Switzerland’s stable economy, favourable tax policies, and political stability make it an attractive destination for expatriates. While corporate shares can be a significant part of long-term investment strategies, relying solely on them can pose risks. Here’s why expat investors in Switzerland should consider diversifying their portfolios.
Market Volatility
Corporate shares can be highly volatile, influenced by economic downturns, geopolitical tensions, and interest rate changes. Events like the 2008 financial crisis and the COVID-19 pandemic have shown how quickly stock markets can plummet. To mitigate such risks, consider diversifying your portfolio to include a range of other asset classes, like property or fixed interest.
Inheritance Tax Considerations for Non-Resident Aliens with U.S.-Based Shares
Non-resident aliens holding U.S.-based shares are subject to U.S. estate tax on these assets, with significantly lower exemption thresholds compared to U.S. citizens and residents. The current exemption for non-resident aliens is only $60,000, far less than the $12.92 million exemption for U.S. citizens. This means that if an expat investor were to pass away holding a significant amount of U.S.-based shares, their heirs could face a substantial estate tax liability, potentially diminishing the value of the inheritance. To mitigate this risk, expats should consider estate planning strategies such as diversifying into non-U.S. assets, using life insurance to cover potential tax liabilities, or setting up trusts to manage and protect their investments from high estate taxes. This further underscores the importance of a diversified investment approach that considers not just market risks but also tax implications.
Currency Risk
Expat investors often deal with multiple currencies. Investing solely in foreign currency-denominated corporate shares can expose investors to currency risk, where exchange rate fluctuations erode returns when converting profits back to the home currency. Diversifying with other currency-denominated assets, such as the Swiss Franc, or those with currency-hedging strategies can help protect against this risk.
Interest Rate Changes
Interest rate fluctuations impact corporate share values. Rising interest rates increase borrowing costs, potentially reducing corporate profits and share prices. In contrast, bonds and other fixed-income investments often perform better in such environments. A diversified portfolio that includes bonds offers stability and income when interest rates rise.
Sector-Specific Risks
Heavy reliance on corporate shares, especially within one sector, exposes investors to sector-specific risks. Regulatory changes, technological disruptions, and shifts in consumer preferences can significantly impact certain sectors. Diversifying across various sectors helps spread risk and reduce dependency on any single industry’s performance.
Economic Cycles
Corporate shares are closely tied to economic cycles, performing well during expansions and poorly during recessions. Since the timing and duration of economic cycles are unpredictable, diversifying into assets with different performance drivers—such as commodities, real estate, and alternative investments—provides balance and stability.
Behavioural Risks
Investors often fall prey to biases like overconfidence, herd behaviour, and loss aversion, leading to suboptimal decisions. Over-reliance on corporate shares can exacerbate these biases, resulting in excessive trading, panic selling during downturns, and chasing high-performing stocks. Diversification promotes a disciplined investment approach, mitigating emotional decision-making.
Access to Broader Opportunities
Switzerland offers expat investors a variety of investment opportunities beyond corporate shares, including private equity, hedge funds, real estate, and precious metals. Leveraging these options enhances portfolio diversification, providing exposure to alternative return sources and reducing reliance on public equity markets.
Conclusion
For expat investors in Switzerland, diversifying beyond corporate shares is essential for a resilient and balanced portfolio. While corporate shares are valuable, relying solely on them exposes investors to risks like market volatility, currency fluctuations, inflation, and sector-specific downturns. A diversified portfolio with bonds, real estate, and alternative investments ensures more stable returns, inflation protection, and reduced impact from economic cycles. Diversification not only enhances potential returns but also provides a robust defence against financial market uncertainties, helping expat investors secure their financial future. If you’d like to review your financial position, please don’t hesitate to get in touch on taylor.condon@skyboundwealth.com