Saving or investing starts with the same goal: growing your money; increasing your wealth. But which method of growing your money yields the most?
Saving
Saving money is relatively safe. When you put 500 euros in your savings account and do nothing else with it, it remains 500 euros. The bank then pays a certain percentage of interest on it, which can even make it grow. However, savings interest rates are getting lower, meaning your money does not grow quickly. Saving is therefore safe, but also offers little return. The low risk translates into a low return.
Inflation
Also consider inflation. Inflation means a rise in the general price level, which means you can buy less with the same amount of money. This simultaneously represents a decline in purchasing power. Suppose in the current era you can buy a loaf of bread for 1.50 euros, and in five years the same loaf of bread costs 3.00 euros. In five years, inflation would then be 100%, and you could only buy half a loaf of bread for the same money. The opposite of inflation is deflation: then your money actually becomes worth more and you can buy more for the same amount.
Taking inflation into account, which we will undoubtedly be dealing with for a long time, it is possible that your current savings - for example the 500 euros from this example - will not be worth as much in ten years as they are now. Add the minimal savings interest to that and saving suddenly no longer seems so risk-free and safe. You could even lose purchasing power. Let alone the scenario where your bank goes bankrupt in the meantime.
Does that mean saving is not a good idea at all? On the contrary. Saving is always advisable. It is always good to save a (small) amount, for instance for unforeseen expenses in the near term. But looking further ahead, investing might be a better option.
Investing
Investing gives you the opportunity to grow your money faster than when you save. The risk, on the other hand, is also greater. You can invest in stocks or in bonds.
Stocks
When you invest in stocks, you receive dividends. This is the distribution of profit from a company to its shareholders. A company that makes a profit can actually do two things with it: retain the profit and invest in the business, or distribute it to its shareholders. It is called a dividend when the profit is distributed to the shareholders.
Bonds
You can also invest in bonds, which means you are lending money to a company or government. You lend your own money to a company or government, and in return for providing the loan you receive a coupon rate. The coupon rate is usually paid out periodically, and can be either fixed or variable.
A bond can have a fixed or indefinite term. If you invest in a bond with a fixed term, you get your money back at the end of the term.
Stock price
Stocks and bonds have a value, the price, and the price can rise or fall. This depends, among other things, on supply and demand: if there is high demand but low supply, the price will rise. If there is low demand but high supply, the price will fall. Your return, also known as the yield on your investment, consists of dividend or interest income, as well as changes in the price. The return can result in either a profit or a loss.
Risk versus return
Investing carries a certain degree of risk. After all, the value of your investments is not fixed: the value can rise, but also fall. Moreover, it is not certain that you will always get your initial investment back. But it is precisely this higher risk compared to saving that creates the opportunity for a higher return. Where saving has a low risk but also yields a low return, the risk that comes with investing can pay off in a higher return.
How much risk you want to take when investing is best determined in advance. When you take greater risks, your return is likely higher. But in the event of price declines, you can also lose money faster (and more). To potentially limit your risks, you could opt for a broadly diversified portfolio, for example with short-term bonds issued by governments or creditworthy companies. This is relatively safe. Naturally, bonds issued by less creditworthy companies are less safe and therefore riskier.
Saving is safe, investing potentially offers higher returns
The risky nature of investing immediately answers the question: saving or investing? Saving is relatively safe: you keep your initial investment, but due to inflation or a bank going bankrupt, you could lose purchasing power in the long run because your money decreases or loses value. Investing, on the other hand, is risky due to rises and falls in the stock price, but investing can yield much more in a short time. When you achieve high returns from your investments, you essentially keep pace with inflation. Inflation reduces the value of money, but because with the right investments you could earn more money than the rate at which inflation hits, you ultimately benefit more - and in less time - from the returns on your investments than from the returns on savings.
Investing yourself or through a financial adviser?
Once you have made the choice between saving or investing, and you have chosen investing, the next question likely arises: should I invest myself or have a financial adviser do it? A financial adviser knows the ins and outs and can advise you on setting up a profile and buying and selling stocks. That is of course convenient, but for that expertise and service you often pay a high percentage of your profits.
If you are already an experienced investor or want to try it yourself, then JackBot is the right place for you. With JackBot, you can get started without the involvement of a financial adviser. JackBot collects and analyses existing data in the most comprehensive and efficient way, and based on past results can offer a guiding and helpful hand in making decisions and finding that needle in the haystack. Sounds good? Then first have a look at our terms of use.