November 2018 - Schweizer Finanzblog

Your portfolio is set up, your asset allocation is fixed – and then the markets do whatever they like. Prices rise, fall, shift. Suddenly your portfolio no longer matches your risk profile. Does it have to be that way? Not necessarily. In this fifth lesson of our financial guide, you’ll learn how to get your wealth back in balance with little effort – and when you can skip it altogether.

In a nutshell

Rebalancing means bringing your portfolio back to your target weighting after market swings – no more, no less.
If you hold a single global ETF and a fixed franc amount as your low-risk portion, you don’t need rebalancing.
It becomes relevant when the low-risk portion is defined as a percentage, or when different asset classes in your portfolio perform differently.
Checking once or twice a year is enough – readjusting only pays off from a deviation of 5 percentage points, ideally via new contributions rather than sales.
The so-called rebalancing bonus can deliver a small extra return, but it’s a welcome side effect – the real argument remains risk control.

What is rebalancing – and do you even need it?

In the last lesson, you learned how to split your wealth into a high-risk and a low-risk portion. That lays the foundation of your portfolio. But the markets don’t stick to your plan: prices rise and fall, and the weightings shift with them. Rebalancing means restoring your original allocation.

Now the stock markets drop by 30%. Your high-risk portion falls from CHF 75,000 to CHF 52,500, while the CHF 25,000 in your savings account stays the same. Your total assets now come to CHF 77,500 – and the low-risk share is suddenly 32% instead of 25%. Your portfolio is much more conservative than you planned.

To get back to 75/25, you’d have to shift around CHF 5,600 from your savings account into the high-risk portion – right after a crash, of all times, when your gut is telling you not to. That’s exactly what rebalancing is: a sober, rule-based correction that brings your portfolio back in line with your risk profile.

When you don’t need rebalancing

But before you set up a rebalancing calendar: not every portfolio needs this correction. If you hold a single global ETF and define the low-risk portion as a fixed franc amount – e.g. CHF 25,000 in a savings account, not counting your emergency fund – you simply have nothing to rebalance. The ETF is continuously adjusted internally by the provider. And a fixed amount doesn’t shift, no matter what the markets do. In the same crash, your CHF 25,000 stays where it is. Your high-risk portion has shrunk, but your risk profile hasn’t changed – and that’s the logic behind the fixed franc amount. No action needed.

So rebalancing becomes relevant when the low-risk portion is defined as a percentage (as in the example above) or when the portfolio consists of several ETFs, for example in a core-satellite approach. In both cases, the weightings drift apart over time – and you have to actively readjust. Let’s now look at how to do that pragmatically and cheaply.

Rebalancing in practice: how to bring your portfolio into balance

When to rebalance?

In theory, there are two approaches: calendar-based and threshold-based. With the calendar-based approach, you review your portfolio at fixed intervals – say, once a year. With the threshold-based approach, you only act when a deviation exceeds a certain value, e.g. 5 percentage points.

In practice, you can combine both: you check your portfolio once or twice a year – and only step in if the deviation is large enough. That’s all it takes. Rebalancing isn’t a day-to-day job, but an occasional fine-tuning.

Three ways to bring your portfolio back into balance

There are basically three methods for bringing your portfolio back to its target weighting:

No need for perfection

If you balance every position down to the last franc, you’ll pay unnecessarily high transaction fees – especially with smaller amounts. Focus on the biggest deviations. Once the overall split between the high-risk and low-risk portions is right again, you can safely ignore smaller imbalances within the high-risk portion. You’ll simply realign them with your next savings contribution. As a rule of thumb: if a position deviates from its target weighting by more than 5 percentage points, action is called for. Below that, the effort usually isn’t worth it.

Good to know: rebalancing in the drawdown phase, Pillar 3 and taxes

Drawdown phase

Everything described so far relates to the accumulation phase – the period in which you build up your wealth. But even if you’re drawing on your wealth in retirement, you can rebalance. The principle is simply reversed: instead of steering new contributions, you first sell positions that are above their target weighting. That way, each withdrawal brings your portfolio closer to its target weighting – without additional transactions.

Pillar 3

If you hold part of your wealth in Pillar 3: here, rebalancing is usually automated. You specify your risk profile once, and the provider takes care of the readjusting for you – often already included in the management fees. You still have to look after rebalancing your non-pension assets yourself, though.

Taxes

For private investors in Switzerland, rebalancing generally has no tax consequences. Capital gains on private assets are tax-free. The only exception: if you trade so frequently and on such a large scale that the tax authorities suspect professional securities trading, your gains are taxed as income. With one or two rebalancing transactions a year, that’s not an issue.

The rebalancing bonus: a welcome side effect

The main goal of rebalancing is clear: your portfolio should match your risk profile again. But there’s a pleasant side effect known in the specialist literature as the rebalancing bonus.

The principle behind it is simple: when rebalancing, you systematically buy more of the investments that have fallen and trim those that have risen. In other words, you act countercyclically – and it’s precisely this behavior that can generate a small extra return over the long term. Various studies put this effect at around 0.1 to 0.5 percentage points per year.

The honest downside

The rebalancing bonus is not a law of nature. It works best when prices return to their average after swings – the so-called regression to the mean. In phases of long-lasting trends, on the other hand, rebalancing can hold you back because you sell winners too early. None other than Charlie Munger, Warren Buffett’s long-time partner, firmly rejected rebalancing for exactly this reason: anyone who systematically trims their winners slows the growth of their portfolio.

Then there are the transaction costs. At an expensive traditional bank, they quickly eat up the bonus. The rebalancing bonus is therefore only worth it with a low-cost online broker that charges low fees per transaction.

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Conclusion

Rebalancing isn’t a third major investment principle alongside diversification and asset allocation – it’s the maintenance that ensures your portfolio still matches your risk profile after market swings.

If you keep it simple – one global ETF and a fixed franc amount in a savings account – you don’t need to worry about it. For everyone else: check once or twice a year, readjust when deviations are larger, ideally via new contributions rather than sales. There’s no need for perfection – as long as the overall allocation is right, you can safely ignore smaller imbalances.

In Lesson 6, we take a closer look at the investment vehicle that keeps cropping up in this guide: the ETF. What’s behind it – and why do we speak of a revolution in private investing?

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Updates

Disclaimer

Disclaimer: Investing involves the risk of loss. You have to decide for yourself whether or not you want to take on these risks.

Errors excepted: We wrote this article on rebalancing to the best of our knowledge and belief. Our goal is to give you, as a private investor, the most objective and meaningful information possible on all things finance. If we have nevertheless made mistakes, or if important aspects have been forgotten and/or are no longer up to date, we’d be grateful if you let us know.

How much of your money belongs in equities – and how much stays in your bank account? The answer is the most important decision you’ll make when investing. Not picking the right ETF, not the perfect moment to get in – but how you structure your assets. In this fourth lesson of our financial guide, you’ll learn how to determine your personal asset allocation step by step and what role your risk profile, your liquidity reserve and the third pillar play in it.

In a nutshell

Asset allocation – splitting your assets into a high-risk and a low-risk portion – is the most important decision you make when investing.
Before you invest, you need a liquidity reserve of three to six months’ expenses. It sits outside your asset allocation.
Your risk profile – made up of risk tolerance and risk capacity – determines the weighting. Whichever of the two factors is more cautious sets the limits.
In the high-risk portion, broadly diversified equity ETFs form the core. The simplest solution: a single global ETF. If you like, you can add to it using the core-satellite principle.
The low-risk portion – bank deposits and possibly high-quality bonds – brings hardly any return, but provides stability, flexibility and rebalancing ammunition.
Write down your target allocation. It’s your guiding star – and in the next market crash it’s worth more than any hot investment tip.

What is asset allocation?

Behind the term asset allocation lies a simple idea: structuring your assets. In concrete terms, it’s about how you spread your money across different asset classes – how much goes into equities, how much stays in your bank account and how much, if any, you put into real estate or other investments.

If diversification is the blueprint, then asset allocation – in other words, the structure of your assets – is the foundation of your house. It determines how solidly the building stands, not the colour of the walls or the model of the kitchen. Numerous studies confirm exactly this: it isn’t the choice of individual products but the way you split your assets that has the greatest impact on long-term investment success. Your asset allocation is what you align every other investment decision with.

Before we get into the details, it’s worth looking at the big picture. Your assets can be divided into three areas, each with a different job: the liquidity reserve as a safety net, the low-risk portion as an anchor of stability and the high-risk portion as the engine of returns.

The liquidity reserve: your safety net

Every sound financial plan includes a liquidity reserve – an emergency fund of three to six months’ expenses in your bank account. This reserve is there to cushion unforeseen expenses such as job loss, illness or major repairs without you having to touch your investments.

Even though the liquidity reserve also sits in your bank account at low risk, it is not part of your asset allocation. The difference: the low-risk portion of your investments is a deliberate strategic decision within your portfolio. The liquidity reserve, by contrast, is a prerequisite that has to be in place before you even think about investing. It’s reserved for emergencies – and therefore off-limits for investment purposes. Paying off any consumer loans also takes priority – their interest exceeds any realistic investment return.

Only what’s left after your emergency fund and paying off debt is your freely available investment capital. And it’s exactly this capital that you now structure through asset allocation.

Your risk profile determines the split

How you split your freely available assets depends on your individual risk profile – that is, on the interplay between your risk tolerance and your risk capacity, which we covered in detail in Lesson 2.

A quick reminder: risk tolerance describes how much of a price loss you can stomach without lying awake at night or selling in a panic. Risk capacity describes how much loss your wallet can absorb without putting you in financial difficulty – determined by your financial situation and your investment horizon.

Both factors need to be in line. An example: you’re young, earn a good salary and could easily cope with a 50% price loss financially. But at minus 20% you get nervous and sell. In that case it’s not your risk capacity that counts but your risk tolerance – it sets the tighter limit. Conversely, if you see yourself as a risk-taker but want to buy a flat in three years, you should stick to your lower risk capacity. In short: whichever of the two factors is more cautious sets the limits.

From theory to practice: splitting your assets

Based on your risk profile, you divide your freely available investment capital into two parts: a high-risk portion and a low-risk portion. As a rule of thumb: the higher the equity share, the riskier – but also the higher-yielding – your portfolio.

Let’s assume a fictitious investment capital of CHF 100,000 – your emergency fund is already in place. You have a regular income and your running costs under control. Five typical ways to split your assets:

For the aggressive profile, we recommend an investment horizon of at least 10 years because of its high volatility. More conservative models with a low equity share, on the other hand, are also suitable for shorter periods.

The high-risk portion: equities at the core, add-ons as satellites

The high-risk portion is the return engine of your portfolio – and its most important building block is equities.

Risk profile	High-risk*	Low-risk**	Historical return p.a.***	Max. loss***	Min. investment horizon
Defensive	0–20%	80–100%	1–2%	up to –12%	0–2 years
Conservative	20–40%	60–80%	2–3%	up to –23%	3–4 years
Balanced	40–60%	40–60%	3–4%	up to –35%	5–7 years
Dynamic	60–80%	20–40%	4–5%	up to –46%	7–9 years
Aggressive	80–100%	0–20%	5–6%	up to –58%	10+ years

ETFs that track broad market indices across all regions of the world are particularly well suited as investment vehicles. You’ll find out why we consider ETFs especially attractive for investing in Lesson 6.

A global ETF as the foundation

The simplest and at the same time most elegant solution: with a single global ETF – such as the Vanguard FTSE All-World or an MSCI ACWI ETF – you invest in thousands of companies from developed and emerging markets, weighted by market capitalisation. One purchase, global diversification, minimal effort. That’s the core idea of passive investing – and the ideal starting point for most investors.

Targeted add-ons using the core-satellite principle

If you want to go beyond this foundation, you can apply the core-satellite approach from Lesson 3. The core – 70 to 100% of the high-risk portion – remains a broadly diversified equity ETF. If you like, you can fill the rest, up to a maximum of 30%, with targeted add-ons in the satellite:

The low-risk portion: security and availability

The low-risk portion is the anchor of stability in your portfolio – and a sedative for your nerves. When stock markets drop 30% yet again, this is the part that keeps you calm. In concrete terms, it does three jobs:

Bank deposits – in a savings or personal account – are the simplest and most liquid option. You can access them at any time. In Switzerland, deposits of up to CHF 100,000 per person and bank are protected by deposit insurance. The expected return is clear: at best some protection against inflation, but no real growth in wealth. That’s not this portion’s job anyway – it’s meant to give you security and room to act.

High-quality bonds – such as Swiss federal government bonds with a top “AAA” rating – also offer a high level of security. Historically, however, their return in Switzerland has been close to inflation. If you’re hoping for a meaningful return after inflation, Swiss bonds will usually disappoint you. Still, they can play a role as a stabiliser in a portfolio – especially for investors with a balanced or conservative profile.

Other options such as medium-term notes or fixed-term deposits offer a bit more return than a savings account, but tie up your capital for a fixed term. You’ll find an overview in Lesson 2.

And what about Pillar 3a?

A question we get again and again: where in my asset allocation does my 3a money actually belong – low-risk or high-risk?

Our answer: neither. Your 3a assets are tied-up retirement savings – you can’t simply withdraw them whenever you want. Early withdrawals are only possible in a few cases, such as buying a home, emigrating or becoming self-employed. That’s why Pillar 3a doesn’t belong in the same drawer as your freely available assets but follows its own rules.

That doesn’t mean you should ignore it, though – quite the opposite. If you still have 10, 20 or more years until retirement, you’re sitting on a huge compounding lever. And that’s exactly why we recommend investing your third pillar in equities. The biggest return killer? Fees. Traditional bank products often charge 1% or more per year – sounds like little, but over the long term it can add up to tens of thousands of francs in lost returns. Low-cost online providers with fees below 0.5% make a huge difference here.

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Conclusion

Asset allocation is the most important decision you make when investing – more important than the choice of individual products, more important than the timing of your entry, more important than whether you buy ETF A or ETF B. It’s your guiding star, the point you align every other investment decision with.

The principle is simple: first, secure your liquidity reserve. Then divide your freely available assets into a high-risk and a low-risk portion based on your risk profile. In the high-risk portion, broadly diversified equity ETFs form the core – if you like, you can add to them using the core-satellite principle. In the low-risk portion, bank deposits provide stability and a good night’s sleep. You look at your 3a assets separately – invested in equities and at low cost.

Write down your target allocation – so that you can monitor it periodically and take corrective action when needed. Because when equities rise or fall, the weighting shifts automatically. How to restore your original portfolio structure easily and at low cost is the topic of our next lesson: Rebalancing.

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Updates

2026-05-19: Table of historical returns and losses adapted to Swiss conditions (adjusted for inflation and currency).

Disclaimer

Disclaimer: Investing involves the risk of loss. You have to decide for yourself whether or not you want to take on these risks.

Errors excepted: We have written this article on asset allocation to the best of our knowledge and belief. Our goal is to provide you, as a private investor, with information on financial topics that is as objective and meaningful as possible. If we have nevertheless made mistakes, or if important aspects have been forgotten and/or are no longer up to date, we’d be grateful if you let us know.

Why does a broadly diversified portfolio beat the supposedly smartest stock tip? The answer lies in one of the most powerful concepts of modern finance theory – and in the only genuine “free lunch” in investing. In this third lesson of our financial guide, you will learn how to use diversification effectively in two stages, where its limits lie and what this means for building your wealth.

In a nutshell

Diversification is the only “free lunch” in investing: you get the same return potential with less risk.
Before you invest, you should meet two basic requirements: an emergency fund covering three to six months of expenses and no outstanding consumer loans.
Stage 1: Spread your equities globally and across sectors – this eliminates company-specific risk.
Stage 2: If you want to go one step further, combine different asset classes – bonds and alternative investments such as real estate can reduce fluctuations or open up additional return opportunities.
With the core-satellite approach, you keep discipline in the foundation and leeway for targeted positions in the satellite.
Stock picking can boost returns – but can also lead to a total loss. That is why diversification is generally the more promising path – and it is scientifically sound.

Resisting the temptation of stock picking

Admittedly, it is not easy to resist the supposedly safe stock tip with rosy profit prospects from your circle of friends. But it is necessary all the same!

If you invest in an individual stock, substantial price losses with no prospect of a lasting recovery are unfortunately an all too realistic scenario. And this affects not only exotic stocks, but also well-known and established Swiss companies.

The Swatch Group, once a popular stock on the Swiss stock exchange, has lost around 70% of its value since its peak in November 2013 – as the chart impressively shows.

The worst case is even more drastic: bankruptcy. Swissair, once the nation’s proud airline, was grounded in October 2001 – shareholders lost everything. Investors in Credit Suissefared little better: once one of the largest banks in the world, it was taken over by UBS in an emergency deal for very little money in March 2023 after a crisis of confidence. Shareholders lost practically everything.

By the way, the opposite of stock picking is not necessarily passive investing – actively managed funds also often hold hundreds of stocks and are therefore broadly diversified. The real counter-concept is concentration on a few stocks. And it is precisely this concentration that increases risk – without increasing returns.

But concentration does not only show up in stock picking. If you keep all your wealth in a savings account, you are also concentrating on a single type of investment – with the difference that the threat here is not price losses but a gradual loss of purchasing power due to inflation. And the compound interest effect, which makes the decisive difference in the long run, remains practically ineffective. We showed how big this difference is over decades in Lesson 1 .

You will find out in the next chapter how diversification solves this risk – and what science has to say about it.

What is behind diversification? The theory in a nutshell

This brings us to the Modern Portfolio Theory (MPT) by Harry Markowitz. He received the Nobel Prize in Economic Sciences in 1990 for his groundbreaking doctoral thesis.

Markowitz was the first to provide theoretical proof of the positive effect of diversification on the risk and return of an overall portfolio. At the core of his theory is the distinction between systematic and unsystematic risk.

All securities on the market are exposed to systematic risk – i.e. market risks such as rising interest rates, recessions or political instability. It cannot be diversified away and is simply the price of investing itself.

Unsystematic risk, on the other hand, is company-specific risk – such as management failures like in the VW emissions scandal. This risk can be reduced through diversification. And that is the crucial point: the market compensates you for systematic risk – but not for unsystematic risk. So if you bet on individual stocks, you take on unnecessary risk without being able to expect a higher return for it.

You achieve the strongest diversification effects by combining investments with the lowest possible correlation . The range extends from +1 (identical movement) through 0 (independent movement) to –1 (opposite movement). Within the equity asset class, typical correlations are between 0.70 and 0.95 – the effect is real, but limited. Combining different asset classes brings much more, as we will see below.

The efficient frontier: what makes an optimal portfolio

Markowitz not only showed that diversification reduces risk – he also specified the minimum amount of risk that has to be taken for a given return. The result is the efficient frontier (German: Effizienzlinie).

The efficient frontier is created by plotting all conceivable portfolio combinations on a chart – with risk on the X-axis and expected return on the Y-axis.

Portfolios on the curve are efficient: they achieve the maximum possible return for a given risk. Portfolios below it are inefficient – too much risk for too little return. Portfolios above the curve are simply not attainable.

A global equity ETF such as the FTSE All-World is close to the MEP – the maximum return portfolio at the upper end of the efficient frontier. A single stock such as Swatch Group, on the other hand, lies to the right outside the curve: with the same or even lower expected return, you bear significantly more risk – without being compensated for it. That is exactly the “free lunch” of diversification: not more return, but less risk for the same expected return.

Diversification in practice – two stages

Theory is all well and good – but how do you actually put diversification into practice? And how far do you have to go? The old stock market wisdom that you should not put all your eggs in one basket comes in two stages. But first, you should meet one important requirement.

The emergency fund. Before you invest, you should keep bank savings covering three to six months of expenses as a liquidity reserve. This reserve serves to cushion unforeseen expenses – for example in the event of job loss, illness or repairs – without you having to touch your investments. Paying off any consumer loansalso takes priority, as their interest exceeds any realistic investment return. Only once you have built up this reserve and are free of consumer debt can you invest the rest of your wealth for the truly long term.

Stage 1 – Diversification within the equity asset class

Let us start with the most important level: spreading your equities widely. A simple rule of thumb helps you find your bearings:

Caution: limited concentration risk even in ETFs

If you buy an MSCI World ETF and think you are perfectly diversified, you should take a closer look: around 70% of the index is made up of US equities, with over 20% in the seven largest technology companies alone – the “Magnificent Seven” (source: MSCI, as of April 2026). In addition, the MSCI World only covers large and mid-sized companies in developed markets – emerging markets such as China, India or Brazil are not included. If you want genuine geographical diversification, you have two options: either add an emerging markets allocation with a separate ETF, or go straight for an MSCI ACWI or FTSE All-World, which already include emerging markets. If you want to go one step further, you can also add a small-cap ETF to your portfolio – and thereby also capture smaller companies.

Lawmakers also have diversification rules: for UCITS funds – the standard structure of most ETFs available in Switzerland – the so-called 5-10-40 ruleapplies: no single position may exceed 10% of the fund’s assets, and all positions above 5% may not account for more than 40% in total. UCITS is not a must, but a quality label intended to protect investors. Other ETFs – such as those that track the best-known Swiss index, the SMI – do not meet the requirements, as Nestlé, Novartis and Roche together regularly account for more than 50% of the index. So if you want to invest in a well-diversified way, you should look out for the UCITS label.

Digression: currency risk – an issue for Swiss investors

When you invest globally, you automatically invest in foreign currencies – around 60% of a FTSE All-World consists of US dollar stocks. What matters is not whether you buy your ETF in CHF or USD, but in which currency areas the companies in the fund operate.

Is that a reason to forgo global diversification? No. In the long run, the benefits of diversification clearly outweigh the drawbacks, and currency fluctuations partly even out over time. ETFs with currency hedging (“hedged”) do exist, but they cost more and eat into returns over the long term. For most investors with a long horizon, currency risk is simply something to live with – and part of the package.

Conclusion on diversification stage 1

Combined with a solid liquidity reserve in your bank account, you are already well positioned with stage 1 – a global equity ETF covers the essentials. But if you want to go one step further – reducing fluctuations or opening up additional return opportunities – you combine different asset classes. That is stage 2.

Stage 2 – Diversification across asset classes

Even more effective than spreading within equities is combining different asset classes – because their correlations with each other are significantly lower than within the equity asset class. While equities from different markets still show correlations of 0.70 to 0.95, correlations between equities and other asset classes are often much lower – sometimes close to zero or even negative. However, correlations are not fixed; they can shift over time. The lower the correlation, the greater the diversification effect.

Bonds

Bonds – in Switzerland usually called Obligationen – often move in the opposite direction to equities. In times of crisis, bond prices rise when everyone is looking for safety. However, this does not always apply: in 2022, both equities and bonds lost massive value when central banks raised interest rates drastically. So bonds are not a panacea, but they can be a valuable portfolio anchor over long periods.

A classic example is the 60/40 portfolio: 60% global equities, 40% bonds. For decades, it has been considered a proven starting point for people with a balanced investment approach – more stability, but also lower returns than a pure equity investment. If you have a long investment horizon and are aiming for maximum growth, you will see bonds as a brake on returns. The right weighting ultimately depends on your individual risk profile – which is exactly the topic of the next lesson.

Alternative investments as an add-on

If you want to expand your portfolio beyond the classic asset classes, you will find further sources of diversification among alternative investments – with different return, risk and liquidity profiles.

Conclusion on diversification stage 2

All asset classes can usefully complement your portfolio – but none replaces the stable foundation of diversified equity ETFs. The golden rule: the more exotic the investment, the smaller its weighting should be.

The pragmatic middle way: the core-satellite approach

The core-satellite approach elegantly resolves the apparent dilemma between diversification and concentration. The idea is simple:

The decisive advantage: you keep the discipline of diversification at the core without giving up the fun of active investing. And you always know what is at stake.

The honest downside: diversification vs. concentration

Here comes a point that finance blogs often keep quiet about because it seems to undermine the main message. But it is part of the truth:

Warren Buffett achieved his excess returns because he bet heavily on a few carefully selected companies. Private equity funds – if they outperform the market at all – also do so through concentrated bets. Anyone who had bet everything on Nvidia or Apple in the past would be rich today.

That sounds tempting – but it is not a realistic path for the vast majority. And for one simple reason: concentration increases not only the opportunities, but the risks to the same extent. For every Buffett, there are hundreds who backed the wrong horse and suffered total losses. Excess returns through concentration require sound analysis, a robust psychological profile, a lot of time – and above all a considerable amount of luck.

For most private investors, the following therefore applies: diversification is not the path to super returns – but it is the path to solid, risk-adjusted returns over decades. And that is exactly what sustainable wealth building means in practice.

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Conclusion

Diversification is not a lazy compromise – it is the only proven “free lunch” in investing: the same return potential, less risk. If you pile up individual stocks, you take on unnecessary risk without corresponding compensation in returns. And if you park your wealth in a savings account, you may avoid price fluctuations – but you pay a different price: a gradual loss of purchasing power due to inflation and missed compound interest.

Even the first stage – a global equity ETF combined with a solid liquidity reserve – forms a sound foundation. If you want to go further, you also diversify across different asset classes – with a sense of proportion.

The core-satellite approach combines the best of both worlds: a stable foundation thanks to diversification and room for targeted positions thanks to controlled concentration.

In the fourth lesson of this financial guide, we pick up exactly where we left off and turn to asset allocation – in other words, how to spread your total wealth across the various asset classes in line with your individual risk profile.

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Updates

2026-06-12: Explained the 5-10-40 rule in more detail and made minor adjustments.

2026-05-18: Added commodities and cryptocurrencies to the alternative asset classes.

Disclaimer

Disclaimer: Investing involves the risk of loss. You must decide for yourself whether or not you want to take these risks.

Errors excepted: We have written this article on diversifying your investments to the best of our knowledge and belief. Our aim is to provide you as a private investor with information on finance that is as objective and meaningful as possible. Should we nevertheless have made mistakes, forgotten important aspects and/or if information is no longer up to date, we would be grateful if you let us know.

Why does one investment deliver an attractive return while another barely beats inflation? The answer lies in the magic triangle of investing – and in a trade-off that nobody can escape. In this second lesson of our finance guide, you’ll find out which three factors are decisive when you build wealth, how they interact, and which goals you can achieve at the same time – and which you can’t.

In a nutshell

The magic triangle of investing shows that return, availability and security cannot all be maximised at the same time.
If you prioritise two of these goals, you inevitably have to compromise on the third – and that applies to every asset class.
Shares offer return and availability, but little security. A bank account is safe and available, but yields hardly any return. Medium-term notes or fixed-term deposits offer security and a little more return – but your capital is tied up.
Which combination is right depends on your risk profile – there is no universally best answer.

What is the magic triangle of investing?

The magic triangle of investing describes the three competing goals of investing your money: return, availability and security. Availability – how quickly you can get at your money – is also called liquidity in the specialist literature. In the figure below, each of these goals forms one corner of the triangle.

Return: what does the investment earn?

Return describes what an investment earns and is the most important starting point for many investors. Typical sources of return are dividends, interest payments and price gains.

As a rule, the higher the return you aim for, the greater the risks you take on – there is no such thing as a consistently high return without corresponding fluctuations. This is exactly where the trade-off in the magic triangle of investing begins.

For building wealth over the long term, it is crucial to reinvest your earnings wherever possible. The compound interest effect means your wealth can grow exponentially over time.

What also matters is the return after costs, taxes and inflation: fees and rising prices can eat significantly into your real return. Especially with long-term investments, it pays to look for low-cost, efficient products – such as broadly diversified ETFs that track an entire asset class like equities at very little cost. Which ones stand out is shown in our article Best ETFs in Switzerland and globally.

Availability: how liquid is the investment?

Availability – often also called liquidity – describes how quickly an investment can be turned back into cash or bank deposits. The shorter this period, the more liquid the investment.

It’s not only the time that counts, but also the cost of conversion. Selling fees, spreads or any early redemption charges can reduce the amount you actually have available.

Liquidity depends heavily on the asset class: exchange-traded securities such as ETFs or shares can be sold on any trading day, whereas real estate or private equity holdings are much less flexible.

In the context of the magic triangle, this means: high availability often comes at the expense of return or security. If you want quick access to your money, you usually have to accept compromises on one of the other two factors.

Security: how safe is my capital?

Security means preserving the wealth you have invested. It describes how strongly an investment fluctuates and how high the risk of a permanent loss is.

An important way to increase security is diversification. Spreading your money across different asset classes, regions and sectors can reduce risk.

At the same time, there is no such thing as absolute security with return-oriented investments. Even broadly diversified portfolios are subject to short-term fluctuations.

In the magic triangle of investing, security is in tension with return and availability. Greater security often goes hand in hand with lower expected returns or reduced flexibility.

You can only achieve two goals at a time

The magic triangle of investing makes it clear that the three goals – return, availability and security – cannot all be maximised at the same time. If you put two of them first, you inevitably have to compromise on the third. This basic rule applies regardless of asset class or market environment.

Option 1: high return + high availability = low security

Shares are the classic example of this combination. They can deliver an attractive return over the long term and can be sold at any time during trading hours. At the same time, they are sometimes subject to considerable price swings – temporary losses of 30% or more are historically nothing unusual.

How secure they are depends heavily on how broadly the investment is diversified. If you bet on individual shares, you risk a total loss in the worst case – for example if a company goes bankrupt. With a globally diversified equity fund – such as an ETF on the global stock market – a total loss is practically ruled out, because thousands of companies would have to become worthless at the same time. So diversification reduces risk considerably – but it does not remove the trade-off in the magic triangle.

This category also includes commodities such as oil, grain or precious metals – although gold is seen more as a store of value and an inflation hedge than as a classic return-generating investment – as well as real estate shares and REITs (exchange-traded real estate funds). Particularly speculative are cryptocurrencies, which are among the most volatile asset classes of all.

Also strong on returns, but with a significant default risk: P2P crowdlending. Investors lend money directly to private individuals or companies and receive higher interest than on a savings account in return. The expected returns are attractive, but the credit default risk is real – deposit insurance does not apply here. Find out more in our article Crowdlending: P2P in Switzerland is soaring.

Option 2: high availability + high security = low return

The classic bank account combines maximum flexibility with a high level of security: in Switzerland, balances of up to CHF 100,000 per person and bank are protected by deposit insurance, and your money is available at any time. But because the bank can’t plan with the capital over the longer term, the interest rate is correspondingly low. In the current interest rate environment, the return is barely enough to offset inflation – at best, the real value of your capital is preserved; it may even erode gradually.

So if you go for maximum security and availability, you take on a different risk: a gradual loss of purchasing power and missing out on real growth in your wealth.

Option 3: high security + high return = low availability

This combination is typical of investments where your capital is tied up for a fixed term. In return, you get a higher interest rate than on a classic bank account, which can at least preserve the real value of your money. However, the return is usually well below that of investing in shares.

Medium-term notes are fixed-income securities issued by banks. Investors lend their capital to the bank for a set term – usually between two and ten years – and receive regular interest payments in return. Because the bank can plan more reliably with the capital, it pays an interest premium compared with a savings or private account. Deposit insurance also applies up to CHF 100,000 per person and bank.

A fixed-term deposit works in a similar way: here too, an amount is invested for an agreed term and earns a fixed interest rate. The key difference from a medium-term note is that a fixed-term deposit is not a security – it is simply a bank deposit, which is also covered by deposit insurance.

The price you pay with both is limited availability: if you need your money early, you depend on the bank’s goodwill or have to accept losses.

Note: in the current low interest rate environment, the rates on medium-term notes and fixed-term deposits are modest too. Comparing providers is still worthwhile, as conditions can vary noticeably from bank to bank.

Your individual risk profile shapes your magic triangle of investing

What your personal magic triangle looks like is not an abstract question – it depends directly on your individual risk profile. This is made up of your risk tolerance and your risk capacity.

Your risk tolerance: how much risk do you want to take?

Risk tolerance describes your psychological attitude towards fluctuations and possible losses. If you can sleep soundly even when your portfolio temporarily loses 20% or more of its value, you have a high risk tolerance. If, on the other hand, you panic at every market dip, you should invest more conservatively – regardless of what would be possible on paper. Risk tolerance is subjective and is shaped by things like experience, personality and financial literacy.

Your risk capacity: how much risk can you afford to take?

Risk capacity describes your objective financial situation. It depends on how much capital you have, what obligations you have and when you are likely to need the money you’ve invested. If you have high fixed costs or will need the capital in the foreseeable future, you simply have less room for risk – regardless of your personal attitude.

How risk tolerance and risk capacity work together

Together, these two factors determine which of the three goals in the magic triangle should take priority for you.

An example: if you’re planning a major expense in the next two to three years – such as buying a home – you should focus your money primarily on high availability and security. Even if you’re generally willing to take risks and stay calm when prices swing, it would be unwise to invest riskily in this situation. Your risk capacity – reduced here by the short investment horizon – sets a clear limit that overrides your risk tolerance.

In short: risk tolerance describes what you want – risk capacity describes what you can afford. For a solid investment strategy, the two need to be in line.

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Conclusion

The dream of a highly profitable investment that is available at any time and also 100% safe is over. Sadly. As in other areas of life, there is no getting around compromises when it comes to investing.

Which combination is right depends on your personal situation: on your risk tolerance and your risk capacity – which also includes your investment horizon. There is no universally best answer – only the one that suits you.

In Lesson 3 we take a closer look: how can smart diversification improve the risk-return ratio – and what does that mean for your portfolio in practice?

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Updates

7 July 2026: Introduced “liquidity” as the technical term for an investment’s availability.

Disclaimer

Disclaimer: Investing involves the risk of loss. You have to decide for yourself whether or not you want to bear these risks.

Errors excepted: We have written this article on the magic triangle of investing to the best of our knowledge and belief. Our aim is to give you, as a private investor, information on finance that is as objective and meaningful as possible. If we have nevertheless made mistakes, overlooked important aspects and/or if information is no longer up to date, we would be grateful if you let us know.

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Rebalancing in practice: how to bring your portfolio into balance

When to rebalance?

Three ways to bring your portfolio back into balance

No need for perfection

Good to know: rebalancing in the drawdown phase, Pillar 3 and taxes

Drawdown phase

Pillar 3

Taxes

The rebalancing bonus: a welcome side effect

The honest downside

Conclusion

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What is asset allocation?

The liquidity reserve: your safety net

Your risk profile determines the split

From theory to practice: splitting your assets

The high-risk portion: equities at the core, add-ons as satellites

A global ETF as the foundation

Targeted add-ons using the core-satellite principle

The low-risk portion: security and availability

And what about Pillar 3a?

Conclusion

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What is behind diversification? The theory in a nutshell

The efficient frontier: what makes an optimal portfolio

Diversification in practice – two stages

Stage 1 – Diversification within the equity asset class

Caution: limited concentration risk even in ETFs

Digression: currency risk – an issue for Swiss investors

Conclusion on diversification stage 1

Stage 2 – Diversification across asset classes

Bonds

Alternative investments as an add-on

Conclusion on diversification stage 2

The pragmatic middle way: the core-satellite approach

The honest downside: diversification vs. concentration

Conclusion

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Updates

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What is the magic triangle of investing?

Return: what does the investment earn?

Availability: how liquid is the investment?

Security: how safe is my capital?

You can only achieve two goals at a time

Option 1: high return + high availability = low security

Option 2: high availability + high security = low return

Option 3: high security + high return = low availability

Your individual risk profile shapes your magic triangle of investing

Your risk tolerance: how much risk do you want to take?

Your risk capacity: how much risk can you afford to take?

How risk tolerance and risk capacity work together

Conclusion

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Updates

Disclaimer

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