Anyone looking back at the investment year will be amazed by the astonishing development of various market segments. Despite geopolitical upheavals, stock markets, driven by technology stocks, have experienced an impressive rally. The same goes for many commodities.
However, the strong performance of these markets has not always been reflected in investors’ returns. This is due to three problems in local portfolios: excessively high cash balances, too large an allocation to the domestic market and portfolios often concentrated in a few large stocks.
Divide assets into three strategies
Although high cash balances give investors a sense of security, they are not as safe as they seem. Since 2017, the real purchasing power of 100 francs in a savings account has decreased by around 6%.
In contrast, an investment in the global stock market would have nearly doubled in value over the same period. This means that cash reserves should be kept at a reasonable but not excessively high level. To better determine the ideal amount of emergency funds, liquidity planning is recommended by dividing assets into three strategies: liquidity, longevity and legacy.
Global diversification
The analysis shows that a very large proportion of equity investments are often held in the Swiss market, concentrated in a few large stocks. Here too, an intuitive feeling of security, since one “knows” the companies, can lead to a biased allocation towards the familiar. However, this has not paid off. If the three largest Swiss stocks were held in a portfolio, the portfolio would have achieved a performance of just over 30% since 2017.
By contrast, a portfolio with an investment in globally diversified technology stocks would have seen its value nearly quadruple over the same period. These stocks now represent about 30% of the global equity market and should continue to deliver above-average returns in the years to come, given the opportunities in artificial intelligence, automation and robotics.
Release the handbrake
The best way to release the often self-imposed handbrake is to invest the core of an investment portfolio in a well-structured model portfolio that is diversified across regional markets, asset classes and sectors.
Ideally, regular automated “rebalancing” ensures that the portfolio stays on track. A core structured in this way can then be supplemented by satellite investments, according to personal preferences, such as those in private markets, currencies or commodities.
