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Equities or investment funds?

Mar 16, 2022.

This article in the «Investing Money» series explains the investment instruments equities and investment funds. What are the pros and cons and what do investors need to be aware of?

Shares: the yield bearers

When you buy a share, you become co-owner of a company. You have a say at the Annual General Meeting and participate in the company’s success – through dividends, but above all through potential gains in the share price.

 

If you want to invest for the long term and achieve a relatively high return, you can hardly do it without equities. However, the long-term high returns come at the cost of one’s nerves, which can be stressed when there are temporary slumps in price. For example, Swiss equities lost around a third of their value in the 2008 financial crisis (see box).

 

Nonetheless, despite such drastic price collapses, Swiss share prices were higher than ever before at the end of 2017 (see chart). The value of equities – and to a lesser extent bonds – has risen significantly faster than inflation (shown in the chart as the consumer price index).

 

Extreme years for stocks and shares

  Annual return   Annual return
Negative years2008 Negative years–34,05% Positive years1985 Positive years61.36%
Negative years1974 Negative years–33,14% Positive years1997 Positive years55.19%
Negative years1931 Negative years–30,09% Positive years1936 Positive years52.52%
Negative years1987 Negative years–27,48% Positive years1993 Positive years50.81%
Negative years2002 Negative years–25,95% Positive years1961 Positive years49.39%
Negative years1990 Negative years–19.31% Positive years2019 Positive years30.59%

Performance of equities and bonds

Source: Banque Pictet

 

What does this mean for the future?

From a past perspective, equities clearly emerge victorious over bonds. At the same time, past returns are never indicators of future returns. Nevertheless, experts expect that equities will continue to yield higher returns than bonds in the future.

 

It is not possible to make reliable forecasts about the future price performance of an individual equity, however, which is why financial advisors recommend buying a whole basket of shares. Although this reduces the potential return on a lucky strike, it also reduces the risk of severe losses – thanks to greater diversification.

 

Generali tip: Due to high price fluctuations, when it comes to equities, you should only invest money that you can leave invested for a longer period of time, so as not to experience losses.

Investment funds: diversification built in

With a fund, you buy a whole basket of shares, bonds or other securities. There are many fund managers around the world, all vying for investors’ attention. In addition to equity, bond, real estate and money market funds, they also offer strategy funds, exchange-traded funds (ETF), hedge funds and funds of funds. Each category has its own subcategories and comes with its own pros and cons.

 

The division of the fund assets into many different positions enables you as an investor to achieve a good level of diversification, even when investing smaller amounts. What is more, investment funds are generally well documented. On the providers’ internet platforms, you will find detailed records, in particular the fact sheet with the most important key figures, details of past performance, investment structure and costs.

 

Funds are measured against a “benchmark”. This is often an index, for example the SMI (Swiss Market Index).

 

PASSIVELY VS. ACTIVELY MANAGED FUNDS

There are various types of funds. One key difference is in the way in which fund managers manage their funds. As the name suggests, with an actively managed fund the securities contained within the fund are subject to constant review in order to identify whether different securities may perform better. The investment specialists always adhere to the objectives defined in the fund. Passively managed funds are the opposite of actively managed funds. Since no active investment decisions are made with passively managed funds, the fees for these are usually lower.

 

Generali tip: Don’t try to find the best fund on the market, but rather a fund that’s right for you and that you can get behind.

MORE ARTICLES ON THE SUBJECT

The third article in our series «Investing Money» explains what an exchange traded fund is.

ABOUT THE AUTHOR

Raphaël Savary has been passionately pursuing his career for 13 years. He holds a Federal Diploma of Higher Education in Financial Planning and is Sales Manager at Generali in the Lausanne-Riviera region. Thanks to his holistic analytical approach and 360° view, he helps Generali clients to optimise their operations from all angles in the areas of insurance, finance and pensions.

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