Borrowing at 1.25% to Fund a Swiss Investment Account

(At least, judging by the number of people who took the time to respond.)

Among those responses, a fair number of people had trouble believing it was possible to get rates as low as 1.25%.

Especially given they are paying 4%, 5%, or even more when borrowing from their US brokers.

I understand the skepticism.

And it’s why I decided to pen something a little extra this week; to explain an important concept when it comes to international portfolios.

As you know, many of our clients ask for our help in diversifying their assets outside of the country.

That often also means diversifying out of the US dollar into assets denominated in other currencies like the Swiss Franc, the Euro, the Singapore Dollar or the British Pound, among others.

But having all sorts of currencies in one portfolio presents a bit of a practical problem:

How do you keep track of performance when some investments are in currency A, some in currency B, and so on?

The answer is that most banks and asset managers choose a reference currency – the currency used to keep score of how well things are doing.

For American clients, that’s often the US Dollar. Doesn’t have to be, but often is.

The underlying investments may be held in three or four different currencies, but performance is translated back into dollars so the client can better understand the portfolio and how it’s working.

For the same reason, I used the greenback as the reference currency in my example – to make it easier to show how leverage can be used in this situation.

So with that bit of background, here’s where the 1.25% came from.

The proposed loan was not made in USD; it was borrowed in Swiss Francs.

At the moment, it’s possible to borrow that cheaply in francs. And while borrowing in another currency does introduce something called currency risk (a topic I’ll have to cover at some point down the line), for Americans looking to build an international portfolio that includes Swiss Franc denominated assets, it can make sense.

Hopefully that clears it up.

If you think something like leverage makes sense for you, feel free to get in touch.