Saving or investing: which is best?

When it comes to building wealth for the future, saving and investing are two central options. But what is really the difference between the two? How do inflation and the time factor 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 face it: your savings shouldn't sit idle in the bank as if they were already retired!

What is the expected return from saving and investing?

Return is the profit on your investment. In savings, return is the interest you receive on your savings account. That interest rate has been very low in recent years - often somewhere between 0% and 2%, depending on the economy and the bank. So saving yields limited growth. With investing, on the other hand, returns can vary widely, depending on how much risk you take and market trends. Returns between 0% and 30% per year are common in the investment world, especially if you look at longer periods. Of course, 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 big! (Whereas saving is more like a little 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 show that over the long term, investing has almost always produced higher returns than saving. For example, the S&P 500 index (a well-known stock index) has never given a negative total return over 20-year periods, while savings rates have often remained stable but low over those same periods.

Investing obviously involves short-term risks - prices may fall. But these risks become significantly smaller the longer your investment horizon. In other words, the longer you invest, the more likely it is that dips in the market will later be made up for by increases.

Have you ever thought, "Investing seems so risky!" Then remember that in the long run, the market is often patient and wise. A bit like a wise old owl - quietly flitting through short-term turmoil and eventually landing wisely (read: the market has historically always recovered and grown over enough years).

What is the risk of inflation?

Inflation is the silent assassin of your purchasing power. It means that money becomes worth less 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 higher prices.

So with saving, you run the risk that your wealth will shrink in real terms, despite the nominal amount staying the same or growing a little. With investing, you generally have a better chance of keeping up with or beating inflation because the expected return is higher than inflation, especially over the long term with stocks. Of course, investing is no guarantee, but historically it has been one of the few ways to really outsmart inflation.

You can think of inflation as that annoying aunt who comes to visit you uninvited: you didn't ask for it, but you have to deal with it. Investing can help you have at least a cookie left 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:

Benefits of saving:

• Very safe: Your money is fixed and you cannot have fewer euros than your deposit (at a Dutch bank, up to €100,000 is even guaranteed through the deposit guarantee system).
• Liquidity: You can access your savings whenever you want, with no loss of price (at most, you miss some interest if there are restrictive conditions).
• Simple: Anyone can open a savings account, no complicated knowledge is involved.

Disadvantages of saving:

• Low return: The savings rate is often low and sometimes lower than inflation, reducing your purchasing power.
• Inflation risk: As mentioned, your money loses value in terms of purchasing power if prices rise faster than your savings rate.
• Limited tax benefit: Outside of some exemptions, there is little tax benefit to just saving; estate taxes can even wipe out some of your interest.

Advantages of investing:

• Higher potential returns: Especially over the long term, investments can yield significantly more than saving. Your assets can grow with the economy and corporate profits.
• Protection against inflation: A good investment portfolio grows on average faster than inflation, increasing or maintaining your purchasing power.
• Retirement tax benefits: For example, if you invest for retirement through certain tax products (such as annuities or retirement investing), you may receive tax benefits.

Disadvantages of investing:

• Investment risks: The value of investments can fluctuate. In the short term, you may suffer (substantial) losses if the market falls.
• Complexity: There's a bit more involved than saving; you have to consider risk diversification, costs, your risk profile, etc. (Fortunately, Vive can simplify much of this for you!).
• Fees: Investing often involves costs (transaction fees, fund fees). Although these are often low with index investing and new platforms, it is still something to keep an eye on.

(Tip: Always provide a solid financial buffer for emergencies when investing - see our blog on this, internal link, so you don't run into trouble if the washing machine breaks down while your money is in investments).

How does a long investment horizon help reduce risk?

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

Why. In the short term, anything can happen - markets can fall because of crises, pandemics, political events. But over, say, 15 or 20 years, those individual events are often small bumps in an upward trajectory. Historically, over periods of 15-20 years, broad equity markets have almost always given positive returns.

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

1. Short term (0-3 years) - Example: You are saving for a down payment on a house or a planned major expense within a few years.
   Strategy: Because the horizon is short, the risk is high that you will have to sell just at a bad time. For such goals, it is often recommended not to invest or to invest very little. Savings or very safe investments (such as a deposit, short-term bonds or money market fund) make more sense here, so that the amount is definitely available when you need it.
2. Medium-term (3-10 years) - Example: You set aside money for your children's college studies starting in 5 or 8 years, or for a trip around the world in about 7 years.
   Strategy: With a medium-term horizon, you might consider a mixed portfolio. For example, a mix of stocks and bonds. For example, you could do 50% stocks / 50% bonds for 10-year horizon, or 30% stocks / 70% bonds for a shorter mid-term goal. That way you have growth potential, but also a fair amount of stability to take hits as the goal gets closer.
3. Long Term (10-20 years) - Example: You start investing at age 30 for retirement around age 60, or put money away for your kids who will be moving out of the house in ~15 years.
   Strategy: A long horizon allows you to focus more on growth because you have time to sit out interim market declines. A portfolio with a higher percentage of stocks is common (e.g., 70-100% stocks, the rest bonds or real estate) because in 15+ years, stocks are likely to offset their volatility with growth. You can add some bonds for balance, but the emphasis may be on yield.
4. Very long term (20+ years) - Example: You're in your early 20s and start investing now for supplemental retirement or a distant future, or you're investing with the idea of transferring wealth to your children later.
   Strategy: With such a long investment horizon, you can invest almost entirely for growth. After all, you have decades. A portfolio of mostly stocks (and possibly real estate, index trackers globally) fits the bill. The long term provides an opportunity to maximize the benefits of compound returns. Short-term risks matter much less because you have more than enough recovery years.
5. Lifetime horizon - Example: You build up assets that you might invest your whole life and only partially use at retirement, or what you even want to bequeath.
   Strategy: This depends a lot on your age and goals. In the beginning, you can invest very offensively (lots of stocks). As you get older, you can gradually go a little more defensive (a little more bonds) to protect your accumulated gains, especially for the portion you need for yourself. For the portion you want to leave to heirs, you can possibly remain offensive if they can also invest it for a long time. This is where customization is important.

Each investment horizon requires its own approach and strategy, taking into account your financial goals, risk tolerance and how much time you have to make up for any setbacks. The longer the horizon, the more volatility you can allow, as temporary declines are often made up by the market later.

So what can you do? That's up to you

Saving and investing each have their advantages and disadvantages, depending on your financial goals and risk appetite. Saving is safe and preserves your nominal amount, but currently offers little return and inflation nibbles away at value. Investing can offer higher returns, especially over the long term, and helps stay ahead of inflation - but 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 such as time and inflation affect your ultimate wealth. Take the time to list your goals and determine how much risk you are willing to take to achieve them.