Low interest rates combined with inflation make traditional savings accounts an ineffective way to grow your wealth. If you're looking to secure your financial future and take control of your retirement, investing your money is a necessity. However, the wide range of investment options available can be overwhelming, especially if you have a small budget.
In this article, we will explore the reasons why investing in the stock market is beneficial, discuss important considerations before you start investing, provide insights on how to invest in the stock market in Belgium, and introduce Curvo as a user-friendly investment app. By the end of this article, you will have a better understanding of how to invest with a small budget and make your money work for you.
Why you should invest in the stock market
Investing in the stock market has long been considered a powerful tool for wealth creation. While it carries certain risks, young Belgians who are willing to educate themselves and take a long-term approach can benefit greatly from participating in the stock market.
Wealth creation
Investing in the stock market offers the potential for long-term wealth creation. Historically, stocks have provided higher returns compared to other investment options such as savings accounts or bonds. By allocating a portion of your savings to stocks, you can take advantage of the growth potential offered by the stock market.
Compound interest
Starting early allows young investors to harness the power of compounding. As Albert Einstein famously said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't, pays it." By reinvesting earnings and dividends, their money can grow exponentially over time. Compounding allows the returns generated by investments to generate additional returns, leading to accelerated wealth accumulation. The earlier you start investing, the more time you have to let compounding work its magic, potentially multiplying your initial investment several times over.
Beat inflation
One of the major challenges in preserving wealth is combating the erosion caused by inflation. Investing in the stock market can help you outpace inflation. Over the long run, stock returns have generally exceeded the rate of inflation, ensuring that invested funds retain their purchasing power.
Savings account have proven not being very effective at this goal as inflation has been consistently above interest rates since 2008. Even if the amount has slightly increased in value (the nominal return), you actually lost purchasing power when taking into account inflation (the real return).
Diversification
Investing in a diverse range of stocks allows for portfolio diversification and risk reduction. By investing in different industries and sectors, you can mitigate the impact of any single company's performance on your overall investments. Diversification is a key strategy to manage risk and increase the potential for consistent returns.
One downside of having to diversify is the need to buy many different stocks, which will quickly rack up large transaction costs. Especially when investing with a small budget, this will eat up your profits. This is where Exchange-Traded Funds (ETFs) come into play.
ETFs are investment funds that trade on stock exchanges, representing a basket of stocks or other assets. By investing in ETFs, you can achieve instant diversification across different sectors, industries, and even geographic regions. ETFs provide exposure to a wide range of stocks, making it easier to spread risk and potentially capture the overall growth of the market. Some of the more popular ETFs such as VWCE cover over 3,500 individual stocks.
Moreover, ETFs often have lower expense ratios compared to mutual funds, making them a cost-effective choice for young investors. When picking an ETF you should aim for a low total expense ratio (TER). Generally anything below 0.25% is considered good.
Curvo shares the same investment philosophy: low cost global diversification without the hassle.
Opportunity to learn
Engaging in the stock market offers a valuable learning experience. It allows young investors to understand how businesses operate, analyse financial statements, and make informed investment decisions. This knowledge is not only beneficial for personal finance management but also for future investment endeavours.
When starting out, you might only be able to invest small amounts. However, habits are what will quickly get you to a considerable amount. Investing consistently every single month will be very powerful as your investable income grows over time. Learn how to invest periodically in Belgium.
Accessible investment apps
With the rise of online trading platforms, investing in the stock market has become more accessible and cost-effective than ever before. There are various investment apps that offer user-friendly interfaces and low trading fees, making it easier for young Belgians to enter the market. This accessibility empowers you to start investing with smaller amounts and gradually build your investment portfolio.
Long-term economic growth
Young investors have a longer time horizon before retirement, which means they can afford to take on more risk and withstand short-term market fluctuations. This enables you to potentially reap the benefits of higher-risk, higher-reward investments such as stocks. The long investment horizon provides the opportunity to recover from market downturns and capitalize on long-term growth trends.
Investing in stocks supports the growth of companies, which, in turn, contributes to overall economic growth. By investing in businesses, you become part-owner and participate in their success. This not only benefits individual investors but also contributes to the prosperity of the economy.
Technical innovations have increased productivity and efficiency, which in turn has lead to positive economic growth over the last 40 years (before as well). The graph below, which shows the evolution of the global stock market since 1979 through the MSCI World index, clearly shows the tremendous growth the last decades. Investing in the global stock market is a way to benefit from this growth!
Things you should know before investing
Before you get ahead of yourself and start investing right away, it's important to first make sure you've covered the following topics.
Educate yourself
All throughout school you probably never learned about how money works or how optimize your taxes. That's a shame, because these are probably some of the most useful skills one could have. You don't need to have a university degree on economics before investing, but understanding the basics certainly can't hurt. We highly recommend going through the Curvo Academy which is a great source on all things investing.
An important concept to consider early on is diversification. We're talking about your life savings, those should not be invested in a single company. We recommend investing in ETFs that cover thousands of companies. That way if a company goes bust, it only has limited impact on your performance.
Set your financial goals
Setting financial goals and keeping track of the plan is a great way to make sure you stay committed to those goals. Make it very clear what you are investing for: buying a house, saving for your kids, becoming financially independent... In all cases, make sure the goal is concrete and specific, has a clear time frame and is measurable.
Good financial goal: Save €10,000 for a down payment on a home in three years
Bad financial goal: Get rich quick by investing in cryptocurrency
As you can see the goal is specific (saving for a down payment on a home), it has a clear time frame (3 years) and it is measurable (€10,000). Such a goal will allow you to regularly follow up and see how much progress you've made.
When investing you should always have a long-term mindset. In the short term the stock market goes up and down, nobody can predict that, not even the big banks. People who trade stocks on a daily basis are nothing more than gamblers. You might have a couple lucky shots, but make sure not to confound luck with skill. A general rule of thumb is that you should be willing to not touch the money you put in the stock market for 10 years.
Be aware of your tolerance for risk (or lack thereof)
A common saying in investing is: "There's no such thing as a free lunch". Translated this means that if you're looking for high returns on your investments, you'll need to additional risk. Every individual has their own risk tolerance, so this is something you'll have to assess for yourself.
A good practice before starting to invest, is creating an emergency fund. This fund should cover at least 6 months of expenses. As such, if a negative financial event occurs you'll be covered and won't have to sell your investments at a potential inconvenient time. In Belgium we have a generous social security system, allowing for lower emergency funds as compared to other countries. Learn how to best save up for your emergency fund.
How to invest in the stock market in Belgium with a small budget
Finding a broker
You can't buy stocks directly on the stock market, you have to do this through an intermediary, a stock broker. There are many different ones with their own pros and cons. We've made a detailed comparison on the best brokers in Belgium.
When investing with a small budget, one of the most important factors to consider is transaction costs. When investing with small amounts transaction costs will have a relatively bigger impact than when investing with large sums.
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Finding an investment
Now that you've found the broker to invest with, we must decide what to invest in. We recommend globally diversified low-cost ETFs. Some common examples would be: VWCE, IWDA and IMIE.
All of these ETFs are tax-efficient (registered in Ireland), are globally diversified (1,000+ stocks across the world) and have low costs (TER below 0.3%).
ETFs are perfect to invest in with a smaller budget as you can start investing with as little as one share. IWDA is currently listed for €78, and you'll find most ETFs around that range.
Use an investment app
Managing your own portfolio of ETFs through a broker is not for everyone. You need to understand the intricacies of investing with ETFs, you are responsible for building the right portfolio of ETFs for you, you need to choose a broker, understand taxes...
Alternatively, you can use an app like Curvo where such complexities are handled for you. When investing through the Curvo app, your investments are managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM). Learn more about Curvo.
When to invest
Most people tend to invest a fixed monthly amount, because that's when they get their pay check. If that's not feasible for you can save up a couple of months and invest every quarter.
Keep in mind that each transaction brings its costs. It does not make sense to invest, if 10% of your investment goes to costs, because you would need a 10% stock market gain to break even. Try to group your investments together so that your transaction costs are at least less than 5%.
An alternative solution to be able to purchase stocks cheaper is through fractional shares. That way you can buy a percentage of a share. This is only offered through specific brokers, so make sure to check if yours offers this.
Summary
In conclusion, traditional savings accounts have proven ineffective in growing wealth due to low interest rates combined with inflation. To secure your financial future and take control of your retirement, investing your money becomes a necessity. Investing in the stock market offers several benefits that can help you build wealth and achieve your financial goals.
The stock market provides the potential for long-term wealth creation. Historically, stocks have delivered higher returns compared to other investment options, allowing you to take advantage of the market's growth potential.
Investing from an early age allows you to benefit from the power of compound interest. By reinvesting earnings and dividends, you can see your money grow exponentially over time. Starting early gives more time for compounding to work its magic, potentially multiplying the initial investment several times over.
Diversification is key to managing risk and enhancing the potential for consistent returns. Exchange-Traded Funds (ETFs) offer a cost-effective and efficient way to achieve diversification across various sectors and industries.
The rise of accessible investment apps and online trading platforms has made investing in the stock market more convenient and affordable than ever before. You can now enter the market with smaller amounts and gradually build your investment portfolio.
Overall, investing in the stock market offers a pathway to financial growth and long-term economic prosperity. By leveraging the benefits of the stock market and adopting sound investment practices, you can make your money work for you and build a secure financial future. Consider platforms like Curvo, which make index investing accessible, enabling you to maximize your investment potential and achieve your financial goals more effectively.