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

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.

Now, that being said – this is a blogpost from the perspective of a Financial Consultant, so let’s talk figures. A latest study from the “Zurich Office for Youth”, Credit Suisse and the OECD shows that the average direct cost of raising a child in Switzerland for a couple is 22’200 CHF per year, meaning over 18 years a direct cost of 400’000 CHF.

Beware, this does not include school fees – so if you think of sending little Heidi or little Einstein (I know he was German, but he became Swiss later on, so it still works) this amount can go up quite significantly.

Coming back to the figure of 400’000 CHF, it is split as follow:

• 32% on accommodation (the more children you have, the more this number goes down in terms of proportion of income)

• 18% on day-care (unfortunately Swiss day-care is the most expensive in the world)

• 17% on food (such costs go up as your baby becomes a teenager that can literally eat anything without putting on weight – I know, so unfair…)

• 13% for healthcare

• 6% on clothing (again, as you can imagine dressing a 13 – 18 year old is much more expensive than a baby considering you pay mainly for the brands our youngsters/teens so desperately need to forge an identity)

• 1% for telecoms (only considers here children above 13 years old – so if little Heidi comes asking for a phone at 10 years old, don’t hesitate – it’s not in the official budget from the Zurich Office – and if you can get away with this explanation, you’ll know as a bonus you have an aspiring public official in the family)

• 14% on entertainment & miscellaneous incidentals and accidentals

Now, this is where I must promote what we do before letting you go. So here it is: you can’t plan for the above “ongoing cost” of raising a child, but you can certainly make sure you plan for higher education needs so when university cost of living and tuition “hits you”, you are ready for it …

Until then, we love our children …

After years of ridicule in the watering holes and forced lectures of other people’s opinions (mainly Tottenham fans), I came to see the situation in a different light. I concede, Arsenal are no longer a top European side, for now!

I needed to view the situation through a different lens. It’s hard to pull up the anchor and reassess one’s own view, but this can be far more important when it comes to decisions that will affect the rest of your life, your finances.

I often hear the anchored statements that prevent action, ‘investing is for fools’, ‘you’ll lose money’, ‘it’s not for me’. Similarly frightening statements that push action – ‘I’m missing out on the bitcoin train’. Often these statements are based on a past experience or an event that has tainted their view. The financial crash in 2008, Greece’s Debt Crisis, The Corona Virus Pandemic, the bitcoin boom, – too much weight is put on an event or past experience which taints reality.

This anchoring can have devastating consequences towards achieving what we want and we limit our lives and our future plans in the process. If you don’t invest, you don’t grow your money. Einstein was right – compound interest is the 8th wonder of the world. Similarly, if you invest poorly or without diversification, you’re at risk. I bet there are plenty of people out there who invested when a bitcoin was at 58,000 USD (Spoiler alert it’s now 35,000 USD at time of writing).

Now I’m not saying you must invest nor that bitcoin is a bad investment. We just need to be more self-critical and understand when we anchor. If speaking to others helps to view situations in a different light, do it. It could be the best way to pull up that anchor and sail towards more fruitful seas.

Before we concentrate on overcoming this issue, we must understand why it occurs. Believe me, you will see this happening in every mundane corner of life, procrastination, diet, exercise and financially. Over 25% of people claim they do not have savings and the most common reason for not building savings for the future is that it can feel like a loss right now. This cognitive effect has detrimental impacts on retirement funds. People have not saved enough for retirement and subsequently compromise their standard of living upon retirement.

Another consequence of the present bias is rushing into investments. Crypto currency is easily accessible; gratifying the urge to invest in one simple click of a button – this often is not a thought-out plan! Subsequently the present bias will be at play when we see the markets drop. An overwhelming urge to vacate the bad situation and associated feelings. Sell and run (sadly locking in the loss!). The present bias is an emotionally driven, cognitive influence that can easily steer us into bad decisions.

So…you have read this far. Now the question should be resonating, how do I control this?

Its relatively simple, it all boils down to a plan. The reason why you are doing something must outweigh the urge for instant gratification. It could be putting the snack aside so as not to spoil your dinner, a smaller rental to build a deposit for the dream home or simply a little here and there to secure your financial independence. Whatever the motivation, it all boils down to the plan and remembering the true reason ‘why’.

When I discuss with clients about investing “now”, the usual answer, expressed as a concept is:
Valerio let’s wait for the “Black Friday” of the stock market.

We all want to buy low, sell high. When the market goes down and you have money, you invest and grab shares of great companies at a fraction of the price. The most important questions everyone should ask are:

• Should I buy now or wait a little longer?
• Should I sell and cash my sizeable profit?
• When will the market bounce back…. Or crash again?

Those are common questions asked by most investors… but not me. I decided long ago to follow a clear investment strategy that doesn’t require me to dither forever about the optimal price of a stock, I buy shares whenever I want based on my investment principles and not the “price of the day.”

To put it simply, I strive to remove emotions out of the “investment timing decision process”. This simple, yet efficient strategy clears out lots of questions leading to paralysis by analysis. How can you seriously define the right price of a stock in front of your computer at home? Even professional managers are struggling to do that.

By keeping a focus on the long-term outcome (retirement in 10-30 years), I don’t have to worry about the current state of the market. I only have to worry about which great companies I want in my portfolio. Waiting with cash on the side would generate tons of questions that I can’t answer, in addition to costing negative interest on many Swiss banks for deposits above 250k.

I get the appeal of cash. Particularly if you grew up through the dot-com bubble or if 2008 is still a vivid memory in your mind and you saw people panicking and struggling to make ends meet when the economy took a serious turn for the worse. Having cash in the bank can feel like a safe place to invest your money, but remove the emotion, and it’s actually one of the riskiest long-term investments you can make. Cash loses value over time. A EUR 100 bill in 2000 is only worth EUR 68 today, when taking into consideration 2% inflation.

This is why simply holding your cash is far riskier than it sounds. With people living longer than ever — and spending more money on things like healthcare and education — sitting in cash as a long-term investment will mean you end up with less purchasing power down the road.

Getting better with money
With all that said, don’t go burning your savings. There is a place for cash in your life. Having a safety net of cash in the bank — three months’ worth of expenses is a good rule of thumb and will help you sleep at night and better handle the curveballs that life inevitably throws at us.

The bank is a good place to keep cash that you might need to access anytime within the next year or so. Longer-term investments — money that you won’t need for at least five years — should go into investment vehicles like the stock market, pension funds or ETF. If you’re a millennial, you have the biggest advantage of all when it comes to investing – time. Don’t squander it by spending all your money or keeping it solely in cash.