Scenario 1
Without Leverage
- Initial Capital
- $2,000,000
- Borrowed Amount
- $0
- Total Portfolio Size
- $2,000,000
- Investment Return (at 4%)
- $80,000
- Loan Interest Cost
- $0
- Net Profit
- $80,000
Return on Your Capital 4.0%
Investment
How to Use Low-Cost Leverage to Boost Swiss Investment Returns
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When it comes to investing internationally, our clients broadly fall into two groups…
Group #1: They are wealth protection focused and realize that diversification is the right strategy for them. They tend to be risk averse and are focused on preserving purchasing power against inflation.
Group #2: They are looking outside the US for stronger gains. Certain asset classes in the US market are looking mighty expensive. Overseas opportunities may offer a better return at lower risk.
Some years ago, most of our active cases fit into the first group. More recently, though, we’ve seen a surge in the second group.
But in today’s piece, I want to briefly talk about something that’s becoming relevant for both groups – the use of leverage in Swiss investment accounts.
It’s made possible by the simple fact that borrowing in Switzerland is very cheap. In fact, I was inspired to write this piece after a Swiss asset manager reminded me that a loan based on an equity portfolio (called a “Lombard loan” in this context), can cost as little as 1.25%.
Here’s a simplified version of how this can work in practice.
Let’s say someone is looking to invest USD 2,000,000. Although some banks will lend up to 90% of a portfolio, let’s work with a much more conservative 60%. The money will cost 1.25%, which is based on a real-life quote from one of the banks we work with.
Scenario 2
With Leverage (60% of capital)
- Initial Capital
- $2,000,000
- Borrowed Amount (60% LTV)
- $1,200,000
- Total Portfolio Size
- $3,200,000
- Investment Return (at 4%)
- $128,000
- Loan Interest Cost (1.25%)
- $15,000
- Net Profit
- $113,000
Return on Your Capital 5.65%
Figures are a simplified, hypothetical illustration and do not reflect any specific investment, fees, taxes, or guaranteed results. Leverage increases both potential gains and potential losses. Before acting, discuss your situation with a qualified advisor.
In other words, the use of leverage increases the return on your capital by 41.25% (moving from 4.00% to 5.65%).
The reason is simple: with leverage, you are able to control a $3.2M portfolio; without it, your portfolio size is $2M.
Your amount of capital at work doesn’t change – it’s always $2M. Rather, you get to use the bank’s money for which you pay a fee – through interest – an expense that is often tax-deductible against investment income.
Of course, as with almost everything, there are pros and cons. In this case, one of those cons is that borrowing to invest exposes you to leverage risk.
If the portfolio value drops significantly, you may have to either come up with a fresh source of funds to meet the bank’s requirements… or you might have to sell investments at a loss.
Even more important, leverage works both ways. If the portfolio doesn’t perform or even goes negative in a given year, that interest still needs to be paid.
With all that said, in practice, we’ve yet to see that happen in such a conservative scenario. However, a prudent investor must weigh this risk as part of the overall strategy.
Thankfully, rates currently unavailable here in the US make that a little bit easier.
We have helped American clients invest in Switzerland going all the way back to the 90s… that’s a lot of experience. If you’re interested in seeing whether a Swiss asset management account is right for you, feel free to reach out.
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About The Author
Brandon Roe started living, working, and investing offshore in 2003. In 2009, he was recruited to build International Man, a community of wealthy investors founded by well-known contrarian investor Doug Casey. He then joined The Nestmann Group under the mentorship of Mark Nestmann, LLM in 2013. It was Mark who taught him wealth protection planning, with a strong focus on tax mitigation and compliance issues. He now works with wealthy Americans who want to reduce their tax burden, protect their wealth, and move themselves and/or their money offshore.
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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