# Beginning in Investment - A Better Strategy for the Long-Term



## ronaldo (5 Jul 2007)

Hi,

*Note:* This strategy will work best if you have €10,000 minimum to start with and can add €300+ per month to the portfolio.

Taking into consideration my thread here ETF's, Direct Shareholdings and the new 8-Year Rule and considering that ETF's will probably fall under the new 8-year rule, would the following be considered a sensible investment strategy.

When looking to diversify, the general consensus is that 10 should be a minimum but, for this strategy, I think 20 is a better number. Therefore, if you look at the Eurostoxx 50, select the top 20 companies and purchase shares in each share in the same proportion as they are (relative to each other) in the index, you will have exposure to 61.72% of the index. 

For example, the chart below highlights the top 20 shares currently in the Eurostoxx 50. If you look at the first - TOTAL - the first number represents the percentage of the full Eurostoxx 50 made up by that company - 5.65%. The second number highlights what percentage of the top 20 companies is made up by that company in the index - 9.154245%. The third number highlights how much out of €20,000 you should invest in that company to gain the correct exposure.

1 TOTAL........................................5.65...9.154245...1830.85 
2 SIEMENS.....................................3.78...6.124433...1224.89 
3 BCO SANTANDER CENTRAL HISPANO.3.69...5.978613...1195.72 
4 E.ON..........................................3.62...5.865198...1173.04 
5 NOKIA........................................3.47...5.622165...1124.43 
6 ALLIANZ.....................................3.33...5.395334...1079.07 
7 BNP PARIBAS...............................3.31...5.362929...1072.59 
8 TELEFONICA................................3.06...4.957874...991.57 
9 UNICREDITO ITALIANO...................2.99...4.844459...968.89 
10 ING GROEP.................................2.96...4.795852...959.17 
11 ABN AMRO.................................2.82...4.569021...913.80 
12 ENI...........................................2.79...4.520415...904.08 
13 BCO BILBAO VIZCAYA ARGENTARIA.2.77...4.48801....897.60 
14 DAIMLERCHRYSLER......................2.76...4.471808...894.36 
15 GROUPE SOCIETE GENERALE..........2.75...4.455606...891.12 
16 SANOFI-AVENTIS........................2.72...4.406999...881.40 
17 AXA..........................................2.47...4.001944...800.39 
18 DEUTSCHE BANK R.......................2.41...3.904731...780.95 
19 INTESA SANPAOLO S.P.A..............2.28...3.694102...738.82 
20 SUEZ........................................2.09...3.386261...677.25 
..................................................61.72...100.00.....20000.00 

Now, of course, you will have to take charges into account. With Interactive Brokers, there is a minimum total charge of $10 per month and a minimum charge of €4 per transaction for European share purchases. As $10 is €7.32 at todays exchange rate, we can assume that we can make 2 transactions per month at a total cost of €8 per month.

This is a buy and hold strategy and so we never want to sell any of our shares if we must pay tax on the gains. Therefore, we must select 2 of the top 20 of our holdings each month to buy and apportion our investment for that month between those 2 choices with one exception - if one of the shares drops from the top 20, we can sell enough of them to use up our annual capital gains tax allowance for that year and any subsequent years and use the proceeds (along with that month's investment) to purchase the new top 20 share - we will never sell anything that arizes a tax liability.

Let's assume we're investing €1,000 at the end of each month. We select the 2 companies most out of sync with the current percentages made up by the index. To divide the money, for example, lets say UNICREDITO ITALIANO is supposed to currently make up 3.5% of the index and E.ON is supposed to make up 5% of the index but our holdings in each is currently valued at €2,900 and €4,000 respectively. Our total holdings of these 2 companies are going to be €7,900 after the purchase. This means that, based on the above percentages the following should be our holdings in each:

UNICREDITO ITALIANO - €7,900 / 8.5 * 3.5 = €3,253
E.ON ------------------ €7,900 / 8.5 * 5 = €4,647

Therefore, we'd purchase €353 of UNICREDITO ITALIANO and €647 of E.ON.

The above would suit the people of a passive nature as there's only a little mathematics at the end of each month and no investigating company books, etc. It will not track the Eurostoxx 50 as thats not the purpose of the strategy, but it will provide diversification and will avoid the temptation to sell shares for the wrong reasons. For example, many people tend to sell a share if it drops alot in a particular period of time. However, they always tend to bounce back (which is why index investors who continue to buy the shares after they drop tend to do well).

When compared to, for example, investing in Quinn Direct funds which have an annual management charge of 1%, the following are the charges that apply (if investing an initial €20,000 and €1,000 per month).

*Quinn*

Initial Charge - €0
Year 1 Annual Charge - Probably above €260 assuming any growth
Year 2 Annual Charge - Probably above €320 assuming any growth
Year 3 Annual Charge - Probably above €380 assuming any growth
Year 4 Annual Charge - Probably above €440 assuming any growth
Year 5 Annual Charge - Probably above €500 assuming any growth
Every year after - Rises more

*Above Strategy*

Initial Charge - €80 (20 purchases at €4 each)
Year 1 Annual Charge - €88 (11 months at €8 per month)
Every year after - €96 (12 months at €8 per month)


However, the above is not a like for like comparison as if you are willing to open an account with Interactive Brokers to follow the above strategy, you will probably purchase ETF's directly rather than invest in Quinn Direct. To see the difference in buying shares directly (possibly using the above strategy) and ETF's, see ETF's, Direct Shareholdings and the new 8-Year Rule


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## Brendan Burgess (5 Jul 2007)

Hi Ronald 

I see where you are coming from, but it's a huge amount of work for very little savings. Owning shares directly in European companies is awkward. I had them a few years ago and I had no idea what was happening. When dividends went missing, I spent ages chasing them up. Then more time trying to find out about tax deductions. 

There will be rights issues, scrip issues, share splits and mergers. Each one is time consuming. 

It really is not worth the hassle. 

And if you factor in your time at €50 an hour, then it's far more expensive than buying an ETF or tracker.

Where are you getting 20 shares from? 

If it was your entire wealth, then 10 is enough. 

If it's only a part of your wealth, then 5 is plenty.  

Brendan


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## ronaldo (5 Jul 2007)

The reason I chose 20 was because the strategy outlined above doesn't buy shares in equal amounts, i.e. if I was spending €10,000 on the top 10 shares, I wouldn't be buying €1,000 in each but would instead have it split based on the proportion of the Eurostoxx 50 each share occupies. I wouldn't feel comfortable having almost 16% of my wealth tied up in one company based on the percentages of the top 10 companies in the table below. Also, buying 10 would only give me exposure to 36% of the index as opposed to 62%.

1 TOTAL........................................5.65...15.76% 
2 SIEMENS.....................................3.78...10.54%
3 BCO SANTANDER CENTRAL HISPANO.3.69...10.29%
4 E.ON..........................................3.62 ..10.09%
5 NOKIA........................................3.47. ..9.68%
6 ALLIANZ.....................................3.33.. .9.29%
7 BNP PARIBAS...............................3.31....9.23%
8 TELEFONICA................................3.06....8.53%
9 UNICREDITO ITALIANO...................2.99...8.34% 
10 ING GROEP.................................2.96...8.25%

Anyway, using the strategy I've highlighted above, the only additional costs in owning 20 shares as opposed to 10 shares is the additional €40 you'd have to pay in commission at the beginning. After this, you're limiting yourself to a maximum of 2 trades per month so as to keep the commissions to a minimum.

After the initial 20 are set up, it's just a matter of the following at the end of each month when you've got your next batch of money to invest:

Check that the top 20 Eurostoxx 50 companies are still the same and,
If not, sell enough of the company that's dropped from the top 20 to use up your annual CGT allowance and use the proceeds together with this months investment to purchase stocks in the company that's joined the index (that's your 2 trades for the month),
If so, work out the percentage of your portfolio held in each company, check the percentages each company makes up in the index at that point in time by looking at http://www.stoxx.com/indices/components.html?symbol=SX5E and choose the 2 companies where your current holdings are most out of sync. Then work out how much of your investment to put in each company using the method shown in my previous post (that's your 2 trades for the month).
*Rule: *Never sell shares when doing so would cause a tax liability. Therefore, you'll only sell shares when they have dropped from the top 20 and you have a CGT free allowance to use for the year. This means, when a share drops from the top 20, you'll sell enough to realise a tax-free profit of €1,270 and keep the rest. Your portfolio will then consist of 21 shares and you can keep the 21st until it rejoins the top 20 in which case you'll buy back some more or, another tax year passes and you can sell another batch to realise a tax free profit of €1,270.


All in all, I'd say the above will take about 1 hour (2 at most) per month. It might not be such a good idea for someone who wants a truly passive investment vehicle but I think it does have it's merits and does deserve at least some consideration.


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## ronaldo (5 Jul 2007)

I've just been reading up on "Bed and Breakfasting" - a practice whereby people used to sell shares to realise a there CGT tax free profit of €1,270 and then immedietely buy them back. The government has introduced a 30-day rule whereby if you buy them back within 30-days, you cannot use the CGT tax free allowance. 

Therefore, when using the above strategy, if the 20th company dropped out of the index one month and you had 1500 shares purchased at €3 each but now worth €5 each. You would sell enough to make a profit of €1,270, i.e. 635 shares and keep the other 865 shares thus using up your annual CGT free allowance.

If, in the next month, that company re-entered the top 20, you would need to wait until the 31st day (which is pretty much what you're doing in the above strategy anyway) and then repurchase enough shares so that you have the correct number of shares in that company. Remember - We DON'T want to ever have to pay tax ;-)

Of course, you wouldn't be able to sell any of the company that was briefly in the top 20 until the next tax year without paying tax on profits. Therefore, we can either keep them if they have rose in value or make our own choice about whether to keep them or sell them if they have dropped in value - I would usually lean towards keeping them because we don't want to sell at a loss and, anyway, chances are they will rise again and possibly re-enter the top 20 next month.


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## ShaneMc (5 Jul 2007)

Brendan said:


> Hi Ronald
> 
> I see where you are coming from, but it's a huge amount of work for very little savings. Owning shares directly in European companies is awkward. I had them a few years ago and I had no idea what was happening. When dividends went missing, I spent ages chasing them up. Then more time trying to find out about tax deductions.
> 
> ...


 
what is the tax staus on european dividends? I know its a complicated question but does anyone have a brief summary? is it a case of getting taxed in Spain and having to pay here or is tax deducted at source at all in Europe?


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## ClubMan (5 Jul 2007)

ronaldo said:


> Now, of course, you will have to take charges into account. With Interactive Brokers, there is a minimum total charge of $10 per month and a minimum charge of €4 per transaction for European share purchases. As $10 is €7.32 at todays exchange rate, we can assume that we can make 2 transactions per month at a total cost of €8 per month.


What about stamp duty (or equivalent) on share purchases - e.g. 1% in _Ireland_, 0.5% in _UK _etc.?


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## ronaldo (5 Jul 2007)

You'd have to make sure that, in the unlikely event of an Irish or UK share entering the top 20 that you eliminate it and go for the top 21. Ireland and the UK are the only  countries where stamp duty is payable.


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## jpd (5 Jul 2007)

My comment on above strategy is that is could be considered to be overweight in financial companies - banks and insurance companies make up 50% of total investment.

Another strategy would be to avoid duplication of companies within each industry segment and to ignore weighting on a market capital basis. The aim is to attain a degree of diversification across industry sectors not just follow the index.


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## ronaldo (5 Jul 2007)

Well it would have to be automatic, i.e. no personal selections of comapanies as this is where trading would start. How about if you only allowed two companies in the same sector. This would make it look like the following for a €20,000 investment which gives you a 55% exposure to the index:

Name...........Sector................Index %...Our %..... Amount
TOTAL..........Oil/Gas...............5.65........10.25........2050.82
Siemens.......Industrials............3.78.........6.86........1372.05
BCOSAN......Banks.................3.69.........6.70.........1339.38
E.ON...........Utilities................3.62.........6.57.........1313.97
Nokia...........Technology..........3.47.........6.30.........1259.53
Allianz..........Insurance............3.33.........6.04.........1208.71
BNPParabis.Banks..................3.31.........6.01.........1201.45
Telfonica.......Telecom..............3.06.........5.55.........1110.71
INGGroup....Insurance..............2.96.........5.37.........1074.41
ENI .............Oil/Gas................2.79.........5.06.........1012.70
Daimler........Automotive...........2.76.........5.01.........1001.81
Sanofi….......Healthcare...........2.72.........4.94..........987.30
SUEZ...........Utilities................2.09........3.79..........758.62
BASF...........Chemicals...........2.01........3.65..........729.58
Bayer...........Chemicals............1.83........3.32.........664.25
DeutsheT….Telecom.................1.77........3.21.........642.47
Unilever........Food/Beverages....1.71........3.10..........620.69
Vivendi.........Media..................1.57.....2.85.............569.87
Philips..........LeisureGoods......1.52.....2.76.............551.72
SAP ............Technology..........1.46....2.65.............529.95 .
.............................................55.10....100.00.........20000.00


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## ClubMan (5 Jul 2007)

ronaldo said:


> if one of the shares drops from the top 20, we can sell enough of them to use up our annual capital gains tax allowance for that year and any subsequent years


What exactly do you mean by the bit in red? You cannot use future years' annual _CGT _allowance in advance or carry forward unused annual _CGT _allowances from previous years if that's what you mean...

Also - I suspect that when it does come to selling and taking money out the _CGT _issues are going to be far too complicated for most people to deal with by themselves so the costs of getting professional advice must be factored in. _CGT _complexities alone is one of the main reasons that I personally tend to avoid direct shareholdings as much as possible.


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## jpd (5 Jul 2007)

I'd be happy with that selection strategy but would tend to agree with Clubman that dealing with CGT issues would be a problem for most people.


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## pernickety (5 Jul 2007)

one thing strikes me in this is that in buying the top 20 and selling when a company falls out of top 20, you are effectively saying buy high and sell low. Holding for long term is great but better if you manage to buy one of the greats when they are at a temporary low, difficult to do I know.


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## ronaldo (6 Jul 2007)

ClubMan said:


> What exactly do you mean by the bit in red? You cannot use future years' annual _CGT _allowance in advance or carry forward unused annual _CGT _allowances from previous years if that's what you mean...
> 
> Also - I suspect that when it does come to selling and taking money out the _CGT _issues are going to be far too complicated for most people to deal with by themselves so the costs of getting professional advice must be factored in. _CGT _complexities alone is one of the main reasons that I personally tend to avoid direct shareholdings as much as possible.


 
Sorry, I was a bit vague there. What I meant is sell enough of the units to realise your capital gains tax allowance and keep the rest until the next tax year and then sell some more to use up that tax years allowance, unless of course the share re-enters the top 20.

I totally agree with the idea of CGT issues being too complicated for alot of people but the strategy may be a good one for those who understand FIFO principals and how to file tax returns. It also may be beneficial to alot of the posters who post from time-to-time that have large amounts to invest for the long-term.

For example, let's consider the extreme. Say someone inherets €400,000 and are retired. Finances to this person is like golf to other retirees and they actually enjoy watching and playing in the markets. They don't need the money as their pension is adequate for them but they want to invest the money for as long as they live for their own childrens inheritences. Assume dividends are 2.5% per annum, growth is 9% p/a and they are a lower rate taxpayers. 

By using the above strategy and reinvesting the dividends, their fund will be worth €2,996,358 after tax is paid (and this assumes you never use the annual CGT allowance which you obviously will using the above strategy and so the actual figure will be higher).

By using the ETF strategy, using the new 8-year deemed disposal rule and assuming that afer the twentieth year all shares are sold and the CGT for the final 8 years is paid, the figure works out at €2,492,632.

So, say we spend 2 hrs per month for 20 years, thats 480 hours. The difference in fund values is €503,727. That's a salary of €1,050 per hour after tax.


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## ronaldo (6 Jul 2007)

pernickety said:


> one thing strikes me in this is that in buying the top 20 and selling when a company falls out of top 20, you are effectively saying buy high and sell low. Holding for long term is great but better if you manage to buy one of the greats when they are at a temporary low, difficult to do I know.


 
Whilst I agree this is true. The fact of the matter is that any index tracker works on this principal and this strategy is aimed at being relatively passive by mimicking the index trackers to a certain extent. The purpose is to avoid the losses incurred by the new 8-year rule. 

There will be charges associated with the stockbroking of €96 per year. These charges are also incurred with ETF's but you avoid the 0.25% AMC with ETF's and you avoid the 8-year rule. With Quinn Funds, the charge is 1% AMC which means that once your holdings reach €9,600, the direct holdings/ETF's work out cheaper.


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## ClubMan (6 Jul 2007)

ronaldo said:


> but the strategy may be a good one for those who understand FIFO principals and how to file tax returns.


I understand both but still find it enough hassle to avoid where possible. Trawling through the _eircom _figures to calculate losses in order to set them against _First Active _capital repayment gains was enough to put me off this stuff for the forseeable future (even if I still have losses to use against gains).


> Finances to this person is like golf to other retirees and they actually enjoy watching and playing in the markets.


 I would say that this would be a minority of the general population to be honest.


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## howdydoo (6 Jul 2007)

We're almost at the height of the bull market now and if we start investing now, we'll ride down, averaging down for lesser value. It's best to wait until the next market cycle to get in (i.e. end of bear market). Remember the Dot Bomb? I know the top 20 weren't as badly affected but still when the whole market is going down, the rest will follow, now matter how strong it is. Have to do more due diligence than buying the top 20.


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## ClubMan (6 Jul 2007)

howdydoo said:


> We're almost at the height of the bull market now and if we start investing now, we'll ride down, averaging down for lesser value. It's best to wait until the next market cycle to get in (i.e. end of bear market). Remember the Dot Bomb? I know the top 20 weren't as badly affected but still when the whole market is going down, the rest will follow, now matter how strong it is. Have to do more due diligence than buying the top 20.


Can you predict the future?


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## ShaneMc (6 Jul 2007)

howdydoo said:


> We're almost at the height of the bull market now and if we start investing now, we'll ride down, averaging down for lesser value. It's best to wait until the next market cycle to get in (i.e. end of bear market). Remember the Dot Bomb? I know the top 20 weren't as badly affected but still when the whole market is going down, the rest will follow, now matter how strong it is. Have to do more due diligence than buying the top 20.


 
Are you for real? How do you know when the next market cycle will begin?


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## ronaldo (6 Jul 2007)

ShaneMc said:


> Are you for real? How do you know when the next market cycle will begin?


 
Easy.. See http://en.wikipedia.org/wiki/Mystic_Meg for details..


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## howdydoo (6 Jul 2007)

I never said I could predict the future. Predictions for fools and liars. I apologize if I wasn't clear enough. I'm just saying using a little fundamental and technical analysis you can get a more accurate picture of where we are in the market cycle.

The bull market has been well underway since 2003. I'm just saying it might a little late to get fully invested. I'm trying insert a chart and can't seem to make it appear. Here's the link though. Ideal buy areas are already gone. Either wait for a correction if you must to get in. But preferably wait for the market cycle for a long term investment.

[broken link removed]

[broken link removed]

[broken link removed]


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## ClubMan (6 Jul 2007)

howdydoo said:


> I never said I could predict the future.


Sounded that way to me:


howdydoo said:


> We're almost at the height of the bull market now and if we start investing now, we'll ride down, averaging down for lesser value. It's best to wait until the next market cycle to get in (i.e. end of bear market). Remember the Dot Bomb? I know the top 20 weren't as badly affected but still when the whole market is going down, the rest will follow, now matter how strong it is. Have to do more due diligence than buying the top 20.


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## howdydoo (6 Jul 2007)

Right, I don't know when the next cycle is either but obviously this cycle is well underway. Since we're already so high, the potential for losses are greater. The interest rates are being hiked in UK, EU, and US, so seems the markets may be affected by this.


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## z108 (6 Jul 2007)

ShaneMc said:


> Are you for real? How do you know when the next market cycle will begin?



In fairness to howdydoo most people believe markets tend to move in cycles. If he believes also that its overvalued then hes responsible for his investment decisions based on that. Perhaps he could have had a better choice of words and written  something like: .... ' I believe We're almost at the height of the bull market now..'...
And any crash will undervalue many stocks when people behave irrationally which is ideally the best time to buy.
If other people believe the oposite I'd like to see the reasons from both sides of the belief spectrum.


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## fluppet (11 Jul 2007)

ronaldo said:


> Assume dividends are 2.5% per annum, growth is *9% p/a*


This seems a little bit high for a long term average.


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## PMU (11 Jul 2007)

Ronaldo: I think you need to benchmark your portfolio against the Eurostoxx50, i.e. calculate its percentage gain / loss and volatility (i.e. std. deviation).  

  Before you make any decisions on subsequent stock purchases / disposals, anyone followign this stratedgy would need to see if the portfolio is: (a) giving you a better or worse return to the index; and (b) is more or less volatile than the index. This gives you four possible outcomes. 

  If you are underperforming the index and are more volatile, the strategy is wrong so you should liquidate and just buy the index, as no amount of tax efficiency or lower costs on direct share holdings can compensate for a poorly performing and risky portfolio. If the  portfolio underperforms the index and is less volatile, you should also consider liquidation; low volatility may allow you to sleep easier at night but it is difficult to see why you would keep investing each month in poorly performing portfolio.   However, if the savings in lower costs and tax efficiency were such as to compensate over time for the poorer performance it might just be worth it. (Assuming you cost your time in maintaining the portfolio at zero).

  If you have a  return equal to or greater than the index but with higher volatility, you need to base future buy / sell decisions not alone on maintaining the fixed-percentage allocation but also on lowering volatility while maintaining performance, as you are carrying risk for which you are not being rewarded.  If, of course, your initial strategy has resulted in a portfolio that both outperforms the index and also has lower volatility, you’re on the pig’s back, and are now probably earning big bucks in Wall St. and not wasting your time contributing to this forum. 

  So, of the four possible outcomes, Ronaldo’s (or indeed anybody else’s) direct share purchase strategy is really worth following only if it delivers a portfolio that outperforms the index with the same volatility (or matches the index but with a lower volatility).

  If it slightly underperforms the Eurostoxx50 with lower volatility it might be worth doing it, if over time: (a) the lower costs involved in direct share ownership less the taxes to be paid on dividends and disposals compensated for the underperformance; or (b) if the strategy after costs outperformed an ETF or tracker when their costs are taken into account.  (Or you could lower volatility, if this is what worries you, by buying the Eurostoxx50 and diversifying by also buying a low or uncorrelated index). 

  In all other underperformance cases you are better off just buying the Eurostoxx50, either via an ETF or a low-cost tracker.


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## ronaldo (11 Jul 2007)

PMU said:


> Ronaldo: I think you need to benchmark your portfolio against the Eurostoxx50, i.e. calculate its percentage gain / loss and volatility (i.e. std. deviation).


 
I think this is over-complicating things. Basically, I'm just selecting the top twenty European shares with a maximum of two in any sector. The calculating percentages isn't even really necessary and could be left out of the strategy by simply buying an equal value of each share.

The purpose of the strategy is to provide an easy way (without delving into company books or technical analysis) of building a diversified portfolio of shares which can be bought and sold in a tax efficient manner and results in less commissions/taxes than a truly passive product such as a Unit Linked Fund. It is not to track the Eurostoxx 50 or any other index.


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## howdydoo (18 Aug 2007)

As I mentioned before, timing is everything. The past few weeks have been a heck of a ride down. But I wouldn't call this a bear market just yet until it's confirmed. Only now, it's considered a correction (although some for panicking more than normal like it is a beginning of one). 

If the market cannot take it higher than the last high, we may be seeing a possible bear market starting, that test could be weeks or more away. Stay tuned...

[broken link removed]

One last thing, prices drop faster than they rise (hence, the reason why bear markets are shorter but deadly in percentage in loss). I think tracking a major stock index is the best way to determine if a portfolio can beat it or not. If not, then ride with it, a simple basket of stocks to own in one instrument.


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## ronaldo (31 Aug 2007)

I've got some inheritence money coming shortly which I'd like to invest. I'm thinking about a slight change to the above. I've looked at the 30 Shares in the Eurostoxx Dividend 30 - as I'd like high dividend payers. 

I'd also like to automate my sharedealing to start with so that I don't have to spend too much time at it until I've enough invested to make it worth my while doing additional research, i.e. the way I see it, as long as I'm well diversified, I'll place my faith in the efficient market hypothesis to begin with and assume that all the shares are fairly priced.

Therefore, I've made a list of the 30 shares in the Eurostoxx Dividend 30 and the sectors to which they belong. It is heavily weighted towards banks and telecoms. However, as suggested above, I've set a rule that I must own a maximum of two shares in each sector and must purchase 15 shares from the 30. This should achieve the diversification I need.

I've ruled out Irish shares (of which there are 4) as my job is based here and I don't want my investments reliant on the Irish economy too. 

I've listed the 30 shares in order of their weightings in the Eurostoxx Dividend 30 and am going to start at the top and purchase each share (provided I don't already have two in that sector) on the way down until I have 15 shares whilst avoiding the Irish shares.

This means that I will have shares in 15 companies that make up 58% of the Eurostoxx Dividend 30. However, unlike my previous posts, I think I might just buy an equal amount in each share.

I have opened a Interactive Brokers account and plan to lodge €2,000 of the inheritence money with them and the other €10,000 in Rabodirect. Interactive Brokers charge €4 per trade with a minimum monthly charge of $10 (close to €8). Therefore, to minimise my commisions, I'm going to purchase 2 shares per month for 8 months. This will have the added bonus of achieving dollar cost averaging. I will purchase €1,000 in each of 2 companies every month and transfer €2,000 from Rabodirect to Interactive Brokers each month to finance this. The money will only last for 12 companies so, during this time (6 months), I'll also need to save up €3,000 or €500 per month. 

In the end, I should have €1,000 in each of 15 companies. I will then continue to lodge €500 per month to Interactive Brokers which I plan to use to purchase shares in the two lowest valued companies, i.e. the companies whos shares have either dropped the most in value or risen the least in value - this will achieve the *buy low-sell high* to a certain extent.

The shares I would own would be as follows:

2 Telecoms
2 Banks
2 Utilities
2 Retailers
2 Property
1 Oil and Gas Producer
1 Chemical Company
1 Steel Company
1 Machinery Manufacturer
1 Diversified Company

Therefore, I'd be limiting my exposure to any individual sector to 13%. They would also be diversified geographically throughout Europe. After a year or 18 months, I'll probably then consider investing in shares in other countries where there is a currency risk such as the UK and US.

As you can see from my previous posts, I've put alot of effort into deciding how to invest before I start but I have to start when I get this money because I'd planned to start over a year ago but never got around to it. Once I start, I'll have the discipline to stick to the budget I've developed instead of living from paycheck to paycheck.

If I manage the above, I'll have €18,000 invested within a year. This is equivelant to $24,550. Interactive brokers will be charging me $10 per month or $120 per year. Therefore, I'll have an annual management charge of 0.49% which will be reducing as I continue to invest.

This means that I'll be paying half the management charge I'd be paying with Quinn and I'll be able to choose my own level of diversification (most of Quinns trackers offer less than what I'd consider necessary). I'd also not have to deal with the 8-year rule and would only need to deal with taxes when I come to sell shares which I'd only plan to do in the most extreme circumstances.


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## ShaneMc (31 Aug 2007)

ronaldo said:


> I'd also not have to deal with the 8-year rule and would only need to deal with taxes when I come to sell shares which I'd only plan to do in the most extreme circumstances.


 
You'd have to pay taxes annually on the dividends. Tax on foreign dividends can be quite messy.


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## ClubMan (31 Aug 2007)

ronaldo said:


> I'd also not have to deal with the 8-year rule and would only need to deal with taxes when I come to sell shares which I'd only plan to do in the most extreme circumstances.


Just curious - towards what ultimate end(s) are you investing this money?


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## ronaldo (31 Aug 2007)

ShaneMc said:


> You'd have to pay taxes annually on the dividends. Tax on foreign dividends can be quite messy.


 
Whilst it's true that you have to pay tax and you will probably need to get an accountant or someone with experience in investing in European markets to begin with to help you file your first tax return, after the first years tax return, you'll know exactly how to deal with the issues. Either way, with the new 8-year rule, it will be impossible to merely invest in funds and have the investment company handle your tax returns anyway so why not learn now?



ClubMan said:


> Just curious - towards what ultimate end(s) are you investing this money?


 
Basically, I'm 24 years old and between me and my employer, we contribute 15% to my pension. I have no debt and I own a site outright on which I plan to build a house. My dad is a developer and so I can get this done very cheaply in Donegal. I can get a mortgage using the site as security and the final LTV will probably be in the 50-60% region. I plan to start the build in about a year.

Whilst it could make more economic sense to save additional money for the house in a deposit account, I have made the personal desicion that I'd rather invest. I'm young, very interested in finance and willing to take risks. It would even be okay for me to have an interest only mortgage for a while as the LTV will be so low or I could even put off building the house for a few years if the market happened to dip at the worst time for me. 

My personal plan is to go interest only with the mortgage and continue to invest. I will proceed with this unless sharp rises in interest rates or drops in house prices change my plans. 

I don't know the plan for the actual investment proceeds. Possibly starting a business 5-10 years down the line or paying off my mortgage. I just feel that I can get a better return than that of my mortgage interest rate. It's true that I'll have to pay tax on dividends but I'm a lower rate tax-payer. It's also true that I'll have capital gains tax to deal with but I have a capital gains tax allowance to alleviate some of this. Also, my TRS relief will make my mortgage loan rate even cheaper.


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## ClubMan (31 Aug 2007)

ronaldo said:


> Basically, I'm 24 years old and between me and my employer, we contribute 15% to my pension.
> 
> ...
> 
> It's true that I'll have to pay tax on dividends but I'm a lower rate tax-payer.


Does it make sense for you to be maximising your pension contributions in this case? Some people are of the opinion that it may not.


> It's also true that I'll have capital gains tax to deal with but I have a capital gains tax allowance to alleviate some of this.


 Just €1,270 p.a. which is not that much (i.e. worth €254 p.a. into your hand).


> Also, my TRS relief will make my mortgage loan rate even cheaper.


 Presumably you know that your relief will be a maximum of €8K @ 20% = €1,600 p.a.


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## Bez (31 Aug 2007)

15% betwen employee and employer is not maximising contributions (unless it is a PRSA).


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## ClubMan (31 Aug 2007)

Bez said:


> 15% betwen employee and employer is not maximising contributions (unless it is a PRSA).


OK - does the original poster feel that contributing the amount outlined is the best option given the circumstances?


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## ronaldo (3 Sep 2007)

ClubMan said:


> Does it make sense for you to be maximising your pension contributions in this case? Some people are of the opinion that it may not.


 
I didn't mention this previously because this is where it gets complicated. Whilst I'm a lower rate tax payer, I work in the north and live in the south of Ireland. My pension works through what is called a salary sacrafice scheme which basically means that I pay pension contributions before tax AND national insurance. Also, the company makes national insurance savings and they pay this into the plan. In the end, my total relief is 40% whilst it would be about 46% when I'm a higher rate payer. With regards to the comments highlighting the fact that I'm not paying the full allowable amount to the pension, the rules in the North allow me to contribute up to 100% of my salary so I have to draw the line somewhere. After the company pays their National Insurance savings into the plan, it works out at around 16% of gross salary thats paid into the plan which I feel is sufficient.



ClubMan said:


> Just €1,270 p.a. which is not that much (i.e. worth €254 p.a. into your hand).


 
It's true that it's not much but, when starting out, I don't see myself selling any more than one share in a particular year (if even). Therefore, I'm allowed to gain €1,270 on that particular share. If I assume that the price has risen, for example, 20%, that means that, unless I own more than €6,350 of that particular share, I will have no CGT to pay.



ClubMan said:


> Presumably you know that your relief will be a maximum of €8K @ 20% = €1,600 p.a.


 
Yes I'm aware of that. I've worked out that, using NIB's tracker rate, if I have a mortgage of 50% LTV or less, the rate will be 4.5% which will allow me a mortgage of €178,000 with full TRS. My mortgage will be well below this. I'm aware that, after 6 years, the TRS will be reduced to €3,000 which will allow for a mortgage of €67,000. In this case, I could consider selling my shares and paying my mortgage down to that level. However, TRS is not the reason for taking the above strategy. It's merely a facter that adds another advantage to the strategy.


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## Guest127 (24 Nov 2007)

didnt make a bad job of predicting if you ask me. I agree with CM on the cgt issue though. its complicated enough as it is. even simple  shares like vodaphone have an uk deduction and still subject to tax here , most likely at 41%. whats the point in avoiding tax on selling shares that make good gains anyway. looks like the ultimate aim is to die very wealthy but most people don't think that way.


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## shanegl (24 Nov 2007)

My reading of the situation tells me that while there may be plans to include them, the 8 year rule does not currently apply to domestic or offshore funds.  If anyone can quote me legislation that says otherwise, go right ahead.

If you read the prospectus of the iShares DJ Euro STOXX 50 ETF, which is an Irish UCITS, you'll note that the fund will deduct any income tax payable from dividends or gains on encashment, leaving the investor with no further liability (unless there is an FX gain) (page 33). The 8 year rule is not mentioned. 

[broken link removed]

This is dated 2006.

The 2007 Finance Act does mention bringing offshore funds under the "gross roll-up" taxation regime, but this isn't the same as the deemed disposal arrangement for the Life funds:



> _Section 39_ amends the taxation rules in relation to offshore funds that are created under the law of EU and EEA Member States and certain OECD countries. These funds are covered by the ''gross roll up'' taxation regime introduced in the Finance Act 2001. This regime was brought in to match a similar regime for collective funds in the State that was put in place in 2000. *Under gross roll up, funds may accumulate without the imposition of tax. However, an exit tax applies when payments are received from the fund or when there is the disposal of an interest in the fund.*


That quote was taken from the revenue website:

[broken link removed]


As far as I'm concerned, I'll be investing in such ETFs to avail of lower charges compared to Quinn etc., if they do eventually bring in a deemed disposal rule, so be it, I don't have the time to deal with the hassle of direct share ownership.


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## maturin (10 Jan 2008)

shanegl,

Here's an extract from the iShares Prospectus dated 4 December 2007. See:

[broken link removed]

This piece refers to funds which are UCITS registered in Ireland.

+++
Shareholders who are Irish Residents or Irish Ordinary Residents

Unless a Shareholder is an Exempted Irish Investor (as defined above), makes a Relevant Declaration to that
effect and the Company is not in possession of any information which would reasonably suggest that the
information contained therein is no longer materially correct, or unless the shares are purchased by the Courts
Service, tax at the standard rate of income tax (currently 20%) will be required to be deducted by the Company
from a distribution made annually or at more frequent intervals to a Shareholder who is Irish Resident or Irish
Ordinary Resident. Similarly, tax at the standard rate plus 3% (i.e. currently 23%) will have to be deducted by
the Company on any other distribution or gain arising to the Shareholder (other than an Exempted Irish Investor
who has made a Relevant Declaration) on an encashment, redemption, or transfer of shares by a Shareholder
who is Irish Resident or Irish Ordinary Resident. Tax will also have to be deducted in respect of Shares held at
the end of a Relevant Period (in respect of any excess in value of the cost of the relevant Shares) to the extent
that the Shareholder is Irish Resident or Ordinary Resident and is not an Exempted Irish Investor who has made
a Relevant Declaration. However, the Company will be exempt from making tax deductions in respect of
distributions and gains on redemptions, cancellations, transfers or encashments of shares held by Irish Residents
and Irish Ordinary Residents where the relevant shares are held in the CREST System or any other “recognised
clearing system” designated by the Irish Revenue Commissioners.
---
 In the same document “Relevant Period” is defined as follows:

“Relevant Period” means a period of 8 years beginning with the acquisition of a Share by a Shareholder and
each subsequent period of 8 years beginning immediately after the preceding period.

My reading (and I'm no tax expert) is that the 8 year rule does apply to iShares ETFs registered in Ireland.

regards,
M.


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## shanegl (10 Jan 2008)

Yep, took me a few reads to get my head around it but it looks like you're right.


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