Investing simply means letting your money work by investing it, in the hope that it will become worth more. Instead of putting all your savings in a bank account at a low interest rate, you buy a share (a piece of ownership) in a company or grant a loan to a government or company (bond), for example. You do this because you expect your investment to grow in the future – the share can increase in value or pay a dividend, and the bond pays interest. Investing is therefore a way to build wealth for later, such as for buying a house, for your pension, or to achieve financial goals.
It is especially important in the long term, because time is a powerful ally in investing. Due to compound interest (literally 'interest on interest'), money you invest grows exponentially as the years pass. A small amount that you invest now can grow into a substantial amount over decades, precisely because any profits are constantly reinvested and generate new profits again. In addition, inflation plays a major role: product prices rise over time, which reduces the purchasing power of idle savings.
In the Netherlands, the savings interest rate has often been lower than inflation in recent years, which means that the money in a savings account can actually decrease in value. Investing can help counteract this, as it historically yields a higher average return than saving. For example, the broad stock market (such as the S&P 500 index in the US) achieved an average long-term return of around 6–7% per year, significantly more than the interest on a savings account. Although investments can fluctuate (or even fall) in the short term, the chance of a positive result increases the longer you give the investment time.
How does investing work and what are the benefits?
When investing, you buy assets – which are things with value, such as shares, bonds, real estate or funds – with the aim of gaining financial advantage from them. You therefore invest your money in something you expect to increase in value or generate income in the future. How does this work in practice? Suppose you buy shares in a company. That money can help the company grow or make a profit, and as a co-owner, you benefit: the share price can rise so you can sell later for a profit, and some companies periodically pay out profits to shareholders in the form of dividend. Or take a bond: you lend money to the Dutch government or a company, for example, and receive a fixed interest rate (coupon) for it. In both cases, your money potentially generates more money.
The advantages of investing mainly lie in achieving a higher return than with saving in the long term. Historically, healthy companies increase in value as the economy grows, and thus stock markets grow with them. You “put your money to work” – while you study, work or sleep, the market can make your investment grow. A well-known benefit is beating inflation: because you generate returns, your assets maintain their purchasing power or even grow, despite everything becoming slightly more expensive each year. Moreover, you benefit from diversification and economic growth: if you have a basket of dozens of different shares, for example (e.g. via a fund or ETF), most economic setbacks in one place will often be compensated by growth elsewhere. Investing also makes it possible to share in global company profits – something you would otherwise not have access to as an individual saver. Finally, starting to invest early, even with small amounts, can yield great benefits thanks to the long investment horizon. Someone who invests a monthly amount at a young age can build up significant wealth over the years purely through the effect of reinvestment and time.
Of course, there are also risks associated with investing – prices can go up and down. Your invested money can increase in value, but also decrease. This is especially true in the short term: the stock market has good and bad days (and occasionally some longer periods). However, an important advantage of a long-term approach is that temporary declines often recover over time, especially if you invest broadly diversified. By remaining calm and not selling in a panic at every dip, you increase the chance of a good end result. In summary, investing works as follows: you invest money in various sources, let time do its work, and reap the benefits of economic growth and compound returns in the long term.
What are shares and bonds, and how do they work?
Shares and bonds are the two best-known forms of investment. For beginners, it is important to understand exactly what these entail, as they form the building blocks of many investment portfolios.
- Shares: A share is proof of partial ownership in a company. Think of it as a company being a cake or pizza divided into pieces; each piece is a share. As soon as you buy a share, you become a co-owner of the company for that piece. If the company is doing well – for example, by making a profit or growing – you benefit. The value of your share can increase, so you can sell it later for more. Additionally, the company may decide to distribute part of the profit to shareholders in the form of a dividend (a type of “bonus” in cash or extra shares). For example: if you own a share of Shell or ASML and the company achieves good results, you will usually see the share price rise and you may receive a dividend. But beware: if the company is not doing so well, the price may fall and you, as a shareholder, run that risk. Shares offer the highest average return in the long term, but also have greater short-term fluctuations in value.
- Bonds: A bond can be seen as the opposite of a share: instead of becoming a co-owner, you become a lender here. It is, in fact, a loan that you give to a government or company. When you buy a bond, you lend out a certain amount for an agreed period, in exchange for regular interest payments. At the end of the term, you get your loaned amount back (in theory). Because you generally get your principal back and receive interim interest, a bond is considered a more defensive investment than a share. The risk is lower: unless the party you lent to goes bankrupt (which is highly unlikely for, for example, the Dutch government), you will get your money plus interest back. The downside is that the expected return is also lower than with shares. Bonds are therefore often used to bring stability to a portfolio. For example: the Dutch State regularly issues government bonds; if you buy such a bond, you receive, for example, ~2% interest annually, and at the end of the term, you get your original investment back.
How do these work together in practice? Many investors opt for a mix of shares and bonds in their investments. Shares for long-term growth, and bonds for stability and a piece of fixed income. When share prices fall, bonds often (but not always) maintain their value better, and vice versa. By diversifying across both categories, you can find a balance between risk and return that suits you.
Other investment options: gold, real estate, funds, ETFs and pension investing
In addition to shares and bonds, there are many other ways to invest. Diversification (spreading) across multiple investment categories can further reduce risks. Here are some popular options:
- Gold and other precious metals: Gold has been seen as a “safe haven” for assets for centuries. People invest in gold (or silver, platinum) because it retains its value in times of economic uncertainty or high inflation. You can buy physical gold (such as gold bars or coins) or invest in a gold fund that tracks the gold price. Gold does not pay interest or dividends, but its price can rise if demand increases or if people seek protection against inflation. In the Netherlands, you can buy gold through specialised dealers or online brokers that offer gold ETFs. The same applies to silver and other commodities: they are tangible assets that can be useful as insurance in your portfolio, but they do not produce income themselves.
- Real Estate: Investing in real estate means investing in “bricks,” i.e., houses, apartments, offices, or retail premises. Real estate can be attractive because it offers two sources of income: rental income (if you rent out the property) and potential appreciation in the value of the property itself. Many people think of real estate investment as buying a second home to rent out. That is possible, but it requires a lot of capital and comes with practical concerns (maintenance, finding tenants, etc.). A more accessible way is through real estate funds or REITs (Real Estate Investment Trusts) – these are investment funds that invest in a portfolio of real estate projects. You then actually buy shares in such a fund and participate in the rental income and value development thereof. This way, you can invest in real estate with smaller amounts, without having to manage a property yourself. In the Netherlands, for example, you have listed real estate funds in which you can participate via your investment account.
- Investment Funds: An investment fund is a joint pot of money from many investors managed by a fund manager. The fund invests that money according to a specific strategy. This can be anything: some funds invest globally in shares, others only in bonds, or in specific sectors (technology, sustainable energy, you name it). When you buy a participation (share) in a fund, you own a piece of the entire mix of investments the fund holds. The big advantage is diversification: with one purchase, you indirectly invest in dozens or even hundreds of different securities. Furthermore, the fund manager takes the work off your hands: he/she decides which shares or bonds are bought and sold. You do pay fees for this (the fund's management costs). An active investment fund tries to beat the market by making smart choices; we will come back to that with active vs. passive investing.
- ETFs (Exchange Traded Funds): An ETF is similar to an investment fund but has an important difference: ETFs usually passively track a specific index and are traded on the stock exchange like a share. Think, for example, of an ETF that tracks the AEX index (the 25 largest listed companies in the Netherlands) or one that tracks the S&P 500 (500 large US companies). Instead of an active fund manager making choices, an ETF simply copies the composition of an index. This also gives you broad diversification, but often at lower costs than active funds. ETFs are popular among beginner investors because they are simple, transparent, and inexpensive. Through an ETF, you can invest in an entire market in one go. In the Netherlands, you can buy ETFs at almost any broker or bank; for example, an MSCI World ETF allows you to invest broadly in thousands of shares worldwide. ETFs thus offer an easy way of passive investing (more on this in the next section).
- Pension Investing (Annuity): In the Netherlands, there is the possibility to invest specifically for your pension with tax benefits. This can be done via a pension account or annuity account at a bank, asset manager (Vive for example), or a broker. The idea is that you deposit money into a special account intended for your pension; you receive (within certain limits) income tax back or do not have to pay it on that deposited amount. That money is then invested, often in a mix of shares and bonds that suits your age and risk profile. Your assets then grow through investments, gross (without paying tax on returns every year), and at retirement age, you withdraw it in the form of an annuity payment on which you then pay tax. The advantage is therefore tax deferral/benefit and the investment return. Many Dutch people invest this way for an extra pension in addition to their employer pension. Incidentally, realise that you probably already invest for your pension through your employer: pension funds invest your deposited premiums in large investment portfolios to make them grow for later. Pension investing in-house (via an annuity, for example) is supplementary and especially interesting if you have a pension shortfall, want extra money for later, or do not build up an employer pension as a self-employed person. It is a relatively safe and smart way to invest long-term, because you do not need the money until your retirement age and you benefit from tax advantages.
Active versus passive investing
An important topic for beginner investors is the difference between active and passive investing. This is about whether you try to be smarter than the market, or rather move with the market.
- Active investing: Here, you try to achieve better results than the average market through research, analysis, and timing. An active investor (or fund manager) chooses specific shares or other investments that he/she believes will perform better than others. An active investor also often tries to enter and exit the market at favourable moments (market timing), for example, selling just before an expected decline or buying before an anticipated rise. The idea is to pick the winners and avoid the losers, to achieve a higher return than “just holding everything”. Active investing sounds appealing – who doesn't want to beat the market? – but in practice, it turns out to be very difficult. You have to constantly monitor the economy and companies, perform analyses, and sometimes dare to intervene. Moreover, you make more transactions, which entails transaction costs, and active funds charge higher management fees. Many studies have shown that only a small portion of professional investors manage to consistently outperform the broad market after costs. In other words: most stock-pickers and expensive fund managers achieve lower returns in the long term than simply the market average, precisely because of those costs and timing risks. Active investing can be fun and instructive as a hobby (and some people beat the market for short periods), but it comes with extra risks and uncertainty.
- Passive investing: This means you do not try to beat the market, but rather follow it. You buy, for example, an index fund or ETF that represents an entire index, and you hold it long-term. Instead of looking for the new Apple or the next Amazon, you essentially buy a piece of all large companies at the same time. Passive investing is also called “index investing” or “diversifying.” The big advantage is that it is simpler and generally cheaper: you do not have to follow the news daily or perform balance sheet analyses, and the costs of index funds/ETFs are low. By diversifying broadly, you also reduce the risk that one wrong choice will tank your entire fortune – after all, you only have a small piece in each company. Although passive investing does not select the top winners of the market, you also do not completely avoid the big losers; you get the average of everything. But notably, that average is often perfectly fine in the long term. Even better, because actively managed investments lag due to costs and errors, passive funds turn out to yield better average returns than active funds over the long term. So, with passive investing, you may not beat the market every year, but you do get the market results – and historically, the trend of markets is rising. For most people (especially beginners), passive investing is a sensible strategy: it takes less time, it is calmer (you don't have to constantly jump in and out), and the return is often very competitive. A saying in the investment world is: “Time in the market beats timing the market” – in other words, simply staying in the market (letting time work) usually beats trying to time it. Passive investing embodies that principle.
Finally: start simple and be patient
Investing does not have to be rocket science. This explanation has shown the basic principles: buy pieces of the economy, spread your risk, give it time, and do not be driven crazy by daily fluctuations. Whether you are a student starting with a small monthly amount, or a working adult setting aside part of your salary – the most important thing is to start and learn through experience. Start with a small amount you can afford to lose, if necessary, so you become familiar with how it works. You will notice that as you understand the terms and movements, investing can become quite interesting and even fun, especially when you see your money growing for you.
Always keep in mind that investing is a long-term process. There will be good years and less good years, but by persevering, investing diversely (preferably many passive index investments for peace of mind), and not trying to time every movement, you will steadily build a financial safety net. This is how you work step by step on your future wealth. Good luck with your first steps in the investment world – hopefully, you now have a better grasp of the basic concepts, and remember: every big oak tree was once an acorn that was planted!
