Self-directed investing with WhiteBox

Costs: the only parameter that is known in advance

Portfolio returns cannot be predicted. Costs can be, and right down to the very last penny. That is precisely why they are worth looking at first.

Key point: the management fee is deducted from of the entire investment amount every year, and not out of profits. In a negative year, you still pay it. And every euro deducted no longer works — the effect compounds.

What happens to one percentage point over 20 years

Let us take €10,000 invested once, and a market that yields 5 percent per annum before expenses. Let us compare two total cost options.

The calculation is simplified: excluding taxes, top-ups and yield fluctuations. It shows not a forecast, but the scale of the impact of costs.

Hence the practical conclusion: a difference of half a percentage point, which looks cosmetic in the prospectus, turns over the investment horizon into an amount comparable to a year's income.

What does the total cost consist of

You cannot compare providers by a single line — expenses are distributed across at least four levels.

Add up all four and demand a single-digit total. Formally, the provider is obliged to show the aggregate costs in the key information document — there is also an illustration of how costs affect the total for the holding period.

Managed portfolio or your own: a fair comparison

A robo-adviser invests in the same exchange-traded funds that are available to any retail investor, and charges a separate management fee – this is added to the funds' own charges. In return, you get a portfolio structure tailored to your time horizon and risk tolerance, automatic rebalancing and, most importantly, the removal of the need to make decisions when the market falls.

A DIY portfolio is cheaper, but requires discipline: choosing funds, rebalancing the weightings yourself and not selling during a downturn. Choosing between the two options is a choice between saving on fees and saving on your own decisions.

A managed solution is justified if it saves you from an action that would cost more than the fee: panic-selling at the bottom, delaying getting started for years, or a portfolio put together at random. If you are already managing your portfolio calmly, the difference in fees cannot be compensated for by anything.

Rebalancing and taxes: a nuance that is rarely written about

Rebalancing is the return of a portfolio to its target allocations. Technically, this is done in two ways, and their tax implications are different.

• Selling the winner and buying the laggard. A sale is a taxable event. Capital gains on sold units are subject to capital gains tax 26.375 per cent (with church tax of 27.82 or 27.99), even if the money remained inside the portfolio.
• Directing new contributions to the lagging asset class. No sales, no tax. This is significantly more effective during the accumulation phase.

Check with the provider which of the two mechanisms is used first. A portfolio that is rebalanced primarily through contributions yields a better after-tax result, other things being equal.

The partial exemption softens the picture: for a fund with a shareholding of 51 percent or more 30 per cent income is not subject to tax (§ 20 InvStG), for mixed funds with an equity share of 25 percent it is 15 percent. Plus the annual tax-free allowance 1,000 euros per person and 2,000 for couples, but only if an exemption claim has been filed.

What is protected and what is not

Briefly, without illusions:

• Fund units — segregated property (Section 92 KAGB). In the event of bankruptcy of a bank or a management company, they do not form part of the insolvency estate. There is no monetary limit.
• Funds in the current account — deposit insurance up to €100,000 per depositor in a single bank.
• Breaches by the financial company — 90 per cent compensation, maximum €20,000 (§ 4 AnlEntG).
• A market crash — completely uncovered. That is the risk for which one is paid in return.

You can check the provider's licence in the public BaFin database using the legal entity name. The brand name may not appear in the database.

You may also want to read

• easyInvesto or ComfortInvest — a comparison of two other platforms and a video summarising three years.
• easyInvesto and ComfortInvest – other solutions with professional management.
• What is an ETF in simple terms — how the funds that the platform invests in are structured.
• ETF taxes in Germany — Abgeltungsteuer, Sparerpauschbetrag and Vorabpauschale are calculated in the same way as for a self-managed portfolio.
• ETF savings plan — what regular accumulation looks like without a manager.
• Investor taxes in Germany – detailed analysis.

Sources

• § 20 InvStG — partial exemption: gesetze-im-internet.de
• Section 18 InvStG — preliminary lump-sum income: gesetze-im-internet.de
• Section 20 EStG — investment income: gesetze-im-internet.de
• § 92 KAGB — segregated fund assets: gesetze-im-internet.de
• § 4 AnlEntG — limits of compensation: gesetze-im-internet.de
• BaFin — database of licensed companies and explanations on PRIIP-KID: bafin.de