The best time to build wealth is now. This is true whether you’re peaking in your career and salary or approaching retirement. Swiss investors commonly opt for real estate and the stock market to build and multiply their wealth. However, the question remains: which is the best bet in the current environment?

While both real estate and stocks offer competitive risk-adjusted returns, they possess distinct return profiles and levels of volatility. Besides, they also tend to perform differently during periods of inflation. So, which option should you choose?

Performance Comparison

As can be seen from the chart below, Swiss real estate has performed remarkably over the past 25 years.

Housing Index in Switzerland from 2003 to 2023
Source: Trading Economics

According to the Swiss National Bank (SNB), Swiss real estate wealth has more than doubled between 2000 and 2020, raising from CHF 942 billion to CHF 2.212 trillion. This significant growth can be attributed to several factors, including limited housing supply, increased institutional investment in real estate, an extended period of negative interest rates, and a rise in mortgage loans.

Moreover, based on the latest EY survey, a striking 92% of respondents still consider Switzerland to be an attractive or very attractive location for real estate investments in 2023.

As illustrated in the table below*, our research here at Le Bijou evidences that the Swiss real estate market has been outperforming the Swiss stock market for the last 20 years. In fact, it has also outperformed US real estate by a factor of 1.25. On the other hand, the S&P 500 did outperform Swiss real estate, but it was way more volatile – more on that later.

Comparison of US and Swiss stock vs. real estate market returns and volatility*

* The calculations were made using SXI Real Estate® Funds Broad TR (SWIIT) and Dow Jones U.S. Real Estate Index (DJUSRE) for the Swiss and US real estate markets, respectively. The Swiss Stock Market Index (SSMI) and S&P 500 (SPY) were used to measure the performance of both the Swiss and US stock markets.

Another way of comparing the performance of these indices is to consider a hypothetical investment of CHF 1'000 in each index 20 years ago and examine the outcomes. According to our calculations, if you had invested this amount in January 2003 in each of these indices and reinvested the returns using the power of compound interest, the results would have varied.

A CHF 1'000 investment in the S&P 500 would have generated close to CHF 5’000, whereas Swiss real estate would have returned CHF 2'800, which is 1.7 times less. Swiss stocks would have generated CHF 2’600, and US real estate would have yielded CHF 2’200, which is respectively 1.9 and 2.2 times less.

The returns of a hypothetical investment of CHF 1'000 in each of 4 indices
from Jan. 1, 2003 to Jan. 1, 2023**

** The calculations were made using SXI Real Estate® Funds Broad TR (SWIIT) and Dow Jones U.S. Real Estate Index (DJUSRE) for the Swiss and US real estate markets, respectively. The Swiss Stock Market Index (SSMI) and S&P 500 (SPY) were used to measure the performance of both the Swiss and US stock markets.

Volatility Comparison

Upon reviewing the outcomes presented in the table above, a notable observation is the remarkably low volatility exhibited by Swiss real estate. With a standard deviation measure of merely 1.88%, Swiss real estate was almost half as volatile compared to the Swiss Stock Market Index, and less than half the volatility observed in the S&P 500. It also exhibited significantly lower volatility compared to US real estate, as can be observed in the chart below.

Volatility of quarter returns in Swiss and US real estate indices over the past 20 years

Real estate tends to exhibit less volatility than stocks due to the fact that the primary component of a stock's total return is capital appreciation, which is inherently more volatile. This relationship is illustrated by the table below, sourced from the San Francisco Fed, which uses Swiss data from 1902 to 2015.

Arithmetic average of annual nominal returns with standard deviation in parentheses
from 1902 to 2015
Source: San Francisco Fed

Upon examining the table, it becomes apparent that not only is capital appreciation more prone to volatility compared to rent or dividends, but the capital appreciation of Swiss stocks demonstrates significantly higher volatility than that of Swiss property.

This observation aligns with our anecdotal understanding. We have all witnessed significant fluctuations in the stock market on a daily and yearly basis, along with periodic booms and busts. During a stock bear market, which occurs about every 3.6 years, the stock market experiences an average decline of 20% or more.

In contrast, while Swiss real estate experienced some slumps in the mid-1970s and 1990s, it has generally demonstrated a consistent upward trajectory over time.

Conclusion

At Le Bijou we’re definitely not against stocks. Indeed, we know for a fact that a well-diversified portfolio should include a mix of real estate and stocks. That said, it’s important to consider the allocation and weight given to each asset class, while also keeping in mind your short-term liquidity needs. Given the inherent volatility of stocks, most investors tend to shift a larger portion of their portfolio towards less volatile assets as they approach retirement. Nobody wants their dream retirement suddenly jeopardized by a nasty bear market.

Therefore, at Le Bijou, we believe that despite the varying performance of stocks and real estate, as well as the occasional drops that may happen during turbulent years, both of these assets play a vital role in constructing a well-diversified investment portfolio.

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