How do you put 25,000 euros in savings to work profitably?

Despite rising interest rates, the money in your savings account will continue to lose purchasing power in the coming years. What are the easy ways to protect your savings against inflation?

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This week it once again became clear that central banks have turned their backs. The US central bank (Fed) raised its key interest rate by 75 basis points for the second time in a row on Wednesday, to 2.25 to 2.5 percent. The interest rate hikes are mainly intended to curb the very high inflation. In June, the American rate rose to 9.1 percent, the highest level since 1981. The battle against inflation has also started in Europe. Last week, the European Central Bank (ECB) raised its key interest rate by 50 basis points to 0 percent, and a second hike is likely to follow in September. The money market expects the ECB to gradually raise the deposit rate to 1 or 1.25 percent by March next year.

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The rise in short-term interest rates seems good news for the 300 billion euros on Belgian savings accounts, which have yielded barely 0.11% interest per year since 2016. In anticipation of a higher ECB interest rate, the internet bank NIBC Direct was the first to raise the savings rate at the end of June, albeit by a modest 0.05 percentage point. Other banks may also follow in the coming months.

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Nevertheless, the chance is extremely small that the real interest on your savings account, after adjustment for inflation, will quickly enter positive waters. ‘Central banks made the turn in the first half of the year from supporting the economy to fighting inflation. But their room for maneuver is limited’, says Luc Aben, the chief economist of the private bank Van Lanschot. He refers to the difficult balancing act that awaits the ECB. On the one hand, inflationary pressures are high, on the other, fears of a recession in the eurozone are growing. Moreover, the energy supply problems will not be solved. ‘If the central bank is faced with the choice of supporting the economy or tackling inflation, it will probably opt for the former,’ says Tom Mermuys of KBC Asset Management.

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There is little point in waiting for the ideal moment to get into the stock market. Time in the market beats timing the market.

Matthias Ceusters

Leo Stevens Private Banking

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Significantly higher savings rates are therefore not immediately forthcoming, not even on long-term savings products such as term accounts. Etienne de Callataÿ, chief economist at asset manager Orcadia, said negative real interest rates could last for more than a decade.

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If you want to arm your savings against a loss of purchasing power, it is therefore better to take action. “The best solution to protect savings against inflation is equities,” asset managers say in unison. “Equities are not only inflation-proof, they are also by far the most profitable asset class in the long term,” says Erik Joly of ABN AMRO Private Banking. ‘Obviously, the investment must match your risk profile. Those who cannot withstand a temporary loss of capital or who are inclined to sell at the slightest decline should stay away from the stock market. But anyone with a sufficiently long horizon is much better off with shares than with a savings account.’

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Is it a good time to get into the stock market? Actually, that question is irrelevant. “There is little point in waiting for the ideal moment. Time in the market beats timing the market,” says Matthias Ceusters of Leo Stevens Private Banking. It is also a fact that today is a much better entry point than six months ago. Compared to the beginning of this year, for example, European equities are more than 15 percent lower.

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There are also ways to reduce the risk of a wrong entry moment. If you want to invest 25,000 euros, it is best not to do so in one go, but in different phases. ‘Opt for a fixed amount, a fixed frequency and a fixed investment product. In this way you eliminate the luck factor when boarding the car,’ says Mermuys. It is also important to stick to the schedule, even when there is stress in the markets. ‘At those times, just more pieces can be bought with the same amount,’ says Aben. According to the Callataÿ, a commonly used rule of thumb today is to invest a third of the amount, another third within six months and the last part within twelve months.

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Step into the stock market spread over time. Choose a fixed amount, a fixed frequency and a fixed product. This way you eliminate the luck factor as much as possible.

Tom Mermuys

KBC Asset Management

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A phased entry is one thing, the question remains which investment product you choose. Here, too, spreading is the key word. As a do-it-yourselfer you can of course get started by selecting stocks yourself, but due to the phased entry and the relatively low amount of 25,000 euros, it is difficult to immediately have a sufficiently diversified portfolio. Those who take their first steps should opt for a solution that does guarantee spread. We discuss three ways.

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1. Stock Trackers

The easiest and most cost-effective way to diversify stocks are trackers or listed index funds. With these funds you immediately have a portfolio of dozens of shares with a limited amount. If you want to keep it very simple, you can opt for one tracker on MSCI World, for example. With this global stock index, you immediately invest in more than 1,500 listed companies worldwide. You then invest in Apple, Microsoft and Tesla, but also, for example, in AB InBev.

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Most providers of listed index funds, such as iShares (BlackRock), Amundi or Xtrackers (DWS) offer a tracker on this index. Depending on the provider, the trackers are listed on easily accessible exchanges, such as Euronext Amsterdam.

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Geert Van Herck, tracker specialist at Keytrade Bank, opts for a portfolio of 2 trackers for beginners. “I would put half in a tracker on MSCI World and half in a tracker on MSCI Emerging Markets,” he says. With the latter tracker, you invest exclusively in the growth markets, with Asian companies accounting for the bulk.

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If you want to spread even more, you can add a few trackers. Erik Joly points out that the MSCI World index invests 68 percent in American companies. “That’s why it might make sense to add a tracker to the European Euro Stoxx 50 or the German DAX index,” he says.

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Trackers lend themselves well to a staggered entry. All you need to do is open a brokerage account with an online broker that charges low transaction fees for orders placed on European exchanges. Certainly if you opt for trackers on Euronext, you can limit the purchase costs of a tracker to a few euros. You also have to take the annual management costs into account with a tracker. These are calculated in the price of the tracker, so that you do not pay them separately. For the most commonly used indices, those costs are less than 30 basis points per year. Finally, there is a stock exchange tax on both the purchase and the sale. For most trackers this is 0.12 percent, although in some cases it can be as much as 1.32 percent. It is important to inform the broker well in advance.

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2. Mixed Funds

Anyone who does not want to invest 100 percent in shares can opt for mixed funds or patrimonial funds. These are funds that invest not only in stocks, but also in bonds or other assets. This diversification reduces risk and can provide greater peace of mind for investors with a lower appetite for risk. However, in the long run you will lose your return.

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Mixed funds can be divided into four groups. The defensive funds invest an average of 35 percent in equities, the neutral funds an average of 50 percent and the dynamic funds 75 percent. There are also the flexible mixed funds that can invest between 0 and 100 percent in equities.

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There are hundreds of mixed funds on the Belgian market, so making a choice is no easy matter. With a long-term horizon, it is better to choose a fund that invests at least 50 percent in equities. ‘The return prospects of an equity portfolio for the next ten years look a lot better than those of (European) bonds. Our advice is to choose sufficient shares in the investment portfolio, taking into account the risk profile. But it is also important to underline the importance of bonds as a stabiliser,’ says Mermuys. Ceusters also does not write off bonds. ‘Yields of 3 to 4 percent on credit-grade bonds in euros with maturities of five to seven years are once again achievable,’ he says.

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Our advice is to choose sufficient shares in the investment portfolio, taking into account the risk profile. But it is also important to underline the importance of bonds as a stabilizer.

Tom Mermuys

KBC Asset Management

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Each bank offers a mixed fund, but past returns indicate large performance differences. In the table you will find a selection of mixed funds with a minimum score of two Time Crowns. These are funds that have been among the better funds in their category in the past five years in terms of both return and risk. Often these are funds from foreign managers that are more difficult to buy from your house bank. Even then it is advisable to open a securities account with an online broker.

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Several brokers offer extensive access to the better funds on the market and charge no or limited entry fees. Examples are MeDirect, Keytrade Bank, Saxo Bank and Deutsche Bank. As with the trackers, in addition to the entry costs, you have to take into account the annual management costs that are included in the net asset value of the fund. For mixed funds, those annual fees typically range between 1 and 1.5 percent. Whether there is a stock exchange tax will depend on whether or not the fund pays out dividends.

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3. Holdings

If you still want to put together a basket of individual shares yourself, you can opt for holding companies. These are listed investment companies that invest in various listed and unlisted companies, usually across different sectors.

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Well-run holdings also often manage to outperform the stock market. A study by De Tijd showed at the beginning of June that 34 European family holding companies were able to present an average return of 17 percent per year, including dividend, over the past decade. That was better than the EuroStoxx50 (+10%) or the MSCI World (+12%). The fact that family holdings risk their own money means that they usually invest in a disciplined way.

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Still, Joly warns. ‘I am certainly in favor of holdings, but with an amount of 25,000 euros, I think that even with 4 holdings, you are still investing too little in a diversified manner.’ He refers to the blow that various holding companies had to endure during the first half of the year. Sofina, Brederode, Prosus, Kinnevik and Eurazeo lost more than 40 percent on average. ‘They are holdings with an excellent track record and good management, but it shows that you are less diversified with a holding than with a tracker,’ he says.

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Don’t go looking for the jackpot

If you take your first steps on the stock exchange, you may soon be tempted to take a gamble on a particular theme or segment. ‘Don’t do it with your first savings,’ is what the asset managers say. Erik Joly gives the example of renewable energy (clean energy). “That sector contains many companies with excellent prospects, but they are often growth companies and they are vulnerable to interest rate hikes, as we have seen in recent months,” he says.
Etienne de Callataÿ also recommends giving priority to diversification with an amount of 25,000 euros. ‘You can invest in technology companies, for example, because you are convinced that this is a key sector for the future. But the question is not whether technology will become important, the question is whether technology will become more important than we already think today and then price in the market. The answer to that question is not simple. Sometimes we think we will be the only ones to discover tomorrow’s winners, but those who think themselves smarter than the rest are often disappointed.’

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