Possible way to assist parents to invest

Dear all
my parents (~64 years old) have two home: one they rent (where my father grew up, only-child) and one where they live/sublet a part on AirBnB.

From July, they longstanding renter has decided to move out. My parents have now the choice to either sell or re-rent.
My father, who is smart but with a traditional mindset on investment, ran the number by himself on possible scenario (selling, invest proceeding vs renting) and came to the conclusion that the first one will leave him more free income after taking into considerations all kind of variables.
This surprised me since he was never one to run such scenarios. Anyhow, it was funny that he wrote all numbers in a doc table and used a pocket calculator to make operations, because “he hates Excel” :smiley:

He thinks after selling, and after all overhead of selling, he will have 400k to invest. He approached me for ideas and concept. Their goal is to use a part to reduce mortgage (they are a bit unlucky - their 10 year loan needs renewal december this year, and my father is budgeting 3%-4% interests)

but from the rest (~300k) he would like to get 6000 chf / p.a. to complement their pension, which is around 2% ROI.

They are new to invest in equity and is my impression they will struggle with volatility. What are good options to generate 2-3% with limited, see almost no volatility?

One of the options I see is that they loan 200k to me, we sign a regular contract, well defined etc, and I get them 3% in the form of monthly installment of 500 chf (which I can easily do from my take-home salary already now without their loan). The advantage for them would be that they have 0 volatility - they see and must declare a credit of 200k on the taxes, which generates 6k p.a. They will pay income tax on that, they are aware.

My advantage is that I know their money is managed with best intention, I will keep track of any additional surplus that the 200k will generate when invested in something like VT and make sure that in the future they get as well this surplus (or my siblings; since I have 3, I am projected to get a fourth of the surplus as per inheritance). Additionally I know they will not panic with any stock market crash and will sleep without problems.

The only problem I see is if they in the future happen to want to take out the 200k from me with short notice, during a bad market situation. So I will need to discuss this with them and phrase it accordingly in the contract (eg that loan repayment request can only happen over 4 years period time, 50k p.a. or something similar).

Are there any other option you see to get my parents a solid 3% out of 200k, with limited volatility? I understand that mixing money management and relatives is very often a bad idea. We are a very tight and united family, both with my parents and siblings, so this is giving me some confidence. But you never know.

I know as well it will hurt me to see them wasting away money in some untransparent product from some banks.

I welcome any idea/critique.

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One idea that you could consider: the structured products, more specifically the barrier reverse convertibles on a basket of stocks. They provide a periodic coupon and a downside protection during the lifetime of the product. You can basically adjust your risk-reward ratio by selecting the “underlying stocks” and the barrier level; with a basket of major Swiss stocks (Nestlé, Novartis, Roche) and a barrier at ~60%, you typically get a 4% p.a. tax-free coupon.
Obviously this is NOT risk-free : if one of the stock prices falls below the barrier, you will most likely receive this stock at the end instead of cash (carefully read the termsheet of the product to understand the reimbursement).
A way to split the risk is to make several smaller contracts with different expiration dates and/or underlying stocks.

Another disadvantage is that the structured product may be difficult to explain to your parents…

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Your Father seems to be financially wise - just probably not that close to Stock investing hinself. Hence my proposal:

  • 25%: Swiss Life Swiss Properties Direct Real Estate: the money was exposed to Real Estate Risks and we keep part of it exposed to the same risk. At the same time, he can this way prevent Wealth Tax on this part and he will get a tax free dividend; the financially wise part of him will like this
  • 25% in Avadis Basis (40% Shares), with a monthy payout plan of about 1/12 of 3% of the original Investment
  • 25% in Avadis Wachstum (60% Shares), with a monthly payout plan of about the same 3% payout
    => These Parts give him (together with the RE Fund) the return he needs; he can further benefit from the (by summer and according to his expectation) increased interest rate levels on the bonds; plus for your mental wellbeeing he gets Share Exposure yet given the distribution plan he won‘t „feel“ the volatility that much
  • 25% in a Kassenobligationen Latter of his liking. Interest Rates should soon increase quite a bit and provide for return that he knows and will like; maybe stager investments over the next 2 years. If he has a social / society side, invest part of it into Raiffeisen Society Share Capital, some Kassenobligationen with the Coop Depositokasse and invest part of it as Depositokonto with a Real Estate Society of his liking; e.g. ABL

Ah yes, in total this would equate to 25% Shares, 25% Real Estate (30% after Leverage Effects), 25% Bonds and 25% Money Market. A fairly sensible mix that gives you perpetual 2% real and this with fairly moderate volatiliy. The Avadis Payout Plan will further hide away most vola so that he just won‘t see it - simply tell him to only have a look at annual statements and after a dow year, manage him accordingly over christmas, before he starts to panick :slight_smile:

Considering they are older and therefore would not likely want to wait out a 5-10 year recession, should that occur, I would recommend investing a relatively small portion (25%, for example) into the stock market (a good, cheap ETF via a cheap, solid stock broker). The rest should (in my opinion) go into fixed-income products like government bonds and medium-term notes. Ideally, the growth of the 25% invested in stocks will balance the low returns from the fixed-income products. The best offer for Swiss medium-term notes with a 10-year term is now a pretty high 1.4%. You can compare interest rates here:

At this specific point in time, I would also consider keeping the second property and renting it out to be a prudent option as well. But I do understand that there may be some pressure to amortize their other mortgage before retirement in order to continue meeting affordability requirements.

The option of giving you a private loan could be beneficial for them from a financial perspective. However, it would be wise to involve your other siblings in the decision and ideally get their consent, since there can be possible implications for estate planning.

Since you mention siblings I strongly suggest not to take any loan from your dad and also make sure you are not the one who decides - or is seen by your siblings to decide - how they invest the money.

Money destroys families, I have seen it many times and it is a no win scenario.

“The stock market performed badly, Grog took this decision”
or
“the stock market went up massively but smarty-pants Grog told them to only put 50% there. I KNEW that was going to happen”

In my opinion this is a scenario where it might make sense for your parents to pay for independent,external financial advice

Otherwise, 4% is the commonly accepted safe withdrawal rate from a diversified, share based portfolio aged 64 so 3% should be safe. If I was advising them I would explore if they were comfortable going in that direction

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For me the big question is how much your parents are going to manage their investment themselves. Do they need 100% automated passive solution? Managed solution/fund? Or they are ready to tweek around in a more or less mustachian way to save on fees?

If you can borrow all their money that they want to invest and pay them a fixed interest, I think it is a good solution and there should be no issues with siblings. Partially borrowing doesn’t make much sense to me.

For implementation, I would look at roboadvisors, True Wealth or Selma. With them, you can create a desired assets allocation and let it run, paying out needed amounts and automatically selling units.

For assets allocation, think about 5 to 10% in gold. Historically it seems to help damping volatility and preserving portfolio value.

Or, why not just repaying their mortgage?

This sounds like a great deal for your parents, but on the other hand, your side of the deal doesn’t look so appealing to me.

Just as a though experiment: would you offer the same conditions to a stranger like me :slight_smile: ? (If not, then it is not likely favorable for you.)

You’ll carry the risk for the downside of the deal, while at the same time giving up the upside.

He could go up to 40%-50% stocks.

At the age of 64, his investment horizon is, realistically, not more than 30 years. At a 6000CHF/year annuity, that’s 30 x 6000 = 180‘000 CHF, assuming no interest (or that net interest will only cover wealth tax). In other words: the desired monthly contribution to his pension can be drawn from the principal without investing anything.

It seems prudent to invest this amount, about half of 300‘000, into fixed income products. The rest can be freely allocated according to personal risk tolerance.

I‘d probably „round it“ evenly to 50-50, cause stock investments will likely cover the risk of extreme longevity.

Additionally to carrying the risk of the deal, you basically “pawn” your salary to cover for the incurred risk.

Thank you all for the comments - very interesting perspectives

Regarding my goals, foremost I want peace of mind for my parents, and hopefully that they are not getting “scammed”. I don’t seek any financial advantage for me, not at all. I just want their retirement to be peaceful and not stressful since their plan was perfectly reasonable (generating 2-3% out of 200-300k, in order to get these 5-6000 a year to complement their income) I thought a loan could be a way out of it. Basically offering a savings account with better interest that what bank offers.

I saw many relevant comments on possible relationship strains with the rest of the family (sibling etc). I am planning to discuss this with them, if they are not comfortable, I will try to find an alternate solution. I didn’t know for instance about Avadis and the mixed allocation funds they provide, so this thread has already been helpful.

I agree that he could. I personally would go 40-50% in stocks, both because I have “time” and because I realize that bear markets offer discounts. But I’m thinking about an average pensioner who wants a steady annuity they can count on with minimal involvement.

Stocks certainly will deliver an average return of at least 2% per annum (at least they have so far), but it’s important to understand that he will be investing a lump sum, so there’s no cost averaging effect. If the market crashes and takes 10 years to recover, that’s 10 years in the minus with no annuity.

While life expectancy has gone up compared to the industrial revolution, 10 years can still make up a large part of a person’s retirement.

On the other hand, with 3/4 in fixed income products, you have a minimum fixed annuity you can count on. The 1/4 in stocks lets you benefit from stock market growth, while not suffering too much during long recessions. But that’s just my personal opinion.

P.s. Avadis and similar asset management services are a good option if you want minimal effort. But for those savvy enough to use a stock broker to invest in ETFs, investing that way can be a lot cheaper, depending on the broker and ETFs you use.

The thing is - you don‘t want to convince a prudent non-shares saver to get a brokerage account. The risk is that they flip and either become active traders and/or get scammed into strange shares or schemes. Unless they themselves express a desire to acitvely invest, you rather go to Avadis as this was an offline, non-App, boring solution where truly nothing much could go wrong. In your situation, i would probably go for a cheap yet low touch solution. Unfortunately, most robo advisors still require some touch latest upon wealth declaration - plus you see the daily volatility; hence and even though I personally don‘t like them much. Avdis is the best evil around…

Avdis? Never heard of them. What’s so special?

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Cheaper and better performance if OP invests the money himself into some broad cheap ETFs and pays the amount to his parents as mentioned in his proposal no?

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Avadis is essentially:

  • 6 Index Funds (1 Money Market, others 20, 40, …100 % Shares vs Bonds)
  • „Relatively“ cheap TER (about 0.8%)
  • No purchase, sale, admin or depot fees (TER only)
  • 100% Swiss made (including fund domicile and no Securities Lending
  • Simple and Painless Index funds: Quarterly, physical statements, one ISIN per Strategy, straight forward Tax Statements

From an Investment Point of view, they are:

  • Passive other than World Small Caps (which currently sucks vs. Their Benchmark but I understand they keep monitoring this and hopefully go passive there as well
  • Monthly re-balanced
  • FX mainly hedged (other than EM Equity and Small Caps i think)

So the key downsides with Avadis are the TER of 0.8%, major hedging, no Swiss Real Estate Funds, fairly long duration of Bonds (no Momey Markets share), No Gold

Upsides however are that it is perfect for people that don‘t get investments, its super simple and „boring“. This with the abiliy to do pay-out plans allows you do to fairly good things where the alternative would be an expensive Annuity or Bank solution that easily costed double the TER plus other crappy fees.

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Of course ot was cheaper. But self investing can lead into trouble with siblings, KESB in case they somewhen developed dementia… plus it probably was a nightmare for the parents as they didn’t understand what was going on with their money. And at the end of the day - no matter how close the relationship; one can only lose when investing for others. At the same time, training them up so that they self invest may be tricky because you dont want to give potentially bored retirees a new toy to invest time and energy (aka gambling) and you are screwed again if they later on develop dementia - worst case you only learn as the money is gone.

For these circumstances, i would go for an annuity; even though they suck as an investment. An Avadis like solution is a tiny better solution that gives you comparable attributes of an annuity yet as a better (still not perfect) Investment. With a required pay-out of 2-3% only, you can afford the inefficiencies of Avadis and build up your pseudo anuity that kind of feels like a real one (ole boring) yet gives you more upside potential. Even with 0.8% TER and partial FX hedging, a 40-60% Avadis Fonds should be able to support a 2-3% Withdrawal Rate. This way they just receive their monthly cheque from their Fonds Portfolio. No worries for them.

Once I am old, I will somewhen and as I have „won“ the game probably as well just move all my funds into such a solution, establish a monthy pay-out order, delete all access credentials, instruct the fund admin to ignore all my orders unless co-instructed my a trusted advisor and pretend the monthy pay came from my pension. Not sure if Avadis will be around by then but that market certainly is there and I am sure that someone will give me such solution.

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I understand where you are coming from, but using a loan as in-between, I would not be investing their money. The money is mine to do as I please. They only know they have a credit for 200k with me, and I committed to an interest of 3%. They don’t care what I invest and they would not consider the investment their money, if done through a loan.

If you are directly managing their money, without going through a loan, I see that oculd be problematic. But a loan at the interface should clear many things up. They invest in me, not in the underlying investing I will be doing. They only see the credit position. I guess they would still be interested to discuss my strategies etc, but the interface is clear. If something happens, we split the credit 4 ways and I continue pay my brothers so to speak, if the contract is well setup and understood by everybody I foresee less objections/problems arising.

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The biggest problem in this setup is a situation when your parents want their money back and it is not a good moment for that. I was thinking about repayment of the principal, but as they want a steady cash flow, it won’t work.

Everyone to his liking, guess you are aware of the risks involved. Just make sure that the loan was at market rates for un-secured Investment leverage (beyond 3%; and that it was a Money Market plus Markup instead of a fixed interest). Otherwise, you may end up in trouble with siblings or KESB. When you further add a clause that it was callable at lets say 30 days; the loan might pass (so Money Market plus probably 5% and Callable).

At the receiving side, just be aware if the potential tax consequences when investing with such loan.

Both the Parents side as well as your side may work out if you had a few millions of assets yourself (both as collateral to secure the loan and bring interest down to the desired 3%)… and as your tax admin then might conclude it was non-material. But without either Real Estate worth 1+M or otherwise Assets worth 2+M, I would personally run this through both a tax advisor as well as a sound legal advisor.

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