ETF (CH vs. global) vs stock picking & Investment in crisis time

Investing / Portfolios
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Hello all,

I recently started my road to investment with the goal of increasing my financial freedom in the future (meaning having the possibility to retire early :slight_smile: ). I’m really thankful to all the resources available on the Internet, especially on this blog.

Just after the 10% SMI market drop, I bought three shares from Swiss companies (UBS, Mobilezone, Swiss Re) that have, from my perspective, a very good cost/return, meaning that the dividend which should be paid in 2020 is above 5% of the cost of the share. I also look at the stability/increase of the dividends paid the last years as well as the evolution of the price of the share the last 5-6 years to avoid overpriced shares.

Now I am split between carrying on such a strategy (stock picking of Swiss companies with a good stock price / dividends ratio) or choosing one SMI ETF [UBS ETF (CH) SMI (CHF) A-dis; iShares SMI (CH)]. My impression is that the return is higher when picking shares with high dividends (5-8%) than with an ETF (2-3%). ETF has the advantage of more diversification but I could also by buy different shares in order to realise such a diversification. The management fees with an ETF is counter-balanced by transaction fees following stock picking. The ETF iShares Swiss Dividend ETF (CH) could also be an alternative as an ETF with a higher distribution in comparison to the two previously mentioned ETF. I see dividends as a way to create a passive income that could be re-invested or, later in my life, used as my main source of income. For these reasons, I am considering choosing a “half-half” strategy, which means choosing one or two ETF and choosing for e.g. 5 Swiss companies with high dividends (Swiss Re, Mobilezone, UBS, Zurich Insurance, Adecco and Swisscom).
What are your advice in this regards ?

Because I am living in Switzerland, I tend to focus much more on the Swiss market to avoid the risk of price change (CHF vs USD/EUR) and to benefits from dividends (many big US companies aren’t paying a dividend). What are the benefit to choose an ETF with international shares ? How much should it account in my portfolio ? I understand it will bring more diversification in my portfolio. However, I have the impression that this diversification is somehow factice as we are anyway living in a world in which all economies and markets are interlinked so what pull or push a market will very likely also be pulling or pushing all other markets.

In addition to this, I read a lot about the necessity to invest regularly month after month instead of doing one investment per year, which is then more subjected to price volatility. However, now that we are entering a crisis and that the stock market dropped, I see an investment opportunity, which makes me more inclined to invest more in the next weeks than to split my investment on a monthly basis until the end of the year. Do you also have any advise on this ?

Thank a lot for you help to my questions - I’m by far not a specialist in finance/market and I’ll highly appreciate your advice :slight_smile:

Danny

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Dividends are bad, mkay, especially in Switzerland where you get fully taxed on them but not on capital gains.

It’s very simple in that case, don’t even try picking stocks! Stick to picking indexes

That’s not diversification, that’s just market risk. Diversification means not suffering some double digit % losses in your portfolio just because some bad shit pops up in the news about one of your holdings With 5 holdings you’re not diversified at all. Imagine a news article tomorrow about accounting fraud at one of your companies will permanently (as opposed to market swings which are temporary) wipe out half of its market value, can you stomach this loss? I’d suggest picking at least 20-30 stocks for some basic diversification.

Market volatility is generally much higher than currency volatility. Look for the forest, not the trees.

There’s few good pure CHF equity opportunities anyway, it’s just too small of a market. Real estate may serve you better here.

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This is not possible if you take the 3 biggest Swiss companies Nestle, Roche,Novartis more than 97% of their revenues isn’t done in CH. So, you would be in any case indirectly impacted by the currency exchange rate. Better diversitfy to reduce volatility and risk

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I think you already know the answers to all of your questions; you are simply attracted by the perspective of higher yields, and trying to find reasons to minimize the risks you are taking at stock-picking. It’s a temptation for all of us, but the general rule here is to be humble regarding your own capacities at predicting the market and thinking you have a better strategy than every one else.

In my opinion, you also have to ask yourself how much worrying you are going to accept on a daily basis. Stock picking will require you a constant check on your portfolio and market analysis, which will require you time and psychological burden; is it sustainable for you in the long term, is it worth the apparent yield?

Yes of course you will probably have higher yields (temporarily?), but it comes at a greater risk, just like every other investment. But you already know that I guess.

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Thank you all for your precious answers!

If I understand corrently you don’t consider dividends as a good way to secure a passive income because of the tax system which prevails in Switzerland (taxable income)? Do you consider capital gain as a better passive income, which of course is more subjected to market volatility ?

That’s a good point. I am indeed indirectly impacted by the currency exchange rate, which I somehow didn’t consider it from my personal perspectrive. But being indirectly impacted is still being impacted :slight_smile:

@Trainsputin : You perfectly summarised my thoughts as well as my dilemma. My idea was to pick a few (~5) Swiss compagnies with a good price/dividends ratio as a way to reduce the risk and increase a relatively secure yields. Of course I’d be subjected to share evolution (for e.g. major negative external shock as mentioned by @pandas) but in the long term (10-15 years) would this not be counterbalanced by the dividends?

Are you currently investing or planing to invest more because of the stock market plunges ? Of course one can never know when the market will have reached the bottom, but it is a very good moment to buy at a lower price.

And speaking of stock market plunges and stock picking, what do you think of the compagny Dufry [Swiss-based travel retailer which operates duty-free and duty-paid shops and convenience stores], whose share price went from around 100 CHF before the crisis to now around 30CHF ?

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I am not stock-picking, but question picking (cherry picking?) :grin:

hm, is it? how are dividends calculated? how are they in general related to the stock price? right - linearly! and you have a whopping bonus of between -35% to -[income tax level]% on those dividends. No, for a swiss investor, dividend focus is clearly suboptimal. especially when compounding over many years.

on top of that, distributed dividends are removed from the company’s assets, and thus are not productive anymore. my ideal passive-indexing company would not distribute dividends at all. but most people like the cash flow despite tax ineficiency, so most companies distribute.

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Personally I started investing in a long-term and effortless portfolio last January (after 5 years of what I consider lucky shots on various stock picking). I had a good pack of cash to invest, but made an agreement (with myself) to spread it over the year, buying every month. (I am very proud of this decision right now). I will not buy more this month than the next one.
For me, having this rule is a fantastic way to keep your mind free of all the worrying and regret, which is in my top concerns.

Without speaking about the risk that this particular company will go bankrupt, travel-related companies are and will be severely impacted by the current situation. It’s a quite easy decision to decide to buy such stock right now. In my opinion, if you do this, you are just giving yourself more trouble in the future, when you’ll be worried about when is the good time to sell.

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Not only. Dividends and buybacks are cash being taken out of business that they can’t compound for you internally anymore. Good if business is not growing but immensely profitable (like maybe PM), not so good otherwise. Best companies you can invest in are compounders - profitable, growing and able to utilize extra cash to grow more and deliver you much higher returns on equity than the market, and most of them not are wasting any (or at least much) money on dividends

I invest for total return and with a job have no need for passive income at the moment. If you’re unemployed and actually need this passive income to pay for your rent, grocery, etc, then math change. But if you were just gonna buy more stocks with them, then you’d be making a mistake to focus on dividends.

There is no capital gains tax in CH, so it’s possible for you to tilt your strategy towards dividends any time later only when you really need them and paying just some minor transaction costs.

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For you today, special price around CHF 20 :wink:

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Thank you for this information !

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It’s interesting because I see that the reduction of the burden caused by the stock market is important for many people. It’s freeing the mind and also the time you need to put into these questions. I understand this more and more, especially that stock picking is somehow close to gambling, especially if you don’t have the time/ability to keep analysing the shares you owe

Isn’t a good time to sell when you think you gained enough ? :slight_smile: Of course, it is always easier to say it than to do it. I suppose setting a limit when to sell when you buy is important. A friend of mine sold his shares two years ago fearing that the stock market would go down. Since two years he has been waiting a new drop to invest again. Patience, which tend to be less and less well spread in our societies, seems to be very important here.

I see your point, thanks. I perceived dividends as a way to, now, invest more and, later, to free myself from work if I wanted to. However, I have a job and doesn’t need that extra money to live or even to invest. Of course, it could help me to invest a little bit more but I understand that it isn’t the most efficient way to increase my savings as dividends are subjected to the high capital gains tax.

What about to buy at a much lower price (-50%) shares which plunged and which are offering high dividends - here also in relation to the perspective to sell them later on to a value close to the one before the current crisis. Do you see an opportunity here ?

ahah I l know… I’m still hesitating a lot I must say. I’m considering investing 10k of shares but of course there is a risk - a risk of bankruptcy that seems to me relatively low (this company seems robust) but of course nobody can’t predict the future… It would be too easy otherwise :wink:

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You mean like airlines? Lol, some of them might be going all the way to zero very soon along with your dividend.

Don’t just assume the market is stupid. Have a thesis why it’s fallen much deeper than the broad market and why it should recover or at least have stable earnings to pay you your dividend for foreseeable future.

There’s no intrinsic guarantee individual fallen stocks would ever recover, unlike broad market. Heck even for broad market history knows exceptions where it took decades for recovery e.g. Japan.

In general with individual stock picking you should develop deeper understanding of underlying business, otherwise you’re just like driving blind. If you don’t have the time to research it, then better to stick with indexes - you get 80% of the profit with 20%, nay, even 1% of the effort. Which frees up the remaining 99% of your time to do things like develop your career and make more money the regular way.

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I guess I’d avoid airlines at the moment… :sweat_smile:

I was referring more to SMI compagnies (UBS, Swiss RE, Swtach Group) which lost around 40% since the beginning of the crisis.

Of course there is no intrinsic guarantee that individual fallen stocks would ever recover. However, this is the hope that everyone investing is hoping, based on what happened previously in the past and also on the idea that an economy based on growth should/must grow to remain sustainable.