Successfully entering the stock market – ETFs make it easy
In the current environment of low interest rates and pricey real estate, the stock market offers an attractive alternative for savings. Simple and cost-efficient solutions are most suitable.
Do you want to buy an apartment or a house sometime in the future? Every now and then, most of us make big plans. Others want more money for their retirement or wish to reduce their workload. All too often, such plans disappear as quickly as they materialized. Darren Hardy writes in his book "The Compound Effect" that we often achieve the biggest changes with small and regular actions.
Let us look at the Müllers, a family of four. The parents are going to retire in 30 years. If the family invests CHF 1,000 per month until retirement and achieves an annual return of 5%, they will be CHF 800,000 richer upon retirement. If these savings are not invested, the accumulated capital will amount to CHF 360,000. In a sense, it would cost this family about CHF 440,000 not to think about their savings.
Anyone keeping money in their savings account in Switzerland earns practically no or sometimes even a negative interest. Real estate makes it possible to let your money work for you. In the long run, you are usually better off buying your apartment or house instead of renting it. However, only a minority can afford to buy real estate, especially in the large centers of Switzerland. According to the Federal Office of Statistics (1), the rate of home ownership is around 40% nationwide. In the big cities, this number lays below 20%. In the current environment, equities and selected bonds therefore offer an attractive opportunity to make savings work for you.
When investing, return and risk cannot be kept apart. You take virtually no risk when you keep money in the savings account, but you also get no return. On the other hand, if you buy stocks, you can expect annual returns between 4% and 9% over the long run. In the short term, however, your investment can lose more than half of its value.
What do you need to consider if you want to invest in stocks? Basically, stocks are worthwhile for all savings not needed in the next 10-15 years. The longer the time horizon, the more your assets grow thanks to the effect of compound interest. If you have the time, expertise, and interest, you can open a trading account with a bank or an online broker and trade stocks yourself. However, independent studies show that this path usually leads to below-average returns (2). Alternatively, you can entrust your money to a bank or an online asset manager.
There are basically two options if you want to invest in stocks. You can buy shares of individual companies such as Nestlé or Apple. You can hereby achieve high returns, but you also risk large losses if the companies you chose go bankrupt. Alternatively, you can buy Exchange Traded Funds (ETFs). With ETFs, you do not put all your eggs in the same basket. Most ETFs contain shares of several dozen or several hundred companies. When you invest in a company, you bet on it being more successful in the future. When you invest in an ETF, you have a stake in the economy of a country, a region, or an industrial sector. And if you are not into betting, you should spread the risk over several diversified ETFs (more on this below).
The Swiss Market Index (SMI) provides insights on what you can expect from an ETF. The SMI consists of twenty large Swiss companies such as Nestlé, Novartis and Swisscom. The performance of the SMI yields information about the state of the Swiss economy. If the share prices of most companies in the SMI rise or fall, the value of the SMI also rises or falls. It is not possible to invest directly in the SMI. However, investors can invest their money in ETFs following the performance of the SMI. If you want to extend the scope of your investments, you can select further ETFs tracking the performance of indices of other economic regions or industries.
According to Harold Samuel, the three most important characteristics of real estate are location, location, location. For investors in the stock market, this rule translates into fees, fees, fees. If the Müllers were to pay 1% annual fees and achieved an annual return of 4% instead of 5%, the accumulated capital would be about CHF 120,000 lower upon retirement. Regardless of whether you or someone else puts your money in the stock market, you should always make sure that your costs remain low. Nowadays, the annual fees of most ETFs are around 0.2% of the invested capital. ETFs are therefore cost-effective.
In an environment of low interest rates and pricey real estate, stocks offer a better long-term proposition for money. ETFs are cost-effective and spread the risk of losses. At True Wealth, you can invest your assets in diversified ETFs starting from CHF 8,500. If you are still young and do not yet own this amount, you may set aside monthly CHF 350 for two years. When opening an account, we assess your risk tolerance. We will recommend a higher share of equities for a higher risk affinity. For a lower risk tolerance, we will suggest other, less risky asset classes such as bonds. Real estate and commodity ETFs provide additional diversification. You can adjust or refine our recommendation whenever you see fit. After opening your account with us, your initial capital will be invested within one to two working days in accordance with your confirmed investment mix. Our annual fee is 0.25%-0.5% of assets under management (3). In terms of price, we are one of the most attractive asset managers in Switzerland. Since we only invest in very liquid ETFs, you have access to your invested money at any time.
- Federal Office for Statistics - Housing conditions in 2019
- SPIVA, Percentage of funds underperforming the index by region
- Fee overview of True Wealth
A previous version of this article was published on 07/23/2021