How would you invest 75 million
Investing 1M in Switzerland: principles, risks, returns
So you've finally made it: the big, fat, seven-digit bank account. 1M! For those who have the privilege of seeing this balance on their account, the thrill is both exhilarating and scary. On the one hand, you are happy to be accepted into the worldwide 0.6% club. On the other hand, you are now preoccupied with maintaining and growing your wealth. Understandably, managing 1 million (CHF, EUR or USD) is very different from managing 100,000.
This article will tell you how to manage your 1,000,000 (CHF / EUR / USD) from someone with years of experience managing and growing a successful multi-million dollar personal portfolio.
The philosophy of wealth
It's important to take a step back and understand what wealth is and what its limits are.
First, wealth cannot provide you with time or health (some may even include happiness in this category). These are inherent in the laws of physics that govern our world. No amount of money, stocks, or real estate can change that fact.
That being said, wealth is an important moderator in your life. It enables you to achieve your goals with ease and minimal frustration, thus increasing your zest for life. It is also an enabler of human interaction that increases your personal wellbeing.
If wealth is viewed as a facilitator (rather than an end goal) the natural question is, “What is the end goal?” Unfortunately, there is no one-size-fits-all answer to this - it's as personal as a fingerprint to each individual. However, if you understand your ultimate goal, you will be able to better assess your investment goals and thereby use your capital strategically.
The 4 principles of global investments and investments in Switzerland
Books that weigh as much as stones have been written on the subject. There is a lot of specialist and academic literature, some of which clearly contradict each other. We have broken them down into 4 easy-to-remember principles that are relevant to any investment scenario.
1. Don't lose money: This is the number 1 rule for Warren Buffett, and it is something that I hold dear. Never invest in a company that is at high risk of permanent capital loss. This refers to projects (or companies) with underlying structural flaws that could one day put them out of operation rather than just causing temporary fluctuations in valuation. After all, any percentage gain can be temporary while a 100% loss is permanent.
2. Don't forget rule 1: The idea of never losing money is so important that it's worth reinforcing with your own rule.
3. Slowly and steadily you win: Here is a riddle. Which investment brings a higher return: 5% for 10 years or 10% for 10 years, but with a market decline of 35% in the middle? Yes, you guessed it right, a constant 5% annual return triumphed. This is a simple math reality: percentage gains and losses are not the same. A 50% loss requires a 100% gain to break even again. Always keep that in mind.
4. Self-improvement is the only way to survive and thrive: There may be more than a few people and companies out there ready to help you manage your wealth. The truth, however, is that no one cares more about your interests than yourself. Therefore, it is important to educate yourself about investing so that, even if you entrust your capital to a professional, you have the know-how to make them to permanently demand his best skills.
The Wealth Playbook: How To Invest 1 Million
Now that you are familiar with the principles of investing, it is time to put them into practice. This playbook section shows you how.
Purpose & goals
It might sound like a cliché, but investing without a destination in mind is like sailing to an unknown destination. You will not know when or if you have achieved your goal. It is therefore important to know what your portfolio should look like in the future.
At the simplest level, there are two key functions of a portfolio:
1. Generate sustainable and increasing income -> This is ideal if you live on a passive source of income and want to gain financial independence. With a return of 5% and a million, you will generate 50,000 in income every year, which can propel you towards financial independence.
2. Achieve real growth in the net present value of the portfolio -> This is usually used to generate a considerable amount for a certain future endeavor (e.g. buying a house, education).
Depending on the goal you are pursuing, this has different effects on the asset allocation. For example, income-oriented investors would invest more capital in income-generating assets (fixed income securities, dividend stocks), while growth-oriented investors would invest in stocks with high growth potential.
Define your time horizon
Do you want to achieve your goal in 5, 10, 20 or just 2 years? Your time horizon is crucial in choosing your asset allocation. In general, the faster you want to get a certain performance, the higher the rate of return and the higher the level of risk. Consequently your time horizon is directly tied to the risk you have to take.
A good benchmark would be the long-term average return of the Swiss Market Index, which has achieved an average annual total return of 5.82% over the past 30 years. At this rate, your portfolio would double every 12 years.
The general advice at 1M level is to just let the portfolio grow on its own and disrupt it as little as possible. That way, you can enjoy the full benefits of annual growth and just let time do all the hard work.
Choose the right structure
Should you invest in a tax-privileged account or a general investment account through your retirement provision? This may sound trivial, but these variants actually and significantly affect the performance of the portfolio because they have different tax implications.
There are various tax-privileged accounts (2nd and 3rd pillar accounts in Switzerland) that have been set up by governments to encourage people to save and invest. You either have no tax liability or you have a deferred tax liability, which means that your portfolio can grow tax-free in the meantime. Take advantage of that!
Still ignoring the impact of taxation on your portfolio? It has been found that even an additional fee of only 1% can have a lasting impact on the long-term performance of the portfolio. Imagine the effect of a capital gains tax of 25%!
Taxes are real expenses that weigh on your portfolio. With the right structure, you can increase your capital in the most tax efficient way and get the maximum effect of compounding. Even a 1% saving can have a huge long-term effect, as shown above. So choose wisely.
Don't put everything on one card
The old adage “Never put everything on one card” remains the top priority in the world of investing, even when it comes to investing in Swiss francs, which are considered to be one of the most stable currencies in the world.
Diversification simply means choosing assets with an uncorrelated risk / reward profile. For example, adding some gold to a stock-only profile means that if stocks crash, the gold should increase in value (due to its safe-haven status). Research has shown that if 20 fully uncorrelated assets are placed in a portfolio, the risk of long-term impairment is low, as losses in one area would be more than offset by gains in other areas.
Diversification also means building up an extensive portfolio. You may know the local Swiss market inside out, but it won't help you if EU-Switzerland relations collapse and all of your assets remain in Switzerland. By investing in assets around the world, you can reduce the risk of investing in only one geographic area.
Here are 3 easy ways to diversify your asset allocation and geography:
1. Use a multi-manager fund with multiple asset classes.
2. Buy a selection of geographic and asset class ETFs.
3. Buy an international index fund (e.g. FTSE World Index).
Diversification reduces the volatility of the portfolio, which is essential for long-term growth.
A side effect of diversification is the realignment of the portfolio. Due to constant changes in the underlying valuation of assets in a portfolio, the optimal asset allocation can never be sustained over the long term. It is therefore important to make regular adjustments (through buying and selling) in order to return to this optimal allocation. Due to the hassle and fees that may be involved, it is recommended that you do this no more than twice a year.
Beware of fees and costs
We have seen the adverse effect of fees on the long-term performance of a portfolio before: a fee of 0.75% will reduce the final value of the portfolio by 17% at the end of a 20 year period.
It goes without saying that fee minimization measures should be considered. Here are 3 easy to remember techniques:
• Use a fixed fee platform instead of a percentage based on net asset value platform.
• Use inexpensive index funds (fees not exceeding 0.25% per annum) unless the active manager has outperformed the market over the long term. Remember, that too can turn around very quickly, as Neil Woodford illustrated this year.
• Don't trade too much - once you've invested (presumably taking advantage of the average cost effect) you should just sit back and let the market do all the hard work.
Consultant, asset manager or do it yourself?
Once you hit the 1,000,000 mark, there will be no shortage of experts willing to devote some of your time to advising or managing your wealth. After all, money has the magnetic property of attracting more money.
At some point you need to make a decision about how your portfolio will be managed. There are 3 main routes:
1. Do it yourself
2. Asset managers
Do it yourself is easy and free. You make all investment decisions yourself and then execute them. Technology has made trading so much easier that retail investors today can access professional trading tools that are just slightly more expensive than their morning coffee. The upside is that it's free and you always have your own interests first. However, you need to have a good understanding of the market, as well as a clear head and dedication of time to your portfolio. In my opinion, this is the best portfolio management technique as no one else is more interested in you than you are.
Asset managers, on the other hand, take over your portfolio and make all investment and trading decisions on your behalf. The advantage of this agreement is that you save time and allow professional expertise to flow into portfolio management. However, this can be an expensive approach (fees start at 1% per year) and their main incentive is to maximize sales for yourself rather than getting the best result for you.
Consultants sit somewhere between do-it-yourself and asset managers. They offer professional expertise to advise investors where and how to invest. However, the final decision is in the hands of investors who may either accept or ignore such advice. Advisers can be informal in the form of friends or formal financial advisers regulated by the relevant authorities. Formal counseling typically costs $ 200 to $ 500 an hour.
Always keep some powder dry (or reserve cash)
There are many qualities of Warren Buffett that contribute to his financial success. First and foremost, it is his patience and willingness to hold large amounts of cash for an extended period of time. Cash is what is called "dry powder" when investing because you can use (or "fire") it when you need it.
Having some cash in your portfolio is always good as the face value of cash does not change and therefore acts as a natural hedge that reduces volatility. The real benefit of cash, however, comes into play in economic downturns, when market fears irrationally drive the valuation of solid and well-run companies below their intrinsic worth. At this point in time, you could get these wonderful companies cheaply, increasing your margin of safety (and therefore your ROI). Buffett really understood the importance of this point, so in late 2008 he aggressively bought into Goldman Sachs and Bank of America.
Keep some powder dry as you may need it quickly (and better to have it than not)!
Have confidence in yourself & ignore all the background noise
There is never a shortage of people trying to express their opinion as loudly as possible. Unfortunately, in the digitally connected world we live in today, these opinions are spreading much faster than necessary, filling up the time people need to think for themselves.
My advice is to remove these distractions from your life, use what you learned about investing, and listen to yourself. You understand your own circumstances better than anyone, and if that means running into the herd, then you do. After all, nobody has lost money unless they jumped on the bandwagon.
Investment Opportunities to Consider
After we have a good understanding of the principles and practices of investing, we will look at the options available to make sure 1M is working as hard as possible for you.
Here you will find an overview of the asset classes available to investors and their various characteristics.
|Characteristics / asset||Cash contribution||Bonds||shares||property||raw materials||Private equity and venture capital|
|Overview||Depositing capital into a regulated financial institution against regular interest payments.||Lending capital to companies or governments in exchange for regular interest payments.||Direct or indirect ownership of public companies.||Direct or indirect ownership of real property.||Direct or indirect ownership of frequently traded commodities (e.g. gold).||Direct or indirect ownership by private companies or start-ups.|
|Investment income||No||Zero on the primary markets; possible on secondary markets||8-10% per year for an index fund. Significant upward trend with the right growth model.||An average of 5-6% per year, depending on the location and the type of property.||Very variable. Depending on the type and timing between -50% and 100% +.||Very variable, can be 0% or 10x + of the invested capital.|
|Income potential||Between 0-3% pa depending on currency and conditions.||Investment grade bonds trade around 3-5% p.a. junk bonds at 8% +.||2.5% dividend yield per year.||3-5% rental yield per year. Very variable depending on the location.||No||No|
|Risks||No risk if the deposit is within the secured limit (currently CHF 100K per person per bank)||Adverse financial results that lead to a default of the borrower on the loan.||Adverse financial results undermine valuation and jeopardize dividend payments.||Adverse economic conditions could reduce demand and lower both price and yield.||Very volatile and prone to global fluctuations in demand and supply.||High uncertainty in business development (hence yield). High probability of permanent loss of capital.|
|liquidity||High if available immediately, otherwise a penalty may apply.||Usually high as these loans are publicly traded.||Usually high as these securities are publicly traded.||Usually low as the properties are illiquid.Can be partially mitigated by investing in REITs.||Usually high as commodities are publicly traded with transparent prices.||Low|
|Transaction costs||No||Low||Low||Around 3-10% depending on the location.||Low||Around 3-5% of the transaction amount.|
|administrative expenses||No||Low||Low||1% of the asset per year.||1% of the asset per year.||1-3% of the asset per year.|
|Minimum investment||No||Usually around $ 1,000||Usually around $ 1,000||A minimum of $ 20,000 for an entire property or $ 1,000 for REITs.||A minimum of $ 50,000 for physical commodities or $ 1,000 for commodity ETFs.||At least $ 100,000|
|fitness||Suitable as a short-term storage option for your portfolio dry powder. Unsuitable in the long term as inflation reduces purchasing power.||Suitable as an income-generating engine for a portfolio.||Suitable as part of a long-term investment strategy.||Suitable as part of a long-term strategy for generating income and maintaining value.||Suitable as a short-term hedge of the portfolio against uncertainties.||Suitable for discerning investors who are not afraid of permanent capital loss of the invested capital.|
1 million is a significant amount of capital that, when invested wisely with the right goals and time horizon, will produce serious returns and propel you towards financial independence. In summary, we leave you three principles that are close to our hearts:
• Simplicity over complexity
• Time is your best friend
• Fees kill returns
Have fun investing!
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