For my sister and for my collegues who still have to do the “ETF thing”.
You finally want to get going and be among the rare breed of stock owner in Germany? This is how.
Germany really isn’t a country of investors, and thanks to the techbubble in 2000 and the 2008 financial crisis this picture solidified. With a record low interest rate this drove Germans into real estate leading to skyrocketing prices and making my hometown Munich the city with the highest real-estate bubble risk in the world. That is even before cities such as New York, London, Paris or Singapore.
So even if people had the necessary change to be able to afford a house in Munich I couldn’t recommend buying one, which basically leaves us with stocks (ignoring bonds).
For people that never really got in touch with the stock market (Germans) or people that are not accustomed to how things are done around here (Expats) I am summarizing an easy entry to invest into stocks in Germany.
What to invest in?
We will be using ETFs for various reasons, mainly diversification at low cost. Also I am making the assumption that investing will be long term, let’s say 20 years plus and to make it easy we’ll look at just stocks.
The current golden standard is to take a distribution of 70% developed countries and 30% emerging markets ETFs.
Some simple rules to choose ETFs:
- A high number of stocks in the ETF (1000+ if available)
- Big enough fund size (100mio +)
- Reasonable yearly cost (TER ≤0,4% p.a.; usually they are around 0,2%)
- If you do not only want big companies but also small ones you want to look for ETF names that contain the letters “IMI” (Investable market index)
- Many Indicies are USA heavy and exclude emerging markets (like the standard MSCI World), if you do want to invest all over the world with a little more of the other countries look for the term “ACWI” (All countries world index) or “All-World”.
Now you choose an etf search engine and look up potential candidates. Let’s look for an ACWI ETF first. I usually sort by size and then choose from the ones that have a reasonable TER.
There is one more destinction to make. There are ETFs that distribute dividends (you regularily get money onto your bank account) or accumulate (they keep the money and reinvest that into the ETF for you). That makes a difference if you want to consider taxes, but more to that later. The terms you’ll see are “D” or “Dist” for Distributing and “C” or “Acc” for Accumulating.
Lets see how that works. (I am using justetf.com. You can use any site that you like.)
As you can see there are a few options to choose from. You could as well try “all-world” but for now let’s stick with the second one the “iShares MSCI ACWI UCITS ETF (Acc)”. (There is an honorable mention the “Vanguard FTSE All-World UCITS ETF Distributing” which is distributing, in difference to our example.)
Now that we have our 70% position we want the fill the rest of our money with 30% emerging markets. Searching for “emerging markets” gives us the following top 5 by size.
As you can see, all are qualifying to our rules so I am choosing the first one with the IMI term, including more companies, essentially adding smaller ones as well. If you want a distributing ETF you can choose line 3 or 5.
Should you want to know more about the ETFs you can click on them for more info and after that you can look up its Factsheet. I do that to look up how many stocks the ETF contains, what the highest weighted stocks (top 10 holdings) are or what regions they cover.
If you are interested in some final tweaks:
- If the ETF has a lot of USA stock in it, the “fund domicile” should be Ireland.
- You can fully ignore the fund currency. As long as the money is in stocks it doesnt matter what they were bought with.
- Finally, always keep a three month salary reserve or as much as you need to sleep well, but not less.
When should you invest?
You will surely wonder when the best time to invest will be. What stocks or sectors will succeed in the future? Will it go up or down?
There is the simple truth that: noone knows. To quote Peter Lynch who is actually considered good at investing: “If you can’t know, you can ignore it.”
What we do know, despite all the crisis the world experienced, the curve for more than a hundred years had an upward trend.
There are people who earn their money investing, they spend their whole day on it and they are good. They have incredible tools. Also a majority of stock trades is already driven by high frequency trading. Imagine a super computer that learns though an AI and trades in nanoseconds. Whatever you think you can do, they can do better.
You will not outsmart them, so don’t try. You will always be the fish, they are the sharks, accept it!
Instead participate on the positive estimated value of being invested into companies worldwide that generate value.
Statistically, on a longer investment timeframe, the best time to invest is always now. The time people wait for the right moment is often enough the time they loose out on more gains than the next crash would cost them.
Still investing “now” can feel very bad and be stressful. With indices at all time highs it certainly does not feel like a good time. An alternative is to invest over a period of 6, 12 or 18 month for sums higher than a monthly savings plan.
The easiest method is to just invest into ETFs via a monthly savings plan, which essentialy means a fixed amont of money is taken from your account per month and invested. Some brokers even offer them free of charge.
How can you invest?
There are several german banks that offer good brokers as well as some new players that have good technology and can offer low prices for a smaller offering.
I will introduce two that, at the start of 2021, seem to be quite ok for what we have in mind.
The first is TradeRepublic, which is a solely app based broker that just offers ETFs from iShares. That is not a big problem because those are ETFs from the biggest player in the market, so you get nearly everything from them at a reasonable price. The UI is very beginner friendly and what they offer is easy to use. They have a set of 324 ETFs that you can create a free of charge savings plan with.
The second one is Scalable Capital. They have an app but as well a desktop version. The offering in the free base version is a bit broader and they have a set of 1300 ETFs that can be used for savings plans free of charge as well. One small difference, they offer one additional free of charge savings plan on any ETF they list. So this would be your chance to go into something from other ETF providers.
With both you can create an account fully online including a video identification option. Traderepublic is a little faster on this.
Transfer money and go. Scalable Capital even has direct debit from your usual account if you create a savings plan (Lastschrift) so you do not even have to transfer money.
There is a minimum amount for savings plans of 25€ per month. With our 70%/30% distribution this results in a 58€ in the ACWI ETF and a combined minimum monthly saving of 83€.
Taxes
There are some tweaks you can make that do not take too much effort. Still, if you want to skip this part I sympathize.
In Germany any person has a tax free amount of 801€ on captial income before tax (Abgeltungssteuer) applies. Any amount above that will be taxed as a withholding tax, so the bank automatically deducts it before you see any money.
To apply the 801€ of taxfree income amount per year you have to create a notice to your broker by creating a “Freistellungsauftrag”. It is an option in the menu and you just set it. The amount can be split between different banks.
To be able to have yearly taxable capital income you can either choose distributing ETFs until you reach the tax free amount in dividends or cover that by selling accumulating ETFs for a higher price than you bought them for. The latter creates additional cost, so I’d rather mix in some distributing ETFs. Another thing inducing tax is a book gain on your ETFs that will be taxed yearly (Vorabpauschale), but this is currently not enough to fill the tax free amount.
Adding ETFs that distribute dividends is only helpful if you do not generate enough “Vorabpauschale” and you reinvest the money soon, or lateron if you need the money to spend it. Otherwise just use accumulating ETFs and go stress free. You can never plan this perfectly but you can take it into account.
To give you an orientation, just by dividends you would need the following amounts to fully use the tax free amount depending upon the dividend yield your ETF provides in a given year. (You can find an average in the factsheet)
2% dividend yield: ca. 57.000€
4% dividend yield: ca. 28.500€
Just by ETF price gain which is taxed via the “Vorabpauschale” you would need about 1.2 million Euros invested with a year on year increase in ETF value of about 4400€ to consume the tax free amount. So as long as the reference interest within the formular is as low as it currently is, this will not be an option alone. Sadly you have to account for it as etf price gains will be taxed each year. Just consider 50€ of your “Freistellungsauftrag” for that purpose and you should be good.
You suffered through enough numbers. Congratulations for making it. Let’s move on the the next chapter.
Finance Porn
You can invest or you can feel invested. You might feel the urge to check your stocks regularily and watch stock market news. A finance autor once called this finance pornogaphy. Maybe you think about adding, selling, rebuying. Maybe you are just fearful and need to check if all is well.
To put it simply: Don’t!
If you invest you invest for years. The more time you spent on monitoring or worse changing your investment, the more you time you loose for other aspects of your life.
Should you tend to sell and buy again you generate cost for yourself. Remember from before how you cannot be better than the big players on the markt other than by chance? It wont feel that way but it’s still the truth. Trying to do so therefore has to be considered gambling.
In a casino there is only one real winner and that’s the bank. At the stock market there are two, the banks and the big players. Statistically it won’t be you unless you are lucky and you can’t plan for that.
Other than that you can pay for tools, consume (payed) information content, take courses and more. They all earn money on that. You don’t.
An important lesson is to resist the urge to involve yourself too much.
This is also true for market crashes. The same way you don’t want to buy at the top, you don’t want to sell at the bottom. Selling in a crash has a higher probability to result in lower performance for you than on other days.
So whatever amount you invest, it should not take away your calm of mind, or worse your sleep. Everybody has their individual level of fear of loosing they can endure. Don’t exceed your limit and you will be fine.
The same applies for getting out of the market. Start to plan that years before you need it so you don’t have to fear a sudden drop in the market.
That’s it. Investing in Germany really is quite simple, isn’t it?
Disclaimer: I wrote this article myself. What I write is my personal opinion. I am not a professional finance consultant and this is not an investment advisory. I am not receiving compansation for this (besides maybe medium).
A certain development in stock market price cannot be guaranteed. Buying stocks can potentially lead to a loss of money up until loosing all of the invested money. All information is subject to error and could be outdated once you read this. The information I am giving does not replace an individual professional advisory that is considering your personal situation, goals and your ability to bear risk. Any liability or guarantee for the correctness of information given in this article is excluded.