In the process of reviewing my personal finances I stumbled across my retirement account and how it could be performing over the next 30 years. Below the first part of my thought process of how to rearrange my retirement portfolio for higher returns.
My personal pain point stems from the historically low interest rates that we as Swiss citizens are currently getting with our 3a accounts, dropping down from 7% in the early 90s to around 0.275% (median). Given an investment horizon of 10 to 40 years, I see two problems with that.
First, the current inflation rate is higher than the interest rate of the average 3a accounts. If the average inflation rate of 0.5% sustains, we would actually come out with less buying power than we started out with.
Second, the problem of opportunity cost. In this particular case, that is the cost of missing out on another, more profitable way of investing. Below a comparison of different interest rates and their impacts on the investment pile over a 30 years time horizon with a yearly investment of 6000 CHF.
|Interest Rate||Investment after 30y|
With a potential surplus of 230’684 CHF, I would prefer an investment with an interest rate of 5% and higher, right? But how? Where do we get 5% and above on our investment? The answer is quite simple:
The Overall Stock Market
As explained in the excellent stock series by JL Collins, we are best off investing in the broad overall stock market and forget about it. However, up to this point, no bank offered the possibility to invest our 3a capital in a passively managed, low cost index fund.
The best options we all had up to now were mediocrely performing, actively managed funds with limited exposure to the overall stock market. Digging a bit deeper we find that actively managed funds are actually quite a bad idea. The “active” means that you have to pay a manager to actively manage the allocation of the capital within the fund, which is hidden in a higher total expense ratio (TER). Furthermore, even the best fond managers cannot consistently outperform the overall market, especially not over a time horizon of 30 years.
Why is the “low cost” aspect so important? Have a look at the table below with a yearly investment of 6k and an assumed interest rate of 5%:
|Cost||Investment after 30y||Cost on Captial|
Leaving the other factors constant (yearly investment and interest rate), the simple fact of accepting higher cost on our assets can cost us 30% of our investment! Luckily, we have a new entrant in the 3a market:
VIAC offers us a chance to invest in comparably low cost index funds. This will hopefully introduce a ripple effect throughout the 3a-investing market and inspire other companies to offer similar low cost solutions. Until then, my money is on VIAC.
But how do I invest in VIAC? What is my asset allocation? Which low cost index funds do I choose? All of this will be covered in the second part of this mini-series.
Disclaimer: I am not in any way affiliated with VIAC nor in any kind or form a professional financial expert. This article reflects my personal views on the world and should not be blindly followed when making financial decisions.