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Achieving a return despite low interest rates and a limited risk budget?

Reading time 5 minutes

The short answer is: Yes, it is possible - with a risk-optimized portfolio. Investment risks are carefully selected and matched. Equities deliver the returns, while first-class bonds stabilize. You achieve your individual investment goal with an investment strategy tailored to you - and a risk-optimized selection of individual stocks and bonds.

If you entrust your suitcase to a safe deposit box, you pay a fee for its safekeeping. That is normal. Anyone who wants to invest part of their money at low risk has been confronted with negative interest rates ever since the SNB lowered the policy rate below zero.  Even after six years of low interest rates, an improvement is not to be expected. More and more banks are lowering the exemption threshold without negative interest rates. What to do? In most cases, the following applies: The risk budget is limited and should not be exceeded; instead, it should be allocated optimally.

First-class bonds form the foundation

Security not only costs money, it also has value. Thanks to low fluctuation risk, bonds have an important function as a risk stabilizer in a portfolio. Moreover, since first-class government bonds have a low correlation to equities, these investments diversify the overall risk. They form the robust foundation and prevent the portfolio from wavering too much in the event of market turbulence.

Shares deliver the returns

Shares provide capital growth, i.e. the long-term return. The historical risk premium is around 4%. It is worthwhile to select the individual stocks in a way that they provide the best possible stability to the portfolio. This is the goal of minimum risk optimization, which reduces the fluctuation risk of a global equity portfolio by about 30% (compared to the market index).  A risk-optimized portfolio with minimum fluctuation risk will grow stronger in the long term as it is more resistant to market turbulences and crises. 

Risk-optimized portfolios win over the long term

How much should or must capital grow? The first important step is to define one's investment objective. The smaller the risk budget (or the risk appetite), the stronger must be the foundation on which the equity portion is built. The advantage of OLZ Risk Optimization is that investors can build on equities even with a small risk budget. Risk optimization reduces equity risk and therefore enables a higher equity quota: e.g. investment strategies for pension funds with 40% instead of an average of 30% equities - or for private clients with a balanced risk profile with 60% instead of an average of 40-50% equities. The higher equity quota means a higher return potential at the same level of risk.

Time for adjustments 

After five years of strongly positive markets - supported and driven by expansionary monetary and fiscal policies - many portfolios have skyrocketed. Less clear is how safe they still are and what investment risks have been built up. It is a good time for a systematic review: We can help you examine your individual investment objectives and adjust your investment risks and strategy accordingly, as the next market turbulences are sure to come.

OLZ Partner Michael Frei

Michael Frei, CFA

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