We know how your mental health can affect the way you deal with money. If you’re feeling low or depressed, you may lack the motivation to manage your finances. It might not feel worth trying. Thinking of the future is hard when you have no motivation to do so. Spending may give you a brief high, so you might overspend to feel better. You might make impulsive financial decisions. If your mental health affects your ability to work, this might also reduce your income and put more pressure on you.

We also know your financial situation can affect your mental health. Certain situations might trigger feelings of anxiety and panic. Worrying about money can lead to sleep problems. Money problems can affect your social life and relationships. You might feel lonely or isolated, or like you can’t afford to do the things you want to.

You don’t need to have significant debts for money to affect your mental health. We know all too well the vicious cycle of depression and debt. Nor are you guaranteed to be happy, just because you have money. Even for those who have money, the emotional connection to money, and the way you think about money, influences your decisions. And these could have huge impacts on your future state of mind.

You might feel guilty for spending money, even if you know you can afford it. Or, you might feel guilty for seeking support, even if you know you need it. You might feel stressed if you’re under a lot of pressure to support yourself and others. And worn down from working so hard to generate the income just to sustain your family. What is it all for?

Steve Jobs had money. “I reached the pinnacle of success in the business world. In others’ eyes, my life is the epitome of success. However, aside from work, I have little joy. In the end, wealth is only a fact of life that I am accustomed to. At this moment, lying on the sick bed and recalling my whole life, I realize that all the recognition and wealth that I took so much pride in, have paled and become meaningless in the face of impending death.”

OK so Steve Jobs is an extreme example, but a key question to ask is: What is it all for? Is it for your family’s security? Is it for charity and philanthropy? Is it for the biggest holiday of your life (AKA retirement)? And have you got a plan to get there? Is your plan balanced enough to allow you the flexibility to live a little?

You might find it helpful to take some time to think about how you feel about money and why. For example, if you’ve struggled with money in the past or didn’t have much money growing up, this might affect the way you feel about money now. You could try answering these questions:

• Are there certain times when you’re more likely to spend money?
• Are there certain times when you’re more likely to save money?
• How does it feel when you spend money?
• Do you feel differently when you’re spending and saving?
• What are the emotions and feelings you think of when you think about money?
• Which aspects of dealing with money make your mental health worse?

Once you’ve done this, you might start to feel like you understand your habits and patterns around money a bit more. Knowing these could help you plan ahead for difficult times.

Having plans give us structure and a framework to work within. We can allow flexibility, and allow ourselves to be human. Using trusted advisers who understand money but also the emotional impact of money is important to keeping balance. And remember, what one person does is not necessarily the same and what others should do. We are all individuals. We all have to find our own balance.

Let’s pick Lauren as an example. She is 35, married and is currently earning 100,000 CHF per year. She is pregnant and wants to understand how the 60% contract when she returns to work after maternity leave is going to impact her pension provision and associated benefits.

Current Situation:

She earns 100,000 CHF per year. The coordination deduction is currently 25,095 CHF (this reduction is to coordinate the first and second pillars) therefore the coordinated salary is:

• 100,000- 25,095 = 74,905 CHF

As she is 35, a minimum of 10% is paid into her second pillar therefore 7,490 CHF is being contributed on an annual basis.

60% Contract:

60,000 CHF earnings per year. Lets assume the coordination deduction hasn’t increased since she returned to work, therefore the coordinated salary is:

• 60,000 – 25,095 = 34,905 CHF

She is now 36 and still in the 10% category so 3,490 CHF is being contributed to her second pillar on an annual basis.

Impact:

Lauren’s Second Pillar Retirement Savings

Although Lauren has reduced her contract by 40%, her annual second pillar contributions have decreased by 53%.

Lauren’s Second Pillar Insurable Benefits:

Children’s disability pension, children’s orphans’ pension, Lauren’s disability pension and the survivor’s pension in place for her husband will all also decrease as these are based on the new coordinated salary.

What does this mean for her and her family?

Lauren will be the main carer for their child and if Lauren was to become sick or die the family would have less protection in place as this is calculated on the new lower figure under the new contract.

At a time when they need more protection in place, they will have less.

What can be done?

In Lauren’s case she started a third pillar with insurance to protect her family on her death. Now if she dies before retirement the family will receive a 200,000 CHF lump sum and she is using the savings provision to save for her own retirement in line with her attitude to risk.

Of course, if Lauren’s circumstances were different my recommendations could have also been different – but that’s the benefit of a financial review

Its name is Inflation, and it’s one of the most underappreciated forces that can impact your life financially.

So, what is inflation? To put it as simply as possible, it is the decrease in the purchasing power of your money over time. For instance, think about what you can buy from the supermarket for 100 CHF today, and then what you might be able to buy with the same 100 CHF, but in 10 years’ time.

Each franc is worth less because the price of goods and services is more expensive. Even a low rate of inflation, if persistent, can have a significant impact on the long-term purchasing power of money. At just 2 percent per year, if sustained, inflation will double the price cost every 35 years. So, in reality, a franc would lose half of its purchasing power. Imagine what the effect would be at 5 percent per year or 8% like we are seeing in parts of Europe or the US now.

If someone took out a fixed-rate, 10-year mortgage at 1 percent and inflation turned out to be 2 percent over the life of the mortgage, the debtor (borrower) would end up paying a real interest rate of negative 1 percent. That’s a good deal for the debtor, but not for the creditor (lender). As you can see from this simple example understanding inflation and its effects can have a significant bearing on your financial assets.

For those that may remember Switzerland, which is now considered a low inflation rate country, has seen multiple occasions of high inflation rates most notably in December 1973 when the headline rate hit 12%, far above where we are today. As the world recovers from the effects of Covid-19, we are starting to see a rapid acceleration in inflation for advanced and emerging markets, driven by firming demand, supply chain shortages, and rising commodity prices.

As the cost of oil rises, the cost of fuel increases which has a knock-on effect on just about everything we purchase. This is especially scary for retirees with large holdings of lower return assets, such as cash and bonds. Fortunately, a common secondary effect of inflation is rising interest rates, as upward price pressure eventually prompts Central Banks to increase borrowing costs and dial back bond-buying programs to cool a heating economy.

To ensure your investments can weather the effects of rising inflation, one should always seek the advice of an industry professional. For more information and advice contact a qualified adviser at Swissential on tel. 022 786 2020 or email info@swissential.com

You do however also have to meet a number of other requirements which can vary across the cantons but which typically include:

• demonstrating written and spoken knowledge of a Swiss national language
• integration into Swiss life and culture
• compliance with Swiss law and customs
• not being considered a threat to Swiss national security
• no time spent on Swiss social welfare in the last 3 years, unless you pay back the money received

What parameters do you check or tick? Is it something that you would consider for you and your family in the near or longer term future…? It is really a beautiful country and is most definitely worth it! Count me in!

The 4 myths about sustainable and socially responsible investments

Clearly, there’s a desire to make a difference. What seems to stand in the way is a number of misperceptions about the actual risks, the returns that can be achieved and the actual impact these investments can have. To answer the question ‘Is this for me?’ – let’s start by dispelling the four common myths surrounding sustainable and socially responsible investments.

• Myth #1: They only come in green

The concept of sustainable investing can mean different things, but it essentially boils down to this: Aligning traditional investing with environmental, social, and governance-related (ESG) principles to improve financial well-being over the long-term. The range of sustainable financial products out there is very diverse and investment choices will entirely depend on the investor’s personal values and preferences. It’s not limited to specific stocks in green energy or organic farming, either. If the investment is in a fund, those companies or activities that don’t meet the investor’s social and ethical standards are filtered out. Investments can also be earmarked for projects that have a positive environmental and social impact. Another option is thematic investing, for instance in renewable energy, biotechnology, healthcare or sustainable forestry, to name the major areas. Between 2018 and 2019 alone, the number of funds that operate under ESG criteria went from 434 to 582 (up 34%)

• Myth #2: Good conscience, bad return

The market shows that sustainable and socially responsible investments are on a par with conventional financial product offerings. Stock companies that subscribe to ESG principles are more than a safe bet. Well-managed businesses that are concerned about their impact on the environment and society are ready to adapt and often more open to innovation. Their employees are well taken care and that makes them better at their job. These companies have a better reputation and are better equipped to weather crises. Which means their business may keep growing. The facts bear this out, especially in the current turbulent market: In the US, for instance, most sustainable funds finished in the top halves of their Morningstar Categories for Q2/2020, and 18 of 26 ESG-focused index funds outperformed conventional index funds. For the year to date, 72% of sustainable equity funds rank in the top halves of their Morningstar Categories and all 26 ESG funds have outperformed their conventional index fund counterparts. Just as the way companies treat their employees and stakeholders has become a differentiator, the way they invest in their employees’ health and safety will become even more important. Sustainable and socially responsible investing will keep up the momentum for this dynamic. And no, the fees aren’t higher than for conventional investments.

• Myth #3: It’s just a fad

The concept of sustainability as an investment driver, which inherently has an ethical component, has been around since the 18th century. Back then, some investors would have nothing to do with the slave trade, preferring to make a healthy profit in other areas. A preview, so to speak, of sustainable and socially responsible investing as we understand it today.

Fast forward to 2009. At the time, sustainable investments accounted for CHF 32.4 bn (up from CHF 7.4 bn in 2005), and by the end of 2019, the volume increased to CHF 1,163 bn. From 2018 to 2019 alone, the share of sustainable funds in the overall Swiss fund market more than doubled from 18% to 38%. Another key reason why sustainable and socially responsible investing is here to stay is regulation. In 2018, based on the results of the Paris Climate Agreement 2016 and the United Nations’ Agenda 2030, the EU launched the Action Plan for Financing Sustainable Growth to:

• Direct capital flows towards sustainable investments

• Mitigate financial risks linked to climate change, natural disasters and environmental and social issues

• Enhance transparency in investment and economic activity (i.e., better governance.)

In other words, the positive momentum developed over the past decade will continue to build. In Europe, we see that investing sustainably is increasingly the new normal, as borne out by the strong rebound after the coronavirus pandemic market sell-off, more than doubling to USD 54.6 billion over the second quarter of 2020.

• Myth #4: It’s not for me

One of the study’s findings: 48% of those surveyed felt that the responsibility to act sustainably rests with companies, about the same for those who felt that sustainability starts at home (45%). As companies are aligning themselves with the new normal, the possibilities for private individuals to make a difference through their investments – while achieving their financial health and well-being goals – are increasing, too. More important than diversity of investment options perhaps, is the fact that the market is open to all, regardless of how little one wishes to set aside for letting sustainable and socially responsible investments grow into a nest egg or a dream come true. Though it’s never too soon or too late to get started, seasoned investors (44%) would recommend starting with a small amount and taking a step-by-step approach. To get a basic understanding of how a capital investment works, click here.

Friends and family can be a good source of advice if they have some experience. Also, the fact that financial advisors may charge a fee should not be a red flag. Their main objective is to make investing work for their clients – who usually are the first to say that good advice is always worth the price. Besides very competitive rates, advisors can also provide tools that allow maximum control over the investment.

But what about after the crisis?

According to ratings agency Moody’s, the Covid-19 pandemic is likely to have far-reaching effects on the financial sector over the coming years, specifically on the way investors and companies approach risk and how they will increasingly focus on ESG factors. The trend towards sustainability and social responsibility was already well underway before the crisis began, it’s just that the crisis has intensified the spotlight on environmental, social and governance factors. In our rapidly changing world, businesses and projects run according to sustainable, i.e. ESG-based principles, are proving to be more resilient and therefore in a better position to offer more stable returns over the long term.

Sustainable investing also plays to one of Switzerland’s strengths: a longstanding tradition in sustainable finance, not least due to an openness that allows for new trends to be recognized and acted upon early on, combined with stable economic and political framework conditions. The result is a financial environment that contributes to a more sustainable world through smart investing, proving time and again that securing one’s financial future and doing the right thing for the planet and society can go hand in hand.

When the pandemic first hit in 2020 and most of the world had accepted extensive use of masks I was slightly horrified by the amount of waste they produce. The image of a mountain of garbage in our oceans followed me around every time I went outside. As a responsible adult, I thought of what changes can I make to provide a bit of relief to the environment and reduce my own carbon footprint? As I looked around my own house, I noticed that my bathroom has quite a grand collection of plastic. The most-used material for shampoo bottles is HDPE (High density polyethylene) which is recyclable, but my closest recycling station only has a PET (Polyethylene terephthalate) bin making it harder for me to recycle. So I thought, there must be a better way to care for my hair while caring for the Earth at the same time, so I decided to switch to solid shampoo and conditioner.

Initially I was very happy with my choice. I got a few bars from local bio shops and a few more from well-known brands. Unfortunately, the solid hair care market is relatively new, so the options are limited compared to the thousands of traditional products. There are multiple benefits that I didn’t even realise, such as I didn’t have to worry when taking it on my travels as it didn’t take up so much space. Also, it seemed my hair reacted well to it as I now had more days in between the washes. It also built some new habits, such as buying some products in a refill system since I became a regular at a ‘green’ shop.

The problem arose towards the end of COVID measures. When it got safer to go to public places and see other people. To pick up my social appearance I found a hair stylist from a higher-end salon who works with my type of Asian hair regularly. This measure was necessary since the treatment I wanted is not very well known in Europe. I was born with naturally straight hair so to give it volume I spend hours styling it. The hair structure is very different to European hair so instead of getting them permed, I wanted to try a Korean perm which would create a soft big curve instead of a twingling shape. I booked an appointment 2 weeks in advance and travelled 2 hours to get to Aarau from Geneva. Upon arriving the hairstylist gave me a critical look but didn’t comment on the state of my hair. She then went on with the preparations of setting up the machine, giving me all kind of gowns and finished preparing by taking a ‘before’ picture. She worked on my hair for 6 hours all the while asking me all types of questions like if I spend a lot of time in the sun, how do I dry my hair and finally what shampoo am I using? By the time that question rolled in I felt too self-conscious to reveal that I use locally made hair soap, but she didn’t even wait for an answer “Your hair is too dry, it doesn’t retain moisture. You must change your products.” We then spoke about how to treat it: shampoo, conditioner, hair masks and oils. She asked me to send her a photo of the ingredients next time I go to buy my products so she can advise on whether it will suit me. After everything was done and I was putting on my coat something dawned on me – she never took an ‘after’ picture.

I was very disappointed that my efforts to save the planet resulted in dull hair and pitiful looks from hairdressers. The result of a 6-hour expensive procedure didn’t even deserve an Instagram story. As I was travelling back home, I contemplated whether I had really helped anything or was I trying to solve an environmental crisis with some nonsensical actions? In the end, I think my heart was in the right place: if there is a demand for more sustainable solutions then producers will adapt. These questions can and should be discussed on a greater scale. None of the big problems have easy solutions and people should be prepared to make greater sacrifices as no goal will be attained by small convenient solutions. A commitment, be it a shampoo change or a savings plan, should not be short-term. Nowadays I think about it often on my way to recycle the HDPE bottles and when checking my sustainable investments.

What fees could you pay? Does this 1% cover the custodian fees? What about the investment management fee? And the underlying fund fees? The big one and no one speaks about is the financial planning fee – what is that? Is that included in that 1%?

If you want to manage money by yourself its easy to keep all fees below 1%. You just need to worry about the custodian (where do you hold your investments – avoid banks if you want to pay less than 1%) and the underlying investments (shares = no cost / collective investments 0.2% – 1% p.a.) But do you have the knowledge to manage your own investments? Are you confident enough to avoid common behavioral traits that ruin any best laid plan? And do you know why you’re investing in the first place? What is your Plan?

Outsource the management or if you receive financial planning advice and fees creep up. But not necessarily by much.

The discussion about fees is an important one and knowing what you pay and to whom is important. Not just for your own piece of mind but for accountability. And lump sum fees should never be built into products – you must be able to cancel them. I’m amazed at people who tell me 1% a year is expensive. People think they pay far less than they actually do and they receive little to no service. I look at portfolios that are charged at 0.5% management fee and I look under the bonnet and they pay over 2.5% per year within collective investment fund charges – some fees are explicit and some hidden – do you know where to look?

Also and by no means a small point is the significant impact of financial planning. Not only from a time saving perspective (your time) but you can save significant taxes too. Why are you investing if you can buy back missing years of your second pillar? What’s your tax rate 25-40%? Wouldn’t you prefer a tax saving and a plan to maximize these and balance this with your investments over time? Pay for advice and you might end up investing less than you would otherwise, saving tax and time. You may end up paying for a service that helps you achieve what you want and saves you money. You’d want to pay for that service? Right?

Value. That’s what is important. Not the size of the fee.

Data from the FinaMetrica (a renowned risk profiling platform) spanning different market conditions over time, demonstrates remarkable consistency in the average scores. Consistency is a good thing. If a client’s risk tolerance changed every time they came to an advisor’s office (or joined them on a Zoom call) it would be very difficult to give consistent defensible advice.

A client’s risk tolerance is how emotionally comfortable they are with taking risk. Imagine a continuum from reducing risk to avoid unfavourable outcomes up to embracing risk to achieve higher returns—where a client sits along that continuum is your risk tolerance. Risk tolerance is a psychological trait, a distinguishing characteristic that makes each person different, much the same way I could be on a scale somewhere between introverted and extroverted.

Like other psychological traits, risk tolerance tends to be stable over time and market conditions. Most people do not change from being an introvert one day to an extrovert the next, nor does their risk tolerance change. Not all questionnaires that claim to measure a client’s risk tolerance are created equal. Psychometrics—the marriage of psychology and statistics, provides standards for evaluating tests, sorting the good from the bad. A good test should be both valid—measures what it purports to measure, and reliable—measure consistently over time with accuracy.

FinaMetrica published data built on more than 1.2 million risk tolerance tests globally from January 2008 through to April 2020, spanning the Global Financial Crisis (GFC) of 2008 to the boom leading up to the current Covid-19 crash. Risk tolerance, globally and across the major markets of Australia and New Zealand, United Kingdom and United States, stays at an average of around 50 (on a scale of 1 to 100). Sure, there is some variation, but not in magnitude nor very correlated to market movements. Interestingly, because FinaMetrica has had thousands of the same clients take the test both before and after a crisis, researchers have confirmed this consistency is not only on average but that individuals largely test the same after a crisis as before.

A risk tolerance test that follows short term market volatility is dangerous for clients and advisors. If a poorly constructed test was applied during bull markets and it made people look more aggressive than they really are, when a downturn comes, they might panic sell and crystalize losses. Conversely, if a faulty test were applied during a down market and it indicated people are more risk averse than they truly are, their advisor could invest them more conservatively than they should, and returns could be unnecessarily sacrificed. Poor risk tolerance tests correlated to the market are also challenging for financial planning professionals and their firms, who must satisfy regulators that the tool they are using is fit for purpose. This is hard to do if the results change every time the client is tested.

So why do many advisors believe a client’s behaviour changes in a downturn and that they become more risk averse? Or why do so many clients do the wrong thing, panic and sell more equities in a market crash if risk tolerance is stable? Maybe it is not the client’s risk tolerance that has changed (as indicated by the FinaMetrica data) but the perception of risk in the marketplace. Clients might be quite willing to live with a 30% drop in their portfolio value but when CNN tells them this crisis could lead to the next Great Depression, no wonder they can become scared!

COVID-19 has brought a market shock and there will be others to come. Advisors who have performed a valid risk profile for their clients (and as we discussed many clients have not completed a proper risk assessment) find that clients are more likely to stay the course. In all cases advisors can and should provide an important role helping clients manage uncertainty to deal with the fear generated in the media, through proper guidance and education. If assessed properly, risk tolerance will be a stable factor in any financial planning conversation, steering the focus towards long term risk and return expectations; restraining excitement during upturns and dispelling unnecessary fears during downturns.