I think you’re making the correct analysis for a retail investor like you and me.
My guess is that the majority of Swiss treasury buyers are institutional investors, including a bunch of Swiss pension funds and the AHV, who both make sophisticated calculations about how much they have to pay out each month in the next few months and guestimates about how much they have to pay out each month for dozens of years going forward.
They’re the buyers of those bonds as those bonds guarantee risk-free payouts (assuming there is such a thing as risk free, but I’m getting off-track …). The pension funds also don’t have to worry about inflation (if anything, politics seems to shift towards lower converion rates). The AHV needs to take into account inflation in their calculations, but IMO politics is a bigger factor in what they’ll ultimately have to pay out (and how that is financed).
Regardless, they both need monthly guaranteed cash flow regardless of valuations, and that’s where the Swiss treasuries ride in as the cavalery.
I believe that we should never have a look at one asset classes return alone. Bonds only Portfolio don‘t make much sense. YET: we should still invest in them as the combination of Stocks and Bonds (plus Money Market) produce optimal, risk adjusted returns.
The Central Bank giveth, the Central Bank taketh. The last few years, we had financial repression as real rates were low, thats bad but nothing much we can change about it. In return to this, people made the mistake of taking on longer duration (they deerely paid for that in 2022) and of taking more Risk (they pay every day as they now take a higher risk than they probably anticipate). Its probably time to simply realise that there are better and there are worse Investment times but we don‘t know what the future brings so no point to speculate.
The only thing that made sense was to move from nominal negative Money Market Investment into Cash / Zero Interest Bank accounts but just because Bonds have a low real yield - I believe they still belong into any portfolio.
I guess your conclusion of low withdrawal rates was a good one. But at the same time, future will probably brighter than we anticipate so I wouldnt go below 3%.
With regard to „safe“ assets. How about short term deposits? Yes, they don‘t yiel positive real return but they will shine in case inflation and/or interest spikes. Plus, they play their essential part in overal Asset Allocation. This by making sure you can recover a scenario where returns based on an anticipated future just don‘t materialize aka Shares go down the toilet.
If you ask me, the default asset allocation that we should all use as a basis (aka fully know why we deviate away from it, and what it costs us to do so) is probably somewhere in the range of 60% shares (oow 25% Global, 25% Hedged and 10% Local), 25% Global Mid-High Duration Bonds (probably half of it hedged)?and 15% Local Money Market / High Yield Savings Deposits. Different Bond Durations call for a different MM allocation but I believe you need at least 10% in MM. Didn’t put it into Portfolio Visualizer (no CHF Hedged Shares / CHF MM) but suspect this would produce a fairly strong Sharpe Ratio Benchmark.
Mainly because the rate is set by actions of the SNB.
From 2008-2022 the policy in developed countries was zero rates. The dice were loaded in your favour if you borrowed at 0 or 1% and invested in assets like stocks and property.
The free lunch is over if you live outside Switzerland and have 5% interest rates. Bonds now look quite attractive.
In Switzerland I see it less black and white. For example IB CHF margin rate is 2.55%. That is an effective rate of 1.5% for someone with a 40% marginal tax rate. Below the target inflation rate. Cost of borrowing is free or negative in real terms…
Could also make sense if everything else is losing a lot more money. e.g. compared to stocks in the 2008 crash. Even losing 10% might seem great in comparison.
Here 7 years from official retirement age. My current allocation is
ETF/stocks: 35%
commodities: 27%
cash (and pension fund): 38%
I am de-risked and I am planning to continue investing each month in ETF/stocks. Still hoping for some good months… Meanwhile, if one of my side bets pays off, I sell and realize the gain. If market turns bearish, I have the ammunition to continue cost-averaging or put money in pension fund to lower my income tax. If markets completely melt down, I hope to be able to sell commodities at a decent price and continue to buy ETF/stocks. If all fails, I need to rely on my income and wait for better times.
For retirement, I imagine to be in 70% stock and 30% cash and be able to pay for my life relying on AHV, dividends and capital gains.
Thanks for the reply. I went out of commodities (except uranium, if you consider that a commodity) as I felt it was too risky at this point in the cycle and will buy back in during the next recession.
I’m planning to fill pension over the next 4 years and convert pension pot into ETF stocks/bonds within a vested benefits account once I stop working.
Since I have to convert part of the stock portfolio into cash over the next 4 years to feed into the pension fund, I’m wondering whether I cash out now to avoid risk of crash within the next 4 years (I already converted this year’s contribution).
We are currently spending <3% of NW and still in employment. I do not envisage the spend rate going higher.
I think an underlying reason is that I would suffer psychologically under a plan that involves the NW pot stagnating or going into gradual decline from a young age. As humans we are wired to want progress. With a 3% withdrawal rate if there is a crash, there is still some hope that it will recover
I am not withdrawing anything from savings currently. We are living off employment income and still adding more to savings. Our annual spending equates to <3% of NW but we are not using the NW to live off currently. We are probably safely FI already
OK. I mis-understood. I thought you meant you were spending 3% of savings after also spending employment income. Which now that I write it out, realise that it no sense at all!
I think we are in a similar situation then. Also at 3% expenditure, but I need around 4 years to transfer funds from taxable to pillar 2 before retiring and have massive home renovation expenditures over the next couple of years to will work to fund that one-off expense. Plus, I’d like to get the Swiss passport before retiring.
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