A simple calculation

Dear Ladies and Gentlemen

If you belong to the people who pay their bills primarily in Swiss Francs and/or Euros you belong to a rather large cohort of a few hundred million people living most probably somewhere on the European continent.

Today, I would like to show you with a simple calculation why I prefer equities over bonds.

If you keep your money as liquid and as safe as possible in a bank savings-account (hopefully with a bank offering some sort of government guarantee or at least a bank not getting involved in investment banking and/or corporate debt) or you have it invested in Swiss and/or German government bonds, you, Ladies and Gentlemen, will most probably receive 0% interest. Maybe you will even have to pay a small interest for depositing your money at the bank or for investing it in government bonds of short maturity and in any case, you will have to pay some small banking fees here and there on a regular basis.

This means, in the case of you wanting to invest your money in a Swiss and/or German government bond for 10 years because of its relatively low volatility, you will have to accept 0% interest or in other words no income whatsoever from such an investment and even worse, you will actually lose small bits and pieces of your money (fees) over the entire 10-year period. This truly means that at the end of a 10-year period you have less money than when you started and in real money terms, which means adjusted to purchasing power, you may have lost 10% – 20% due to inflation over that period.

To me this seems not a very attractive investment.

On the other hand, if you invest your money over 10 years in some solid listed company that pays regular annual dividends of 4.5%, thanks to the effect of compounding you will receive some 50% return over the same period. True, you will most probably have to accept higher volatility, but doesn’t the proposed return deliver an incentive high enough to accept such volatility?

Ladies and Gentlemen, to me it does!

Now, I know this is a very simplified calculation but both examples are real and possible in today’s market environment. Solid company delivering 4.5% dividend yield on one side and 0% 10-year government bond on the other side.

Think about it!

As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG