The Equity Imperative
Solvency forecasts for pension funds are gloomy in most countries. In Switzerland, the three pillars will be insufficient and political blockages combined with individual egoism prevent a solution from being found. Everyone must therefore build up what I will call a fourth pillar for their retirement because the states will not be able to provide sufficient financial protection. A house, why not a little bit of gold are ways to contribute to this fourth pillar, but too much cash is a bad solution. Indeed, the real value of the same amount of money will decrease with time and the ridiculous yields of bonds make them unfit to compensate inflation. Stocks, in spite of their higher volatility and high current price level, allow to build up a diversified capital in terms of industries and currencies (nobody knows the relative value of the Swiss franc or its main currency in 20 years) and to fight against inflation.
Personal expectations and investment plan
You shall define an investment plan that will include the long-term return expectations (which may correspond to a long-term history after deducting a conservation margin regarding the level of valuation, let’s say 5% or 3% after inflation), your asset allocation, i.e. the components of your wealth (real estate, stocks, bonds, cash, etc) and the part of your future wealth that you wish to invest in stocks. As cash loses its real value, real estate often already constitutes an important part and bonds do not offer a satisfactory return today, you can concentrate your efforts on equity. A basic asset allocation was earlier defined as a mix of bonds and equity. Due to the current monetary policies, bonds (particularly in USD, EUR, CHF) shall be avoided at the moment. For the sake of diversification, these stocks should represent the global market as best as possible, with different industries and currencies.
Understand the risks
To date, with few exceptions, the global economy and equity markets have always grown over the long term. In the short term, for reasons of liquidity, conflict or other crises, stocks can lose much of their value. Good returns on average are therefore accompanied by significant risks, especially in the case of individual companies. Diversification (see principles below) helps to mitigate this risk without reducing the potential return.
Define the time horizon
Do you want to invest in the medium term, in order to buy a chalet in Austria for which you will pay in Euro, or in the longer term for your future, i.e. to make reserves for the moment when you can stop working? If this is your case, the following principles are for you. Other people, such as some of the Gamestop buyers in February 2021 or such as those trying to time the market, see the stock market more as a short-term speculation game. I understand the playfulness and the need for thrill, but this is not my field and I address myself to readers who are looking for a solid and serious long-term approach. This recommendation is less exciting and entertaining that other propositions, but you will have the best chance of success on the long-term.