I took the plunge with ETFs

[whytis]

I was reading this forum over a good number of months, and information is relatively scarce, so I thought it might help some potential investors hear of people who went ahead with purchasing ETFs.

The basics of how I did it:

1. Signed up for a stock brokering account with Saxo Bank UK.
   1. Once you apply, a sales rep will be in touch, and you can ask them questions
   2. You can choose between Saxo's Danish or UK banks
   3. There's an inactivity fee of £25 per quarter I believe
2. Transferred cash to Saxo
3. Decided on an asset allocation strategy
   1. All shares. 40% European index. 40% US index. 20% emerging markets index.
   2. Decided not to purchase bond ETFs as I can't get my head around how they work, even though a lot of talk is about the mix of your portfolio between equitites and bonds.
4. Researched iShares ETFs to keep it simple, and chose a European MSCI maket index ETF, and a US MSCI market index ETF.
   1. Both are accumulating (they don't pay dividends).
   2. Both are domiciled in Ireland
   3. Both will be subject to the (at present) 41% tax every seven years (there are discussions on that elsewhere on AAM)
   4. The European one is Euro-denominated. The US one is USD-denominated, so I'm probably more exposed to currency exchange rates into the future with that one.
   5. I still have to pick an emerging market one
5. Placed a purchase order for each of my chosen stocks (edit: I should say "ETFs", not stocks) on Saxo for 50% of my lump sum. Over the next two quarters, I'll spend the rest of my 50% lump sum, just for the sake of a taster of some "euro cost averaging".
   1. Each order cost €12, if I remember correctly
6. In the future I'll either choose to pay the quarterly inactivity fee, or place small investment orders and pay the transaction fee.
7. Outstanding question I don't have the answer for: whether Saxo will be withholding taxes on my potential gains, and whether I'll need to do anything about that.

Behind that was lots of reading, including AAM, Rory Gillen's good book, Random Walk Down Wallstreet book, lots of podcasts. Much of the media I consumed (like money podcasts) was US-centric, which is a problem, because their assumptions are against the backdrop of a different tax regime.



The basics of why I did it:

• It's for a college fund that is planned to be accessed in 16 years.
• I chose ETFs over Irish Life index funds because the returns should be significantly higher after I compared fees over 16 years.
• I chose ETFs over individual shares. This is despite the tax situation on ETFs being a real penalty (ouch!), but still less of a risk that I perceive with individuals shares.
• I chose a three-fund strategy to try to keep it simple.

I hope this helps any potential newcomers to get a taster of how I went through with it.

 

[Fella]

Congrats I went with saxo also , I'm very impressed with saxo.
I bought Msci world , Msci Europe and some emerging markets I've started to get a bit addicted and bought some more exotic ones lately. I bought bonds and gold as a hedge against stock market crashing( maybe it's not a hedge ) I'm enjoying building my portfolio it's so diverse now as I hold 7 different ETF's , my original plan was to put about 20% of my wealth into ETF's but I'm now decided on 70% after reading keeping 80% of my net wealth in cash is ridiculous. This tax thing I don't know either and was only thinking recently I should ring them soon and find out do they deduct it , hopefully in 7 years there will be tax changes and they lower tax . My shares are up 4k now since august I wonder should I cash out and make use of the yearly tax free allowance and rebuy, that's another one I'm thinking about .

 

[whytis]

Thanks for sharing, Fella! It's nice to hear from people who've tried the same path.

One reason I'm going with as few ETFs as possible is that you can't offset losses in one against another. So it's possible, if there's a bit loss, that you'll lose out on one ETF, but yet still have to pay tax on the other profitable one.

In Saxo, under "Account", there's a link to a PDF about a service to get tax back. That got me wondering about whether they'll be withholding some tax.

 

[Fella]

Yeah I found that same link myself , I remember when I signed up the guy rang me and he asked me about where I was living for tax purposes, tax is going to be a bummer for sure , I can't see myself ever been happy if I actually have to hand over say 41k out of 100k profit it would just kill me. I read on a lot of other forums american ones and uk ones they talk of 401k's and ISA's were as we have literally no incentive here , you pay tax on your earnings then again on your savings and investments , Ireland is a cruel country to live in they just milk you with taxes.

My plan to was to keep it at 3 or 4 but i found so many ETF's I like I'm trying to restrict myself !

Re bonds - it's just government bonds or corporate bonds as far as I see it it's just your investment in bonds is basically a loan to governments or big corporations , I bought European government bonds 1-3 year and 5-7year there is little volatility in them but low interest , you can go for junk bonds which are higher yield but more risk , think bonds just sure up your portfolio .

 

[whytis]

I read on a lot of other forums american ones and uk ones they talk of 401k's and ISA's were as we have literally no incentive here , you pay tax on your earnings then again on your savings and investments , Ireland is a cruel country to live in they just milk you with taxes.

401ks is for pensions. There's also tax relief on income in Ireland, up to certain limits, and after paying PRSI and USC for PAYE employees.

Re bonds - it's just government bonds or corporate bonds as far as I see it it's just your investment in bonds is basically a loan to governments or big corporations , I bought European government bonds 1-3 year and 5-7year there is little volatility in them but low interest , you can go for junk bonds which are higher yield but more risk , think bonds just sure up your portfolio .

Thanks, and that makes sense. What then determines the going price of the ETF? Is the value of a unit you own of an ETF growing because interest is being paid back into the ETF?

 

[Joey101]

My shares are up 4k now since august I wonder should I cash out and make use of the yearly tax free allowance and rebuy, that's another one I'm thinking about .

Just a note on that, as ETFs are not taxed under the CGT system you won't qualify for any annual tax free allowances. They are taxed under 'exit tax'.