Questions from beginner about investing from Germany

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rtaf84
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Joined: Sat Nov 24, 2018 11:55 am

Questions from beginner about investing from Germany

Post by rtaf84 » Thu Dec 06, 2018 1:08 pm

Greetings Bogleheads!

My story and request(s) for information will probably sound very similar to others in the forum, however after trying to find posts from people in a similar situation as me, I thought it would be best if I created a new post to gather all important (to me) questions.

I have been slowly trying to educate myself financially since last Summer and my plan is to start investing early next year. Some details about my situation:

Country: EU citizen residing in Germany
Emergency funds: 12 months of expenses
Debt: 0
Tax filing status: married, filing jointly
Age: 35

I currently have 70k sitting in my savings account essentially doing nothing. Starting out, my idea is to invest 6k every year, either 500E monthly or in a single yearly transaction. The problem is that living in Germany and investing from here makes certain things complicated (also not speaking the language doesn't help either).

My questions:
  • Broker: I am aware of the main differences of independent brokers vs banks, the most important one being the fact that banks do all the complicated taxation stuff for you, however I'd definitely appreciate specific recommendations or pros/cons of specific brokers. I currently have a bank account with DKB, which also offers a Depot account for investments. Is someone using DKB for ETFs? How does it compare with ING-DiBa/Comdirect/etc?
  • Banks in Germany have offers on specific ETFs if they are part of a "Sparplan", which essentially means that an amount needs to be invested monthly. Is this approach more preferable compared to doing a single or 2 transactions every year? What about broker fees and taxation?
  • Accumulating vs Distributing ETFs: I am aware that taxation changed in 2018, however it is not entirely clear to me which ETF type is preferable now for long term investments. A concrete example would be great!
  • Synthetic vs Physical ETFs: a lot of the ETFs that are being offered are synthetic. What is the general opinion on these compared to physical ETFs?
  • I plan to start with a simple portfolio consisting of MSCI World and Emerging Markets. I still have not decided about the low risk asset of my portfolio, i.e. bonds. What is your opinion on including a government bond ETF in the mix?
That is all for now! I know it is a lot, but I would definitely appreciate feedback on any of my questions. In case a forum member is experienced in investing in Germany and is in the mood for mentoring a newbie, please send me a private message ;)

indexfundinvestor.eu
Posts: 15
Joined: Sun Oct 14, 2018 7:56 am
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Re: Questions from beginner about investing from Germany

Post by indexfundinvestor.eu » Sun Dec 09, 2018 3:56 am

Banks in Germany have offers on specific ETFs if they are part of a "Sparplan", which essentially means that an amount needs to be invested monthly. Is this approach more preferable compared to doing a single or 2 transactions every year? What about broker fees and taxation?
At the end of the day what matters is fees. I don't use a Sparplan, I use DeGiro so I can't help you with this. But take a look at what you want to invest in a given year, understand what that is going to cost you and compare the alternatives (once a month vs. twice a year).
My understanding is that Sparplans are about (mandatory) monthly contributions for which they don't charge you anything. Check if supplemental contributions are more expensive and what they are charging per year.
Accumulating vs Distributing ETFs: I am aware that taxation changed in 2018, however it is not entirely clear to me which ETF type is preferable now for long term investments. A concrete example would be great!
justETF wrote an article on the topic: https://www.justetf.com/de/news/etf/etf ... -2018.html
They even have a calculator: https://www.justetf.com/de/etf-steuerrechner.html

The goal of the new law is for both ETFs to have the same tax rate. So the tax rate will be similar between distributing and accumulating. The key difference is that Accumulating ETFs might pay less tax along the way and more tax at the end. So the compounding effects could be greater.

At the end of this blog post there is an Excel file and in that Excel Sheet the author compares the performance of an accumulating vs. distributing fund (starting at 10k). Both funds pay the same tax rate (18.4625%) but at the end of 10 years the accumulating fund rises to 17,872.68 vs. the distributing fund 17,820.24 EUR. After 20 years the accumulating fund to 33,197.475 and the distributing fund to 32,425.807.

I might try to write an English version of those articles because I keep having to get back to it to remind myself on the topic.

I ended up choosing distributing funds because I was particularly concerned about what would happen in the event I move out of Germany. With an accumulating fund you pay part of the taxes during your lifetime of holding and then deduct those taxes when paying capital gains taxes. If you want to keep holding the fund and you move elsewhere, when paying capital gains taxes in another country you wouldn't be able to deduct the "advance payments" you already made (or you could but that would be troublesome). My expectation was that with a distributing fund I would pay all the taxes I owed along the way (not less, not more) and that would be a great deal.
This question might be a non issue, since it might be just easier to sell all your holdings when moving countries to reset the cost basis.
Synthetic vs Physical ETFs: a lot of the ETFs that are being offered are synthetic. What is the general opinion on these compared to physical ETFs?
I use physical. I think synthetic ETFs are getting less popular.
The ETFs I needed all have physical versions so I didn't see the need to use synthetic.
I plan to start with a simple portfolio consisting of MSCI World and Emerging Markets. I still have not decided about the low risk asset of my portfolio, i.e. bonds. What is your opinion on including a government bond ETF in the mix?
I think it is reasonable to have at least 20% in fixed income. You can do that through a bond fund or CDs or savings account or a mix of all.
I like the xtrackers global sovereign because it only has government bonds (investment grade).

I've seen AGG also suggested here. That looks like a reasonable choice too but it has corporate bonds too.

rtaf84
Posts: 3
Joined: Sat Nov 24, 2018 11:55 am

Re: Questions from beginner about investing from Germany

Post by rtaf84 » Mon Dec 10, 2018 3:55 am

Thank you indexfundinvestor.eu for the extensive reply!

One additional question about the brokers in Germany: I have noticed that the "independent" brokers (i.e. those that are not banks) are usually much cheaper. What would the practical differences be between DeGiro/flatex and DKB for example?

iluv2fly1
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Joined: Tue Jan 13, 2015 6:44 am

Re: Questions from beginner about investing from Germany

Post by iluv2fly1 » Mon Dec 10, 2018 7:27 am

Depending on your future plans (and which country it is), I would consider investing in your home country rather than in Germany. I live in Germany, but send all my money home to invest. I am worried about the high fees in Germany, but also whether I would understand all the fine print in legal German.

rtaf84
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Joined: Sat Nov 24, 2018 11:55 am

Re: Questions from beginner about investing from Germany

Post by rtaf84 » Mon Dec 10, 2018 7:38 am

Hi iluv2fly1, thanks for your comment.

It actually crossed my mind at some point that it might be more beneficial to start investing this way, but I think it would complicate things a lot, especially taxation, since I would have to declare everything in Germany anyway.

indexfundinvestor.eu
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Re: Questions from beginner about investing from Germany

Post by indexfundinvestor.eu » Tue Dec 11, 2018 2:38 am

One additional question about the brokers in Germany: I have noticed that the "independent" brokers (i.e. those that are not banks) are usually much cheaper. What would the practical differences be between DeGiro/flatex and DKB for example?
The biggest difference about from fees would be the fact that if you use a broker not domiciled in Germany you will have more paperwork to do. A local broker will do tax withholding a non local broker won't.

My strategy for next year is to pay a tax accountant to fill my taxes for me so it won't be a big issue. But that is another cost to consider (which may potentially offset the low fees so you have to do a cost benefit analysis).

I don't know about flatex and DKB. But the common gripes about DeGiro are:
* for its basic account it engages in securities lending. even though DeGiro puts collateral in place, in the event of a black swan event you could loose your shares. DeGiro has a custody account you can get for which no securities lending is possible. The fees are a bit higher than the basic account.
* Dutch law does not allow DeGiro to hold actual cash, so the cash funds you have there (that is the cash laying around before/after you make a trade) is actually investing in money market instruments. It usually has the same value over time but in theory it could fluctuate.
* it is a suuper cheap broker so my impression is that people are typically more wary of it than a normal broker. the price does send a message here. I think people in general do 10x more due diligence for DeGiro than their typical local broker.

If you are considering DeGiro it might be worth taking a look at the comments in the r/eupersonalfinance or r/EuropeFIRE. I definitely think there is a hate/love relationship with it (which is a good thing so you can know both sides of the argument).

Depending on your future plans (and which country it is), I would consider investing in your home country rather than in Germany. I live in Germany, but send all my money home to invest.
I think it would depend on the country too. If I were German and moved to France I wouldn't invest in Germany because the taxes would be withheld and then I would have to do additional paperwork within France to deduct those already paid taxes. I wouldn't do this if your home country withholds taxes for trading in the stock market. I think most won't withhold taxes but it is something to keep in mind.

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