Swiss Franc and why diversification is important
This week has produced an amazing event on the Swiss Franc that was preventable. After the GFC the Swiss National Bank (SNB) decided to put a cap on their currency to protect it from any volatility against the Euro. That was back in 2011 and I vaguely remember receiving an email telling me to stay away from the Swiss Franc because of government intervention.
This will not affect someone who has a properly diversified portfolio as I have previously mentioned in other posts such as 3 Step Plan to Financial Freedom. If you are a Swiss exporter you would not be happy as they will eventually struggle to keep their goods at attractive prices. If you are paid in Swiss Francs you’ll be laughing!
Over the last three years the SNB set a minimum value of 1.20 franc to 1 Euro. On the 16th January 2015, the Swiss Central Bank decided to lift the cap on their currency and almost instantaneously the Franc shot up about 30% in value against the Euro. Of course this sent shock waves through many markets around the world and some panic was obvious. I have been sent calming emails from broking houses saying they have not been adversely affected by the volatility. If brokers are sending out notices it means that it is a significant event.
Why didn’t they lift the cap in stages?
The SNB obviously chose to lift this cap in one chunk rather than in stages which would have lessened the shock on the markets. The US Govt. is a perfect example of gradually slowing a stimulus package after the GFC. Their “Quantative Easing” package was gradually reduced and at all stages the Reserve Bank Governor made announcements about any changes. This is the way this decision should have been dealt with but the SNB thought otherwise.
Why do I really need to diversify?
If I haven’t convinced you yet why it is important to diversify your investments I have another Swiss Franc story. This is a story from my childhood in the 70’s just to prove that problems have occurred in the financial system for a long time. A local family ran a successful marina business and owned all the land the marina was on. They used to store boats in sheds and charge people for storage and for launching their boat. The owner of the business was ageing and decided to develop some property to fund his retirement. I can’t remember all the details about how many units etc were built but I do know the loan was in Swiss Francs. They were obviously convinced by a finance guru that Swiss Francs was the best way to fund the venture. I also can’t remember why but for some reason the Swiss Franc Loans rose dramatically and the family was all but ruined. Their easy retirement turned into a nightmare. They sold the business, land and had very little, if any thing, left. They were the nicest family but were seduced by a “quick fix retirement plan”. If only they had sound advice at the time and diversified their investments the story may have been very, very different.
So the moral of this story is please diversify your investments whatever you do. Whether your favourite investment is housing, the share market, foreign exchange, or running a business. There are ways do diversify in all these areas.
To quote an old saying – “Don’t put all your eggs in one basket”.
If you don’t understand the devastating effects that a decision like this can trigger – read this article.