A recession resulting from the coronavirus crisis is inevitable in Switzerland. But aside from that fact, there are many unanswered questions, with the most prominent being: how long will the recession last. While some economists predict economies to show a health recovery as early as this year, others predict a long, hard depression lasting many years. How the Swiss and global stock markets will develop is also unknown.
Inflation or deflation?
Many analysts expect high inflation over the mid-term – possibly after a short-term deflation. The expansive financial policies of key central banks like the US Federal Reserve Bank is a primary factor in the predictions of high inflation being made by some analysts.
Some experts no longer rule out the possibility of a hyperinflation in western countries. Stagflation – a combination of inflation and lack of economic growth – is also a heavily-discussed scenario.
Switzerland, relatively speaking, is better positioned financially than many other countries, and is likely to suffer less under the crisis than other European states like Italy and Spain. But in today’s connected global economy, Switzerland is not immune to being hit hard.
How should investors respond to this insecure environment? To help provide some direction, moneyland.ch analyzed each asset class individually.
Stocks as an investment
Stock markets fell fast and hard over February and March 2020, and have moderately recovered since. Some investors see this as an opportunity to buy at a discount, while others expect further falls and new lows.
What we do know: Nobody can predict the optimal time to buy in advance. Most investment experts recommend buying stocks in a series of regular investments over a period of time until the full desired amount of stock has been purchased. This is known as unit cost averaging.
The reason to do this is: So far, stock market indices have always recovered and climbed over the long term. The Pictet index tracking the Swiss stock market shows that between 1933 and 2019, the Swiss stock market has grown by an average of 8.29% per year, without accounting for inflation. You can use the historical return and interest calculator to find out how the stock market performed over a given period.
The drawback: Unit cost averaging only works for long term stock investments, so patience is essential. “As a rule of thumb, you should be prepared to wait at least 10 years for markets to recover from crises. Even then, there is no way to know for sure whether stocks will increase in value over the next 10 years,” states moneyland.ch CEO Benjamin Manz.
Still, investing in stocks is recommended for investors with sufficient risk capacity and risk tolerance. Stocks protect from inflation more effectively than bonds, savings accounts and fixed deposits. However, you must be able to afford to keep your money tied up in the investments for long periods of time – especially in a worst-case scenario in which market take many years to recover.
How to invest in stocks
You can buy shares in individual companies which you believe have strong return potential. But picking individual stocks exposes you to more risk than investing in all the companies making up a stock market index. You can invest in indexes using passively-managed investment vehicles like exchange traded funds (ETFs) and index funds.
You can buy shares in companies and ETFs using a bank or specialized stock broker. Always take time to compare the brokerage fees and custodial fees charged when you buy and hold stocks and ETFs. The differences in fees charged by different banks and brokers are huge. You can compare all relevant brokers which hold Swiss banking licenses using the interactive online trading platform comparison on moneyland.ch.
You can find more useful information in the guide to investing in stocks and the guide to investing in ETFs.
Do actively-managed funds make financial sense?
There are thousands of actively-managed mutual funds, each with their own individual portfolio makeups. While many funds’ portfolios include stock components, funds also invest in bonds, real estate and other asset classes.
But actively-managed funds have some major disadvantages. The biggest disadvantage are the high fees, which have a negative impact on returns.
Savings accounts as a conservative investment vehicle
If you have a low risk tolerance, staying out of the stock market is likely the better choice. This is also true if you are likely to need your capital within the next several years because it is possible for economic crises to last for many years.
If you want to minimize risk of loss, savings accounts provide a conservative investment vehicle. The savings account comparison on moneyand.ch makes it easy to find the savings accounts with the highest interest rates. If you have a lot of capital, you should divide it between multiple banks. This lets you avoid being charged negative interest and also provides greater security against bank bankruptcies.
But savings accounts have a disadvantage: They provide less protection against inflation than stocks, for example. Still, if inflation were to rise drastically, you can always withdraw your capital and shift it to other investments. The notice periods and withdrawal limits for each account are shown in the interactive savings account comparison. Typically, private accounts have fewer restrictions on capital withdrawals, but pay 0% interest on average.
Important: Savings accounts are less prone to market fluctuations than stocks, but historically they have performed poorly compared to stocks over the long term. As the historical interest and return calculator shows, the average nominal interest rate of Swiss savings accounts between 1933 and 2019 is just 2.45% per year. The average capital growth of Swiss stocks over the same period was 8.29%.
Fixed deposits as an alternative to savings accounts?
Fixed deposits and medium-term notes are an alternative to Swiss savings accounts. The advantage: On average, interest rates are higher than those of savings accounts, as the fixed deposit comparison on moneyland.ch shows. The interest rates are fixed over the full fixed investment term. That can be an advantage if markets and interest rates perform poorly over that term, but it can also be a disadvantage if interest and markets develop positively because your capital is tied up.
The main disadvantage of fixed deposits and medium-term notes is that you commit to tie up your capital for as much as 10 years. In times when future developments are difficult to predict, sticking with short fixed investment terms is recommended.
Gold as a supplementary investment
Gold is known for being more resistant to both inflation and crises than bonds and savings accounts, for example. This pattern can be seen in the current crisis: After a short-term dip, the gold price (unlike stocks) soared to new highs. However, it is possible that the gold price will come down significantly over the coming years.
A disadvantage of gold: Developments in gold prices are largely unpredictable. As with stocks, you must be able to afford to hold gold investments over long periods of time. There is no reason not to hold some gold as a supplementary investment. Holding physical gold in a secure location provides the greatest security against crises. You can find useful investment tips in the guide to buying gold in Switzerland.
There is no ideal investment vehicle
There is no single ideal investment vehicle for all investors. The amount of assets you already hold – including pillar 2 and pillar 3a retirement assets – plays a major role. Swiss real estate has historically been a relatively crises-resistant investment. This is particularly true when you own your own home.
Your risk profile – your risk tolerance and risk capacity – is also a key factor when choosing the right investment vehicle.
“A good general rule is to never put all your eggs in one basket,” says Benjamin Many from moneyland.ch. For example, if you invest most of your capital in one company’s stock, you stand to lose almost everything if that company goes bankrupt.
Wealth management vs. do-it-yourself
It is now possible to buy and sell securities like shares in stocks and ETFs relatively easily using an online trading platform. The only requirement is that you have some investment know-how. The primary advantage of buying securities yourself using an affordable online trading platform is that you save a lot of money.
If you are not interested in investment terms or do not feel confident investing on your own, you can have a wealth management service invest your capital for you. Just note that wealth management services are often expensive. Robo advisors – digital wealth management services – now offer much more affordable wealth management services.
Do you have more questions?
If you have any questions about investment, please post them in the investment forum to get answers from experts and other forum members. You can also post questions anonymously under a user name of your choice.
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