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What investment instruments are there?

Dec 15, 2020.

A basic rule for successful investing: only invest in financial products that you fully understand and carefully assess the possible risks. This is examined in more detail below.

 

There is also another basic rule of investing: the simpler and safer a financial product is, the lower the return it will generate. The more return an investment promises, the greater knowledge and risk tolerance it requires. So what do you need to bear in mind? We have put together the most important investment instruments for you:

 

 

Savings accounts: the liquid reserve

It is well known that savings accounts these days yield hardly any interest. And if you consider the account fees, the assets in saving accounts are even losing value. The big advantage offered by savings accounts is depositor protection: should a bank become insolvent, savings of up to CHF 100,000 are protected.

 

Generali tip

The depositor protection of CHF 100,000 applies not per account but per customer. We therefore recommend that you spread savings over this amount among several different institutions.

 

A savings account is the place to keep your iron-clad reserves. It’s for amounts that you will need in the next two to three years and for savings that you are continuously building up.

 

Foreign currency accounts

If you own real estate abroad or do business abroad, it may be useful to have a foreign currency account. This can save you foreign currency exchange fees. However, you also incur a currency risk. Foreign accounts offering interest rates of up to 5% or more may be tempting, but if the currency falls by 20% against the Swiss franc, you end up losing money.

 

 

Bonds: for medium-term investments

Bonds – also called annuity certificates or fixed-income securities – are debt securities issued by companies or public authorities such as the Swiss federal government, cantons and municipalities. When you buy a bond, you are entitled to interest (coupon) from the issuer and repayment of your deposit after a certain period of time.

 

The time until your money is made available to you again is usually fixed and is considerably longer than with a savings account, where you can access at least part of the money at any time. This is one reason why bonds usually earn more interest than a savings account. The longer the term of a bond, the higher the average interest rate.

 

How secure is a bond?

There is no guarantee that you will get your money back at the end of the term. It could happen that the issuer becomes unable to pay. This makes it all the more important to establish the issuer’s creditworthiness, or in other words: his future solvency. The creditworthiness of bond issuers is measured by rating agencies. The two best-known rating agencies are Standard & Poor’s and Moody’s. You can derive the risks of a bond from the credit ratings assigned by these two agencies.

Credit ratings and potential insolvency

Credit rating by Standard & Poor’s / Moody’sAAA/Aaa  Issuer qualityExcellent Probability of default in %*0.521
Credit rating by Standard & Poor’s / Moody’sAA/Aa  Issuer qualityVery good Probability of default in %*0.522 
Credit rating by Standard & Poor’s / Moody’sA/A Issuer qualityGood Probability of default in %*1.287 
Credit rating by Standard & Poor’s / Moody’sBBB/Bbb Issuer qualitySatisfactory Probability of default in %*4.637 
Credit rating by Standard & Poor’s / Moody’sBB/Bb Issuer qualitySlightly unsatisfactory Probability of default in %*19.118 
Credit rating by Standard & Poor’s / Moody’sB/B Issuer qualityConsiderable risk Probability of default in %*43.343
Credit rating by Standard & Poor’s / Moody’sC Issuer qualityVery high risk Probability of default in %*69.178 
Credit rating by Standard & Poor’s / Moody’sD Issuer qualityAlready insolvent Probability of default in %*100 

* Percentage of bonds that were not paid back over a ten-year period (calculated by Moody’s). So, if you buy bonds from 100 different issuers with an A rating, you have to expect that in the next ten years a little more than one issuer (1.28%) will not repay the money invested. 

The safer the bond, the lower the interest rate

The higher an issuer’ credit rating, the lower the risk for investors – but also the lower the interest rate that the issuer has to pay to its creditors, i.e. you. And conversely, the lower an issuer’s credit rating, the higher the interest rates need to be to attract investors.

 

Good to know

You should also diversify your bond investments by buying bonds from multiple issuers and choosing different maturities. Funds suitable for bond investments are those that are to be invested in the medium to long term – i.e. around five years.

 

Price fluctuations during the term

If you keep your bond until the end of the term, you will get 100% of the invested capital back. However, the price may fluctuate considerably during the term and fall well below 100%. Three factors affect the price of a bond:

  • General level of interest rates: The lower the current interest rate environment in which a bond is issued, the lower its coupon. For this reason, bonds issued a few years ago at a higher level of interest are worth considerably more on the stock exchange.
  • Credit rating of the issuer: When an issuer’s credit rating falls, the prices of its bonds also fall because the risk of bankruptcy has increased. A rise in credit rating has the opposite effect.
  • Investors’ need for security: Investors who have just made losses with equities like to take refuge in safe bonds. Bond prices thus rise accordingly. When investors focus more on equities again, bond prices go down.

 

These changes in the prices of bonds are only relevant if you want to sell a bond before maturity, i.e. before the end of its term.

 

Medium-term notes

Medium-term notes are issued by banks. They are not traded on an exchange and are usually held until the end of their term. The term is from two to eight years. The interest rate is higher than with a savings account, but at present it is still not much above 0%. However, there are considerable differences in the interest rates offered by the various banks.

 

One advantage of medium-term notes is that, like money held in a salary account or savings account, they are generally guaranteed up to CHF 100,000 under the depositor protection scheme. Please note, however, that the limit of CHF 100,000 applies per customer. Medium-term notes and account balances are added together.

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 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%

Performance of equities and bonds

 

What does this mean for the future?

From a past perspective, equities clearly emerge victorious over bonds. But past returns are not good indicators of future returns. Nevertheless, experts expect that equities will continue to yield higher returns than bonds in the future.

 

It is hardly possible to make reliable forecasts about the future price performance of an individual share, 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 losses to a disproportionately high degree – due to the diversification effect.

 

Good to know

Investing in individual stocks only pays off with larger amounts of capital. In concrete terms, the proportion of equities in your portfolio must be around CHF 200,000 at least. Because of the potentially high price fluctuations (volatility), you should only invest money in equities that you can leave invested for the long term: at least ten years, or better even longer.

“By investing the same amount every month, on a regular basis, you minimise the risk associated with market volatility and increase the chances of a return.” 

Raphaël Savary, Sales Manager

About the author

Raphaël Savary has been passionately pursuing his career for 12 years. He holds the 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, he advises his clients efficiently to help them optimise their financial planning in the areas of insurance and pensions.

Investment funds: diversification built in

With a fund, you buy a whole basket of shares, bonds or other securities. There are around 100,000 fund managers worldwide, 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.

 

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 – see also the info sheet “The most important indices”). The better a fund has performed compared to the relevant index, the higher its rating.

 

Passive beats active

There are basically two types of fund manager. There are those who try to beat a benchmark index and those who simply invest in the exact same securities of the benchmark index and copy it. While the former actively look for securities that outperform the benchmark, the others save themselves the trouble and invest passively. Because this incurs less expense, passively managed funds cost significantly less than actively managed funds. 

 

In most cases, the time-consuming search for the best securities is not worth it anyway as the costs are often higher than the additional profits that can be achieved. What is more, active funds also incur higher costs because the managers carry out trading transactions more frequently – every transaction costs the investor money. These higher costs mean that “active” funds are hardly ever successful. Most of them perform worse than the corresponding benchmark index.

 

Generali tip

Do not try to find the best active funds. Invest in cheaper passive funds, index funds or ETFs (exchange-traded funds) instead.

 

Successful ETFs

An exchange-traded fund, or ETF for short, is an extremely low-cost investment instrument that – unlike conventional funds – can be traded continuously on the stock exchange like shares. Unlike other investment funds, no issuing commission is charged on a purchase, just the brokerage fee, as is the case with any direct purchase of securities. As special funds, ETFs are subject to public supervision and do not entail any issuer risk. The range of funds on offer is constantly being expanded: there are ETFs for individual sectors (such as energy or technology), regions (emerging markets) and commodities (such as gold), and those geared to specific investment strategies (pure bond ETFs, pure equity ETFs). 

 

ETFs are often very cheap – on average more than 1% cheaper than actively managed funds, year for year. Over a period of years, you can thus save tens of thousands of francs.

 

Like other funds, ETFs are subject to supervision by the Swiss Financial Market Supervisory Authority (FINMA). The Swiss stock exchange must also ensure that fair buying and selling prices are offered for every ETF at all times. At least one bank must ensure that there is an offer to buy and sell at market rates. 

 

Please note: There are also expensive ETFs. In any case, you should pay attention to the costs and compare different products. If an ETF costs more than 0.6% per year – based on the TER – you should consider carefully whether the product really impresses you so much that you would like to buy it.

 

TER and more – the cost of funds

The costs of a fund are usually reported by the provider in the form of a key indicator, the Total Expense Ratio (TER), as a percentage of the invested capital. 

 

The TER does not include all costs – even though the name might suggest it does. What it includes and what other costs are involved is shown in the following box.

 

TER and other costs

The TER includes the following items:

  • Management fee: for an equity fund, this can sometimes be over 2%; for a cheap ETF, it is in the range of only tenths of a percentage point.
  • Custodian bank fee: this fee is charged by the fund bank. As a rule, it is less than 0.3% of the fund assets per year.
  • Costs for business operations: for fund prospectuses, auditors, advertising campaigns, etc.

 

Three other items are not included in the TER:

  • Issuing commission: a one-off purchase fee that you have to pay when buying a fund. Usually, the fund companies specify a maximum percentage that the distribution companies may charge in the documents. This is often around 5%.
  • Redemption commission: when you sell your fund units back to the fund company, you often have to pay a fee.
  • Custody account fee: this is the fee you pay for your own custody account. It is around 0.2% of the value of the securities deposited.

Choosing the right fund

A fund’s rating is an important selection criterion. There are a number of specialist fund analysis firms that check the quality and performance of funds and award stars, for example Lipper, Ifund Services and Morningstar. 

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