Last updated: November 16, 2024
It’s been 18 months since Olivia walked out of the stock market after her nightmare meeting with Mr. Henri. Since then, she’s been focused on her career. This has earned her a promotion to a managerial position in a new company, resulting in a nice raise. This change has prompted her to look for a way to make her money grow at a minimum. She opened a blocked savings account at SBU at 0.2% after looking for the best option on the MoneyLand.ch comparison tool. She made up her mind that it was better to take her time to accumulate a small fortune than to burn her wings for wanting to become rich overnight. With this system, she hopes to switch to 80% at work by the time she’s 50.
It’s Tuesday morning, and Olivia is drinking her tea in the restaurant car of her Intercity to Geneva (where she now works). She receives a text message from her former manager John, whom she had asked for advice recently before starting her new job:
“Have you seen the new MedTech unicorn from EPFL? It’s the same founders as the startup we invested in at the time !!! I reinvested in it 9 months ago. I told you their idea had potential! Look at ‘Le Temps’, I hear they’re about to go public!!!!”
Olivia sees the article on her iPhone, skims it, and gets all pale… The MedTech startup started back from the same concept but addressed the — much more lucrative — corporate market rather than individuals. They have just announced that they have exceeded CHF 1 billion in value. Their IPO (i.e. listing on the public stock exchange) is planned for a few weeks from now.
She’s starting to feel bad when she thinks about the earning opportunity she just missed. She could’ve switched to 50% at work with that. When she gets to Cornavin station, she cancels her 10:00 a.m. workshop, faking a migraine. And she heads for the Starbucks on the Quai des Bergues — the one with the view of the Jet d’Eau fountain. On the way there, she mopes that she should have stayed in touch with John.
She spends the morning reading every article she can find on that unicorn. She searches the Agefi and the NZZ for information on how they managed to raise new funds after a bankruptcy, as well as on their exponential growth in less than two years. After several hours, she concludes that it’s still far too risky to bet on a single horse. Especially since at the time of the IPO, nothing is said that the public will agree with the investors. She has already heard the similar story of an American startup whose share price had fallen just after going public.
She feels relieved because she thinks her conservative savings account and gold investment strategy is safer and less stressful to achieve her goal of reducing her work time. But this relief is only short-lived, as she has another doubt in her mind: “Still, if I could achieve even a 4% return, I could consider part-time work much sooner!”
She tells herself she needs to re-evaluate her strategy.
Maybe now she should ask her cousin who invests in real estate for advice, since she saw that the stock market was not for her? Or could peer-to-peer (aka P2P) loans be part of her new portfolio, even if only up to 10% to boost it?
A million ideas go through her head. Where should she start?
She decides to contact William to get his advice. Olivia knew him from her first job. Like her, he’d started investing around that time. When she and John (and their other colleagues) were having intense discussions about the stock market during the lunch break, William didn’t talk much. Whenever he was asked about his investment strategy, his answer “I invest in the index and I bought a rental apartment” sounded too boring in the middle of the heated discussions about which startup was going to make it.
Oliva was with William during her EMBA class last year. She had learned that he was still investing in the same way he did when they were colleagues. He seemed calm and thoughtful when he talked about it. And according to his explanations, it seemed to be going well. He was hovering around a 7% annualized return on the stock market, and he had sold his rental apartment with a 12% annualized return.
She sends him a WhatsApp, briefly explaining her situation, and asks him if he would have time to grab a bite to eat in the next few days. That same afternoon, he replies:
“Gladly. I’ve got a session at Lausanne tomorrow, if that works for you, we’ll meet at the restaurant near Ouchy where we’re going with the EMBA team.”
Olivia discovers IPS
Olivia arrives at the restaurant early and asks to have a table in a quiet corner so she can hear herself talk. As she settles in, she sees that she has received a text message from William:
“I arrive around 12:15, my session goes on forever… sorry!”
She uses this extra time to organize her thoughts on the corner of a table:
- Define what to invest in between real estate, P2P and equities, and how often
- Carry out the necessary steps for real estate investing
- Open the necessary accounts for the rest
- Follow my strategy to the letter
That’s when William arrives.
“Sorry I’m late, Olivia. I’m on a big case with a supplier in China, and we’re finalizing the final details before signing. I almost postponed our lunch, but you seemed pretty stressed out, so tell me about it.”
Olivia summarizes her situation, from her stock market debut with John’s famous MedTech, through her SC “advisor” and the fees for his Porsche, to her SBU blocked savings account with a return of 0.2%.
She comes to John’s recent message, and her own “self-control” not to be fooled by her old demons of quick wins. Then she shows him the plan she has in mind.
William listens patiently, and asks her a simple question:
“Why do you want to invest anyway?”
She explains to him that she would like to go part-time one day, and that with her simple savings it’s going to take some time:
"…So with your plan, it’s still gonna take you a few months to get your first piece of real estate. And that’s not to mention all the paperwork you’ll have to do in the first year. It’s gonna take you a lot of evenings."
“Really? No, but I want it to go faster, and I don’t want to devote my life to it once it’s bought!” exclaims Olivia.
“OK, let’s leave that aside for now. You also talked about P2P investments. Sounds interesting, I looked it up quickly, and actually you can get away with 8-14% right now depending on your strategy.”
William adds: “On the other hand, it’s still fresh as a market, and in early 2020, there are two platforms that closed overnight. Websites were no longer accessible. Nothing. People lost everything, it was a scam. There are some platforms that seem serious, but you have to look for them, and be prepared to lose some cash, because it’s quite risky in the end. It’s not like a company that generates cash. You’re lending to individuals who generally don’t have access to bank loans because of their financial situation. Plus, you have to look at the middleman loan companies as well.”
Olivia is not entirely convinced because she has read other more positive things about P2P, but she nods in agreement anyway.
“OK…but I still have to get into something quickly. Because time is my ally, with the famous magic of compound interest.”
“I completely agree with you on this point. You need to get a move on if you want your money to work constantly while you go about your business.”
“But to do that, whether it’s real estate, P2P, or even stocks, I need to find the right things to buy and to…”
William cuts her off: “You need to create an IPS for yourself.”
“An IPS?”
“An Investor Policy Statement.”
“It’s like a strategy for telling what to invest in and how often?”
“If you want…but not really…an investment policy statement is a statement that first defines your life goals. Then you set out the strategies you’re going to use to achieve those goals. It contains information such as a list of your current assets, the ideal allocation of these assets and your future portfolio, your risk tolerance, and your needs in terms of the liquidity of your investments.”
At that moment, William’s smartphone vibrates on the table.
“Sorry, apparently there’s a new blocking point with my Chinese contract, I really have to run, I don’t have time for coffee. My best advice right now is that you read everything you can about this IPS thingy. Look at sites like Boglehead, the term is ‘IPS’ for Investor Policy Statement. Once you understand the principle, create your own.”
Olivia interjects: “But isn’t it a bit too much to do this just for investment purposes?”
“No no, on the contrary. You really need to go through this first stage of introspection because your worst enemy in investment is yourself. I also got an IPS and luckily I had it during the last crisis, because otherwise I would have lost a lot of money thinking I was smarter than average. It’s like a procedure at work. Once it’s set, you follow it to the letter. Remind me once you’ve created your own and I’ll give you my advice if you like.”
Olivia thanks William for his time while he pays in a hurry and rushes out of the restaurant.
| Investor Policy Statement | |
|---|---|
| Assets | Everything you own |
| Debts | All you have to pay back |
| Why do I want to invest? | The most important question |
| Risk profile | The second most important question |
| Asset allocation | What percentage of what |
| Alternatives | The money you want to invest in risky stuff, and you don’t care if you lose it all… |
| Monitoring & control | How often and how to check your portfolio |
| Investment philosophy | The precepts that apply to all your investments |
Example of an “Investment Policy Statement”
Two weeks later…
It’s been two weeks since Olivia had lunch with William. She’s gonna meet him again for coffee before she goes to work to show him where she’s at.
“I took your advice. I’ve read everything I could about IPS and also the IPS term as you pointed out. It’s cool because I’ve really been able to think about my life’s purpose.”
And she’s pulling out her draft:
| Investor Policy Statement | Olivia (first draft) |
|---|---|
| Why do I want to invest? | Switch to 70% for my 45 years old (for my personal projects and to have time for me) |
| Risk profile | Able to withstand volatility like I am in for the long term |
| Asset allocation | 50% real estate, 30% blue chip stocks, and 20% P2P loans |
She details her choice of asset allocation: “I read a little about the stock market, and I keep a preference for real estate because I like the idea of having rents that fall every month. And ditto, I’m still thinking of testing between 15-25% in P2P loans in addition to shares in well-known companies (aka blue chips). So for the moment I’m thinking 50% real estate, 30% blue chip stocks, and 20% P2P loans. But I want to keep reading about these topics to refine my ideal asset allocation. Once that’s done, I’ll be able to get started. I also need to look at investing part of my 3a, but I’ll do that afterward.”
“It’s a good start.” replies William, thinking that she had omitted several points. He’ll talk about it later.
But where did you get the idea for the portfolio allocation?" continues William.
“I’ve been thinking for myself about what went wrong in the past and what I should avoid, like the rising startups of the moment. Then I talked to my cousin who knows about real estate and other types of investments. And he wasn’t shocked by my allocation.”
“OK. But just to be sure, do you have a good overview of the different types of investments? At least the best known conventional and alternative investments, with their roles, returns, and associated risks?”
Olivia seems a little surprised. “Conventional and alternative? No. Well, in terms of their roles, it seems logical to me, ultimately the goal is to generate cash. And I know the stock market’s risky, and real estate remains a safe value as it’s rock.”
“I had the same vision when I started my journey as an investor. And I realized that it was important to have this overview in order to establish a good strategy with full knowledge of the facts. In very crude and jargon-free terms, there are two types of investments. Conventional investments are cash, stocks, and bonds. The last two are things you buy on the stock market. And then you have all the other so-called alternative investments like real estate, gold, P2P loans, buying shares in a startup or a private company not listed on the stock exchange, crypto-currencies — although that latter is more like playing in a casino but whatever.”
He goes on to say: “Alternative investments are called ‘alternative’ because they’re often less liquid (i.e. you can’t sell them as easily as a click on the stock market), and historically they were only available to institutional investors (like professional asset managers or insurance companies) although now they’ve become more mainstream.”
William pulls out his Moleskine and sketches the following table for her:
| Investment type | Average expected return | Risks |
|---|---|---|
| Conventional | ||
| - Shares | 5-8% | Medium to high |
| - Bonds | -1% à +5% | Low to medium |
| Alternatives | ||
| - Real estate | 4-35% | Medium to high |
| - Gold and other precious metals | n/a | Medium to high |
| - P2P loans | 5-14% | High |
| - Cryptocurrencies | n/a | High |
“Ah well, you see I’m right with my real estate! Part-time’s mine !” exclaims Olivia.
“Yes, that’s the right reasoning. But see if I add a column with the effort it takes.”
| Investment type | Average expected return | Efforts |
|---|---|---|
| Conventional | ||
| - Shares (manual picking) | 2-7% | +++ |
| - Shares (via funds) | 5-8% | + |
| - Bonds (manual picking) | -1% à +5% | +++ |
| - Bonds (via funds) | -1% à +5% | + |
| Alternatives | ||
| - Real estate (in your own name) | 4-30% | +++ |
| - Real estate (via crowdfunding) | 4-6% | + |
| - Real estate (via funds) | 5-8% | + |
| - Gold and other precious metals | n/a | +++ |
| - P2P loans | 5-14% | +++ |
| - Cryptocurrencies | n/a | +++ |
“A ‘+’ sign means ‘15 minutes / quarter’. And when I put a ‘+++’ sign, it means several hours a week.” specifies William.
The joy disappears in one look from Olivia’s eyes. “Ah. So that brings me back to where I started with your second table. I really don’t want to spend hours a week on it. I thought the worst thing I could do is go into crowdfunding real estate but it just doesn’t seem that interesting. Because if I understand correctly, I have to take either real estate through a fund, or bonds, or shares. How do I choose?”
“If you actually dissect each option to understand what it’s used for in a portfolio, it clarifies a lot of things.” William answers.
He continues: “To make it short because I have to leave for work in five minutes. Stocks are used to increasing your wealth and protect you from inflation. The idea is, if you have 2-3% inflation, you’d rather be invested in stocks with a 5-8% return to make your money grow than see your cash depreciate in the bank in a savings account with its ridiculous rate…”
William sees that Olivia is blushing after his last sentence, but decides to ignore it and goes on:
“As far as bonds go, it’s called a ‘fixed income’ investment because it’s nothing more than a loan you make to countries or big companies. And they pay you back regularly with interest. In addition, while stocks protect your cash from inflation, bonds protect you from deflation because you are always paid back the same amount with interest, even if the price of everything you buy goes down.”
“Just to be sure, we agree that inflation is when your CHF allow you to buy less today than yesterday because prices have gone up. And deflation is when my purchasing power goes up because prices go down like they did during the last recession. Is that right?”
“Correct.” confirms William. “And real estate, on the other hand, helps you fight inflation, and most importantly, it diversifies you away from the stock market. Afterward, you have to take it with a pinch because when you buy stock funds you also own real estate through the companies in which you invest, up to about 3-5%. And according to some studies, the risk of exposure to the real estate sector is not rewarded enough by funds to make it worthwhile.”
And then I still wouldn’t take a little bit of gold? asks Olivia.
Forget about it! I thought this could be as good a refuge as the average investor not so long ago. But then I learned, through some serious economic papers, that yes, it can protect your money, but if you think you’re gonna live 2'000 years… Otherwise, it’s not worth it." William responds tit for tat.
“Okay, so let’s go with stocks, bonds, and maybe real estate. All through funds like you wrote. That seems to be the best fit for me. So what’s the procedure now for picking out what I need?” Olivia gets impatient.
“Wait, don’t go so fast, you sound like me when I started!” William replies. “Let’s finish your IPS first to make sure you’re confident with every point. Let me summarize by filling in some of the blanks, and you tell me if we’re aligned.”
William takes a new page from his Moleskine and sums it up:
| Investor Policy Statement | Olivia (second draft) |
|---|---|
| Assets | - CHF 257'000 on SBU savings account at 0.2% - CHF 78'000 on pillar 3a |
| Debts | Car loan with CHF 9'300 still to be repaid |
| Why do I want to invest? | Switch to 70% for my 45 years old (for my personal projects and to have time for me) |
| Risk profile | 8/10 (1 = unimaginable to lose would only be CHF 1, and 10 = I can survive stock market lows of -50% of the initial value of my portfolio) |
| Asset allocation | Stocks and bonds, and possibly real estate (% still to be defined) |
| Alternatives | Maybe keep 1% margin to be able to “play” with e.g. P2P loans |
| Monitoring & control | - Revise your allocation every quarter - Do not stress to the nearest %, these are estimates - Compare my portfolio to a similar index to see how it performs (for example the SMI if you choose a fund that replicates it) |
| Investment philosophy | Still to be defined |
What do you say? he asks Olivia.
“And just to be clear, an 8/10 risk profile is what I experienced during the last stock market crisis. Basically, my portfolio went from a net worth of CHF 158'500 to CHF 103'000. And this in less than three weeks! That’s almost -35%!”
“Oh gosh for the -35%. No, but it’s okay, it seems good. Ten years ago I wouldn’t have been capable of such self-control but today I am. Anyway, I’m starting to see things more clearly. But what’s all this about investment philosophy?”
“I’m glad you ask me!” replies William.
He goes on: “When it comes to investing, there are some basic precepts for an ‘intelligent’ Swiss investor to know. It took me a long time to learn them, but if I can help you move faster, it can only benefit you on your new path as an investor.”
“Cool, thank you William. But what am I supposed to do now? Go back to the University in philosophy class?!” she jokes.
William is paying the invoice, explaining to her: “Read some annual letters from Warren Buffet. Start with the ones from 1996 and 2008 if I remember correctly, there are some nuggets in them. And also, google ‘interview Jack Bogle’, it’s another wise man of finance to know. Get back in touch with me when you’ve had a chance to analyze all this, and we’ll eat together to debrief.”
- Knowing why you want to invest is the basis
- Defining your level of risk is the second most important thing
- Because your worst enemy in investing is yourself
- There are conventional and alternative investments
- Each type of investment has its own returns and risks, as well as an associated workload
- An Investment Policy Statement (aka IPS) allows you to summarize your entire strategy on a single A4 page
Next step
In the next chapter, Olivia will learn the key principles of a Mustachian Swiss investor. This will enable her to finalize her IPS in order to kickstart investing in an informed manner.