Bonds for a Swiss investor in 2020

Hey guys!

This is my first post and probably something you have read a thousand times!

I am 25 and just started the typical three-fund based portfolio. I was looking for an option to replace the 20-25% quota that is “classically” invested in bonds ETFs (negative yields, etc… you know it better than me).

My idea was to keep 10% of my net worth in cash (0.5% interest rate in my bank account) and to invest 10% in some smart bond ETF.
I would obviously exclude Swiss bonds (negative). I’d exclude corporate bonds funds (equities are better in that case) and I have very mixed feelings about european government bonds (although slightly positive my money would be waaay safer in cash form).

Here come the questions:

  • Should I get global bonds ETFs? (if yes, do you have recommendations?)
  • Should I get US government bonds ETFs? (such as IE00B1FZS798 that I could buy for free on Degiro?)
  • Do you have any better recommendation?

I am really not an expert on bonds ETFs so I have a hard time screening them and understanding their potential!

Sorry if the questions are boring, I struggled a bit to find relevant and up to date information for a Swiss investor having access to Degiro and I really appreciate this forum so I’d be happy to get your point of view.

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Hi and Welcome to the forum!

I am not an expert either but here are my comments - others are welcome to correct me:

  • bonds have as main goal in a portfolio to offer you safety in reducing its volatility (main reason to have them): goes up when equity goes down (simplified).
  • Bonds offer you a secure income (second reason to have bonds), as long as they have a positive yield
  • but to have safety you need government or aggregate bonds in chf or chf-hedged (as chf is veeery safe, no global needed here but not wrong). Problem: they ALL have negative yield now!
  • you do not want to buy the following bonds: corporate, or emerging market, or not chf or chf hedged (unless your base currency is not chf)
  • so you want bonds to stabilize your portfolio and / or have a safe income. If you do not care about volatility (very long term investment) and do not need a safe income, you do not need bonds

Put short: I suppose you do not need bonds! But:

  • emergency fund in cash (never! part of your investment portfolio): how much depends on your job security, single or with family etc -> i suppose you are single and educated (you could always find a job) : 3 months of expense usually enough (but do not underestimate and adapt it as life goes on)
  • chose your strategy, take your time
  • save to invest
  • invest every time you have cash (be in the market) or at a regular frequency (do not time the market)
  • use a low cost broker
  • put all your investment in low cost, global equity ETF(s): what are yours and in which %???
  • Stay the course (do not panic, do not time the market)
  • if you have various ETFs, chose the allocation, stay the course and rebalance using yours savings / dividends (not selling etf)
  • think about bonds again in 20 years (your pension fund can be considered a safe income and will be a nice part of it)
  • Use your time to educate yourself, find a good job, social life, family, NOT playing with the stock market
  • if you still want to play with the market, allow a small part (max 10%) of your yearly investment (not of your portfolio) and have fun gambling (we all do)
  • if you think you can do active investing a) you are a fool and will lose b) or you know better than me

My strategy.
You need your own and it has to fit you in bull and mainly in bear markets.

Have fun the next 30+ years

Ps: i amba novice in finance and i do not work in this sector. Many on this forum know more than i do but i have the feeling that many are also quite young. If you want the opinions from older people who went through some financial crisis, go on bogleheads.org forum.

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My humble opinion:
You are 25 and you don’t need bonds.
And if you are working you can consider your pension fund (1st & 2nd pillar) as your bond portion - so you are well off with the “secure” part for your age without getting them outside of that.
(For me this makes about 25% at the moment, “automatically”)

Ignore them for at least another 5-10 years (unless you go full FIRE by then already :slight_smile:).

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Why not? (emerging market bonds)

  • Higher default risk overall
  • i am not sure they have a strong negative correlation to stocks: In a world crisis, stocks going deep south, i would assume people to run to USD / CHF not Pesos

+1. You still have your whole career and job income ahead of you, which will provide cash in downturns. There’s no need for bonds in your portfolio. Just keep some emergency cash buffer. If you get fired, you have unemployment insurance which will keep your lights on for a while.

If these are foreign currency denominated there’s default risk. Most governments are basically more or less like mediocre-run corporations just with taxation power as the source of their revenues. Sometimes things go tits up and if the bonds were not in a currency they could themselves print, you get a sovereign default. And when they can print their way out, their currency can devalue as a result while investors flee to hard reserve currencies like USD.

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You can buy swiss residential real estate funds. In term of stability and return, they are between stocks and bonds, so they can’t directly replace the bonds part, but they can replace 2/3 of bonds and 1/3 of stocks for example. If you pay wealth tax you can also save a lot of money with funds with direct property of buildings. Then the part of bonds that you don’t replace with RE funds, you can keep it in cash or in bank bonds (not sure about the name in english). The Caisse d’Epargne d’Aubonne has 7/8 years bonds with an interest of 1.25% for example but others usually are not as good. 0.5% is not that bad but you can find better depending where you live.

Source?

Could you show me some examples?

https://ceanet.ch/conditions/

You can find the list of funds here http://www.immofunds.ch/site/files/torga/ch_immo_funds_20190820.pdf Some of them are commercial real estate so not for you. Some of them can’t be bought.

I wonder myself which non share investments I should include, if any (I am older as well, so it‘s often recommended, even though pension funds basically play the same role as bonds).

Are there any real estate ETFs that you would recommend? And I checked Immofunds, their price basically went through the roof the last year. Isn‘t that then more share-like than bond-like?

I found this video regarding REITs very interesting, even though not specific for Swiss investors, the gist should be the same:

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Where’s the catch with this CEA? Is it like a normal bank with all guarantees up to 100kCHF per person?

I see on their page:

Avec nos comptes épargne, vous constituez un capital garanti, sans frais bancaires et à des taux d’intérêts attractifs.

That is a normal bank, except they don’t have shareholders that’s why it is better for the customers.

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I (33,m) keep my portfolio simple:

Bonds for me: 15%
BVG (Pillar 2)
Cash (Emergency Fund)

Indexfund: 80%
VT
Viac Global 100 (Pillar 3)

High-Risk / Hedge: 5%
Cryptocurrencies
Stockpicking

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I prefer not to recommend any fund. Yes they are expensive at the time, but not all of them :slight_smile:
If you compare the 3 asset class over 5 years you get that : (EDIT : the real estate index on this graph also includes commercial real estate which is more volatile than housing)

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After the last weeks, this is what happend…

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I agree with a lot of what has been said but would like to add that it is important to distinguish between risk capacity and risk tolerance, and that these two vary from person for person (this is why financial advisors are required to care about the suitability of the advice given to each client).

Even if a person has the capacity at 25 to go all into stocks, because they would objectively not need this money, it may nevertheless be a mistake to do so if this person does not have the risk tolerance for that much stock as well. Overlooking this can lead to emotion-driven reactions at the next crisis, selling at the worst possible time, and getting back to the market when it has already recovered. Having a risk-free part in the portfolio makes this more unlikely to happen.

The last major crisis is now more than 10 years ago. Many investors who recently joined the market have not yet experienced such a durable crisis and tend to underestimate the strength of will that it takes to go through them.

Am I forgetting 2020 and the lockdown? I am not: this year was special in many ways and markets went down faster than anytime in modern history last February and March. But we are now just a couple of months later, and the S&P 500 is already close to an all time high again, which can give a feeling of overconfidence. Also, this crisis is still ongoing and we do not know what will happen in the coming years after such a brutal drop of GDP and billions of people in a very difficult personal situation.

Crises, in the past, often involved markets going down a bit slower that what we saw in 2020, but durably over several years. Several years is a lot more than a couple of weeks. The temptation becomes increasingly high to sell in the middle of a drop with no end in sight, and many miss the recovery.

Of course, bonds have a risk too: inflation. And stocks do provide safety against it in the long term, but at the cost of high fluctuations. In the end, the choice of asset allocation is a personal decision that everybody has to make for themselves, and adjust with time, preferably between crises.

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Interesting topic.
What is you view on the following: Due to the current uncertainty and high stock prices I am considering making my portfolio more safe (I know that comes with the price of missing out new highs): On top of the second pillar and cash reserve for 3 months I want to buy some very safe ETF (in CHF or EUR) - maybe bonds…
Reason is I currently have 10-12 months of cash reserve which is to high but I dont want to put everything into the stock market right now.
What is your view on that?

I guess the safest asset class now is just CHF cash?

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Or is USD now “cheap” so buy a bit of those for future purchases? :slight_smile:
But it’s rather a FX speculation. :grin:
Probably makes sense to keep CHF, as it’s the currency we mostly spend in here.

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