Investiment crucial for the building and preservation of wealth; as although it sometimes seems daunting and reserved for the elite.
In this article, we will explain why investing is an integral component of your financial planning and address the initial questions that newcomers to the investment world should ask.
Why Invest?
Reducing expenditure is an essential first step towards achieving financial security, however this is not the ideal way to preserve and grow your assets. Low interest rates and inflation can actually erode the value of your savings over time.
The best way to manage cash which is not required for immediate spending is to invest your money so that it works for you. Essentially, this means allowing your capital to be utilised by others so that it brings you interest in return.
Fighting Inflation and Preserving Purchasing Power
Before considering generating income, viewing investment as a hedge against inflation is crucial. It's a common misconception that a Swiss franc saved today will retain its value in the future. However, assuming an annual inflation rate of 1.6%, one Swiss franc saved today will only be worth 72 cents in 20 years. Therefore, earning a return on your capital is essential to safeguarding its value and purchasing power.
Starting Early and Harnessing the Power of Compound Interest
The exponential potential of investment is often underestimated. In the first year, your return is calculated based on the initial sum. In subsequent years, your return is calculated based on the initial sum at the start plus the gains from the previous year. This gradual accumulation can yield significant returns over the long term.
For instance, a 5% return on an investment of $1,000,000 would generate CHF 50,000 in the first year. Without compound interest, this would result in a profit of CHF 1,000,000 over 20 years. However, by reinvesting the returns generated each year, you can amass a profit of CHF 1,653,000 over the same period.
Understanding Your Investor Profile
To begin your investment journey, it's essential to assess your current financial situation to determine how much and how you should invest. Indeed, you should always maintain a liquid reserve for unforeseen circumstances. Once you've identified the required amount, you can estimate how much you can invest without jeopardizing your financial security.
Additionally, define your investment objectives. Are you saving for homeownership, retirement, or to protect your inheritance? Is this capital essential for your future, or can you afford to take some risks with a portion of it? Answers to these questions will help guide you to the types of investments best suited to your investor profile.
Choice of Financial Products
A wide array of financial products are available to help you build your investment portfolio. Some examples include:
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Stocks: These represent ownership in a company and provide certain rights, such as voting at general meetings and receiving dividends.
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Bonds: Essentially, loans extended to companies or governments, which grant periodic interest payments to bondholders.
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Funds represent a share in a portfolio of securities managed by a bank or fund management company.
While these are well-known financial instruments, many other options have varying mechanisms and risk profiles.
Passive and Active Management
Two key methods exist for managing investments. Active management regularly involves adjusting your portfolio based on economic conditions or market forecasts. You can delegate these choices to a financial institution or personally take charge of your portfolio, but it can demand significant time and expertise. Passive management, on the other hand, seeks to match the performance of an index, typically by investing in index funds managed by financial institutions.In both cases, it's advisable to diversify your risk by not investing all your wealth in a single asset class.
Conclusion
Investment is a fundamental aspect of life and financial planning, whether for savings or retirement. Above all, take a cautious approach and invest only in assets you understand. Seek guidance from a qualified adviser when necessary.
The Piguet Galland team is here to assist you in embarking on your investment journey.
Annualised performance of discretionary management portfolios since 1 January 2019
CHF portfolio
EUR portfolio
USD portfolio
Prévoyance+ (CHF) portfolio
