Conclusion: For ETF vs shares modelling, we need to be mindful about how much of the gain we assume is from dividends and how much is from capital growth.
For the purpose of trying to first order model outcomes. I suggest that we assume that all vehicles have the same (before fees) performance. (This assumption may not actually be true for the direct share holding where a smaller basket of shares, even with re-balancing, may under or over perform the broad index. But if we determine direct shares is optimal, we can then go read the research on optimal strategy about how to invest in a basket of shares).
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Why is the capital gain higher in the directly held shares than the ETF? You should assume that they are the same.
I have assumed that the shares will return 0.5% more than an ETF due to lower charges, but I might be wrong.
How is it unattainable?That's not what I'm saying, I'm well aware of how percentages work. By exaggerating the performance of a fund, 8% a year for 16 years is basically unattainable, the net amount even after lopping off the 41% is still a large sum of money and you would still be happy. But that's not a realistic scenario, run the model again with 4.5% growth, you end up with alot smaller gross sum after 16 years , then the 41% needs to be lopped off, that's reality. By exaggerating the growth the extra 3.5% surplus growth is paying the tax but that's Alice in wonderland performance
most investment funds and individual investors only achieve 4.5% a year on average, therefore using 8% as a benchmark for growth is not what the majority of people and funds will be achieving, its an ideal but not typical . There weren't too many people investing everything in the global msci ETF 16 years ago, I don't think it even existed back then as ETFs were still in their infancy. Many irish people were investing in banks, builders like McInerney , baltimore technologies, Elan etc. Therefore doing comparisons based on this ideal performance is not realistic as the majority of funds and investors will never achieve itHow is it unattainable?
It’s not wildly out of step with long-term returns from global equities.
I think the caveat should be in bold at the beginning of the post, not at the end.That's why I always place a caveat to verify the information when presenting to a third party and double check if I'm using it myself. We are in the early days of AI and it's improving very quickly, just remember that like VAR in football, today is the worst it will ever be.
I have assumed that the shares will return 0.5% more than an ETF due to lower charges, but I might be wrong.
Yes - that makes sense. Any suggestions on a reasonable split for capital appreciation vs dividends? I have in my latest post above set these at 3% / 2.5% respectively in response to some comments that my original figures were too high. (I had originally used some figures from my own ETF's which have performed at 7-8% over the last ~10 years or so.)
Some of my best work@AJAM also features in that thread too
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