I lived in Switzerland for four years. I do not want to bother you on how the pension system is designed there, is quite similar to UK and very different from Italy, but the short story is that I have some funds stuck there until I will be 65 (if they do not change the law before). Between my job and the other 99 problems I got, I have very little time to dedicate to it but is a non-negligible amount and if you consider I still have 25+ year in front of me, make sense to try to compound and not leave the money sitting on an account at 0% return. At first, 0% might seem a dreadful return, but do not forget that the Swiss Central Bank pushed rates to -0.75% (lower than the ECB) and yields are negative up to THIRTY years if you buy a Government bond. Therefore I wrote to the company that it is holding my funds and asked what investments option I have.
In my mind, the plan was pretty simple: give me an ETF indexed to MSCI World, or if not possible an S&P500 index, and meet back in a quarter of a century. I can go 100% equities because it is not a big amount and I can tilt my overall portfolio to have a lower risk profile somewhere else. Again, I cannot touch those funds for a long period of time, if tomorrow the market crashes I will still have time to recover and I cannot use them to buy anything anyway. My car breaks? Cannot touch them. Have to go to the hospital? Cannot touch them. My daughter university? Still 20 years to go and anyway…cannot touch them.
Obviously I cannot follow my plan.
To ‘protect’ me, let me introduce you Mr Government and his Regulation. To be honest, this is not some strange Swiss quirk, lots of European countries have the same (bad) laws. Ordinary people have a very basic to non-existent financial knowledge so they can fall easy pray to a big variety of scams and they need someone to look after them. They would not if the Government would add mandatory courses at school on a topic that will affect any person who will buy a house, have a credit card, have a car or retire, but it is easier to impose laws that thwart competition, make everything more expensive and…have people get scammed anyway.
I understand regulation is needed, to a certain extent, but let me highlight some of the (unintended?) consequences:
- all the funds I can invest in have big exposures to Swiss securities and when they invest somewhere else, they are hedged back to CHF. This kind of make sense from a risk management point of view, if the country do poorly you do too but eliminates the scenario where the country do great (and so prices via inflation, for example) and you are left behind because you had invested in other assets. The problem is that it makes sense only for people who plan to retire in Switzerland, which is not me or the other 2.1 million foreigners working there, 20% of the total population.
- more regulation means less competition and less competition means more costs. Financial costs look negligible at first, 0.X% but if you account for them over long periods they bite. The additional issue is that you have to evaluate costs not in a vacuum but in the specific situation, which is a negative interest rate environment. One thing is to pay 40bps when bond yield is 5%, another is to pay a fee which is 50% to 100% equal the cost of being forced to have a 20% or more allocation to Swiss bonds.
- I think it is really hard to write rules that force the fund managers to be transparent without burying the investors in pages of small print and counter-productive data. The end result is that navigating around these products is hard even for me that I (kind of) do it for a living. Since these funds are targeted for retail and not professional investors, you can find just the bare minimum info on Bloomberg, which is a big telling on how transparent the funds want to be.
Here some advice if you happen to be in the same situation, not necessarily in Switzerland since there other countries that follow the same model and more will too in the future.
- Focus on the elements you can control. Where to start? Choose between the funds with the lower costs. Do not forget that every person in the chain is taking his cut: if the fund you choose invest in other funds, you are paying their costs too (and usually are not written anywhere). Your assets custodian, the company where your funds sit, also is charging you a fee. Each fee might be small but all combined are a significant amount.
- Try to minimise also the tax cost. For example, I moved my funds to a canton (a region of Switzerland) that I did not even knew existed before, only because they have a favourable tax treatment. How did I find out? I did my homework. Ask around you, most likely some of your colleagues and/or friends are facing the same issues; whatever advice you receive, try to understand using your brain if it makes sense for you: maybe your colleague is giving you a valuable tip but his circumstances are different than yours.
- Do not panic. It is true that I cannot touch my money but I can always go in and change the asset allocation/funds because the stock market went down 20% and I am freaking out about my retirement. Choose a long term plan considering your appetite for risk, be honest with yourself and then stick to it. Do not assume you can stomach a 100% stock allocation now because we live in a bull market since 10 years; what were your thoughts on December 2018? Were you still bullish after the drop?
Regulation can be a positive for a lot of people but it can also create negative incentives: think about how banks lend a lot to consumer, even if it is against their interest. Try to keep the big picture in your mind.
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