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%
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 missive, I want to briefly talk about something that’s becoming more interesting for certain clients in 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 Switzerland, or an SBLOC in the US), 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.
I’ve set the expected annual return at 4%, although to be clear, this is for our example only; I’m not making any representations about what a Swiss portfolio will return.
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.
So with that said, could something like this be right for you? It’s a good question and one worth exploring with a licensed advisor.
Thankfully, borrowing rates currently unavailable in the US may make the decision a little 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.
About the Author
Brandon Roe
CEO & Head of Planning Services Brandon 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 joined The Nestmann Group in 2013. He now takes a leading role in both client planning work as well as general business operations.
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