Managing family money is a significant responsibility, often accompanied by unique emotional and relational dynamics. Whether you’re entrusted with 50,000 euros or any other substantial sum, understanding the nuances of investment and risk is crucial. This guide addresses key considerations for handling family funds, particularly when navigating currency conversion from euros to dollars and making sound investment decisions.
If you’re in a position where family members are entrusting you with funds, like a sum of 50,000 euros, with the understanding that these funds might need to be readily accessible, a cautious approach is paramount. It’s easy for misunderstandings and anxieties to arise, especially when market fluctuations occur. Financial matters can strain even the strongest family ties, so transparency and a conservative strategy are your allies.
However, if the scenario is different, and you have the autonomy to manage these funds, even with the possibility of losses, your investment strategy can be more flexible. In this case, whether you’re starting with 50,000 euros or considering its equivalent in dollars, the principles of sound investment remain the same.
First, consolidate the funds. Choosing a reputable broker with low fees, such as Interactive Brokers (IBKR), is a smart initial step. Next, assess your immediate financial needs. This includes establishing an emergency fund, considering any real estate aspirations, family support obligations, or travel plans. Allocate the necessary capital for these short-term needs in a readily accessible currency, potentially Swiss Francs (CHF) depending on your location and spending habits.
With your short-term needs covered, the remaining capital, potentially derived from converting 50,000 euros to dollars, can be strategically invested. A globally diversified ETF, like VT or VWRL, offers a broad market exposure, mitigating risk through diversification. If you are in a committed relationship, involving your partner in these financial decisions is advisable, ensuring alignment and shared understanding. Your current spending might be in CHF, but consider future needs; if you anticipate relocating or if your retirement expenses might be in a different currency zone, factor this into your fixed income or cash allocations.
The question of disinvesting suggests a potential discomfort with a purely stock-heavy portfolio, particularly during market downturns. If a 100% stock allocation, similar to VIAC’s global 100 strategy, feels too risky, it’s essential to pre-plan your course of action for market crashes and adhere to it. Market timing is notoriously difficult, and predicting market peaks and troughs is nearly impossible. The recommended strategy is to select an asset allocation that you can confidently maintain through market volatility – meaning no panic selling during downturns. If this is your inclination, then a 100% stock portfolio might not be the optimal choice. For inspiration in building a more conservative portfolio in the current low-interest-rate environment, consider exploring strategies similar to VIAC’s approach to low interest rates: Pillar 3a: Strategies – VIAC.
If the 50,000 euros, or a dollar equivalent, originates from family with the expectation of potential recall, a more conservative investment strategy is definitely warranted. If the funds come from different family sources or branches (e.g., euros and Canadian dollars), maintaining separate accounts and tracking them individually adds a layer of organizational clarity and accountability.
Initiate an open discussion with your relatives to align on key aspects:
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Broker Preference: Do they have a preference for a European or Canadian broker, or are they comfortable with your broker selection, regardless of location? While IBKR remains a strong contender due to its low fees, DeGiro (European) or a Canadian brokerage might be more reassuring if geographical proximity is a concern for your family. Their peace of mind is a critical factor in managing family funds.
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Currency Preference and Investment Currency: Do they expect the funds to be invested in their original currencies (EUR/CAD), or is USD or CHF acceptable? Are they prepared to remain calm and trust your management even if the US experiences high inflation? The chosen investment currency and fund selection should align with the benchmark and expectations set with your family. Currently, safe Eurozone bonds may have negative yields, making cash (in EUR) a potentially more viable option for the fixed income portion. Canadian government bonds may still offer positive yields, making them a potentially better avenue for fixed income in CAD. Generally, matching the duration of bonds to your investment timeline is advised; when uncertain, intermediate-term bonds are often a prudent choice.
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Risk Tolerance and Time Horizon: What level of loss are they comfortable with before it causes them concern or puts undue pressure on you? Is this a long-term investment horizon (e.g., 10 years or more), or might they need to withdraw funds sooner? Understanding their risk appetite and time horizon is crucial in defining a suitable investment strategy.
If the answer to the risk tolerance question is “we are not okay with losing money at all,” it’s wise to respectfully decline managing these funds for investment purposes. No investment in the stock market guarantees returns, and jeopardizing family relationships for investment ventures is rarely advisable.
However, if they are open to some level of risk, collaboratively define realistic growth expectations. A conservative growth target, like 1% annually, might be reasonable. Aiming for 2% already introduces a relatively significant risk, and exceeding this increases the probability of not consistently meeting the target. Establishing a benchmark helps manage expectations and provides a reference point to deflect potential unsolicited advice or second-guessing, ensuring you can stick to the agreed investment plan. Maintaining consistency in the investment plan is paramount, especially when multiple family members are involved and opinions may vary.
Conduct a thorough risk assessment, considering your relatives’ ability, need, and willingness to take risks.
Ability: This is dictated by the maximum loss your relatives are willing to accept. If they specify a 10% loss tolerance, then that 10% threshold becomes your absolute limit for potential losses at any given time. A conservative strategy would involve keeping the majority of the capital outside of risky investments, readily available and protected.
Need: Assess the level of risk needed to achieve the agreed-upon benchmark. Historically, global stock market returns averaged around 8.3% annually in USD from 1900 to 2020 (nominal CAGR): Historical Returns of Global Stocks – Mindfully Investing. Remember, these are nominal returns and don’t account for inflation, nor do they factor in fees and taxes. If the target is a modest 1% annual growth, then approximately 1/8.3%, or about 12% of the capital (in USD terms), would theoretically need to be allocated to stocks.
Willingness: This reflects your relatives’ personal comfort level with market fluctuations and potential temporary losses.
A prudent approach could be:
- Invest the amount equivalent to the accepted potential loss in a globally diversified ETF (like VT/VWRL). Keep the remaining capital in a high-yield savings account or short-term, low-risk bonds.
- Clearly communicate realistic return expectations to your relatives, and perhaps even set slightly lower expectations to build in a safety margin. For instance, if your analysis suggests a potential 2% average annual growth, suggest a target of 1% to 1.5%. If they are not comfortable with these conservative returns, guide them in redefining their maximum acceptable loss, emphasizing the inherent trade-off between risk and return and reminding them of the negligible returns currently offered by savings accounts – the very reason they are exploring investment options.
- Benchmark your performance against these mutually agreed-upon expectations.
- Periodically reassess their loss tolerance and growth expectations with your relatives, considering the portfolio’s current value and evolving market conditions.
Example Scenario:
Assume your family resides in Switzerland and is considering investing CHF 100,000. They express a maximum loss tolerance of 10%. Historically, the USD has depreciated against the CHF by roughly 70% from 1971 to 2020, equating to approximately a 2.42% compounded annual loss in value. Conversely, a global ETF investment assessed in CHF might have yielded a historical CAGR of around 5.7%.
With a 10% loss tolerance on CHF 100,000, the maximum amount to risk is CHF 10,000. Investing this CHF 10,000 in a globally diversified ETF could potentially yield an average annual return of 0.57% (nominal, before fees and taxes) based on the historical 5.7% CAGR.
The remaining CHF 90,000, which must be protected, should be kept in a safe, liquid account. While a 100% market drawdown is historically unprecedented, for ultra-conservative planning, especially with family funds, consider a more substantial buffer. Historically, the S&P 500’s maximum drawdown has been less than 60%: A Brief History of Bear Markets.
For a highly conservative model, particularly when managing family funds, planning for an 80% maximum drawdown is prudent. In this scenario, even in a severe market crash, stocks would retain 20% of their value. Therefore, the target stock allocation could be calculated as: 10% (maximum accepted loss) / 80% (maximum expected drawdown) = 12.5%.
With a 12.5% allocation to stocks and 87.5% in safe assets, the expected annual return would be approximately 0.71% (5.70% * 12.5%).
In discussions with your relatives, you might suggest targeting a 0.5% annual return, providing a comfortable margin. You would then invest CHF 12,500 (12.5% of CHF 100,000) in a broad, diversified ETF and keep CHF 87,500 in a secure savings account. Monitor the portfolio, and when the stock portion grows beyond 12.5% of the total portfolio value due to market appreciation, rebalance back to the target allocation, either within pre-defined bands or annually.
Is this overly conservative? Yes, absolutely. But managing family funds introduces relationship risks that, in my opinion, outweigh the pursuit of aggressive returns. There’s a reason why banks don’t offer 5% interest on savings accounts and why pension funds often adopt highly conservative investment strategies. When handling family finances, prioritizing capital preservation and clear communication is often more valuable than maximizing potential gains.
