Investment portfolio split

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1

Hi Mustachians,

I would like to discuss my distribution in investments. In the back of my mind I know that I should rebuild my portfolio. I’ve build my portfolio with a lot of help from information from this forum. I redistributed this into the flexible money (including the financial cushion) and that which I invest in VT. At first I filled Willbe account to ~50k chf, with the plan to buy a property in PL in the near future, this plan has now fallen by the wayside with prices that, in my opinion, have moved a little away from reality. I then started to pump all my monthly savings into VT on IB. I am thinking of significantly reducing the funds I hold in Willbe at 1.1% and then putting them into IB and buying VT (it’s now ~20k) . I would like to hear an opinion from someone who is looking at this from the outside. I want to keep my portfolio diversified. I also cannot convince myself of 3a, as I am still paying QST, in my situation it is not viable to deduct tax, and investing in 3a takes away all flexibility. I’m 28 and I don’t earn more than 120k. (Kanton BS)

Thank you in advance for your suggestions and arguments.

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FWIW, won’t you soon be above the wealth threshold for mandatory declaration anyway?

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3

VT is fully diversified regarding stocks.

If you can accept stocks volatility in general and dont need the money for 8+ years, you can just go all in there.

Considering you are still not doing a tax declaration an alternative ucits fund like SPYI or FWRA would be slightly more tax efficient though.

If you cannot stomach 100% stocks, adding a total bond index fund hedged to chf like GLAC or AGGS is also a good idea.

As soon as you need to do a full declaration go all in VT (+ bonds if you want) and max out 3a.

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4

In this case, I think the cash balance is more than enough as a type of fixed income.

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5

I could never wrap my head around bond funds, to be honest. For me creating a bond ladder, if one can find one, is both conceptually easier and more meaningful. Can one actually make a meaningful bond ladder in CH? Last time I tried to check I couldn’t find anything remotely attractive, some Swiss bonds even had a miniscule negative interest, for the privilege of lending money to the Swiss Govt. I guess some people who’re afraid their money will get eaten by their governments feel it’s made more secure this way?

Bond funds, on the other hand just seem to keep ones money tied up, eat all the volatility of the bond market, and often return unreliable amounts whereas holding (investment grade/good) bonds to maturity will return the principal plus interest. A bond is a loan, after all.

OP I was under the impression that filling a 3A is ideal in pretty much every case, regardless of earnings above or below 120k and thus having to do a tax declaration.

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I think cash is very different in term of portfolio construction than a bond fund.

If you just want to lower volatility a little, sure cash is fine, as you are then simply not 100% in stocks. But it does not really help you much in drawdowns.

But you want your bonds a hedge against those equity drawdowns, as an uncorrelated (and most of the time in drawdowns negatively correlated) asset you can rebalance your portfolio with.
With a constant maturity bond fund, you also get what‘s called the “term premium”, as well as some credit premium of the varying credit ratings of bond issuers in the fund.

You get neither with cash.

Cash probably also soon will get towards near zero interest again in CHF.

A bond ladder only really makes sense to get constant cashflows and to liability match, i.e. in retirement.

If you don’t have liabilities to match (expected expenses), then bonds have no real immediate purpose for you and you should just stay in cash/short term bonds. And cash only if you just want that part to have a risk free return.

2022 has skewed the picture a bit on the view of bond funds. It has literally been the greatest bond drawdown ever in history.
And in the majority of equity drawdowns, bonds go up and help you therefore.

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7

For income <120K, It would depend on the actual residence of OP. Sometimes filing income tax return can lead to higher taxes if someone lives in high tax Gemeinde vs cantonal average. So in all cases, some math should be done to determine actual tax liability by Quellensteuer.

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Exactly. In my case (Kanton BS), from what I have done the calculations, it is not beneficial.

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It’s true that when you try to seek return in CHF, bonds have lower return. However in general , you would have slightly higher return than cash as you would be rewarded for duration risk. The question is if you are willing to go through the hassle. I normally use bonds within 1E or 3a and let pension funds manage the work.

Regarding bond ETFs, I think they help in managing credit risk because investments are spread across many companies. And in addition not all bonds in CHF are available for small denominations.

The thumb rule I use is following.

Let’s say modified duration of bond ETF is 2.5 years which has current YTM of 1.5% and TER of 0.15%

If I buy this ETF today and hold for 2 x 2.5 years = 5 years, I have more or less surety that I would have my principal back and 1.35% per annum return.

I read this rule of thumb somewhere „2 x duration for locking the yield and 1X duration to lock the capital“

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10

Note that the limit for mandatory wealth based declaration seems to be 75k in BS anyway.

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11

Now that interest rates have been lowered, there is 0.85% on Willbe, which convinces me all the more to take out a large part of the funds from there and buy VT. What do you guys think?

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We think “market timing”.

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The decision to invest should be separate from that, does not matter if the interest is 0% or 10%.

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14

Especially since the real (inflation adjusted) returns are roughly the same, but one benefit of lower interest rate is that the taxes are lower.

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15

I think you should always focus on asset allocation and expected long term real returns (returns above inflation)

Based on history , following can be expected. This is not guaranteed but we need to make some assumptions

Cash -: maybe covers inflation if you are lucky
Bonds -: 1-2% above inflation
Stocks -: 4-5% above inflation

So rather than focusing on interest rates in bank, think about how much of your net worth you want in each asset class (Stocks , bonds, Cash).

Let’s say S% , B% and C%

This should drive the decision if you should move from Willbe to VT.

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