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Investment for Expats in the Netherlands

Submitted: October 2014

A large range of investment products is available on the Dutch markets for retail investors, including shares, bonds, mutual funds, structured products, leveraged investments, and derivatives generally.

Inflation in the Netherlands

The European Central Bank (ECB) is strongly committed to price stability, i.e. inflation must be slightly below 2% over the long-term. In practice, the ECB is solely concerned with inflation throughout the Eurozone, which is nothing more than an aggregate.

The Netherlands has traditionally been a low inflation country, with inflation rates frequently between 1 and 3%. As of August 2014, the Dutch inflation rate stands at 1%, i.e. considerably above the Eurozone aggregate (+0.4%). For more information on monetary policy, see Foreign Exchange for Expats in the Netherlands.

Savings accounts and term deposits

In the Netherlands, there is no need to apply for a term deposit. An easy-access savings account will be enough. It can be a good thing to compare what’s available on the market, but you generally wouldn’t find better than just more than 1%, i.e. below the 1.2% tax on net investable wealth (see below).

Investing on the Dutch financial markets – introduction

Dutch banks generally have investment funds on offer. Usually, the investment strategy of the fund will be made clear at the outset, e.g. low-risk/low-yield, fixed-income, high-risk, emerging markets, etc. There are charges for this service, but you don’t have to check the financial markets every day.

Alternatively, you might wish to manage your investments for yourself. Most traditional banks offer a share dealing service for retail investors. In the Netherlands, Binckbank has pioneered the online stockbroker concept – with one of its objectives being to offer competitive charges for retail investors.

Dutch securities (costs)

Generally speaking, self-invested securities are not an attractive option unless you invest a large sum of money, i.e. no less than €10,000. A transaction of less than €2,000 at a time is likely to see its yields eaten away by the charges. When trading Dutch securities, here are the main costs you should be aware of:

Higher charges may apply if you trade foreign securities. Securities traded in Paris, Brussels, or Lisbon through Euronext will generally be subject to the same charges as Dutch securities.

Dutch shares (overview)

Dutch shares tend to show a lot of price volatility, but they tend to follow a given trend for several years before a reversal can take place. The main index in the Netherlands is the AEX 25. In the 1990s, the AEX 25 rose from about 70 (1988 low) to just off the 700 mark (summer 2000 all-time high). Since this bubble popped in 2000, the value of the AEX 25 has been more connected to macroeconomic fundamentals and corporate profits.

In current market conditions, high-dividend shares generally have a yield of over 3%. This might sound low, but it is not very surprising given the ultra-low interest rate environment in the Eurozone. Today’s interest rates, on their own, can greatly explain why the AEX 25 did not fall back closer to its 1988 low.

Fixed income

In the Netherlands, fixed income securities are unlikely to beat easy-access savings accounts unless:

The yields on Dutch Government debt have strongly decreased over the past year. A 10-year Government bond would get you 1.1%, down from 2.2% in September 2013. In that respect, the Netherlands has one of the lowest yields across the Eurozone.

Government bonds are subject to market variations. Bond prices rise when the market demands a lower yield, and they shrink when the market demands a higher yield. Over the past year, Dutch bond investors have made substantial gains because interest rates have gone South. As the Eurozone is subject to high deflationary risks, the ECB has a strong case to engage in further monetary loosening. Interest rates on the market have therefore some room to move further down, though not by much.

Investing overseas

There is no special need for Dutch residents to park their investments outside the Netherlands in the sense that the Dutch financial markets are modern enough. For expats, however, it may make sense to keep their savings and investments in their home country. Doing so may be much more straightforward to do.

Beating inflation and taxes

As in any country, expats must beat inflation and taxes to preserve the real value of their savings. In the Netherlands, all residents are taxed at a rate of 1.2% of their capital, subject to some exemptions. This is the so-called “box 3 income”, which is a 30% income tax on a notional 4% yield on your assets. There is no further tax to pay. However, this 1.2% tax tends to strongly encourage its residents to invest in riskier assets, such as shares or corporate bonds. Otherwise, the tax will just eat away your savings quickly.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with Dutch inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country. The picture for expats in the Netherlands can be illustrated in the below example:

Example

Sam is an expat in the Netherlands. During his stay there:

If Sam keeps €100 in a savings account, its nominal value after one year will be 100 + 1 (interest) – 1.2 (tax) = €99.8. In real terms, this is 99.8/(1+0.02 (inflation)) = €97.8, i.e. 2.2% below Sam’s initial investment.

If Sam invests €100 in Dutch shares, their nominal value at the end of the year will be 100 + 4 – 1.2 = €102.8. In real terms, this is 102.8/1.02 = €100.8, i.e. 0.8% above Sam’s initial investment. The result is that Sam has to take risks by investing in shares, because the real value of his funds would probably erode away in a savings account.

 

 

 




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