Insight into investment options

In this rapidly changing world, wealth accumulation is crucial for financial security. This article offers Flemish entrepreneurs insight into investment options, with a focus on stocks, bonds, real estate and gold. Alternative investments such as private equity, and collectibles such as wine, art, and crypto are not included.

Each asset class, such as stocks, bonds, real estate and gold, has its own characteristics and risk-return profile, essential for a diversified portfolio. Stocks offer a high growth potential but with more risk, bonds are safer but less profitable, real estate combines rental income with increases in value, and gold serves as a “safe haven” in uncertain times. While stocks and bonds are accessible worldwide, here we focus on domestic real estate.

We limit our analysis (somewhat arbitrary) to the last 20 years: 31/12/2003 (or 30/06 for real estate) to 31/12/2023.

This period was very special with interest going to almost zero. Something that had never happened before. Meanwhile, interest rates are back at levels comparable to the 90s, and currently even at the highest level since the introduction of the euro. The dollar, meanwhile, strengthened from 0.79 EUR per USD on 31/12/2003 to 0.90 EUR per USD at the end of 2023.

Stocks

The MSCI World Index offers participation in global stock markets through a representative selection of 1,400 companies from 23 developed countries. This index is ideal for investors who want exposure to a global portfolio, as it offers diversification across geographical regions and sectors.

The S&P 500, one of the most followed U.S. stock indices, includes the 500 largest companies in the United States. He is seen as a barometer of the health of the US economy.

The MSCI Europe Index focuses on developed European markets and provides comprehensive coverage of 425 large and medium-sized companies in 15 European countries.

For all indexes, we take into account the reinvestment of the dividends received.

The S&P500 has been the best-performing index over the past 20 years, with an average annual return in euro of 10.4%. An investment of €100 has grown to €725. The MSCI World also did well, with a return of 8.5%. €100 thus grew to €511. The European stock markets, with a heavy weight of banks and car manufacturers in 2008, fared slightly less, rising 6.4% to €346.

When comparing these three indices, it is important to consider their geographical and sectoral focus. The MSCI World Index offers broad global coverage, while the S&P 500 focuses on the US market and MSCI Europe focuses specifically on European companies.

Bonds

Bonds are (usually) a safe claim on interest from governments or companies. To compare returns, we look at Bloomberg's Aggregate Bond Index for EUR and USD. It contains high-quality corporate and government loans from the various currency zones. The returns are more or less comparable, with an annual return of 3.6% in the US and 2.8% in the Eurozone. €100 invested in Europe gave €173 after 20 years, while $100 resulted in $186 over the same period.

The main negative period was when interest rates were raised in 2022 and 2023.

Gold

Gold has done quite a good job over the past 20 years: €100 invested in gold would now be worth €563, slightly higher than a basket of world stocks. What is striking is that gold often performs opposite to stocks and therefore rises in times of crisis.

However, this good performance by gold is rather exceptional. €100 invested in world stocks in 1980 would be worth €6,000 today, while gold would only be worth €420. Between 1980 and 2003, gold therefore posted a negative return (!)

Realty

Real estate is an essential part of Belgian families' family wealth and attracts many investors. Between 06/2003 and 06/2023, house prices rose by an average of 4.27% per year, below the historical average of 5.5% since 1970, but this growth varied widely, with lower increases after the 2008-2009 banking crisis and during the euro crisis (2012-2016), and higher increases before the banking crisis and during the covid pandemic. This means that the median value for a 2002 home rose from €103,000 to €255,000.

It is important that these figures do not include rental income and costs such as maintenance and contract renewals. In addition, real estate markets vary widely regionally, which means that national averages do not always reflect local trends. The price changes are also different for large houses, closed houses and apartments. These real estate figures can therefore be taken with a big grain of salt.

Comparison

In comparison, we will look at the long-term returns of the past 20 years, the maximum loss, the best 5-year period and volatility. Volatility is the extent to which the price of a financial instrument fluctuates over a period of time.

It is striking that not every asset class has the same risk and return. Real estate and bonds experience fewer price fluctuations but also pay less. In the case of real estate in Belgium, it is striking that declines are rare, in contrast to other European markets such as the Netherlands and Sweden.

The S&P 500 and MSCI Europe have the highest volatility of around 15.1% and 15.7%, suggesting greater price fluctuations and therefore higher risk. This is consistent with the nature of stock markets, which are more sensitive to market fluctuations. Real estate and bonds show significantly lower volatility, especially real estate only 2.1%, making them more attractive to risk-averse investors. Please note that the property category does not take into account rental income, maintenance or taxes, which can be substantially more complex than stocks or bonds.

The sharp decline in bank shares in 2008 severely affected Europe. The biggest interim stock market loss was therefore for Europe, with the European stock index falling by more than 50%. The low point was reached in the first quarter of 2009, which also indicates that the stock investor needs a firmer stomach. All the best 5-year periods for stocks and gold end in March 2014, which indicates that buying in times of crisis can be particularly beneficial.

Stocks and gold gave higher returns but also more fluctuations in their price. The good performance of gold over the past 20 years is remarkable, which is the exception rather than the rule in the long term. Thanks to a major technology component, US stocks outperformed global indices. Due to the very wide spread of the global index, it does provide a slightly smaller volatility.

For the investor, it is clear that adding a well-diversified stock portfolio, despite the peaks and troughs, provides a more than decent return and is a good addition to the overall portfolio. Of course, you can come to Value Square for this.