Saving or investing: what should I do best?

When it comes to building wealth for the future, saving and investing are two central options. But what exactly is the difference between the two? How do inflation and the factor of time influence your choice? And what kind of return can you expect from saving versus investing? In this article, we answer these questions and help you make an informed choice. Because let's be honest: your savings shouldn't just sit idle in the bank as if they've already retired!

What is the expected return from saving and investing?

Return is the profit on your investment. With saving, the return is the interest you receive on your savings account. This interest has been very low in recent years – often somewhere between 0% and 2%, depending on the economy and the bank. Saving therefore provides limited growth. With investing, on the other hand, the return can vary widely, depending on how much risk you take and market developments. Returns between 0% and 30% per year occur in the world of investment, especially when looking at longer periods. Naturally, the rule is: the higher the return, the higher usually the risk.

We like to say: investing is like gardening – with a little patience, a small plant can grow considerably! (Whereas saving is more like a plant in a pot that grows slowly, unless you give it a lot of time.)

What does the past say about saving and investing?

Historical data shows that investing over the long term has almost always yielded a higher return than saving. For example, the S&P 500 index (a well-known stock index) has never given a negative total return over periods of 20 years, while savings interest rates often remained stable but low during the same periods.

Investing naturally entails risks in the short term – prices can fall. But these risks decrease considerably as your investment horizon lengthens. In other words: the longer you invest, the greater the chance that dips in the market will later be compensated by rises.

Have you ever thought: “Investing seems so risky!” Remember that the market is often patient and wise in the long term. A bit like a wise old owl – it quietly flutters through short-term unrest and eventually lands wisely (read: the market has historically always recovered and grown over sufficient years).

What is the risk of inflation?

Inflation is the silent killer of your purchasing power. It means that money becomes less valuable as the prices of goods and services rise. For example: if you have €10,000 in a savings account with 1% interest, but inflation is 2%, you are effectively losing purchasing power – your money is not growing fast enough to keep up with the higher prices.

With saving, you therefore run the risk that your capital really shrinks, despite the nominal amount remaining the same or growing slightly. With investing, you generally have a better chance of keeping up with or beating inflation, because the expected return is higher than inflation, especially in the long term with stocks. Of course, investing is not a guarantee, but historically it is one of the few ways to truly outsmart inflation.

You can see inflation as that annoying aunt who visits uninvited: you didn't ask for her, but you have to deal with her. Investing can help you at least have a biscuit with your coffee despite her arrival!

Advantages and disadvantages of saving and investing

Let's compare directly. Below we list the main advantages and disadvantages of saving and investing:

Advantages of saving:

• Very safe: Your money is fixed and you cannot have fewer euros than your deposit (up to €100,000 is even guaranteed at a Dutch bank via the deposit guarantee scheme).
• Liquidity: You can access your savings whenever you want, without any loss in value (at most you miss some interest if there are limiting conditions).
• Simple: Anyone can open a savings account; no complicated knowledge is involved.

Disadvantages of saving:

• Low return: The savings interest rate is often low and sometimes lower than inflation, causing your purchasing power to drop.
• Inflation risk: As mentioned, your money loses value in terms of purchasing power if prices rise faster than your savings interest.
• Limited tax benefit: Apart from some exemptions, there is little fiscal benefit to ordinary saving; wealth tax can even negate part of your interest.

Advantages of investing:

• Higher potential return: Especially in the long term, investments can yield significantly more than saving. Your capital can grow with the economy and corporate profits.
• Protection against inflation: A good investment portfolio generally grows faster than inflation, causing your purchasing power to increase or be maintained.
• Tax benefits for retirement: If you, for example, invest for your retirement through certain fiscal products (such as annuities or retirement investing), you can receive tax benefits.

Disadvantages of investing:

• Investment risks: The value of investments can fluctuate. In the short term, you can suffer a (considerable) loss if the market falls.
• Complexity: There is a bit more involved than saving; you must take into account risk diversification, costs, your risk profile, etc. (Fortunately, Vive can simplify a lot of this for you!).
• Costs: Investing often entails costs (transaction costs, fund costs). Although these are often low with index investing and new platforms, it is still something to keep an eye on.

(Tip: Always ensure a solid financial buffer for emergencies before you start investing – see our blog about this, internal link, so you don't run into problems if the washing machine breaks down while your money is in investments.)

How does a long investment horizon help to reduce risks?

The investment horizon is the time you plan to leave your money invested before you need it. The longer your horizon, the more risk you can generally take, because you have time to sit out any setbacks. A long horizon significantly reduces the risk of loss.

Why? Anything can happen in the short term – markets can fall due to crises, pandemics, or political events. But over, say, 15 or 20 years, those individual events are often small bumps in a rising line. Historically, broad stock markets have almost always given a positive return over periods of 15-20 years.

Here are some example situations of different investment horizons and what your strategy might look like:

1. Short term (0-3 years) – Example: You are saving for a down payment on a house or a planned large expense within a few years.Strategy: Because the horizon is short, the risk is high that you will have to sell at exactly a bad time. For such goals, it is often recommended not to invest, or to invest only very limitedly. Saving or very safe investments (such as a deposit, short-term bonds, or money market fund) are more logical here, so that the amount is definitely available when you need it.
2. Medium term (3-10 years) – Example:\ You are setting aside money for your children's studies that will start in 5 or 8 years, or for a round-the-world trip in about 7 years.
   \Strategy: With a medium-term horizon, you can consider a mixed portfolio. For example, a mix of stocks and bonds\. You could do, for example, 50% stocks / 50% bonds for a 10-year horizon, or 30% stocks / 70% bonds for a shorter medium-term goal. This gives you growth potential, but also a significant amount of stability to absorb setbacks as the goal approaches.\\
3. \Long term (10-20 years)\ – \Example: You start investing at age 30 for your retirement around age 60, or you are putting money aside for your children who will be leaving home in ~15 years.Strategy:\ With a long horizon, you can focus more on growth, because you have time to sit out temporary market declines. A portfolio with a higher percentage of \stocks is common (e.g. 70-100% stocks, the rest bonds or real estate) because over 15+ years the chances are high that stocks will compensate their volatility with growth. You can add some bonds for balance, but the emphasis should be on return.
4. Very long term (20+ years) – Example:\ You are in your early 20s and are already starting to invest for supplementary retirement or a distant future, or you are investing with the idea of later transferring capital to your children.
   \Strategy: With such a long investment horizon, you can invest almost entirely focused on growth. After all, you have decades of time. A portfolio with mainly stocks\ (and possibly real estate, global index trackers) fits this. The long term offers the opportunity to maximise the benefits of compound returns. Short-term risks matter much less, because you have more than enough recovery years.\\
5. \Lifelong horizon\ – \Example: You are building up capital that you may invest your whole life and only partially start using upon retirement, or which you even want to leave as inheritance.Strategy: This largely depends on your age and goals. Initially, you can invest very offensively (many stocks). As you get older, you can gradually become somewhat more defensive (a few more bonds) to protect your accumulated profit, especially for the part you need yourself. For the part you want to leave to heirs, you can potentially remain offensive if they can also invest it for a long time. Customisation is important here.

Every investment horizon requires its own approach and strategy, taking into account your financial goals, risk tolerance, and how much time you have to recover from any setbacks. The longer the horizon, the more volatility you can allow, because temporary declines are often later compensated by the market.

So what can you do? That is up to you

Saving and investing each have their advantages and disadvantages, depending on your financial goals and risk appetite. Saving is safe and maintains your nominal amount, but currently offers little return and inflation nibbles away at the value. Investing can yield higher returns, especially over the long term, and helps to stay ahead of inflation – but it has short-term fluctuations and risks. Time is your friend here: a long horizon makes investing safer and more effective.

Whatever you choose, it is important to understand how factors like time and inflation influence your ultimate capital. Take the time to list your goals and determine how much risk you want to take for them.