
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recently launched a theme
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highlighting the five year
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market linked C. D.'s- for
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listeners and our viewers out
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there what exactly is a market
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linked CD. So market linked CD's
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are on like similar to a
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traditional CD there issued by
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a bank and they鈥檙e FDIC insured
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so that you get your principal
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back at the at maturity- unlike
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traditional- CD's. You don't
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get a regular interest payment
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instead your return at
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investment is determined based
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on the underlying index for
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example the S. and P. five
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hundred. So let's say for
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example you by a five year
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Market linked CD tied to the
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S. and P. five hundred
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at the end of the five
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year period. You'll get your
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principal back plus a return
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based on the performance of the
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S. and P. five hundred over
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that period of time. And
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usually there this comes with
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that some guard rails you're
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not gonna get the full
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participation the SP five
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hundred but you also won't be
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exposed to the downside risk S
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and P five hundred. And so based
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on the terms that we're seeing
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in the market today you might
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be able to participate- one for
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one in the S. and P. five
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hundred return up to fifteen
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percent. But you'd also be
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protected on your principal at
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maturity so you do you can't
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lose for any money at maturity
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so at the end of the day. At
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the end of a five year period
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you're gonna get a return
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between zero and fifteen
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percent. And what we notice is
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that you know this is allowing
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investors to tap into the
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possible value that we see in
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the stock market but not taking
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on the full risk. Of a direct
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investment in the stock market.
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That鈥檚 really interesting. Why
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are market linked CD is
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offering a higher yield than
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traditional bonds and what are
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some of the risks and Vestor
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should pay attention to. So
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one of the things to
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remember is that unlike
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traditional CD's these are not
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paying out regular income
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payments so you're sacrificing-
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regular coupon payments along
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the way- the return is only
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paid out when the M. L. CD
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matures. And it's possible
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although unlikely when we look
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at historical returns our
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forward looking simulations
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that you'll end up with a 0%
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return on your investment. If
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stocks do poorly in a five
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year period for example so
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unlike a traditional buying
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your not guaranteed any
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return on your investment it is
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a high likelihood but it's not
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guaranteed. On top of that.
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Like a lot of these other
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instruments MLCDs can be
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difficult to sell if you need
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your investment back before the
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maturity of the investment
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that's also true for CD's- but
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it might be exacerbated a
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little bit because there's not
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as much of a market from. For
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structured investments like
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market linked CD's on an ongoin
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basis- so we estimate currently
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that- to take all of to take
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all these risks on investors
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are able to return- able to get
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an average return is about
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twice. What you can get on five
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year treasury bonds- so we
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think that MLCD鈥檚 can be a
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particularly good fit if. You
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have cash you need to set aside
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for spending in five years
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time- and- where you can afford
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to lock up cash for a five year
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period. But but where you're
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not willing to have a loss on
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your investment if you are
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willing to have a loss in your
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investment- there are other
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investments that can give you a
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higher return- potential but
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but you are risking that at the
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end of that five year period
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you'll need to find cash
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somewhere else. To make up any
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shortfall and so it's important
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to discuss all these options
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with your you UBS financial
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advisor to understand the terms
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of a particular market linked CD
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And to understand how it
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compares to some of the. Other
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alternatives that might be
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available to you. Yeah a lot
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of- important components market
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linked CD鈥檚 for investors out
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there to consider and discuss
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what their financial advisors
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thank you so much Justin for
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sharing that. That was Justin
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Waring investment strategist the
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chief investment office at UBS
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thank you again. UBS is on
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social media you can follow us
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on linkedin Instagram Twitter
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and Facebook to find highly
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content from our best thinkers
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and intellectual capital I can
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help you make more informed
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investment decisions. And as
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always if you have any
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questions about your portfolio
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please speak with a financial
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adviser. Thanks for joining
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everyone and don't forget to
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check out other episodes and
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UBS trending they can be found
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on demand on UBS dot com slash
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studios and on the UBS channel
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on YouTube. Until next time I鈥檓
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Wendy Mock have a great day
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and remember to keep your eyes
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on what's trending.
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