How can your savings or other income yield the best return? That question is becoming more and more pressing now that inflation is spiraling out of control and life is getting more and more expensive. We consulted financial journalist Michaël Van Droogenbroeck (VRT NWS) and expert Erik Joly (ABN Amro).
Compared to a year ago, life has become more than 8 percent more expensive. We all feel that when we go shopping, stop at a gas station or get our energy bill. At the same time, the low interest rates are gone. Those who want to borrow in 20 years’ time are already paying more than half more interest than in January.
For many people it becomes difficult to put some money aside at the end of the month. Anyone who succeeds in doing so wonders what he or she can do best with that savings. We investigated 5 options and bundled the pros and cons, and some tips.
A number of concepts:
Inflation: The inflation rate indicates the average level by which prices have risen. If inflation exceeds 8 percent (as is the case now), this means that products that together cost 100 euros a year ago now cost an average of 108 euros.
Interest: interest or interest is the compensation you pay or receive, expressed as a percentage of the amount you borrow or lend.
Stock: When you invest in stocks, you buy a piece of ownership of a company. You then benefit from dividend or profit distributions and price increases.
Bond: if you invest in bonds you finance loans from large companies or governments. You receive interest and get your investment back at the end of the term.
The savings book
According to the most recent figures from Belgostat, Belgians together have more than 298 billion euros in savings accounts. So we opt for it en masse and according to financial journalist Michaël Van Droogenbroeck there are a number of good reasons for this.
“The savings account remains the safest way to put money away because it has a number of assets,” he says. “You can always access your money. Suppose your bank goes bankrupt, then you are also protected for 100,000 euros per person. The stocks nextdoor ipo is found online. It is also a simple product that everyone understands and everyone knows what it is. And you always get a little interest because banks are obliged to give a minimum interest of 0.11 percent per year on regulated savings accounts.”
So you make a little profit every year on a savings account, but the problem is that inflation is higher than interest. Van Droogenbroeck gives an example: “Imagine that at the beginning of last year you had 1,000 euros in your savings account at 0.11 percent interest, then after a year you have 1,001.1 euros. But life is 3.2 percent more expensive that same year which results in a loss of purchasing power”.
Those who want their money to pay off are therefore not always best off with a richly filled savings account. Nevertheless, it is better to always leave a certain amount, advises financial expert Erik Joly. “It is always smart to keep 3 to 6 times your net monthly salary as an ‘iron’ savings reserve. That can be used for unforeseen expenses. If you have more than that, you can start thinking about other ways to make your money pay off.”
Stocks and bonds
Two options are investing in stocks or bonds. This can be done on the stock markets, but they are also awake from the high inflation. Is it smart to invest now?
“You never know in advance whether it’s a good or bad entry point,” replies Van Droogenbroeck. “No one can predict the future, not even on the stock market. It is therefore always advisable to spread your investment and not buy all your shares at once.”
Joly also has tips for those who start investing. “You always have to go there with money that you won’t need for the next 7 to 8 years,” he emphasizes. “The stock markets always remain uncertain in the short term, in the long term it gives you the opportunity to make your capital profitable.”
“In addition, you have to ensure that you diversify properly. Don’t put all your eggs in one basket, but make sure that you spread sufficiently across regions and sectors,” he adds.
View the “Ask your question” with Michaël Van Droogenbroeck about our savings here:
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But which companies are the best to buy shares from? Joly recommends opting for companies that can pass on the increased energy costs, packaging costs and wage costs. “Those will be able to sustain their earnings and theoretically will be able to maintain their dividends,” he says. “I am thinking, for example, of companies in the pharmaceutical sector or certain food and beverage companies.”
According to him, it is less smart to bet on a technology company companies that will not immediately turn a profit. “Because the profits of these types of companies usually only grow exponentially within a number of years, they are very sensitive to interest rate increases because a euro or dollar is worth more today than in five years.”
According to both experts, equities will face competition from bonds due to rising interest rates. Bonds have long been uninteresting due to low interest rates, says Van Droogenbroeck. “Now that interest rates are rising, they may become more interesting again.”
“Certainly in US dollars it has already been pronounced,” Joly adds. “You can achieve net returns of 3 percent on maturities of 2 to 3 years, but that does not cover inflation and you have the risk of the exchange rate with the dollar. It is even more difficult in euros, but you see that here too certain bonds already give something in terms of return.”
With real estate you have to make a distinction between a house or apartment that you buy to live in yourself and real estate that you buy to rent out. “The first is the best investment in all areas,” thinks Van Droogenbroeck. “You don’t have to rent anymore, it’s financially interesting and perhaps also emotionally.”
Buying something to rent out is another matter. “That has been popular in our country for a long time because you could assume a double return: on the one hand the rental income and on the other hand the real estate itself, which increased in value.”
“Real estate prices have risen phenomenally in recent years, especially due to the low interest rates,” says Van Droogenbroeck. “But that is now changing, borrowing has become more expensive. It is not an exact science, but it is expected that property prices will stabilize or perhaps even correct.”
Joly also sees a number of disadvantages to buying real estate to rent out at the moment. “The market is expensive, your loan is getting more expensive and you invest quite a bit of money in one particular apartment or house.” He therefore advises to always spread money over movable and immovable property.
Money has to roll, you sometimes hear, but is it smart to buy products right now or is it better to wait? That is also difficult to predict, but it is always best to keep a financial buffer.
If you have something left over, according to Joly it is not necessarily better to wait. “Taking into account the expected evolution of raw materials, the disrupted supply chains and the inflation trend, it seems to me that prices will rise rather than fall”, is his cautious forecast. “So if you know that you need an electric bicycle within this and three months, for example, I would order it now. Otherwise, there is a real chance that you will have to pay more.”
And then of course there is also gold. Is that a worthwhile investment right now? “It is a question that is always asked when the stock markets are doing badly, but it is difficult to give a meaningful answer to this”, says Van Droogenbroeck. “Gold has the major disadvantage that it is a dead investment. If you want to get a return on gold, you are at the mercy of the gold price and that is the law of supply and demand. It does not yield dividends or interest between buying and selling.”
And there are currently a number of other things against gold, says Joly. “Gold has become quite expensive over time, so you certainly don’t buy it cheap. In addition, it is traded in dollars and the rise in the dollar makes it more expensive for all investors who do not trade in dollars to buy gold.”
But according to both experts, gold can be useful as a buffer in your portfolio. “It is often said: gold can be a kind of fire insurance,” explains Van Droogenbroeck. “You don’t take it with pleasure, but if the rest does poorly or burns up, there is that. The gold price is often the canary in the coal mine, and indicates if there is uncertainty in financial markets.”
“There is no right or wrong”, emphasizes Van Droogenbroeck. “It depends on the margin people have and on their risk profile. It is always a personal choice, but it is good to think about it. It is possible that this exercise will end again with the savings account, but then you have thought about it. I would say: inform yourself and then make a decision.”
Indeed, don’t do it rashly and spread your risks, Joly concludes. “Don’t put all your eggs in the same basket and get in dribs and drabs.”