Bond investments

[Baptiste Wicht]

Dumb question from my side: why should investors living in Switzerland only invest in Swiss bonds? (this is the only discussion I see here).

Why not invest in US bonds, or bonds from other countries?

For me (and not everybody agrees), it's because of currency. Bonds are to reduce the volatility of your portfolio. If you get US bonds, they are in USD, so you introduce a new form of risk with currency risk. So, for me, CHF bonds make much more sense.

 

[gaijin]

Just to expand the post of @Baptiste Wicht . For me, the complexity of bonds are inversely proportional to their return. Investing in bonds from other countries introduces the discussion (and decisions) about their credit rating, making the selection of 'good' bond investments even harder and more complex.

Maybe it's just my fading memory, but don't other countries have bonds in CHF? I vaguely remember some countries of Eastern Europe giving out loans (and bonds?) in CHF, since it's considered to be a strong and stable currency. This would not be a currency risk but a pure creditor risk.

 

[Baptiste Wicht]

Maybe it's just my fading memory, but don't other countries have bonds in CHF? I vaguely remember some countries of Eastern Europe giving out loans (and bonds?) in CHF, since it's considered to be a strong and stable currency. This would not be a currency risk but a pure creditor risk.

Interesting, I did not know that. Looking into it, there seem to be multiple foreign issuers of CHF bonds.
Multiple Swiss banks even funds with "CHF Foreign Bonds".

 

[Sjs]

Good morning,
This thread is very interesting conceptually, but at the end of the day, do any of you actually invest in bond ETFs and if so which one (s), or is the conclusion that it is simply not worth it at the moment and better to stick to cash instead?
I am reviewing my finances at the moment and designing a simpler portfolio and have to decide what to do with my current 20% bond ETFs. I am a year away from FI so negative returns actually matter.
Thanks!
Sjs

 

[gaijin]

do any of you actually invest in bond ETFs

I don't.

better to stick to cash instead

For low amount, yes I think it is. The problem with cash are withdrawal restrictions. I think UBS lets you withdraw 50k without previous notice. But most banks limit the free yearly withdrawal to 10k or 20k.

designing a simpler portfolio and have to decide what to do with my current 20% bond ETFs

Would you mind sharing what you mean by simpler? Also, what's your withdrawal strategy for FIRE? To me, 20 bond ETFs sound quite reasonable on first sight.

 

[Sjs]

I don't.


For low amount, yes I think it is. The problem with cash are withdrawal restrictions. I think UBS lets you withdraw 50k without previous notice. But most banks limit the free yearly withdrawal to 10k or 20k.


Would you mind sharing what you mean by simpler? Also, what's your withdrawal strategy for FIRE? To me, 20 bond ETFs sound quite reasonable on first sight.

Thanks for your reply, that's a good point and I will check out restrictions.

To answer your question, by simpler I mean fewer than the 11 positions (!) recommended by my financial advisor in 2023. They have performed rather well (except for US bonds), but the more I learnt about investments, the more I felt a simpler portfolio with a more hands on approach on my part would serve my objectives just as well at a much lower cost. And this blog/forum has definetely helped boost my confidence in that path ! So I am now designing and building my simpler portfolio (70% equity (1 global ETF+1 Swiss ETF) + 30% cash/bonds), hence my question about bonds.

About FI, the short answer is max 3.2 %. I only realised 2 yrs ago, aged 58, that with a bit more planning I could leave my job confidently any time. What a relief ! Learning has been the fun part of the journey. And btw I had never heard of the FIRE movement, let alone considered I could be within range. Too late...

My plan is to keep 3-5 years' expenses in cash to weather the sequence of return risk, and cover expenses from investments the good years, topped up for the next 5 years by some very part time self-employment. I then access my vested interest accounts and count on a 3.2% withdrawal rate from total capital.

Does that make sense ?

Best,
Sjs

 

[Baptiste Wicht]

This thread is very interesting conceptually, but at the end of the day, do any of you actually invest in bond ETFs and if so which one (s), or is the conclusion that it is simply not worth it at the moment and better to stick to cash instead?

I don't invest in bonds either. But I use my second pillar as bonds. My goal is to keep 10% in second pillar to reduce volatility during accumulation and then switch to 100% after retirement.

At the moment, I agree that Swiss bonds are not great for individuals and cast is just as good.

To answer your question, by simpler I mean fewer than the 11 positions (!) recommended by my financial advisor in 2023. They have performed rather well (except for US bonds), but the more I learnt about investments, the more I felt a simpler portfolio with a more hands on approach on my part would serve my objectives just as well at a much lower cost.

Completely agreed. For most investors, 11 positions is either too little if you invest in single stocks or way too many if you invest in ETFs. And as you said, you could save money by doing it yourself.

My plan is to keep 3-5 years' expenses in cash to weather the sequence of return risk, and cover expenses from investments the good years, topped up for the next 5 years by some very part time self-employment. I then access my vested interest accounts and count on a 3.2% withdrawal rate from total capital.

Does that make sense ?

It does. This is a cash cushion. Ideally, an equity glidepath would work better but as we already discussed in this thread, Swiss bonds ain't that great.

 

[gaijin]

70% equity (1 global ETF+1 Swiss ETF)

I fully agree with @Baptiste Wicht that reducing ETFs makes sense.

My plan is to keep 3-5 years' expenses in cash to weather the sequence of return risk,

Sounds to me like quite a large amount, I would probably keep it much shorter, such as one year. But I'm still far away from FIRE, so my opinion might change once I get closer.

To come back to the questions of bonds: you might want to consider dividend ETFs for a compromise between a stock and a bond ETF (such as iShares Swiss Dividend ETF (CH), assuming your bond/cash is in CHF).

 

[Rttm]

(70% equity (1 global ETF+1 Swiss ETF) + 30% cash/bonds)

It makes a lot of sense to reduce the number of holdings if your strategy allows for it.

My plan is to keep 3-5 years' expenses in cash to weather the sequence of return risk, and cover expenses from investments the good years, topped up for the next 5 years by some very part time self-employment. I then access my vested interest accounts and count on a 3.2% withdrawal rate from total capital.

It makes a lot of sense to reduce the number of holdings if your strategy allows for it.

I currently do not hold bonds, but I am in the accumulation phase and still have several years to go. If I were in your position, I would also opt for a 70/30 split (though if I were limiting myself to only two asset classes, I would actually choose to include many more). The worst-case scenario for you right now would be a crisis that jeopardizes your ability to reach FIRE.
However, holding a large amount of cash worsens your portfolio's Safe Withdrawal Rate (SWR), even if it provides a greater sense of security. To improve the SWR, you should primarily focus on the Sharpe ratio. Considering only equities and bonds, the best Sharpe ratio is achieved with a 60/40 allocation, using bond ETFs with a 7–10 year maturity from nations with very high credit ratings (preferably AAA).

Below, I have included a backtest starting from 1970, which offers a solid historical perspective. I have modeled your portfolio both with and without bonds; observe the comparison: the returns are very similar, but the portfolio with bonds exhibits significantly less volatility, with a Maximum Drawdown of -33% during the dot-com crisis and a recovery duration of 5.3 years. This is the significant advantage bonds offer, far surpassing that of cash. Unfortunately, the website is Italian-based and denominated in Euros, so it does not include Swiss bond ETFs.

Backtes.to - European ETF Portfolio Backtester

Backtest UCITS ETF portfolios, track investments and plan financial independence.

www.backtes.to

 

[Sjs]

Thanks for your replies and suggestions, and even modeling it out, wow that’s great! I’m going to look into it again and will adjust my strategy.

One reason for the big reserve in cash is that a) I’m quite nervous about the sequence of returns risk, went through 2008 and remember the pain. But I can see cash is perhaps a simplistic solution.
And b) my children have just started university and talk of doing part of their studies abroad. I want that to be possible. So an extra reserve.
Which brings me to a question: how do you factor in education/ continued education? Not so much the cost as the loss of earnings?
Or any other big adventure: take a year off, travel the world?
Anyway thanks again!
Sjs

 

[Baptiste Wicht]

One reason for the big reserve in cash is that a) I’m quite nervous about the sequence of returns risk, went through 2008 and remember the pain. But I can see cash is perhaps a simplistic solution.

Don't worry too much about your reserve being too big. It may not be optimal from a returns point of view, but it may be optimal from letting you sleep soundly. This matters!

And b) my children have just started university and talk of doing part of their studies abroad. I want that to be possible. So an extra reserve.
Which brings me to a question: how do you factor in education/ continued education? Not so much the cost as the loss of earnings?
Or any other big adventure: take a year off, travel the world?

Excellent question. I did not really think about that. Taking a year off seems like you should factor that before early retirement. Travel the world is a an expense increase in my opinion.

But children education is an excellent point that can be a surprise. And you are definitely right to take it into account. In Switzerland, it's likely not too expensive, but if they have plans to study abroad, this may make a huge difference indeed. I would factor that in as extra reserves and then integrate these reserves into the general capital if it turns out to not be the case.

 

[Rttm]

a) I’m quite nervous about the sequence of returns risk, went through 2008 and remember the pain. But I can see cash is perhaps a simplistic solution.

Were you already invested in 2008? If so, congratulations; I imagine it was a very difficult time. I wasn't invested back then and have few personal memories of the crisis itself. Every time I plan and look at the charts, I tell myself "it's fine," but I wonder how I would handle a similar crisis psychologically.
There are two schools of thought, both with pros and cons:
The "Bucket" Approach:You maintain emergency funds (for daily expenses, fixed costs, and unexpected costs) managed in cash and bonds. Since bonds in Switzerland often yield near zero, you can simplify this by holding everything in CHF. The rest is invested in equities.
Pros:

• It’s a simple method, easy to understand and calculate.
• You always know you have liquidity for emergencies or crises.
• Cash can provide psychological security.

Cons:

• It’s not optimal for the best Safe Withdrawal Rate (SWR) since part of the capital isn't invested, and it’s not optimized for risk/return.
• The equity portion will still suffer significant drawdowns during crises, which can be psychologically taxing, especially if the crisis lasts long and the CHF fund gets depleted over time.

Another system is to consider your entire wealth as a single portfolio (which is what I try to do) and adjust the portfolio's volatility to what you can tolerate, aiming to improve the risk/return ratio.
Pros:

• The SWR is significantly better; with various asset classes, you achieve a better risk/return profile.
• It’s highly adaptable to any need. You can build a portfolio focused purely on growth without worrying too much about volatility, or aim for linear (though slower) capital growth.

Cons:

• You need to understand the dynamics of various asset classes, combine them, and understand how the hypothetical portfolio behaves in a crisis. It is much more complex to design.
• Since every crisis is different, it’s hard to predict how you’ll react psychologically if you’ve taken too much risk. Conversely, if you are too conservative, it can be frustrating to watch equities surge while your portfolio grows more slowly.Nothing stops you from combining both approaches and finding a middle ground; in fact, that’s often recommended.

b) my children have just started university and talk of doing part of their studies abroad. I want that to be possible. So an extra reserve.
Which brings me to a question: how do you factor in education/ continued education? Not so much the cost as the loss of earnings?

You were right to take that into account in your case. It’s hard to give a definitive answer without knowing your specific situation. However, there is research on spending flexibility relative to market performance. I suggest looking up research by Cederburg on this topic.For example, if a crisis hits, you postpone the sabbatical year; if the market performs very well, you allow yourself extra expenses. This approach should significantly mitigate the sequence of returns risk. I hope this helps

 

[Sjs]

Were you already invested in 2008? If so, congratulations; I imagine it was a very difficult time. I wasn't invested back then and have few personal memories of the crisis itself. Every time I plan and look at the charts, I tell myself "it's fine," but I wonder how I would handle a similar crisis psychologically.
There are two schools of thought, both with pros and cons:
The "Bucket" Approach:You maintain emergency funds (for daily expenses, fixed costs, and unexpected costs) managed in cash and bonds. Since bonds in Switzerland often yield near zero, you can simplify this by holding everything in CHF. The rest is invested in equities.
Pros:

• It’s a simple method, easy to understand and calculate.
• You always know you have liquidity for emergencies or crises.
• Cash can provide psychological security.

Cons:

• It’s not optimal for the best Safe Withdrawal Rate (SWR) since part of the capital isn't invested, and it’s not optimized for risk/return.
• The equity portion will still suffer significant drawdowns during crises, which can be psychologically taxing, especially if the crisis lasts long and the CHF fund gets depleted over time.

Another system is to consider your entire wealth as a single portfolio (which is what I try to do) and adjust the portfolio's volatility to what you can tolerate, aiming to improve the risk/return ratio.
Pros:

• The SWR is significantly better; with various asset classes, you achieve a better risk/return profile.
• It’s highly adaptable to any need. You can build a portfolio focused purely on growth without worrying too much about volatility, or aim for linear (though slower) capital growth.

Cons:

• You need to understand the dynamics of various asset classes, combine them, and understand how the hypothetical portfolio behaves in a crisis. It is much more complex to design.
• Since every crisis is different, it’s hard to predict how you’ll react psychologically if you’ve taken too much risk. Conversely, if you are too conservative, it can be frustrating to watch equities surge while your portfolio grows more slowly.Nothing stops you from combining both approaches and finding a middle ground; in fact, that’s often recommended.

You were right to take that into account in your case. It’s hard to give a definitive answer without knowing your specific situation. However, there is research on spending flexibility relative to market performance. I suggest looking up research by Cederburg on this topic.For example, if a crisis hits, you postpone the sabbatical year; if the market performs very well, you allow yourself extra expenses. This approach should significantly mitigate the sequence of returns risk. I hope this helps

Thanks, Rttm, I will look into both approaches, I do find the bucket approach reassuring but I get the point.

Ref 2007/2008, it was quite a challenging experience, and quite lonely too. My portfolio lost 40% and it took years before I regained confidence to invest again. I didn’t sell in a crisis because I had kept cash aside and had a good job with a high savings rate. But I didn’t add either. So in a way it was all quite abstract, other than the unsupportive comments I received from my circle, most of whom considered investing to be a form of Russian roulette.

Life has changed-for the better in this respect- and I am sure this forum would help us all feel a little more supported in steering the course.