Review of investment strategy + questions

[georgehay]

I (30M) have 180k CHF (excluding 3a pillar and 2nd pillar)

I save like 4k/mo.

Using IBKR

I have spread my investments as so:

20k P2P lending

70k S&P500 ETF

20k Total International Stock market ETF ex-US (VXUS)

30k play money in stocks, which i put in 2-3 companies that i think might be interesting

40k cash in bank

I don't plan to grow the play money or the p2p, but rather split 80/20 in the 2 ETF.

1-Is it a a ok split?

2-Should I care about the ETF being in USD and maybe switch to CHF ETF? or Euro ETF?if so, which ones would you recommend.

3-Is IBKR the best broker choice ?

4-Which ETF would you recommend for Total Stock Market, S&p500 and Ex-US exposure in IBKR?

5-Should I just consider my 2nd pillar the safe part of my pie for now and only migrate out of stocks/ETF after 50s? (3.5% return guaranteed as company has to fund it if they don't achieve it)

6-What are methods for reducing wealth tax? Any tax optimizations i should pay attention to?

7-Something I am missing?

Edit:

interest rate of 2nd Pillar 3.5%

Can't move cantons because of life objectives.

Using a Finpension 3a

 

[getwisdom]

@georgehay Hi there,

I won’t comment on the split per se, since it all depends on your objective, personal situation and your personality. I will however point out that the total world index is around 60% US stocks already. In the end, your portfolio has very little exposure to other markets than the US. (I’m not saying this is a bad thing, just pointing it out.)

The currency of the ETF shouldn’t matter. It is just the currency in which the ETF is denominated, nothing more. The same holds for gold, for instance. Yeah it is denominated in USD, but the asset is gold. What matters for stocks is the company’s currency exposure. This is difficult to track though. Just remember than the country of domicile isn’t the same as the firm’s exposure. A lot of big companies have international exposure.

What you want to pay attention to is the domicile of your ETF. To minimise your tax leakage, you should buy US domiciled etf for US stocks, CH domiciled ETF for Swiss stocks (if you’re Swiss resident) and Irish ETF for other ETF. One exception is the VT etf. It is so cheap and so US weighted that it being US domiciled is a good thing. (There’s a whole can of worms that can be open related to inheritance issues with us based assets, but I don’t want to go there.)

IBRK is a great broker if you’re a Swiss resident. It is cheaper that Swiss brokers and you don’t pay Swiss stamp duty taxes on your trades because it’s not a Swiss broker. However, you can’t find Swiss bonds directly on it, for instance ( if that is something you are interested in investing into).

For an international exposure to stocks, I’d go with the VT etf.

I don’t think there exists a good ex-us etf domiciled in Ireland. If you want to split between geographies, I’d go with a couple etfs, like Europe, emerging markets, japan, pacific ex Japan (all ishares), for instance. You can also add the chspi for a home bias if you do desire.

I don’t know what your job is. But if it is stable, then you’re basically a walking bond therefore your future is the safe part of your portfolio. The present value of your future earnings dwarfs the money you have saved to this day.

You can theoretically take risk, but that also depends on your personality, your family situation, future events, etc.

For tax optimisation… it’s a case by case. Basically you don’t have a lot of choice regarding how much you put in your 2nd pillar, but sometimes you get the option of adding to the existing balance. I would only do this when your marginal tax rate is maximised. Yeah, putting money in your 2nd pillar makes it not taxable, but wealth tax isn’t the biggest issue yet for you it seems. You can also extend the basic 2nd pillar and have you and your employer put more in it. This extension can also be invested differently than the basic 2nd pillar (see PensFlex, for instance).

NOW: I would suggest you to put money in a 3rd pillar account every year. There is a maximum amount, which is fully tax deductible (revenue and fortune wise!), and it can be invested.

I personally use VIAC and invest 100% in international stocks. But there are other options out there, of course!

I think you’re already very advanced for your age. You’ll miss things for sure, but hey, we all do

 

[georgehay]

@getwisdom Thanks, and thanks for all the explanations.

I will check Pensflex, good to learn some things exist.

I am already maxing 3A.

Yes, 1 years savings now is more like 3years in previous incomes. And even moving the next step in the latter to get an extra 10-15k net seems more impactful than any investment strategy.

i was told to avoid adding to 2nd pillar until maybe 5-8years before retirement.

 

[getwisdom]

@georgehay Glad to have been of help. The advice to avoid 2nd pillar until 5-8 y before retirement makes sense, especially for higher end salaries and current rates.

 

[dimetx]

@georgehay Avoiding 2nd pillar, because you might outperform the savings on taxes?

Are there any other reasons why not?

 

[georgehay]

@dimetx For a marginal tax rate of 30%.

Investment paying 5% (conservative number for this high interest rate times)

Ex: 4k/year = 2.6k effort on net income

So for 2nd pilar we count 4k/year and on net 2.6k invested per year.

Second pilar paying 1% interest: in 17yrs 2nd pilar is less profitable

Second pilar paying 2.5% interest: in 27yrs 2nd pilar is less profitable

Arguably it is a long time, but also the fact of not controlling the 2np pillar interest and maybe changing companies during the career can be problematic for such long calculations.

 

[dimetx]

@georgehay Thanks for your reply.

I just did some calculations and you're right. I am just not sure how you calculated your "less profitable". If 2nd pillar pays 1% interest only, the investment with 5% interest should be outperform the 2nd pillar way before 17years of runtime.

What was your calculation?

btw: I think adding to 2nd pillar makes not only makes sense shortly before your retirement, but also when you plan buying a house within the next 10 years. The 2nd pillar money added in the last three years before buying the house have to be excluded - otherwise you'll have to pax income taxes on it by law.

 

[arolo]

@getwisdom Thanks for the clear advice

 

[getwisdom]

@arolo My pleasure

 

[iambridget]

@getwisdom Good response!

 

[getwisdom]

@iambridget Thanks

 

[hesmyrock]

@getwisdom Can you explain the point of "currency of exchange doesnt matter" a bit further?
I thought it matters because when s&p500 grows 8% but USD loses about 3-4% to CHF you rest with 4% gains. When you buy in CHF the position is hedged so you might make an average of 6-7%

 

[getwisdom]

@hesmyrock Oh! That’s not what I meant! I was talking about the ETF currency: for instance, you can buy the snp500 in usd, eur, cad, chf, without it being hedged.

It you want to hedge currency risk, you can buy a chf-hedged etf. It will cost more with respect to management fees and there’s an embedded cost to the hedge (you can look up forward risk parity to better understand how hedging is priced: you basically paid the interest differential between the two currencies on a short term basis).

But: what you’re hedging is not the etf currency but rather the underlying assets ‘currency risk.

Example: imagine investing one share in a local company in Switzerland, whose costs and revenues are 100% chf. For some reason, the company is listed in chf and in eur, and your cousin, who lives in Italy, also buys a share, but in eur.

What I’m saying is that you could buy the share denominated in eur and that wouldn’t matter. The value of the stock is not impacted by the eur/chf rate. If the euro loses value vs the chf, then the share price in eur will rise the same amount, all other things equal.

Your cousin could also buy the chf share, but that wouldn’t matter. He has chf risk because the underlying company does business in chf, whether he holds a eur share or chf share.

Edit: In your example, the impact of the currency rate on the snp500 price is really on the underlying companies’ businesses, which then impact shareholders like you. But it’s not because the etf is denominated in usd.

I hope this is clear enough

 

[hesmyrock]

@getwisdom Thank you for very much! This helped a lot. So it is not that silly to buy CHF-hedged ETFs after all.

 

[getwisdom]

@hesmyrock It is not silly, no. But it has a cost and could erode your returns, like all types of insurance

Often investors chose to either not hedge and assume currency risk, or to partially hedge and accept some currency risk. Hedging is indeed costly!

 

[johnstead]

@getwisdom On the long run, it tend to be inrelevant, but on the short and medium term can make sense as the companies do already currency hedging so FX changes are reflected only partially into their yearly earning and an value in the short run can be influnzed by other factors

 

[getwisdom]

@johnstead I’m not sure I’m understanding your point completely, so tell me if I’m not.

I agree that companies might hedge their flows in the short term, but the drivers of their value are long term earnings, which can’t be hedged.

Now clearly there are other factors coming into play when valuing stocks.

 

[johnstead]

@getwisdom ok, let me explain better, think on this topic there are 3 considerations:

1/on short and medium term it is difficult for the market to understand fully the implications of the FX currency fluctuation on the company long term earnings, beside company internal currency hedging, we should keep in consideration that while top line revenue may be easly evaluated as usually companies report sales break down by geography there is way less clarity on the underlying cost structure by currency so bottom line result are more difficult to predict.

2/It helps you protect from short term currency variation due to external events, eg different timing in monetary policy

3/

If you expect your local currency to strengthen over time than could make sense to use hedged EFT. e.g., if CHF increases in value against the USD than a ETF S&P 500 EFT CHF-hedged should give you higher return than and EFT S&P 550 EFT USD as you locked the value of the FX.

Make more sense?

 

[wessy]

@getwisdom Hi there - first I want to thank you immensely for your thorough support on this topic as it has been great guidance! (especially the part about tax leakage)
I currently my ETF money in VUSA but I'd like to transition to a simple 2/3-fund portfolio and I'd love your advice on this topic:
- Should I only hold VT at 100%? or do I need to spread it like 80% VT and 20% something else?
- Regarding pillar 3a, I'm in the process of switching from SwissLife to VIAC and therefore I'm not familiar with the investment options there. What does your VIAC portfolio look like? (or do you just click "international stocks" and call it a day )

 

[getwisdom]

@wessy Hi,

Sorry for the (very) late reply.

I'm happy that my explanations were of use to you!

Concerning your questions, here are a couple of points:

- VUSA is on the "expensive side" with 0.07% TER, compared to IVV (0.03%), for instance.

- You can definitely hold 100% VT if your goal is to be exposed to international stocks and you've got no particular opinion on which geography you think is going to out(under)performance during your time horizon.

- If you'd like a "home bias", you can also split 85% VT and 15% CHSPI, for instance. Note, however, that Swiss multinationals have international exposure.

- At the moment, I simply picked international stocks on Viac. I'm thinking of maybe allocating to real estate though, since dividends wouldn't be taxed. It's only at the thought level, however.

I'd be happy to answer your questions as best as I can.

Best