# My advice to my daughter on investing...



## rodorchai (7 Aug 2017)

Here is my advice to my daughter:
INVESTING

There is a good* stockbroker *in Dublin, Campbell O’Connor and Company. They send you the share certs – nothing fancy like nominee accounts unless you want to get into fancy investments - and that is old fashioned and good.

I do not buy unit funds - though they are popular with ‘retail investors’ (that’s us) - but *unit trusts*, for various reasons. A trust is a company which (like a fund) invests in a range of other companies, sometimes specialising in a particular kind of company, so the risk involved in choosing individual companies is lessened. But unlike unit funds, you can buy or sell shares in a trust just like in any company – by phoning the broker. And there are dividends just like a company.

There are also ETFs (exchange traded funds – that _can_ be bought through a broker) which can be very specialised (e.g. there is one which invests in companies all involved in cybersecurity!) and also can be passive (e.g. invests in the Dow Jones index without choosing any particular companies in it). I have not invested in these so far –  I am not sure I need them, some do not have totally upfront financing.

Sometimes we have invested in particular *companies *as there can be some good yields (dividends). A trust could yield say up to 4%, but a company could give say 6%. As regards yields, compare bank deposit rates of 2% from which DIRT tax of 20% is then taken. The same is taken from dividends at source, so you have finally about 1.5% (bank) compared with say 4.5% (company). [This no longer true of many UK companies - no tax deduction, you get the full div tax free.]Of course you can lose your investment, but if you buy shares in a big sound company for a long period, it is almost like being in the bank. Take say Glaxo Smith Klyne GSK pharma, yield 5.6%. There is also the possibility of using a system of reinvesting divs automatically if you do not need the income – the compounding effect of this can be great. Also remember the div can go up regularly for such a company, so you can end up getting an even better yield on your original investment. Mind you, there is an apocryphal story about the ten big companies that Fortune magazine listed in 2000 as the great ones for the new millennium – and that are all now gone! Remember Kodak? No, I said Kodak, not Kojac. Oh well, just forget it. Anyway, if a big company dies, it gives plenty of notice, and there is time to get out. Some of the Fortune ones were probably taken over anyway, good for their shareholders.

*Bonds *are loans issued by governments and companies. We did well out of Irish bonds when the country was still regarded as a risk (it was gratifying to read in the newspapers later that a famous US investor had bought them too) but they have gone up since because Ireland is now risk-free, which means that yields are too small to make them worth buying now. Worse, they might drop as interest rates generally are rising.

The amount of *information* available to the private (retail) investor is now tremendous. Take an example: Since you like reading about tech advances, you have read in *Moneyweek mag [subscribe to it!]*one of their great articles about latest global trends, in this case self-drive electric cars. You can go to the FT Financial Times online, and for free* go to your fantasy portfol*i*o [start one!]*where you have made ‘investments’ in companies you have heard about as being hot things in this area. You know that self-drive electric cars are the next great thing, but do you invest in Google which can make the programmes, in Merc which can make the cars, in Tesla which can make the batteries or cars or in Albermarle which can mine the lithium ore for them? Well, better not any of them directly, especially as you see that some have dropped by 10-20% since you ‘bought’ all of them for your fantasy portfolio last year. Let someone else do it for you, so check out the main holdings of some technology trusts and lo, one good one has 5% of their money in Tesla, 3% in Google, so let’s leave _them_ keep an eye on it all for you, buy 1000 shares in that trust, and (now let’s look up the yield, online, for that trust) ah yes get 2.5% per annum anyway while you hang around waiting for the cars - not bad. Apart from the FT website (free) we subscribe to Moneyweek (for a great read on world affairs too),  and to an occasional FT on Sat – all worth it for even more info. This availability of info has empowered private investors, and the trend towards self-investing has also been assisted by new laws and tax incentives.

*Shares can go down in value as well as up. You can lose some or all of your money. Past performance is no guide to future returns. *Like ‘Smoking Kills’ on cig packets these warnings must be included at the end of any financial ads or advice. How do you live with them?

*Shares can go down in value as well as up.  *Say you invest €2,000 in a unit trust and some months later it has lost 10% of its value. That is €200, ouch. But it is a paper loss until you sell. Before buying you made sure that you did not need to use the money at short notice. Or if you did need to, that you would be able to borrow from the Family (otherwise you might find a horse’s head in your bed). Also, at your leisure, you intend to buy shares in something else so that ups and downs in the portfolio can even out. Let’s imagine then that after a while you have gradually and thoughtfully bought shares in a couple of trusts and companies. They are indeed averaging out until aarrgh! the price of oil drops and the markets get a fright (scenario of Dec 2015) and _everything_ drops so your portfolio is on average down 5%. You had €10,000 invested at this stage so the paper loss is now €500. Warren Buffett said once that the markets are like having a likeable but eccentric friend who comes in one morning in tears and wringing his hands shouting Sell! Sell! Next morning he comes in radiant and joyful shouting Buy! Buy! Enjoy his antics but ignore his advice. If you have cash in hand, consider buying some of those shares that you had in mind for a long time while the market was precariously at a peak and you were waiting for it to drop.  An internet bookmark for the NASDAQ (US tech exchange) marked a few years ago gave the index then as 4050. The year 2016 has had the worst opening weeks for markets ever, yet today 25th Jan the index is at 4589 (!). Patience rewards. There is much written about the psychology of investing e.g. women make better private investors than men because they do not buy and sell so often – less trading. Men perhaps begin to enjoy it as a hunt or gamble - which brings us to small companies.

*You can lose some or all of your money. *Many ways of helping you lose some or all of your money are provided by *small companies*. Big companies can do it too (Anglo Irish Bank, Volkswagen) but small companies are dangerously attractive because they are often in exciting areas (self-drive cars, gene therapy…) and have faster growth  – and go bust more often. There are gurus who recommend small companies, such as the famous Lord John Lee in the Financial Times Saturday ‘Money’ supplement. So after a year or so ‘investing’ in some companies recommended by him, in your fantasy portfolio, maybe you could put some money into one in reality, and meanwhile just consider buying shares in an appropriate trust such as JP Morgan European Smaller Companies Trust.

*Past performance is no guide to future returns. *This warns us of possible unforeseen events for a company, but also of *market cycles*.Trusts investing in so called emerging markets (developing countries) at the beginning of 2014, indeed anyone investing in 2014, would have done well. The year 2015 was bad for emerging markets, but Japan did well. If at the end of those years you looked up the performances of the fortunate trusts, you would have been given a very good impression, but had you invested in those trusts for the following year your investment would have been mediocre or at a loss. Currently (Jan 2016) commodities (oil, industrial metals), emerging markets, China, US, biotech are out of favour, while Europe, Japan are relatively in favour but only relatively. Financial journalists can more or less account for this situation, but no one knows when you should invest in e.g. Rio Tinto miner again to be in right at the next upturn of commodities (well, _we_ wouldn’t anyway, would we, as it is an unethical miner). In general the markets move ‘3 steps forward, 2 steps back’, so again patience rewards if you are on a good thing long term.


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## Brendan Burgess (8 Aug 2017)

Hi Rod 

Interesting advice but needs some tweaking. 


A few points. 

Dividends are not tax free in Ireland or England. There is the equivalent of withholding tax in the UK, it's just that you can't claim a credit for it.

In any event, they are taxable in full in the recipient's hands. 



rodorchai said:


> There is also the possibility of using a system of reinvesting divs automatically if you do not need the income – the compounding effect of this can be great.



This is a misunderstanding of what is happening here.  

Check out this post: The Free Dividend Fallacy 

If your daughter saves instead of spending and invests the savings in shares, she will benefit from compound interest or compound returns. The availability or not of a Dividend Reinvestment Plan is irrelevant. For example, should could take her dividends from GSK and invest them in another company. 

I suppose that the biggest one is that there is no evidence at all that you or your daughter could pick shares better than the market, no matter how well informed and how well read you are.  Having said that, if you do a lot of research and pick 10 shares as a result, they should not do any worse than 10 picked at random.

Brendan


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## Sarenco (8 Aug 2017)

Brendan Burgess said:


> There is the equivalent of withholding tax in the UK, it's just that you can't claim a credit for it.



That's not quite correct Brendan.  The UK is actually somewhat unusual in that it generally doesn't apply a withholding tax to dividend payments by UK companies.

However, it's certainly correct that dividends received by or credited to an Irish investor from a UK company are subject to Irish income tax.


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## Firefly (8 Aug 2017)

rodorchai said:


> *Shares can go down in value as well as up.*



More like.....shares can go up in value as well as down


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## Brendan Burgess (8 Aug 2017)

Sarenco said:


> The UK is actually somewhat unusual in that it generally doesn't apply a withholding tax to dividend payments by UK companies.



Thanks. There was something odd, wasn't there? Did they withhold 15% and Irish people could claim only 10% credit? 

But, as you say, the key thing for the OP and his daughter is that dividends are taxable at your marginal rate.

Brendan


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## PMU (8 Aug 2017)

Your daughter (and probably everyone else) could profitably read "If you can . .  how millennials can get rich slowly" by William J Bernstein ( of Efficient Frontier fame), which is his advice on how 'young people' can invest for retirement.  Mr Bernstein has made this book freely available on his web site http://efficientfrontier.com/ef/0adhoc/2books.htm and at  https://www.dropbox.com/s/5tj8480ji58j00f/If You Can.pdf?dl=0.
The book is written from an American perspective (e.g. 401(k) plans etc.) but it should not be too difficult to port its advice to a IE/EU situation.


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## Sarenco (8 Aug 2017)

Brendan Burgess said:


> There was something odd, wasn't there?


Sort of.  UK residents previously got a tax credit (replaced last year with an annual allowance) that was of no benefit to Irish residents.


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## AJAM (21 Aug 2017)

If you are investing in stocks, I would sum up the key rules as follows

*Rule 1 - Hold a Diversified portfolio*: Do this by buying broad based ETF's i.e. index trackers that track the S&P500, the EuroStoxx 600 etc.
Why? Because there is lots of Nobel prize winning research that proves that you get the same return at lower risk (or higher return at the same risk) by using a diversified portfolio. You need at least 100 stocks to get the full benefit of diversification. And studies also show that >80% of active managers fail to consistently beat the market. 
*Rule 2 - Minimize Taxes* : Do this by using US domiciled ETF's instead of Irish or EU ones. Also you should minimize dividends (assuming you are in the highest income tax bracket). So use VTI and IEUR and VWO as your US domiciled ETFs to track the US market the European market and emerging markets respectively.
Why? Because Ireland has crazy rules that charge 41% Tax on Unit/Mutual funds and European domiciled ETF's, but charges 33% CGT on individual shares and US domiciled ETF's. Dividends are taxed as income at your marginal rate.
*Rule 3 - Minimize Transaction costs*: Do this by using low cost brokers (e.g. Degiro.ie) and low cost ETF's (e.g. Vanguard & Ishares mgmt fee ~ 0.2%) instead of expensive Unit or Mutual funds (often fees of 1% p/a)


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## galway_blow_in (21 Aug 2017)

AJAM said:


> If you are investing in stocks, I would sum up the key rules as follows
> 
> *Rule 1 - Hold a Diversified portfolio*: Do this by buying broad based ETF's i.e. index trackers that track the S&P500, the EuroStoxx 600 etc.
> Why? Because there is lots of Nobel prize winning research that proves that you get the same return at lower risk (or higher return at the same risk) by using a diversified portfolio. You need at least 100 stocks to get the full benefit of diversification. And studies also show that >80% of active managers fail to consistently beat the market.
> ...



IEUR has a very low daily volume , better go with VGK or EWZ for europe


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## Jim2007 (21 Aug 2017)

galway_blow_in said:


> IEUR has a very low daily volume , better go with VGK or EWZ for europe



Irrelevant, the market makers are obliged to create or pick up.


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## AJAM (22 Aug 2017)

galway_blow_in said:


> IEUR has a very low daily volume , better go with VGK or EWZ for europe


VGK is definitely another fine option. EWZ is an ETF for Brazil. I think you mean EZU (which is a Euro focused ETF i.e. it excludes UK and Swiss stocks) although EZU has a higher expense ratio (0.48%) than either IEUR or VGK (0.1%). Also, as EZU excludes the UK and Swiss markets it is not as broadly diversified as IEUR or VGK.


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## AJAM (22 Aug 2017)

Wollie said:


> Companies that meet the criteria set out above tend to over-perform rather than under-perform over a long period.


If that were true, then someone would just make a fund using the screen you just described. It would consistently out perform the market and then everyone would buy it. 
Of course, that would drive the price up until it no longer outperformed the market.


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## galway_blow_in (22 Aug 2017)

Jim2007 said:


> Irrelevant, the market makers are obliged to create or pick up.



well it might be an issue if someone wishes to buy a relatively large amount , not so easy buying 50 k worth of an etf with a volume trade of only fifty thousand per day , you end up paying more or if you try and set a price , you are waiting forever for a fill


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## joe sod (22 Aug 2017)

Wollie said:


> (2) She should like the company and want it to grow by selling more of its products and services. That would exclude companies that depend on addiction for their success: tobacco, drinks and gambling companies.



Are you not confusing personal morality and investing, you might not like the products they sell but that does not mean that they are bad investments. A company like Diageo might be an excellent investment even if you personally dont like the products they sell. Some of the best investors in the world have invested in drinks companies.


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## joe sod (23 Aug 2017)

Wollie said:


> There is the additional financial/ risk consideration that such companies are highly susceptible to regulatory action, which makes them bad candidates for a concentrated portfolio. They fail the criterion of long-term strategic durability.


Surely almost every company you invest in would fail on "long-term strategic durability", a company like diageo has passed this test for the last 200 years, however nobody knows the future. If you looked at warren buffets portfolio 30 years ago and today, there is very little of it the same, and he is the one that said his optimum holding period is "forever", therefore not even he can find these companies of "long term strategic durability", with exceptions like Coca Cola, but wait is Coca Cola now subject to sugar taxes, so cross that one off aswell.


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## AJAM (24 Aug 2017)

Wollie said:


> Going back to AJAM's earlier suggestion of devising a screen using the criteria I identified, it will be a long time yet before a computer can screen for strategic durability.


Wollie, I never implied that a computer could, would or should do it. There are literally thousands, if not tens of thousands, of active fund managers, constantly seeking for ways to beat the market. Studies show (time and again) that less than 85% of fund managers  fail to consistently beat the market. 
You're saying you have a screen that can beat the market. Whats more, it's a relatively simple screen that you're daughter can apply with a little bit of homework and study. I am saying that I am massively skeptical! If you're right, you and your daughter will be billionaires. 
Once you have 5 years of data, showing how you actually outperformed the market, please let me know. I'll give you and your daughter all my money to manage.


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## joe sod (24 Aug 2017)

Wollie said:


> I think I've made the point already, but I'll say it again: the main advantage of investing in shares rather than funds is that you are less likely to be fazed by a fall in the share price than would be the case if you were invested in a fund and you didn't know the reason for a price movement, up or down.


 
I totally disagree, you are more likely to panic with individual shares than with funds such as ETFs or investment trusts. I have experience of pharma companies falling 50% in a matter of days, when news of a drug failure came through . I have never seen this happen with an ETF or fund, it may fall 50% but it would take it years rather than days and the ETF would have to be concentrated in a highly unfavourable sector like mining or commodities.


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## PGF2016 (25 Aug 2017)

Wollie said:


> Do you honestly think that I would countenance my daughter, or anyone else I love or respect, putting their money into a share that could lose half its value in a matter of days?



But how can you be sure the shares you pick won't do this? You simply can't so please don't suggest otherwise.


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## joe sod (26 Aug 2017)

Wollie said:


> how me even a single example over the last 20 years of a share that met the criteria I set out and which lost more than (say) 20% of its value over a period of (say) three months.



i think VW would be one example, also Tesco . These were core holdings in many of the best funds, yet even the best fund managers did not foresee trouble ahead. How then do you think amateurs like your daughter could avoid these shares if the professionals were not able to. Even Warren Buffet got caught by Tesco.


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## galway_blow_in (26 Aug 2017)

joe sod said:


> i think VW would be one example, also Tesco . These were core holdings in many of the best funds, yet even the best fund managers did not foresee trouble ahead. How then do you think amateurs like your daughter could avoid these shares if the professionals were not able to. Even Warren Buffet got caught by Tesco.



volkswagon is still far higher than it was ten years ago , fifteen years ago it was 30 euro

tesco has been a bit of a disaster alright , price was higher in the year 1999


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## joe sod (27 Aug 2017)

But an amateur investor would still have got caught out and probably panicked when all the bad news hit the headlines (about VW) and sold his shares, especially one overly concerned about avoiding alcohol, tobacco and betting stocks. Whereas a professional fund manager is more likely to sit out the negativity and not sell at the bottom.


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## joe sod (27 Aug 2017)

a good posting wollie, at least you can go into detail to back up your viewpoints, you obviously know your stuff even if i disagreed with you on some points.


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## galway_blow_in (28 Aug 2017)

joe sod said:


> But an amateur investor would still have got caught out and probably panicked when all the bad news hit the headlines (about VW) and sold his shares, especially one overly concerned about avoiding alcohol, tobacco and betting stocks. Whereas a professional fund manager is more likely to sit out the negativity and not sell at the bottom.



when that scandal broke about VW t


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