investing when interest rates are low

How to Invest Your Money When Interest Rates Are Low

How should you invest your assets when banks pay little or no interest? Find useful information on investing during extended low-interest periods in this guide.

Times are tough for Swiss savers. Since 2008, the interest paid by banks for money invested in pillar 3a pension accounts, vested benefits accounts, savings accounts and private accounts has declined steadily. The current low interest environment across Europe has hastened the decline. The final blow to interest rates came with announcement by the Swiss National Bank (SNB) that it would impose negative interest rates on the financial reserves which it holds on behalf of Swiss commercial banks. The central bank’s implementation of negative interest rates triggered a sharp decline in the already-low interest rates.

According to SNB statistics, current interest rates in Switzerland are the lowest they have ever been across the 20th and 21st centuries.

In February 2018, the mean average interest rate across Swiss savings accounts for adults was a sad 0.08%, with the average interest rate paid out to adult private account holders sitting at a pathetic 0%. The mean average interest rate of 3a retirement accounts was 0.311% and that of vested benefits accounts was 0.11%.

If your bank has all but quit paying you for the use of your hard-earned cash, you may be wondering whether there is a more lucrative place to park your money. Here, lists useful tips which can help you to optimize returns on your savings.

Option 1: Keep your money in savings accounts

  • Many private accounts (checking accounts) in Switzerland pay 0% interest, which makes them a terrible place to park large amounts of money. Remember that if you are not earning interest or other yields on your money, you are losing money to inflation by default. Swiss savings accounts generally have higher interest rates than private accounts because they are designed for long-term saving rather than facilitating transactions. If you have money which you do not need for regular expenses, keeping it in a savings account rather than in a private account lets you earn at least some interest.
  • Unlike 3a retirement accounts and medium-term notes, regular savings accounts have the benefit of relatively easy access to savings. However, you should inform yourself about possible withdrawal limits or notice periods. The rule of thumb when it comes to savings accounts is that the higher the interest rate, the more limitations apply to withdrawals. The savings account comparison clearly lists withdrawal limits and notice periods.
  • The interest rates of most Swiss savings accounts are low and will likely decrease further in the future. Taking the time to compare savings accounts is important because some banks offer much higher interest rates than others. You can use the savings account comparison to compare interest rates.

Option 2: Fund your 3a retirement savings

  • If you expect to park your money for a very long time – until you retire, buy a home, or leave Switzerland – funding your voluntary 3a retirement savings can be a good investment because money contributed to 3a savings can be deducted from your taxable income.
  • The interest rates used for 3a accounts vary widely between banks, so comparing accounts is imperative. You can compare 3a retirement savings accounts using the 3a retirement account comparison.
  • Disadvantages of 3a retirement accounts: Annual contributions to 3a savings are limited by federal regulations. If you are not employed or self-employed, you cannot use 3a solutions to save. A major disadvantage is that assets placed in 3a accounts cannot be accessed until you reach the legal age (5 years ahead of the standard retirement age), buy a home for use as a primary residence, or leave Switzerland permanently.
  • 3a retirement funds or 3a investment fund accounts can potentially deliver higher returns than the interest paid by 3a savings accounts, but there is also a risk of losing money. You can find more information in the guide to 3a retirement funds.

Option 3: Buy medium-term notes

  • The highest-yield medium-term notes deliver more interest on long-term investments than saving accounts.
  • There are major differences in the interest rates offered by different Swiss medium-term note issuers. The medium-term note comparison makes it easy to find the medium-term notes which pay the highest interest.
  • The disadvantage of medium-term notes is that your money is tied up and inaccessible until the notes mature. If interest rates increase or if better investment opportunities arise within the investment term, you cannot withdraw your money and invest it elsewhere before the end of the note term.

Option 4: Buy shares in stocks or ETFs

  • Advantage: Investing your money in the stock market can potentially bring you higher returns than placing it in a savings account.
  • Disadvantage: You risk losing money if the value of shares declines. Investing in shares is only recommended for savers with a large risk capacity.
  • Many stock market experts consider current stock market rates to be inflated and that price corrections are likely. However, there is no accurate way to predict developments in the stock market.
  • The basic principle that shares should be held over long terms – a minimum of 7 to 10 years – in order to wait out possible price corrections or fluctuations, generally applies. Buy shares and other securities using an affordable broker to minimize your costs. You can use the securities broker comparison to find the most affordable broker for your investment needs.
  • Be wary of expensive, actively-managed investment funds. Take the time to consider more affordable alternatives like ETFs. ETF-based online asset management services are also an option.

Option 5: Pay your taxes in advance

  • Depending on your canton of residence, you can earn up to 1% interest on advanced tax payments.
  • Disadvantage: Only a handful of cantonal tax offices currently pay relatively high amounts of interest on tax advances. You also cannot invest an amount significantly larger than your tax bill. You can find more information in the guide to interest on tax advances.

Option 6: Real estate

  • The interest rates of fixed-rate mortgages have increased somewhat, but remain very low.
  • The value of residential property can fluctuate, so investments in real estate are not risk-free.
  • In the current low-interest environment, residential property is an investment option which is worth considering, provided you have enough investment capital and meet mortgage affordability requirements. It is worth noting that investing in real estate is not limited to wealthy investors who can afford to channel capital into investment. Investing in a home of your own in which you can live also qualifies as a real-estate investment.

Rules of thumb for would-be investors

There are many ways in which you can invest capital. These two rules of thumb apply a majority of investments:

  1. For direct investments and stock market investments: The higher the potential returns, the greater the risk of loss.
  2. For interest-based investments with no direct risk of loss: The higher the interest rate, the tighter the limitations on capital withdrawals. 

A report

More on this topic:
Swiss savings account comparison
Swiss 3a retirement account comparison
3a retirement fund comparison
Medium-term note comparison
Securities broker comparison

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