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Investing in the Netherlands


Attention

Before diving into the subject, and considering that investment is a sensitive topic, I have to provide the following disclaimers:

  • I am not a certified financial advisor nor I claim to be one
  • In this page I do not provide any recommendation, but I provide my personal vision and experiences
  • Investment involves risks and it is possible to lose the invested amount

Investment introduction: investment vehicles

There are several ways of investing, in this page I will focus in the three more traditional ones: stocks, bonds and mutual funds. While there are other ways of investing like CFDs, Forex and derivatives, in general they imply a higher risk, and they are beyond the scope of this page.

Each stock, bond and fund has a unique ID. That allows to identify products and make sure that your investment does not go to to the wrong company, like Tweeter – Twitter case… For the stocks, the ID is the ticker, for bonds and funds the ID is the ISIN. In the case of Funds, they also differentiate different classes of the same fund. They may have different fees, different costs, different currency, have or not have dividend…

Stocks

Stocks are the traditional investment method. You pick a company, and buy a given number of their stocks. With that you become partially an owner of the company. In general, you can only buy integers of a stock, although there are new services appearing that allow buying and selling ‘fractional stocks’. That becomes handy when you want to buy high-priced stocks like Amazon, for instance.

The advantage of investing in stocks is that you can do stock picking, choosing which company you want to buy. However, to properly evaluate a company you need particular knowledge, either about the sector or about finances. There are several (free) tools out there which can help in the process, either a general Yahoo Finance, or more advanced like Finviz or GuruFocus.

A key aspect from stocks is that they are extremely volatile, and can change their price faster than the company changes its value. One example is Volkswagen with the emissions scandal, not only Volkswagen was affected but also Daimler and BMW, although they were unrelated.

In case of bankruptcy, stock owners have the lowest priority, investors usually never recover the investment. The higher risk is rewarded with higher benefits: as you are a ‘co-owner’ you participate of company growth (stock price raise) and company benefits (dividends).

Bonds

From investor.gov, “A bond is a debt security (…). Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer (…). In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal. (…) When it “matures,” or comes due after a set period of time“. Basically, they convert you into a lender. They are one of the most conservative investment vehicles, as they have a fixed end value and fixed interest. However, that is only valid when you keep the bond until it maturity date, as in the meantime their value can oscillate.

On the drawbacks list we have diversification and duration. With a face value of at least 1000€ (commonly 50.000€) it gets difficult to buy and distribute. And with a duration between 10 and 30 year, it becomes difficult to wait for maturity.

If you cannot wait for bond maturity, you have to sell it in the secondary market. In the secondary market, the bond price can vary quite a lot, both above and below the face value. Just as an example, the price of this Russian Government Bond ranged from 75% to 112%, while the 100% is only guaranteed at the maturity date. If you are curious about the secondary market, check it out in Börse Frankfurt.

In case of bankruptcy, bonds are better than stocks, but they are only guaranteed with company assets. That means that the bond value is no longer guaranteed. Beware that that also applies to government bonds, with the example of the Greek bond crisis haircut. In such cases, it is possible to lose part of the investment.

Mutual Funds

To overcome some limitations of stocks and bonds, the mutual funds appeared. From investor.gov, “A mutual fund is a company that pools money from many investors and invests the money in securities“. The securities can be stocks, bonds, derivatives and a mix of them. They can be either managed or passive. Managed funds have an investment crew who does the investment research, and decide in what to invest. Passive ones just copy an index, which is a stock exchange aggregation, for instance, the SP500. Unlike the stocks, they have inherent management fees, and in some cases also entry/exit fee or even success fee. Like with stocks, there are several (free) information sources like Morningstar.

The main advantages of mutual funds are diversification and simplicity. It is very easy to diversify with them as you may be able to participate in them with as little as 10€. As they can be actively managed, you don’t need to know all details about a company, the fund manager takes care to select the best companies for you.

At the same time, as a fund manager controls your assets, it may happen that you don’t really understand your investment. Also, beware that the mutual fund is just a vehicle of investment that invest in other items. That means that a mutual fund composed by derivatives inherently carries all the risk of the derivatives. Or a mutual fund applying hedging, may result in losses when the markets are positive, and so on.

A particular case of Mutual Fund is the ETF, an Exchange-Traded-Fund. Basically, it is a mutual fund that you buy in the stock exchange as if was a regular stock. Usually they are passive and have lower costs than normal Mutual Funds.

Investment introduction: investment ‘methods’

Considering the profile of this page, I will focus in investment, discarding trading strategies like scalping. That means that you have basically two options: averaging strategies and ‘stock picking’ strategies.

Averaging Strategies

By this name we have “Dollar Cost Averaging” (DCA) and family. The idea is to regularly invest the same amount of money, for instance, monthly. With this method, when stocks are expensive you buy less amount, and when they are cheap you buy a higher number. It is the simplest and laziest method that you can use.

There is some controversy about what is better, if DCA or ‘all-at-once’ investment. The key of DCA is that you are investing as you are getting the money. Publications like this one points that you should invest as much as possible as fast as possible, to take advantage of the compound interest.

This strategy works very well with Mutual Funds, where it is possible to automate a portfolio and have a monthly saving investments without doing anything.

Timing and Picking

In this case, you try to see if the market or a given company is ‘cheap’ or ‘expensive’ and then you modify your investment decisions accordingly. Several publications point that it is very difficult to time the market and try to avoid corrections. Often, you exit too soon and enter too late. A different topic is investing by picking the companies. As pointed before, for that you need to have a deep understanding of financials and company details. In this case, you may be able to outperform the market. For instance, that is the case of Warren Buffet, who has been able to select good companies at cheap price, and achieve consistent higher-than-market returns. However, he is one of the exceptional cases. In my case, I highly doubt that I have the needed skills to even match the market.

It is possible to do general Timing and Picking with Mutual Funds, by selecting funds depending on sectors, countries, etc. Beware that mutual fund orders usually take couple of days to execute, they are not for trading. Also they do not have enough granularity to select the ‘key’ companies, so you have to go to sectors (robotics, biohealth, agriculture…) or countries (Russia, UK, Japan…)

Investment brokers. Who can I invest with?

Once the basics have been introduced, it is the time for “Who can I invest with?”

Typically, for investments you need a broker. Nowadays, most banks also provide brokerage services, but often they are more expensive than specialized brokers. In the Netherlands banks like ABN Amro, Rabobank or ING have their own brokerage account options, but you also have specialized brokers like Degiro. There are several ‘magical’ brokers where you do not actually have access to anything, they manage everything for you, and brokers that claim that you can invest while you are resting in the beach. Also most banks offer you the ‘managed’ options, where they select the investments for you. I personally don’t trust the automatic / managed / etc. I prefer to minimize possible conflicts of interest and chose the investments myself. Also someone told me long time ago that no-one will cares about your money as much as you do yourself.

For the aforementioned reasons, the following information is for accounts “do it yourself” where you have direct access to the stock / fund market.

Degiro

At the time of writing this article, Degiro is the most competitive broker that you can find, with investment fees as low as 0.50€+$0.004 per USA stock. Even better, they offer a ZERO FEE for a given set of ETFs (list here). Of course, there is a fair usage policy for that. Basically, you are limited to 1 free buy or sell operation of less than $1000 per each month per ETF code. For a small investor, that is great, as it allows you to have an automatically invested diversified portfolio for free. On stocks, the fees depend on the country, but they offer also one of the best rates in Netherlands as well, at 2€+0.03%. They have a ‘connection fee’ when you do operations in exchanges different than AEX NL. That amount is 2.50€/year per exchange, for instance Nasdaq, or NYSE. To know how much the fees are in total you can use their cost calculator page.

expatinnl investing in the netherlands with degiro

ING

ING, on the ‘zelf in op de beurs‘ charges an overall maintenance fee of 16€ per year + 0.24% on the invested balance (up to 75.000€, 0.12% above that). That gives you access to a quite extensive list of Mutual Funds and ETF without additional fees. However, any investment outside of those has a fee of 4€+0.04%, in general higher fees than Degiro, and more limited. Hence I would use it only for mutual funds and ETF outside of the free list of Degiro.

expatinnl investing in the netherlands with ing

ABN Amro

ABN Amro also has a flat maintenance fee, in their case it is 0.2% of the invested balance (up to 100.000€, 0.12% above that). Although the flat fee is lower than in ING, the fees for stocks are higher than ING, and the list of free Mutual Funds is more limited than the one available in ING. However, it is a very good option to start, thanks to the reduced fees compared with ING. And most importantly, they are quite more expat friendly than ING, having most of their items available in English. If you are interested, check them here.

My personal selection:

Before continuing, I want to insist that this section is a personal opinion, and not a recommendation whatsoever.

Personally, I like that with ING you can access to 430 mutual funds and 300 trackers, some of which are best-in-class. And I like the flexibility and low cost of Degiro, which are just impossible to beat. Their kernselectie ETF offer is great, but to my knowledge, only passive ETFs are offered.

There is quite an important dilemma about what is better, if an actively managed fund or a passive one. It has been proven that most of the actively managed funds cannot outperform passive index-based funds with low cost. Which strategy is better is definitely out of the scope of this page, but there is plenty of material to read: like Bogle or Graham among others.

Some combination of funds that I like from ING:

  • LU0834154790 – Morgan Stanley Investment Funds – Global Opportunity ★★★★★: A bit concentrated in USA, but quite amazing performance lately.
  • NL0000292225 – NN Emerging Europe ★★★★: A bit of spices adding Emerging Europe. Quite volatile, be ready for rollercoaster.
  • LU0847328340 – JPMorgan Funds – Europe Strategic Growth Fund ★★★★★: I like growth companies.
  • LU0346388456 – Fidelity Funds – European Smaller Companies ★★★★: Typically, smaller companies have more growth potential, although they crash worse. Unless the crashes are fatal, they also can recover quite fast.

I also have some emerging in Latin America and Asia-Pacific. They are quite more volatile than Europe and USA, but they are the spices in the portfolio. A dish without spices can be quite dull, but you would never eat a black pepper sandwich, would you? Same goes for my portfolio.

The kern ETFs from Degiro:

I still don’t use Degiro for free passive ETFs. For now I used it for stocks and options. However, I plan to add some ETFs to my portfolio in the future, as they have quite interesting items in the list, but first I will have to study what.

With passive ETFs, the selection process is easier, as there is not much performance gap (they copy an index). First, I will select what index/topic I want to track. In my case, I will go for something not liked at the moment, for instance, Turkey. Then I will compare all available ETFs, with preference of lower running costs. Also I prefer Accumulation funds to Distribution, because dividends are taxed, but capital gain is not. And also something to consider is if the ETF is physical or derivative based. In the first case, the ETF holds the stocks, while in the second case, the ETF holds a derivatives representation of the stock

Degiro kern ETF – Turkey example:

I found iShares and Lyxor ETFs, both tracking the index MSCI Turkey. To have the full information I have to google them and read iShares product page and Lyxor product page. In the product pages I see that the Lyxor is accumulation and has 0.45% running costs and the iShares is distribution and has 0.75% running costs. Also in the product pages it is possible to see that the Lyxor is derivative based and the iShares is a physical index copy, hence the increased costs.

Then, considering that my position won’t be long term, I will go for the Lyxor. For this strategy I don’t consider critical the fact that the ETF is using derivatives for the following reason: if there is a crash big enough that the derivative market (in particular SocieteGenerale, the counterpart of Lyxor) blows up, all emerging markets (including Turkey) will crash badly. If that occurs, the investment will already be lost entirely, regardless of the counterpart.

If instead I was doing some hedging investment buying mining sector, for instance, I would go for physical, because hedging strategy is supposed to help when ‘all hell breaks loose’.

Closing lines

If you want to invest, do not trust those scammy commercials that offer you unrealistic returns in unrealistic time, ‘while you are enjoying in the beach’. The more they try to make the things look easy and exempt of risk, the more careful you should be. Investment is not a game (regardless how they paint it in the Ads) and if it goes wrong, it means loosing money. For that reason, you should never invest money that you don’t have or you will need. Think of investment as a long term goal, not a ‘get rich quick’.

Having said that, I like Degiro both for passive ETFs and for stocks, where you can start investing and learning about stock picking paying peanuts. For instance, last October I bought 22€ of SMTC Corporation ($SMTX) paying less than 0.60€ fee.

expatinnl investing in SMTC from the netherlands with degiro

To invest in active mutual funds I like ING because it has a quite a broad offer, some of them being exceptionally good. That also means that I have to do more work to filter them out, but I am very happy with some of the options, like I pointed before.

Someone pointed to me that he wanted to buy ASML stocks. Funnily, in Degiro you can buy both in the NASDAQ USA and AEX NL stock exchanges. In the first case your fee will be 0.50€+0.004/stock and 0.01% exchange fee, while in the second case your fee will be 2€+0.038%. (If you want to run some calculations use the Degiro fee calculator). With a ‘normal bank’ like ING or ABN Amro that cost would be at least 2€ higher.

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