Bonds for a Swiss investor in 2020

[Vorac]

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.

[dbu]

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 ).

[San_Francisco]

@yakari

you do not want to buy the following bonds: corporate, or emerging market

Why not? (emerging market bonds)

[pandas]

@dbu

You are 25 and you don’t need bonds.

+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.

@San_Francisco

Why not? (emerging market bonds)

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.

[REandSTOCK]

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.

[REandSTOCK]

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.

[Myfirstme]

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?

[happy]

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

[baldur]

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.

[REandSTOCK]

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

[essential]

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

[REandSTOCK]

I prefer not to recommend any fund. Yes they are expensive at the time, but not all of them
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)

[REandSTOCK]

After the last weeks, this is what happend…

[ProvidentRetriever]

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.

[Woodman]

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?

[Cortana]

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

[dbu]

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

[Zerte2]

@Cortana

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

Assuming the CHF is safe, yes. Bonds have a risk (very low in probability, but high in CHF’s) with a possible raise in interest rates. So why take any risk, for negative yields?

[baldur]

@Cortana

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

This is something I’m thinking about, in the context of money printing. Which kind of impact on CHF, Swiss economy, real-estate market, etc. could have the fact that SNB is the biggest money printer as compared to GDP?

[Zerte2]

More worth to monitor (IMHO) is the SNB’s own capital compared to the total liabilities. Currently it is not too worrisome (163.8 billion / 956 billion). But given the growth of the balance sheet and the fluctuations of assets prices, who knows what could happen if the ratio becomes too close to 0%… Perhaps some large bank somewhere in the world would issue an internal note recommending to clients to sell CHF assets… If the SNB suddenly needs in its turn to sell some of their USD/EUR/… assets (after years of buying anything), at a lower price, then we could perhaps have a nice feedback loop where the SNB’s own capital is solidly in negative territory. That could be fun …