I just opened an IB account and starting to build a portfolio. My 2nd pillar is not very substantial, even though I’m in my late 30s.
Should I add bonds in the mix? The US Treasury 1-year has currently a yield of 5.3% which is pretty high and in line with the ROI goal, however, it also opens me up to conversion risk to the US dollar…
The relevant MP post that I read said to count the 2nd pillar as a bond and therefore he doesn’t need to add this, but with the current rate, it seems reasonable to add some US treasury to get started?
There is the conversion risk in the short and medium term, but there is also the inflation differential over the long term. The inflation is higher in USD than in CHF, so that USD is anticipated to depreciate in the long term, although in the medium term it will have ups and down.
In the long term, real (inflation corrected) yields are more or less the same in all (main) currencies, so it is a good idea to focus on the currency that you use now, and the currency that you will be using when you retire.
Diversifying a bit into bonds in other currencies can be useful, but that shouldn’t be done for the extra yields, it’s for diversifying the issuers. This can also be done via hedged bond funds to avoid the medium term fluctuations.
Also, if you invest in bonds, pay attention to the duration (the time left until the bonds mature), because high durations make bonds sensitive to changes in interest rates. I think for most of us who use bonds as a buffer, durations of 5-7 years are the maximum we should expose ourselves to, and that’s already high (an increase of 1% of interest rates makes the bonds go down in value by 5%-7% – multiply the duration with the potential increase of interest rates, and you get a rough idea).
T-bills are the biggest single holding in my portfolio. I keep fixed interest with low maturities mainly <3 months and <6 months with a few reaching out to 1-2 years.
As you say, the biggest exposure is to FX movements. But my T-bill holdings are temporary and I expect to re-deploy them within the next few years - either buying USD denominated stocks or converting to CHF and investing into pension fund with VIAC (which ultimately will have significant USD exposure anyway).
I’m fairly bullish on USD in the near term, so not too concerned with adverse FX impact.
It definitely isn’t. The trading currency of an ETF is irrelevant. While the companies in VT have a lot of exposure to USD, they also have exposure to lots of other currencies.
And taking currency risks is reasonable for the part of your portfolio where you expect higher returns for the risk you take (as is typically the case for stocks), but can be problematic for bonds if you consider those bonds to be the stable part of your portfolio.
Currency risk is very different for stock and bond. There’s really little reason for a swiss investor to buy unhedged foreign bonds.
And if you want to make an FX bet, maybe do that directly instead of mixing it with your bond allocation.
(Also higher yield is bad for taxes, it should be better to have a 2% return in CHF than a 4% one in USD, since you’re taxed on income but can’t deduct the USD depreciation)
With TLT at prices not seen for many years, it can be tempting to buy now. However:
A change in Fed policy at the short end of the curve, doesn’t necessarily impact the long end; and
While rates are high compared to recent years, they are not particularly high when looking at times in the past with high inflation. Further rises are possible at the long end leading to more capital losses (and potentially high inflation makes holding to maturity unattractive too)
Agreed. Most people equate bonds with safe/stable, but at the long end, they are quite volatile and speculative instruments used to make bets on long term rates (I don’t think anyone would have sensibly tried to hold 20+ year maturity treasuries to maturity as a strategy).
The recent Austrian 100 year bond issue was mainly bought up by hedge funds for the extremely long duration.
Guess you are aware but this is extremely tax-inefficient (in Switzerland). Over a cycle, T-Bills yield the same than Swiss Money Market investments. The only difference is that given higher interest rate level in the US, a larger part of the return is in taxed distributions than if you held it in CHF (or CHF Hedged T-Bills).
Or you can buy US bonds issued in 2020 with basically 0 yield. In this case they are trading far below par so as it converges into expiry all your returns are capital gains .
That’s a weird reasoning Don’t we agree this isn’t an optimal strategy? You could still contribute similar amount to the pension fund and you’d pay less tax (save the marginal tax rate amount). In any case you lose the marginal tax rate on the difference between the low CHF rate and high USD rate.
Unless you want to contribute more into your pension fund than what your salary was. This way, you can inflate your income and this way contribute more to the pension fund. From an opportunity cost and tax savings point of, it just doesnt make sense. At the same time, I think they would still prevent pension fund buy-ins larger than your salary.
It’s not supposed to be an optimal tax strategy, but an optimal investment strategy. I’m happy to take 6% interest and keep my capital, rather than lose the capital that has been lost in recent times with the S&P500.
I’m not sure i understand you here. you’re saying that because the interest is higher on USD, that I’m paying more tax? OK, but then I’m getting more income too. I’d rather get income of $100 and taxed $20 than get income of $50 and get taxed $10.
Can you share some of these funds. I’m not familiar with the Swiss funds, but would be interested if there are any with current yields similar to T-bills and similar risk profile.
I’m bringing my taxable income this year down to $80k. So any additional income I will offset with pension contribution.
I don’t think there is such a restriction. I’ll know next year as I plan to buy in for more than my salary.
Interesting strategy. I’m not sure whether from a tax perspective, it works that way. I know for example that the captial gain on zero coupon bonds are taxed as income.
In any case, rather than deal with individual T-bills, I buy these wrapped in ETFs where only part of the natural income is distributed and part grows the capital value. So it isn’t quite as bad as getting a 5.5% dividend.
Its time to read about interest rate parity. The principle is quite simple; as long as we talk about open Markets when one Country has 5% interest rate and the other country had 2% interest rate; the currency of the first country will de-valuate 3% p.a. vs. the second country. The logic behind is quite simple - opportunity cost/benefit and efficient markets. Plus it actually works.
Therefore, you shouldn’t focus on Distributions but total returns. Whether you have a look at Total Return in USD or in CHF doesn’t matter. From a total return point of view, you could simply invest your money in just any CHF Money Market Fund. You would get distributions worth about 1% and you get appreciation of about 0.5%. This compared ot USD MM Funds where you get 5% distributions, yet lose about 3.5% on negative appreciation due to FX Loss. Overall, and before tax, you have the same total return. Post tax (which was on distributions only but not on appreciation/negative appreciation), the picture is clear that you rather invest in Swiss MM Funds.
I‘d rather get 45 CHF than 100 USD income (interest) - as long as my invested capital appreciates by another 45 CHF against the USD equivalent. Think that was what @nabalzbhf was referring to: the tax advantage of currency appreciation vs. interest.
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