Welcome to part 2 of this mini-series. As mentioned in part 1, investing our 3a capital in low cost index funds is a valid alternative compared to traditional solutions. In this post I will present to you a deep dive into the VIAC world, outlining the strategy I implemented for myself.
There are some good standard strategies offered by VIAC, for example the “Global 100“. I would not call you crazy if you just go with that one and call it a day.
That being said, I personally wanted to get to the bottom of it and try and find an improved asset allocation in terms of diversification and cost. Below the thought process of me going through the majority of the Asset List of VIAC and assembling my own portfolio.
As shown below, Swiss bonds currently have negative returns! I therefore gladly ignore this specific asset class for now.
I might come back to bonds later in life, as they are generally known to have lower volatility than stocks. Even then I would prefer a diversified global bond mix over a specific Swiss bond. However, for now I do not trust bonds for the long term and I am super happy with a admittedly high stock allocation.
Swiss Stock Market Indices
Our first group of stocks! Here we go! We have four choices to allocate our capital in the Swiss stock market. Even though this is a heavy example of home bias, we are forced by the nature of 3a investing to allocate at least 40% of our capital in CHF. Note, that VIAC requires us to have 3% in cash which reduces the available percentage to invest in CHF from 40% to 37%. The four available options are:
- CSIF SMI (Product cost 0.00%)
- CSIF SPI Extra (Product cost 0.00%)
- UBS ETF SLI (Product cost 0.20%)
- UBS ETF MSCI Switzerland IMI SRI (Product cost 0.28%)
Following the advice from the first post to keep the product cost to a minimum, I exclude options 3 and 4. The other two are way more interesting, adding no external product cost to the mix. Both are Credit Suisse Index Fonds (CSIF) but track different indices:
- SMI: “The SMI is the blue chip index and the most important stock index in Switzerland. The SMI comprises the 20 largest stocks.”
- SPI Extra: “The SPI Extra offers the opportunity to track the development of shares not included in the SMI, which makes it the benchmark for these securities.”
In the graph below, the y-axis represent the number of companies sorted by their market capitalisation from top to bottom. Here, we find our two options, the SMI and the SPI Extra:
Self-Made Swiss Market Index
Ideally, we would like to diversify as much as possible, therefore favouring the overall “Swiss All Share Index” or the “SPI” (SPI = SPI Extra + SMI). Unfortunately, this is not an option, so we split the available 37% of our CHF-capital following the market capitalisation between SMI (CHF 1145, Dec-2017) and SPI Extra (CHF 408B, Dec-2017). This leads to:
- SMI: 37% * 1145/(1145 + 408) = 27.28%
- SPI Extra: 37% * 408/(1145 + 408) = 9.72%
Adding our 3% in CHF-Cash, we reach our final allocation in Swiss Francs, namely:
- Cash: 3%
- CSIF SMI: 27%
- CSIF SPI Extra: 10%
Global Market Indices
Repeating the exercise from above, we start with the full list of available options:
- CSIF Europe ex CH
- UBS ETF MSCI EMU SRI
- iShares Core S&P 500
- UBS ETF MSC USA SRI
- CSIF Canada
- UBS ETF MSCI UK IMI SRI
- CSIF Pacific ex Japan
- UBS ETF MSCI Pacific SRI
- CSIF Japan
- CSIF World ex CH
- CSIF World ex CH hedged
- CSIF World ex CH Small Cap
- CSIF World ex CH Small Cap hedged
- CSIF Emerging Markets
- UBS ETF MSCI Emerging Markets SRI
Simple is Better
Let us get our friend “simplicity” to dig through this pile. We can forget about all the indices covering only a portion of the global market as we strive for the highest degree of diversification. Similarly, I very much like the approach of a “set it and forget it” solution which also favours an all-world solution. This leaves us with a reasonably short list of options:
- CSIF World ex CH (USD, Product cost 0.00%)
- CSIF World ex CH hedged (CHF, Product cost 0.00%)
- CSIF World ex CH Small Cap (USD, Product cost 0.09%)
- CSIF World ex CH Small Cap hedged (CHF, Product cost 0.09%
In order to reduce the list even further, we ignore the small cap options due to the associated product cost. Finally, this leaves us with the question whether we would like to have our all-world (without CH) portfolio hedged in CHF or leave it in USD. Hedging reduces the foreign exchange risk but comes at a cost. Have a look at the two graphs below. Can you see a difference?
I am personally not willing to give up potential gains just for hedging, which leaves me to contribute the remaining 60% to “CSIF World ex CH”. Including the thought process from above, we arrive at a diverse, low-cost VIAC-portfolio:
- 3% Cash
- 10% CSIF SPI Extra
- 27% CSIF SMI
- 60% CSIF World ex CH
So what does that all mean in terms of cost reduction? Well, the above mentioned “Global 100” clocks in at 0.53%. In comparison, our individual strategy outlined above costs us around 0.51%:
The difference of 0.02% over the next 30 years turns out to be between 2k and 6k CHF, depending on how much interest the global market will bring.
What do you think? Do you agree? What is your individual VIAC strategy? Let me know in the comments section!
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.