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"More encouragement must be given to personal pension provision"

March 5, 2020

The Swiss generally know more about finance and retirement provision than people in other countries. Nevertheless, the level of knowledge is insufficient. Finance professor Erwin W. Heri, a man of action, works tirelessly to rectify this. He writes books for investors, gives savings tips and produces videos on financial topics, all of which explain complex correlations in a clear and simple way.

The financial world has become faster and more complex. Is this placing excessive demand on society or are we mistaken?

The excessive demand is a consequence of a large part of the population knowing little about retirement provision, investments and finances. Many people lack understanding of economic correlations. The financial world hasn't become any more volatile or complex. The processes underlying the financial market remain unchanged. Only the flood of information has increased considerably compared to the past. Stories get written about every little thing – we are bombarded with financial news across various channels. Much of this can be discarded.

You've dedicated yourself to educating people about financial issues. Why is that and what is your teaching approach?

My aim is to push people toward personal pension provision to help them be less reliant on the state. If you want to do it right, you need a basic knowledge of finance and retirement provision. I am convinced that the facts of the financial and economic world can be explained in a simple and understandable way. The question is always how to reach people. In particular, I want to get young people interested in the topic, as they still have a long investment horizon and financial knowledge and savings tips are particularly important. I have always relished the challenge of breaking down complex things in such a way that they can be understood by everyone. On our free online platform – at www.fintool.ch – we present short explanatory videos, which we assemble into libraries in the premium area. This results in entire series and seasons – a kind of "Netflix for investors."

I advise everyone to save using equities: invest in equity funds or even in individual securities, but do this with a long-term time horizon of at least ten years.

The Swiss learn how to save from an early age, but this is no longer sufficient today. The consumer world is a state of exultation and many people have unrealistic expectations about pensions and their benefits. Therefore, private pensions are becoming increasingly important. What is your advice to the small saver?

I advise everyone to save using equities: invest in equity funds or even in individual securities, but do this with a long-term time horizon of at least ten years. The formula is simple: broadly diversify across low-cost products and sit back. Probably the greatest challenge is to mentally withstand the volatility on the markets and not to lose your nerve and fall for speculation.

What does broad diversification mean? Is gold, for example, a fixed component of a diversified portfolio for you?

Broad diversification means investing in shares, bonds – by means of index funds or ETFs (editor's note: Exchange Traded Funds) – and real estate. When doing so, the distribution is based on the investment horizon and the ability to withstand short-term psychological fluctuations. When someone mentions gold, I often joke that: "gold belongs on my wife's neck, but not in my portfolio." But seriously, there's a lot of hype around gold. For me personally, gold is more of a thing of speculation in the long term. As with other assets, anything that does not produce any current income rather belongs to the realm of speculation.

I focus strongly on the Swiss market, because I – unlike many of my colleagues – believe that the currency risk is too great to go "too international."

Is the diversification within the Swiss market sufficient or do you recommend investing globally?

I focus strongly on the Swiss market, because I – unlike many of my colleagues – believe that the currency risk is too great to go "too international." Especially in our case, the Swiss franc is constantly appreciating, and hedging this risk is expensive. However, I have made one exception: I invest in a broadly diversified emerging market fund. I believe that the emerging markets have great potential.

And how do you feel about saving in the 3rd pillar?

I'm a huge fan of this, but even here it's clear: the higher the equity component, the better the long-term return. In Switzerland, the 3rd pillar should be promoted more strongly by allowing higher contributions and relaxing the restrictions on 3a products. (Editor's note: The investment of funds in pillar 3a is subject to legal restrictions.) These restrictions are based on a fundamentally incorrect risk concept. The start-up VIAC is showing the way: it allows you to invest almost 100 percent of your contributions in equities. Banks are increasingly catching up with their pillar 3a offers.

Should you buy into your own pension fund?

In principle, I think Swiss pension funds are in good condition. Buying into the pension fund is certainly also an interesting option for income and tax considerations. However, it depends on the financial health of the pension fund and how it deals with buy-ins in the event of death, for example. Buy-ins are also attractive if the investment strategy is determined by the investor themselves and the highest possible proportion of equities can be chosen.

Do you still invest your personal money in cash and shares? Or have you changed your strategy due to the current interest rate environment?

My portfolio includes stocks, real estate and cash. I see no reason to make adjustments. Negative interest rates are no problem for me personally at the moment. However, if the exemption limits were to be lowered, I would distribute my cash across different banks. And if this should not suffice, I would eventually even keep the money in a safe.

You reached the AHV retirement age last year. What are your personal plans in terms of saving and continuing to work?

When I turned 60, I created a ten-year budget. Now I know exactly how much I need per year. I extrapolated this amount to ten years and put cash aside for this. I invested the remaining financial resources in equities. I worked in large companies for years. If I was still doing this, I would probably have retired by now. But as a passionate entrepreneur, I can't imagine stopping working for a long time – I'll keep going as long as I enjoy it.

The most important tips

Get an overview of all your obligations and upcoming expenses. Plan your budget actively!
Put aside enough in fixed-interest investments (cash and bonds) to cover your obligations – that's what I call saving – and invest the remaining (long-term) unrestricted assets in equities (funds and individual securities) – that's what I call investing.
Diversify widely and invest for the long term – don't look for short-term profit.
Be disciplined, pay particular attention to the cost of investment and keep your nerve.
Only buy what you understand. Invest in your knowledge and above all trust yourself.

Dr. Erwin W. Heri

Dr. Erwin W. Heri held management positions at various financial service providers (banks and insurance companies) over many years. At the same time he was, and still is, Professor of Financial Theory at the University of Basel. He has written numerous books and articles on financial and investment issues. As founding partner of the financial education platform www.fintool.ch, Erwin W. Heri wants to promote financial education and enthuse people about private pensions.