Author Topic: Suggestions needed for the riskiest part of asset allocation  (Read 5313 times)

Grog

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Hi everyone

tl;dr: I save 40k/y. 25k are bound by law and gives low return. How do I get the maximum possible reward for my remaining 15k?
And thanks for everyone reading and commenting! I'm learning so much here in this forum.

Finally I got all the information I want from my company pension plan. Now I can really consider all my belongings in a whole portfolio, and act consequently. I'm swiss so things are slightly different here but the suggestion I need are country independent.

We have a so-called three-pillar system for retirement. piller 1 is social security from the age of 65, so let's skip it.

Piller nr 2 is company pension plan: you can't decide how the money is invested, they do a 45% equity 55% bond split and are by law obliged to give you a minimum of 1.75 % of interest yearly, it can be more but is never more. They compensate for inflaction, so I consider them my "bond" allocation:  "safe" 1.75% return after inflaction. They put ~9500 per year in my name while taking something away from my paycheck (~4500 chf). I spontaneously try to max out my contribution since is deductable from income: around 8500 chf per year.

Piller 3 is a tax-protected account where you can invest max 6739 chf per year and it can go in a fund that has maximum split of 45% equity, 55% bonds.

The rest is up to you. I still have 15000 chf to invest somewhere, and I started to put them in a MSCI world index. But Istill didn't know how my company 2 pillar worked it was everything new.

So as recap, out of a total of 40k saved per year :

18000 goes to my "2nd pillar", a pretty safe investment that guarantees 1.75% return after inflaction and save me 2100 chf of taxes per year (I still have to pay some taxes when I will be accessing them, but at an advanteged rate. I can access them starting from 60 or to start a self employed business, like "blog-writer" ;) ). Of this 18k, I can't decide anything about 9.5k of them.

6739 for my third, tax protected mutual fund. Expected growth rate after management fee of 0.60% (lowest possible I found): around 3.5% (worst case)

This give me a combined growth rate of: 18k/40k * 1.75% + 6.38k/40k *3.5% = 1.34% for 24.38k out of 40k of my investment.

And this by maxing out my risiko AND tax gain....pretty poor scenario, isn'it?

But this are "safe investment" (as long as if any actually exist) and at least will guarantee me a good pension by 65.

My investment plan is simple: be as rich as possible in 22 years (I will be 50 years old, aiming for 2M chf) while giving priority to max out my contribution and lower my taxes, that are a drag to my overall growth return but I prefer the money to be mine and not to pay the state a dime more of what I should.
Not thinking about FIRE or anything. Just that. 2M chf, and to achieve that I have to have an overall return of around 6.5% annual if I keep my 40k yearly contribution.

By making an inverse calculation, to achieve that I have to have a growth rate of 11.2% with my free-to-invest 15k. I know it's not possible with etf index, but I will aim high and see where I land. I expect my contribution to grow with pay increases so average return can be around 9%.

What do you counsel me? I know that past performance are no referral for the future, and I still want to invest simply in etf passive index.
I feel that the MSCI world gives you a good coverage and diversification but slightly less return then a pure STOXX 50 or a S&P 500.
Small cap? or emerging markets? I have the impression that overall return for EM were inflate by that huge expansion phase between '02-'07 and are not really capable of constantly return 10% as the historical return says.
I have access to a good variety of indexes and etf. I would prefer only 1-3, max 4 etf and I will contribute/rebalance quarterly.
Btw inflaction here was 15% in the last 20 years, 0.75% growth per year.

I've started reading Bernstein and other books but I just wanted to hear other opinions, I want to make the most informed decision possible but here and of my friends nobody knows anything about finance and stocks (strange for a swiss guy, eh? OTOH, finance sector is only 17% os Switzerland GDP. I barely know someone who works for a bank).

milesdividendmd

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #1 on: May 15, 2014, 12:50:04 AM »
If you want to stretch for returns, a 50-50 mix of small value (I like RZV as it is very small and very value-ey) and emerging markets would be reasonable. I might also Mix in a momentum fund such as the ishares ETF MTUM as this will provide good diversification for the small value tilt.  (one third of each would be good). As a Swiss investor I am not sure if you have access to these.

If you do your portfolio would look very much like a "Larry portfolio" as described here:

http://www.nytimes.com/2011/12/24/your-money/stocks-and-bonds/taking-a-chance-on-the-larry-portfolio.html?_r=0

If you want to manage your investment, and it is tax sheltered, and trading costs are very low, a simple ETF momentum strategy as described here would be reasonable as well:

[MOD EDIT: Link removed.  Please stop spamming links promoting your own site.  A single link in your signature is sufficient, and will be under every post you make.  Thanks.]

Good luck!

« Last Edit: May 20, 2014, 09:04:56 PM by arebelspy »

Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #2 on: May 15, 2014, 03:38:47 AM »
thank you for the suggestion! I'll have to check out this momentum strategy, because I wouldn't dislike be more active and here in Switzerland we absolutely no taxes in capital gain, even short/long term. We have taxes on dividend instead.
Rebalancing one fund every month would be ~25chf though (selling & buying ETF), so I will have 300 chf expenses every year, compared to ~100chf to just adding 1200chf every month to a broad, diversified ETF.

But 200 chf out of 15000 means that the momentum strategy should be at least 1.2% more profitable than a passive broad invested index. Does anybody pursue this strategy actively?

clifp

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #3 on: May 15, 2014, 03:54:23 AM »
It doesn't sound like you are particularly risk adverse given all your safe money and if the desire is to "be as rich as possible by 50".  I'd suggest 100% equities.  The mix is more challenging. I personally think the emerging markets especially China is in fact going to rapidly displace the US as the largest economy. But even when that occurs their per capita GDP will still only be $13,000.  I haven't spent a lot of time in China (but I do have many friends that have) but I can say that I have never seen such a money obsessed/entrepreneurial cultural outside of Silicon Valley.

 I also think that emerging markets are the area where it makes the most sense to find a good active manager. Alas I couldn't recommend a specific fund or ETF.  Alternatively if you can invest in the Vanguard VWO I can certainly see stick 1/3 to as much as 1/2 your money there. A 1/3 in MCSI also make sense. The remaining I think I'd invest tactically by looking asset classes that have high potential (i.e. equities or junk bonds) and were laggards last years. So this year it would international if you were in the US.

http://www.blackrock.com/investing/literature/investor-education/asset-class-returns-one-pager-va-us.pdf

Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #4 on: May 16, 2014, 05:16:34 AM »
It's incredible how only a couple of days of full immersion can help perspective. There are many things I've barely scratched...

In the end I'm starting to hink that I should control what I can control, and not focussing to much on the rest.

That's why I'm starting to thinking that the most sensible thing to do is investing in the SPI (our broad swiss index) in order to avoid currency problem (and the swiss franc is so strong, you always have problem), minimizing rate-change risk.

For example I've seen that all the not-chf-hedged ETF based on the MSCI World index reported a real increase in 2013 of 4% instead of 11.3% of the index! Is crazy! 2/3 of the performance lost in currency conversion.

So I'm taking more risk by concentrating on the swiss index, but on the other end I'm eliminating other sources of risk. And the SPI has a fantastic annual total return over the last 20 years (10.7%).

clifp

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #5 on: May 16, 2014, 02:36:24 PM »
Considering it is Switzerland and not say Cyprus or Congo, I think that is an entirely reasonable plan.  I am somewhat but not entirely surprised that currency conversion loss is so much.
I am sure there have been periods of time when the Swiss Franc hasn't been strong, but I sure don't remember them in my lifetime. :D

milesdividendmd

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #6 on: May 16, 2014, 04:09:57 PM »
I can't believe 2/3 of a world index fund profits would be lost to currency conversion. That seems impossible.

The dollar was relatively unchanged in value relative to the Swiss franc last year with 1 chf being worth 1.09 dollars 12/31/2012 and 1.12 dollars 12/31/2013.   And our
 dollar purchased international indices had very little tracking error relative  to their international indices.

I would recheck your facts before ruling out internationsl diversification.

Alexi

Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #7 on: May 17, 2014, 04:52:15 AM »
I can't believe 2/3 of a world index fund profits would be lost to currency conversion. That seems impossible.

The dollar was relatively unchanged in value relative to the Swiss franc last year with 1 chf being worth 1.09 dollars 12/31/2012 and 1.12 dollars 12/31/2013.   And our
 dollar purchased international indices had very little tracking error relative  to their international indices.

I would recheck your facts before ruling out internationsl diversification.

Alexi

Thank you Alexi for your reply! You even bother to check out the conversion. Maybe my facts are wrong, so I'll gladly check again and maybe you can correct me.

What I did was very simple: I've taken the average 1-year overall return of 5 MSCI world Total return etf listed at Swiss Exchange but without currency hedge:
https://www.justetf.com/ch/find-etf.html?index=MSCI%2BWorld&distributionPolicy=distributionPolicy-accumulating

They go from 3.30% up to 5%. Let's say 4 % overall return for the last 52 weeks.


Then I've look at the MSCI World index return for the last 52 weeks:
http://www.msci.com/products/indexes/performance.html

It is up 11.65%!

This bothered me so I went to check the MSCI World CHF hedged recently started by iShares and in whichi I intuitively started investing:
https://www.justetf.com/ch/find-etf.html?index=MSCI%2BWorld%2B%2528CHF%2BHedged%2529

It is up 11.35% !


My conclusion was: currency is a darn big problem.

And btw the Swiss index is practically a proxy for the world index, since all our listing have international orientation. The two curve MSCI Switzerland and MSCI World for the last 10 year are identical, just a positive offset for the SPI. No domestic influence here, only global. That's why I would prefer to invest in the Swiss index: same dynamics as the CHF-hedged World index, but with less fee (as low as 0.25% vs 0.55% of the World chf-hedge)

nassoro

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #8 on: May 22, 2014, 01:56:11 PM »
Out of curiosity, have you looked at the SwissCanto funds?  I'm inclined to put about half of my 3rd pillar in Swisscanto (CH) Equity Fund Value Switzerland A, and a quarter in their small-mid cap.  Its a reasonably international set of stocks, and is something I can actually buy (limited to cantonal banks for my 3rd pillar).

warfreak2

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #9 on: May 22, 2014, 02:17:00 PM »
If you "need" 11% then this is not so much higher than the (admittedly pre-tax) long-term nominal growth of the US stock market (10%). It's easily achievable with ETFs, it just requires a small amount of leverage - meaning you borrow some money at a low interest rate and invest that too. Leverage increases your expected return by increasing your risk - if the stock market goes to zero, you lose more than everything, but if high-risk/high-return is what you're after then this is the simplest way to achieve it. I do have to question why you "need" such a high return, though.

Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #10 on: May 22, 2014, 02:58:29 PM »
If you "need" 11% then this is not so much higher than the (admittedly pre-tax) long-term nominal growth of the US stock market (10%). It's easily achievable with ETFs, it just requires a small amount of leverage - meaning you borrow some money at a low interest rate and invest that too. Leverage increases your expected return by increasing your risk - if the stock market goes to zero, you lose more than everything, but if high-risk/high-return is what you're after then this is the simplest way to achieve it. I do have to question why you "need" such a high return, though.

Because the pension plan of the company, that grows of 10k every year at least, is completely untransparent and by law it grows at 1.75% every year. You can't choose a plan, you can't do nothing, just watch and suffers in seeing such low returns.
Since this is almost risk-free, and I know I'll have it for my rent, I just wanted some counsel on how to increase profit by having more risk on the money left that I can choose where to put.

Out of curiosity, have you looked at the SwissCanto funds?  I'm inclined to put about half of my 3rd pillar in Swisscanto (CH) Equity Fund Value Switzerland A, and a quarter in their small-mid cap.  Its a reasonably international set of stocks, and is something I can actually buy (limited to cantonal banks for my 3rd pillar).

I have my 3rd pillar in a swisscanto fund. I think by law you can only choose a maximum stock allocation of 45%, no more. I'm maxed out with Swisscanto passive index BVG 45, the less expensive and with the maximum percentage of stocks (45%).

warfreak2

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #11 on: May 22, 2014, 03:39:28 PM »
Because the pension plan of the company, that grows of 10k every year at least, is completely untransparent and by law it grows at 1.75% every year. You can't choose a plan, you can't do nothing, just watch and suffers in seeing such low returns.
Since this is almost risk-free, and I know I'll have it for my rent, I just wanted some counsel on how to increase profit by having more risk on the money left that I can choose where to put.
I recognise the point of having exclusively high-risk/high-return assets with the remaining portion, since you have so much already in low-risk/low-return assets. I just don't see why you decide you want 2MM CHF at age 50 and therefore decide the risk level based on that goal. It seems like putting the cart before the horse. IMO, you ought to first get an idea of what your risk tolerance is, and then see how long it takes to get to 2MM (if 2MM really is the goal), rather than setting the target date first and then accepting whatever risk is necessary to get there.

Think of it like a long trek. You decided on the destination, but if you decide an arbitrary arrival date, then the amount of walking you have to do each day will bear no relation to your physical fitness, or whether or not you can sustain walking that long each day. A much better plan would be to work out how long you can reasonably walk in a day, and then calculate your arrival date from that.

Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #12 on: May 22, 2014, 11:33:24 PM »
Well I've started with this:
http://www.bogleheads.org/wiki/Investment_policy_statement

your asset allocation is not only dependant on your risk tolerance (very high for me, since half of my money is either bonds or guaranteed company pension plan) but on your long term goals too. If you want a ceratin goal, you have to adapt your AA to fit these goals. And for me it was "As rich as possible, aka stock return of my contribution for 25 years, aka 2 million".

nugget

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #13 on: October 17, 2016, 05:14:12 PM »
are there any news on this topic?
I am in the process of making up my mind for a personal investment strategy and lots of the things written in grog's initial post apply to me.
I am located in Switzerland, ~30y, finishing my PhD, and want to maximize returns while having a time horizon of 30,40, even 50 years.
my basic strategy is to be globally diversified: US, EU, Far East, EM, +Switzerland

I came across the ideas of small cap & value which led me to some stuff like "Vanguard Small-Cap Value Index Fund Admiral (VSIAX)" or  equal-weighted ETFs, where only one on the sp500 and SToxx Europe 600 are available at the swiss stock exchange.

Grog, any nees? anything to learn?^^
Thanks!
-nugget


Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #14 on: October 18, 2016, 05:16:04 AM »
hi nugget
honestly two years ago I was in rush FIRE etc now I think I'm calmed down....my first son came to the world, etc.
My focus shifted, now everything is automated, every three months I get dividend from Vanguard all-world, add money and reinvest. That's it, 4 times a year. Plus one per year some swiss small cap like ETF SPI-mid.

The only thing I'm considering is to switch to Postfinance 75 to increase the stock allocation but at the moment I'm a bit lazy and still happy with the swisscanto funds.

I feel my need to increase risk because everything was locked into pillar2/3 decreased. I think the next best thing is to try to advance your career and increase your salary. In this way you can increase your contribution to taxable ETF etc without increasing risk overall. That's what I did and now I'm making 30% more that what I was making in 2014....

nugget

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #15 on: October 18, 2016, 06:01:25 AM »
Hey Grog,
thanks for your answer!

I like your points of realism here :)
I know i will not forever invest the time into this topic^^

but for my curiosity: what interesting things did you look into when you were searching for high risk & return?
I "believe" there is that monotoneous correlation between risk and return. I may not be willing to go beyond small value stocks, but what comes after? is there anything? i am aware of venture capital, but this will not be part of my portfolio anytime before my net worth is 10M^^





« Last Edit: October 18, 2016, 06:09:36 AM by nugget »

Grog

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #16 on: October 18, 2016, 08:25:30 AM »
You could loan money to invest, like buying index fund on margin loan

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nugget

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Re: Suggestions needed for the riskiest part of asset allocation
« Reply #17 on: October 18, 2016, 04:26:56 PM »
Yes of course, do the leverage.
well for me, that is behind the red line of casino. Formally correct but a no-go for me :)