Going beyond the 3 Pillars
Pension funds are intended to be conservative in their investment outlook. As a result, relying exclusively on the 3 Pillars for retirement planning may leave you disappointed. For this reason, many Swiss residents top up their retirement savings with additional investments in more lucrative asset classes, such as equity, real estate, and private equity.
For instance, real estate investments offer a unique set of its own 3 pillars, including diversification, stable income, and potential appreciation in value. Our comprehensive analysis indicates that adding even a small amount of real estate to your portfolio can significantly increase return while reducing volatility.
As a result, we discovered that each 10% decrease in stocks and bonds in a portfolio, combined with an equal rise in real estate allocation, can result in a considerable improvement in portfolio returns and a decrease in volatility. Our research has found two highly effective diversification strategies, namely the well-diversified 40/40/20 and 30/30/40 allocations of stocks, bonds, and real estate. Both strategies have produced remarkable outcomes. Notably, when compared to the traditional 60/40 portfolio, these strategies showed an impressive 142% decrease in volatility over the past ten years. In addition, the latter strategy, with a higher allocation to real estate (40% vs. 20%), has produced slightly higher returns.*
Real estate risk/return profile based on the quarterly compound return for the past 10 years
* The calculations were made using the SIX – Swiss Market Index (SMI) as the Swiss stock market, SXI Real Estate® Fnds Broad TR (SWIIT) as the Swiss real estate market, and the SBI® AAA-BBB Total Return (SBR14T) as the Swiss bond market.
Furthermore, while there is no guarantee that home prices will always rise, history has shown that real estate values tend to increase in value over time. Additionally, rental income from real estate investments can offer a consistent supply of cash flow during retirement. This combination of stable income and value appreciation provides an effective hedge against inflation, further enhancing the attractiveness of real estate investment as a feasible option for retirement planning.