A New Paradigm for Retirement Portfolios

After making regular contributions to the mandatory first and second pillars of the national pensions system, retired Swiss residents can on average expect to receive a pension equal to roughly 60-70% of their previous income.

That level of provision falls short of what would be required to maintain your living standards in retirement, for which the OECD recommends a minimum “replacement rate”, as it’s known, of 70-80% of pre-retirement income and experts advise replacing between 70-90%.

And, unfortunately, it’s not going to get better. The lengthy period of low interest rates has significantly reduced the Swiss replacement rate under the first and second pillars. It has dropped by more than 10 percentage points since 2008 and is expected to drop by another 15 points by 2040.

All of this makes it imperative that you create your own personal pension fund. But the question is: “How is that done?”

Risk appetites and target dates

The first step is to assess your own “risk appetite” and simply note how many years you have until you are eligible for the state pension, known as OASI (Old Age and Survivors Insurance) in English. That age is 64 for women* and 65 for men.

* Note that women born in 1964 or later will only receive OASI at the age of 65, i.e., as of 2028, both men and women will retire at the age of 65.

The longer the period, the more risk you can take or, in other words, the more equity-like investments you can hold. Over the last 30 years or so, equities have delivered about twice the returns of bonds while presenting a higher risk in terms of volatility.

Comparison of stocks vs. bonds returns and volatility since 1926
Source: The Pictet Group

For many years up to about 2010, especially in the USA, financial advisors encouraged clients to “de-risk” their investments as they approached retirement. Essentially, that meant reducing the equity, or growth, component in favor of bonds and cash in order to secure a steady post-retirement income.

Vanguard target-date funds allocation based on years left to retirement age
Source: Vanguard

Such “lifestyle” or “target date” investing has become less prevalent as a growing number of experts have questioned its validity, especially following the Global Financial Crisis (GFC, 2008-2009). One of the most significant effects of quantitative easing (QE), introduced to avert recession after the crisis, has been to inflate the market prices of nearly all assets, essentially reducing the risk-reduction benefits of traditional asset diversification across listed bonds and equities.

Furthermore, an analysis of actual lifestyle strategies showed that, in many cases, they delivered worse returns with no less risk than a portfolio with a more-or-less constant balance between equities, bonds, and cash.

There is another issue. Target-date investing assumes you will maintain a low-risk portfolio, largely invested in bonds and cash, throughout your retirement to secure an adequate pension.

However, your retirement could last 30 years or more, and such de-risking would mean missing out on the equity rise that would undoubtedly occur over such a long period. Those bull markets could significantly increase the size of your pension “pot”, enabling you to generate a higher level of income.

The 60-40 problem

You might conclude that the traditional “60-40” investment allocation – 60% in equities, 40% in bonds – is the best approach for your retirement portfolio and that this balance should be maintained indefinitely. And, indeed, the strategy worked well over the last 50 years, until 2020.

The net growth of a CHF 1’000 hypothetical investment in stocks, bonds,
and 60/40 strategy on 1st January 2013*

* The calculations were made using the Swiss Stock Market Index (SSMI) as the Swiss stock market, and SBI® AAA-BBB Total Return (SBR14T) as the Swiss bond market.

Take note of, how the balanced portfolio outperformed expectations during the outbreak of the coronavirus pandemic in 2020 (see chart above). However, it has significantly underperformed in 2022 as a result of the subsequent rise in inflation to levels unseen in 40 years or so and the impact of Russia’s invasion of Ukraine.

Annual returns of 60/40 portfolio
Source: PLANADVISER

That was only the most recent mishap, however. The 2008 GFC downturn has been noted already, but the after-effects of the “dot-com” market collapse (2000-2003), although less damaging in absolute terms, lasted much longer.

The problem is, therefore, that investing in a 60-40 portfolio can be terrible for your financial health and potential retirement income. Even if that is only for a limited time, the impact on your sense of security and well-being tends to be long-lasting.

What the professionals do

Despite the turbulent financial climate, there are still assets in which a prudent investor can find shelter from these storms. Let’s take a look at what Swiss pension funds have done; after all, their sole raison d’être is to invest for a comfortable retirement, therefore they are experts.

Swiss pension fund asset allocation history since 2012
Source: Swisscanto

Aside from the increased exposure to foreign assets of all kinds, two trends are evident from the 2023 Swiss Pension Fund Study from Swisscanto. First is the near-constant annual reduction in fixed-income investments.

The second – and most important for the purposes of this study – is the equally-continuous annual increase in the weightings of real estate (initially devoted to Swiss assets but now increasingly composed of foreign assets as well), infrastructure, and so-called “alternative” investments, including private equity and hedge funds.

These trends have been observed in pension schemes across the developed world. For example, the chart below depicts what US pension funds have done over a similar timeframe. It is worth noting that, like their Swiss counterparts, fixed-income investing has been continuously reduced in favor of real estate and private equity, while public equity has also been slowly reduced on an annual basis.

US pension funds asset allocation history since 2001
Source: Equable Institute

The unambiguous message from the professionals is, therefore, that exposure to private markets – private debt, infrastructure, private equity, and real estate – is essential to creating a portfolio that will assure a comfortable retirement.

Not just professional pension managers, but the universe of investors in general, have increased their reliance on private markets (as shown in the chart below).

Assets under management trend of alternative assets, 2000-2022 (in USD billion)
Source: S&P Global

Overall, these investors in private equity, in particular, have not only reduced risks in terms of volatility, but also increased their returns compared to listed equities. Readers familiar with the Moonshot white paper on private equity have previously seen the chart below.

The net growth of a CHF 1’000 hypothetical investment in Cambridge Associates US Private Equity Index and Russell 2000 Index on 1st January 2012 (in CHF)**

** The chart is for illustration purposes only as neither the Cambridge Associates US Private Equity Index nor the Russell 2000 Index may be directly invested in as they are simply measures of the performance of its constituent securities.

For the comparison between private and public equity, the Russell 2000 Index was chosen as the benchmark for public equity, because of its high content of technology companies and younger enterprises. In general, this makes it a better benchmark than the S&P 500 or the main European market indices.

When it comes to real estate returns, a similar picture emerges, especially in Switzerland: a more-or-less steady rising trend that has been disrupted quite infrequently and with relatively minor damage to investors’ capital.

Swiss house prices since 2000
Source: Bloomberg

What these comparisons highlight is not just the substantially larger cumulative returns from private equity and real estate over the last several decades, but the more constant and progressive trend when compared to public equity markets.

A new paradigm

After accepting that private markets are an essential component in long-term investing, the next question is how much should be allocated.

The pension funds are a good example to follow. According to the charts shown previously, their combined allocations to alternatives and real estate have increased to 20-30% of their total assets, primarily funded from bonds sales.

That suggests that the former 60–40 portfolio of equities and bonds might now be allocated 60-15-25, with the last figure representing the allocation to private markets.

However, the new allocation seems unbalanced, especially given the aforementioned figures including exposures to miscellaneous and other unspecified assets. In any case, there should also be a cash component to cover significant expenses that are unexpected (e.g.: your house needs a new roof) or impossible to time in advance (e.g.: your daughter’s wedding).

A more prudently balanced allocation might therefore look as follows.

Adjusted 60/40 portfolio allocation***

*** Please keep in mind that investing comes with a risk, and we are not in power to recommend neither this strategy nor any other strategy. We strongly recommend that you consult a financial professional before making any investment decisions.

The Moonshot gateway

As a private investor with adequate but moderate wealth at your disposal, you may be frustrated by the emphasis on private equity and real estate because the funds and projects that invest in those unlisted assets require minimum investments of at least CHF 100’000 and, all too often, CHF 1’000’000 or much more.

Moonshot, however, requires a minimum investment of just CHF 10’000 to gain access to the most exclusive individual opportunities in both private equity and real estate.

Our investment options go beyond individual private equity or real estate deals. You can choose from an array of meticulously crafted portfolios that provide access to top-tier private equity funds or properties in the most exclusive and high-demand locations, all within a single product.

The time is now

There is one final imperative for anyone looking to invest for a worry-free retirement: get started now. Time will only be on the side of those investors who ensure they have enough of it by initiating their portfolio as soon as possible.