Low interest rates combined with inflation make your savings account a poor place for your long-term savings. It's almost essential to invest your money if you want to grow your wealth. But with so many options out there in terms of picking stocks, getting started can be daunting. We look at the reasons why you should invest in stocks, how to do it in Belgium and some of the dangers of stock picking.
Why you should invest in stocks
The financial future of young Belgians, millennials and Gen-Z, is under threat. Historically there's been a strong reliance on the state to fund our retirement. However, our state-funded pension systems are under increasing pressure due to changing demographics. And our political leaders are not doing what is necessary to prevent a pension crisis.
We need to make our savings work for us in order to set ourselves up for the future and take control of our retirement. We also know that saving accounts are not sufficient and interest rates are at historic lows. With inflation being above interest rates since 2008, this means that every year, we lose money if it’s not put to work.
The solution is to take matters into your own hands by investing your savings. As a potential investor, there are many reasons why investing in stocks can be beneficial for you. Let's go through some of the benefits of putting your money to work.
Long-term wealth creation
Historically, the stock market has provided higher returns compared to other investment options like bonds or a savings account. By investing in stocks, you have the potential to grow your wealth over the long term as the value of your investments appreciates.
Invest in companies from across the globe
Stocks provide an opportunity to invest in companies from across the globe. This allows you to participate in the growth of industries and economies, diversifying your investment exposure beyond Belgium.
Flexibility
In finance jargon, the stock market offers high liquidity, meaning you can buy and sell stocks relatively quickly. This flexibility allows you to adjust your investment portfolio according to your investment goals. Compare this to investing in property which is popular in Belgium where you can't sell a fraction of a house, but you can sell a single share of your stock.
Continuous growth of the global economy
Advances in technology have revolutionised industries, increasing productivity and efficiency. Innovations in areas such as technology, automation, artificial intelligence, and renewable energy have positively impacted economic growth by creating new opportunities and growing the markets. 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!
Before you start investing in stocks
Here's a four-step checklist to go through before you decide to invest in stocks:
Step 1: educate yourself
Looking back on our education, we realised that we were never taught how to manage our own money. We believe that everyone's financial life will improve if they are armed with the right knowledge. So before you dive into the world of stocks, it's important to educate yourself about investing. Learn about the basic concepts, terminology and different investment strategies. Consider reading books or checking out online resources. For example, it's important to understand the taxes associated with investing. The Curvo Academy has many resources to help you educate yourself.
Step 2: set investment goals
This is an important point. Why are you investing your savings? Is it for your retirement, to make the most of your savings, to buy a house, to save for your children or to live off your investments? Setting clear goals will help you develop an appropriate investment strategy. Use our compound interest calculator to see how much you'll be able to save up long-term.
Step 3: assess your tolerance for risk
This can be difficult. Your risk tolerance is your willingness to take risks in pursuit of higher returns. Some people are comfortable with a high level of risk (i.e investing all in one stock!), while others prefer to invest in lower-risk assets. Your risk tolerance depends on your financial situation, your investment objective and, most importantly, your personality. You also need to measure your risk capacity. This is the amount of risk you can afford to take without jeopardising your financial situation.
Step 4: establish an emergency fund
Before you start investing, ensure you have an emergency fund in place. This fund should cover at least three to six months' worth of living expenses. It acts as a safety net to protect you from unexpected financial setbacks and means you won't need to dip into your invested money to cover these costs. Learn more about how you can save for an emergency fund.
How to invest in stocks in Belgium
It's easy to buy shares in Belgium through a broker. They act as an intermediary between you and the stock exchange where you can buy and sell shares. There are many brokers to choose from in Belgium. They differ from each other:
- Their fees, as some are cheaper than others.
- How they handle taxes. In general, domestic brokers take care of declaring and paying all taxes you owe. Foreign brokers tend to shift the responsibility (and fiscal risk!) to you. You also need to declare foreign accounts to the Belgian National Bank.
- The ease of setting up an account. Some provide streamlined apps, whereas others only offer a clunky web application.
- Safety. Some brokers have had issues with the regulators.
Head on over to our guide to brokers for a comparison of the different brokers available in Belgium.
Dangers of stock picking
Some people manage their own portfolio of individual stocks. It's fun and exciting, it's easy to get started by installing any of the broker apps, and you get to invest in the companies you love. But in all likelihood, your returns will be inferior to a portfolio of index funds.
It takes time to do it well
For a start, it takes a lot of time if you want to do it well. And you should if you're investing your life savings! You have to do the research to convince yourself that a particular stock is undervalued by millions of investors around the world. Then you have to decide when to sell. It's best to decide this in advance to reduce the risk of making investment decisions based on your emotions. Emotions are an investor's worst enemy.
You need to buy and sell at the right time
Also, when you buy a share, you need to remember that there's another person on the other side of the transaction who is selling their share to you. Every transaction in the stock market is essentially a trade in opposing views. That other person may be an individual investor like you. But only about 15% of trades are made by individual investors like you and me, so they're more likely to be a professional at a hedge fund, large bank or other financial institution. And there's a good chance they have access to much better information than you, which is why they decided to sell the stock. Investing is their livelihood, and they have whole departments of analysts to help them do it. So from the moment you buy the stock, the odds are against you.
Picking winners is a challenge
Finally, only a relatively small number of stocks do really well. In fact, most stocks don't do all that well. And if you don't own the ones that do, you're much more likely to underperform the market. This skewness makes stock picking really hard.
It's high risk
When you invest in one individual company, you're exposing yourself to a lot of risk. Let's take the (former) German media and investor darling which was Wirecard. It was a payment processing company billing itself as the next Paypal. It grew to be one of the most valuable stocks on the German DAX index and even at one point sought to acquire Germany's largest bank (Deutsche Bank).
However the stock collapsed to zero in 2020 as they fraudulently reported having €1.9bn in cash which didn't exist. It's one of the largest corporate collapses in Germany ever recorded. Sadly many lost their entire savings as they invest their savings in one company.
Investing in ETFs: best way to invest in stocks
There is a better way to invest in stocks from Belgium. There are several reasons why investing in ETFs is one of the best ways for Belgians to grow their wealth, in comparison to trying to pick winners from the thousands of stocks available. Here's why.
It just works
Long-term index investing has worked in the past. And there's no reason it shouldn't work in the future. Just take the global index like the FTSE All-World Index as an example, which is composed of 4,165 companies across 49 countries. It has delivered an average yearly return of 8.4% since 2005.
Low-cost
One of the problems associated with active investing are the high fees. Every time you buy or sell a stock, you incur a broker cost and taxes. ETF investors pay lower fees because index funds are very cheap to run. It's simple to track an index: all that is required is buying the stocks in the index, and update when the index changes. It doesn't require expensive analysts or other specialists.
Diversified
One of the goals of index investing is to diversify as much as possible. Through diversification across many countries and sectors, you eliminate unnecessary risk. And you also benefit from the growth of the best companies in the world, not just the large German, French or American companies you know. By investing in as many companies as possible, you're almost sure of including the winners, namely the minority of stocks that are responsible for most of the returns.
You can invest with a small budget
Another advantage of ETF investing is that you don't need a lot of capital to get started. You can even invest with as little as €50 through apps like Curvo. This makes ETF investing possible for everyone, especially young people who just started their career and want to grow their wealth by putting their savings.
They're tax-efficient
Belgium doesn't tax profits from investments in stocks, making ETF investing particularly tax-efficient for us Belgians. By investing in accumulating ETFs, you avoid the 30% dividend tax you have to pay when investing in individual stocks.
Conclusion
With low interest rates and rising inflation, investing in stocks is essential for growing your wealth and securing your financial future. While stock picking can be risky and time-consuming, investing in ETFs offers a diversified, low-cost, and tax-efficient way to benefit from the global economy’s growth. Start small, stay informed, and make your savings work for you.