Investing in a low interest rate environment

Assets held in a savings accounts today earn little to no interest. If you want to build up your wealth progressively, it is worth looking into other options. We'll show you how the low interest rate environment came about, what it means for investing, and what room you have for maneuver.

The negative interest rates that the Swiss National Bank (SNB) introduced on current accounts in this country at the start of 2015 and that have been with us ever since are a reaction to several global economic slumps since the turn of the millennium. Central banks use such measures to strengthen the economy. Saving and holding large amounts of cash is deliberately made less attractive so that more money is spent, thus boosting the economy. The sovereign debt crisis in the euro zone has also forced many central banks to cut key interest rates and even to introduce negative interest rates. Incidentally, interest rates were already falling worldwide before the economic crises, partly due to low inflation and the global trend towards an increasingly older population.

What may be good for the growth of the economy and for employment comes at a price: If low to negative interest rates are compounded by inflation, savings deposits lose value in real terms, as the net monetary value and purchasing power decline more than the deposits grow.

This affects institutional investors and ultimately the entire working population. After all, pension funds are among the most important investors. The interest rate situation has led all institutional investors to hunt for yield and many pension funds to reduce the amount of money they spend, i.e., through lower pensions for the newly retired.

When it comes to pensions, women are usually more affected by this development than men. This may be because their income is lower, they work fewer hours, or because a break in employment has already reduced their maximum pension in old age. In addition, low interest rates combined with an aging population are causing pension funds to lower the conversion rates used to calculate pensions. This means that employees can expect a lower monthly pension after retirement.

Conventional saving is thus no longer an option. Investing is the order of the day. Alternatives to savings accounts certainly exist and these offer opportunities for real growth even in a low interest rate environment, as they benefit from economic growth, which in turn is boosted by low interest rates. The most important options for you at a glance:

Shares with two opportunities to boost potential returns

With equities, you acquire shares in a listed company. These securities can contribute to the growth of your assets in two ways: Dividends are often paid out to shareholders in good financial years. And expectations of positive business development lead to a higher share value. You then realize a profit when you sell the stocks.

On the other hand, selling stocks after negative market developments results in a loss. As is the case with most investment opportunities, you need a sufficiently long time horizon, and should both start and wind down your investments gradually.

Bonds with a lower yield and lower risk

Bonds are a form of loan to companies or government institutions. They have a defined term, after which you get back the amount you paid in. The annual interest rate is fixed for the entire term. Bonds offer higher potential returns than savings accounts, and a lower investment risk than stocks. The risks specific to this asset class are the risk of default and the risk of loss in value due to rising interest rates. In the case of foreign bonds as well as shares, currency risk is an additional factor: the currency in which the security was purchased may lose value against the Swiss franc.

Combinations of funds and mandates

In contrast to investing in only one or a few companies, a broadly diversified portfolio can reduce risks and increase opportunities. This does not require more money and is easy to do via investment funds or with an asset management mandate.

With funds, you invest your money either in specific types of shares, such as shares in companies, or in a combination of different investments. In doing so, you select one or more existing funds that match your investment strategy and risk profile.

With an asset management mandate, such as UBS Manage, you delegate asset management to the bank's experts, but set the guidelines for the composition of your portfolio yourself.

The risk of losses also exists with funds and mandates, but is more widely spread and therefore potentially lower. Additionally, you also have to consider the respective fees incurred.

Own home or real estate fund

Low mortgage rates usually make home ownership more attractive than renting. A well-chosen and well-maintained property will generally go up in value and is often cheaper for you in the long run than a rental apartment. But like any investment, home ownership carries specific risks that you need to know, such as brokerage and maintenance costs and loss of value if the purchase price is too high.

Via funds, you can also invest in a “basket” of different properties and benefit from positive developments on this market with low capital investment compared to buying a house.