We talk a lot about investing, but what is it, how does it work, where does our money go when we invest? These are the questions that often preoccupy us when we’re new to investing.
So I thought I’d explain it all to you in this blog post.
Ready to go? Let’s gooo!
PS: If you’re in a rush, you can listen to the content in the podcast below 😉
First of all, when we talk about investing, what does it really mean?
Well, it means putting your money into financial assets on the stock market, which can be stocks, bonds, mutual funds or ETFs (which are actually a basket of stocks), etc. These assets will increase in value over the years, and some may pay you money annually. These assets will increase in value over the years, and some may pay you money annually. If we take shares as an example, they will pay you a dividend each year, which means money depending on whether or not the company has made a net annual profit.
Of course, it’s also possible to invest your money in alternative assets, such as works of art or whisky, but in this case you need more specialized knowledge to know how to assess their value. Without going into too much detail, new investment platforms offer these alternative investments, accessible from as little as CHF 25, so you can buy parts of these assets without having to store them at home. But I’ll explain this in more detail in a YouTube video.
Of course, it’s also possible to invest in physical real estate, but again, this is a less accessible investment since it requires a fairly high initial capital. For example, if you want to buy a house or apartment, you’ll need to put up equity of 20-30% of the property’s value, so if you’re buying a million-dollar property, you’ll need to put up between CHF 200 and 300,000 from your own pocket. This is much higher than the CHF 25 minimum required by stock market investment platforms, for example. What’s more, without going into too much detail, it is possible to invest in real estate on the stock market, via shares, ETFs and funds in this field. You won’t be able to live in the property, or rent it out, but you will be able to invest in it.
A riskier investment is crypto-currencies, which are available on investment platforms from as little as CHF 1. But since you don’t build your fortune first with risky assets, I’m going to concentrate my explanations on stock market investing, which is accessible to everyone, for this article. As you can see, with me, safety comes first!
If you want to invest, you’ll first need to open an account on an investment platform. This can be a Swiss platform like Swissquote, if you want to play on the Swiss side, or an American one like Interactive Brokers, if you want to save on fees. Personally, I use both platforms. It can also be applications like Yuh app, if you want to access your account on your cell phone and you want a Swiss platform. Interactive Brokers also has a mobile application. If you want to get into investing, you’ll find promo codes and affiliate links to the right of the articles.
So, once you’ve opened an account and it’s been activated, you’ll need to deposit money into this investment account from your bank account. The money usually arrives very quickly, 2-3 working days max.
Then you may need to convert your CHF into USD or other currencies, especially if you use Interactive Brokers and Swissquote, to then buy financial assets from foreign markets, and thus diversify your portfolio. But don’t worry, it’s done in 3 clicks. For Yuh, there’s no need to convert your Swiss francs into other currencies, the platform takes care of that when you buy financial assets. But the fees are a little bit higher.
And then you can buy your ETFs, stocks, bonds or other financial assets on the platforms or apps. You search for what you want to invest in, enter the amount of money you want to invest and click on “buy”. The transaction takes a little time, and then you own the financial asset in your portfolio. And then… A HUGE Bravo! You’ve made your first investment in the stock market!
Later, in 10-20-30 years, when the asset has appreciated in value, you can resell it. And you’ll have made what’s called a capital gain. You’ll be able to use that money for your retirement. And if you don’t know what to invest in, don’t worry, there are several expert finance blogs highlighting financial assets with healthy growth that are potential investments for your retirement. In fact, I’ve also released a YouTube video explaining how I’d invest money if I were starting out in the stock market right now. Of course, I’ve used my profile as an example and it’s not investment advice. But it can help you understand how to build your investment portfolio.
And just to reassure you, I’ve written out the whole process for you, from opening your account to your first investment, on the YUH platform in this article -> Article Link and on Interactive Brokers in this article -> Article Link. So now it’s up to you, when you feel ready 😉
Where does my money go when I invest in the stock market?
When you invest in the stock market, your money is used to buy shares or other financial securities such as bonds or exchange-traded funds (ETFs).
These shares or securities are issued by companies or governments seeking to raise funds to finance their projects or operations. By purchasing these securities, you become the owner of a portion of the issuing company or government. This may entitle you to a share of the company’s profits.
So this may sound like gibberish to you, but don’t worry. I’ll explain it more concretely by analogy 😉
Imagine you’re lending your friend money to help him open a business. In return, your friend gives you a portion of the company’s ownership in the form of shares. If your friend’s business does well and generates a profit, the value of your shares may increase, as if you had invested money in the creation of a profitable business. And if you decide to sell your shares later, you can make a profit.
On the other hand, if your friend’s business doesn’t do well and doesn’t generate a profit, the value of your shares may fall. This would be like lending money to a friend who can’t pay back his debt. You risk losing money if you decide to sell your shares at a lower price than you paid for them.
It’s important to note that, just like lending money to a friend to open a business, investing in the stock market involves risk. Companies can encounter financial difficulties or changes in the economic environment that can affect the value of their shares. That’s why it’s important to diversify your investment portfolio and not put all your eggs in one basket.
What about risk?
On the risk side, there’s of course the risk that a company might go bankrupt, and that if you own a share in that company, well, your investment ends up at 0. Hence the advantage of investing in ETFs, which are baskets of stocks that diversify your investments and reduce the risk of your investment falling to 0. Because if index ETFs fall to 0, then the whole stock market will plummet and we’ll be heading for a global catastrophe. And I might as well tell you that everything you’ve contributed to the 2nd pillar will be close to 0. But we’re not there yet. Then there’s the risk that the platform on which you’re investing might also go bankrupt. But I’d like to remind you that a bank is just as likely to go bankrupt and cause you to lose your savings in excess of CHF 100,000, since in Switzerland, banks are obliged to reimburse you up to CHF 100,000 in the event of a problem.
All good things have to wait, and you’ve waited long enough! By investing your money in the stock market, you protect yourself against inflation, and therefore against the loss of value of your money.
In 2022, inflation in Switzerland was 2.8%. So for a monthly salary of CHF 6,000, you lost CHF 168. What’s more, leaving your money in a savings account earns you at best 0.75%. This means that your money still loses 2.05% of its value. So with an annual salary of CHF 72,000, you lost CHF 1,476. That’s quite something. Whereas over the last 30 years, people who have invested in Swiss equities have enjoyed an average annual return, adjusted for inflation, of 9%. So personally, between losing 2.05% and gaining 9%, my choice is quickly made.
Secondly, investing in the stock market allows you to build a better retirement. Why better, because contributions to the 1st and 2nd pillars provide you with a very low retirement pension.
For the 2nd pillar pension, you need to take your contributed capital and multiply it by the current conversion rate, which is currently 6.8% for the compulsory part.
Example: If my retirement savings amount to CHF 200,000 at retirement age, all I have to do is multiply this amount by 0.068. This gives me CHF 13,600 paid annually. In other words, my 2nd pillar pension will be CHF 1,133 per month, which will be added to my AHV.
As for AHV: the minimum pension for a single person is currently CHF 1,225 per month, and the maximum CHF 2,450. The amount of your pension depends on several factors.
The higher your salary, the higher your AHV contributions. As a result, your pension will be higher. In short, to obtain a maximum pension, your average annual income should be at least 88,200 francs per year.
So if you add up the first 2 pillars, you’ll have between CHF 2,400 and CHF 3,600 per month. That’s why investing your money in the 3rd pillar, in the stock market, in real estate, etc., is so important.
And while we’re on the subject of figures, to give you an idea, if you were to invest CHF 50 a month in an ETF with an annual return of 9% for 35 years, at the end of 35 years, using the principle of compound interest, you would have a capital of CHF 135,702.93.
By comparison, if you left this CHF 50 in your bank account, at the end of 35 years, you’d have a capital of CHF 21,000.
And the higher the investment, the higher the final capital.
For example, if your initial investment is CHF 200, and you invest CHF 200 per month for 35 years, at an annualized interest rate of 9%, you’ll have CHF 542,811.72 after 35 years if interest is calculated once a year. Whereas, without taking inflation into account, you’d have at best CHF 84,000 if you left the money saved in your bank account.
For me, these are the 2 main advantages of investing:
1: protect your money against inflation
2: create nice savings for a better retirement
That’s all for this article. I hope it has helped you understand what we mean by investing your money, and the risks and benefits associated with investing. If you still have questions, don’t hesitate to ask me in the comments section.
