Understanding 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 excluded.

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

We limit our analysis (somewhat arbitrarily) 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 rates going to quasi-zero. Something that had never occurred before. Meanwhile, interest rates have returned to levels comparable to the 1990s. And currently even at the highest level since the introduction of the euro. Meanwhile, the dollar has strengthened from EUR 0.79 per USD on 31/12/2003 to EUR 0.90 per USD at the end of 2023.

Shares

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

The S&P 500, one of the most widely followed U.S. stock indices, includes the 500 largest companies in the United States. It is considered a barometer of the health of the U.S. 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.

We take into account the reinvestment of dividends received in all indexes.

The S&P500 has been the best performing index over the past 20 years with an average annual return in euros of 10.4%. A €100 investment grew to €725. The MSCI World also did well, with a return of 8.5%. €100 thus grew to €511. European stock markets, with a high weighting of banks and automakers in 2008, did slightly less, rising 6.4% to €346.

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

Bonds

Bonds provide a (mostly) safe claim on interest from governments or corporations. To compare yields, we look at Bloomberg's Aggregate Bond Index for EUR and USD. This contains quality corporate and government credits from the different currency zones. The returns are more or less comparable, with an annualized return of 3.6% in the U.S., and 2.8% in the Eurozone. €100 invested in Europe yielded €173 after 20 years, while $100 over the same period resulted in $186.

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

Gold

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

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

Property

Real estate is an essential part of family wealth among Belgian families and attracts many investors. Between 06/2003 and 06/2023, house prices grew at an average annual rate of 4.27%, below the historical average of 5.5% since 1970. However, 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. That is, the median value for a 2002 home rose from €103,000 to €255,000.

Importantly, these figures do not include rental income and costs such as maintenance and contract renewals. In addition, real estate markets vary widely regionally, meaning that national averages do not always reflect local trends. Also, price changes are different for large houses, gated homes and apartments. Therefore, these real estate figures should be taken with a large grain of salt.

Comparison

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

It is worth noting here that not every asset class carries the same risk and return. Real estate and bonds experience less price volatility but also yield less. With real estate in Belgium, it is notable that declines rarely occur, unlike other European markets such as the Netherlands and Sweden.

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

The sharp decline in bank stocks in 2008 hit Europe very hard. Consequently, the biggest interim stock market loss was for Europe with a drop of more than 50% for the European stock index. The low point was reached in the first quarter of 2009. This also indicates that the equity investor needs to have a firmer stomach. All of the best 5-year periods for equities and gold ended in March 2014, indicating that buying in times of crisis can be particularly beneficial.

Equities and gold gave higher returns but also more fluctuations in their price. Notable is the good performance of gold over the past 20 years, which is the exception rather than the rule over the long term. U.S. stocks, thanks to a large technology component, outperformed world indices. The very large spread of the world index does give it a slightly lower volatility.

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