Camille Van Vyve
20 Apr 2024
What to invest in to generate stable long-term income?
The ultimate goal of an investor is typically to one day reap the rewards of their efforts by earning a steady income from patiently accumulated assets. But how can one build this income stream sustainably, meaning without excessive costs and without depleting their capital too quickly?
1. Investing in real estate
Many Belgians have the fixed idea of buying real estate early enough so that once it's paid off, it can generate a comfortable rental income. It's certainly an interesting idea—especially considering that rents are currently not taxed in Belgium—as long as one can afford it. However, the registration fees and notary fees (15% of the purchase price), the down payment required by banks (20% of the total price + fees), the interest burden of the loan (close to 4% per year over 20 years currently), and the ongoing expenses associated with any type of real estate require deep pockets... and weigh on the return. Additionally, the capital is then completely tied up and cannot be easily divided. To precisely evaluate the return on a real estate investment, Easyvest has built a simple and downloadable model: do the calculation, you might be surprised!
2. Investing in a few stocks and bonds with good returns
When receiving a group insurance payout, an inheritance, or when deciding to invest accumulated savings over time, some people decide—with or without professional help—to invest in a few flagship stocks, expected to provide stable and comfortable returns. Typically, a handful of stocks considered "blue-chip" and bonds with a reasonable coupon rate. This is the case of Mr. Dupont, who has a nice capital of €400.000. This capital is invested entirely in 4 (!) Belgian stocks, spread across three sectors of activity. These companies have a good history in terms of dividend distribution, which allows Mr. Dupont to receive until now a comfortable dividend of around €9.000 per year. Very satisfied with his investment, Mr. Dupont nevertheless opted for a risky and expensive strategy, because:
- Its annual dividend is subject to withholding tax of 30%
- Its portfolio is very concentrated, on only 4 stocks, a single (small) country and 3 sectors of activity. This lack of diversification significantly increases the risk and potential volatility of one's portfolio.
Furthermore, it is extremely difficult – if not impossible! – to bet on long-term “champions”. As shown in the infographic below, over the last 20 years, only Microsoft has remained in the top 5 best stocks globally.
3. Building a diversified portfolio with ETFs
Easyvest recommends investing capital as early as possible in a portfolio of ETFs that are maximally diversified, including stocks from around the world and eurozone government bonds. Such a strategy is:
- Cost-effective: accessible from €5.000 with fees ranging from 0,5% and 1% per year
- Performance-driven: over the last 10 years, the global equity market has generated an annualized return of 9,8%, a benchmark that very few active managers have managed to match. Conservatively, we can expect an average return of 7% per year in the long term.
- Rational: the portfolio is maximally diversified across around 4.000 stocks, limiting volatility. The bond portion of the portfolio also mitigates risk according to the investor's profile and investment horizon.
- Efficient: Easyvest only invests in capitalization ETFs, which means that dividends and interest are reinvested year after year rather than being distributed, which allows capital to be preserved as much as possible in the long term.
- Tax-efficient: in Belgium, capital gains on shares are not taxed. Only the capital gain realized on the bond portion of the portfolio will be subject to the 30% withholding tax. Moreover, when it comes to paying the annuity, it's usually preferable to sell stocks rather than bonds, as the stock portion of the portfolio tends to appreciate the most. Only the stock exchange tax (TOB) of 0,12% will be due on this type of transaction.
€200.000 = €1.000 per month for 20 years
"Savings for retirement are like exercising to stay fit": it's obvious but often too easy to put off. In investing, like in other areas, setting a goal is key to success. That's why Easyvest has developed a simulator that not only allows you to project potential income but also helps you set a financial goal and define the effort required to achieve it starting today. Using our simulator, you'll discover that €200.000 accumulated can generate a monthly income of €1.000 for 20 years, considering a 2% inflation rate, a median scenario with a 50% chance of success, and an evolving risk profile (becoming increasingly defensive over time).
A simple rule of three
Are you aiming for a monthly income of €3.000? Through a simple rule of three, you now know that it will be necessary to accumulate a capital of €600.000 for that purpose. While the amount may seem high, it's achievable for those who start investing early. In a previous blog, we calculated how long it takes and with what monthly effort it's possible to accumulate a capital of €1 million—without winning the lottery or inheriting from a wealthy uncle!
Easyvest's simple and effective income portfolio
Do you want to make the most of the capital you've diligently and patiently accumulated during your working life? Avoid paying excessive fees and build an income portfolio based on ETFs that will allow you to preserve your capital for as long as possible. Try our simulation now on our website and schedule an appointment with one of our managers to get answers to all your questions!