(Request) Spreadsheet/Model comparing after tax returns of ETF, Life assurance, Directly held shares, non tax relieved pension contribution?

SPC100 said:
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.
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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.)
 

I have assumed that the shares will return 0.5% more than an ETF due to lower charges, but I might be wrong.
 


Why is the capital gain higher in the directly held shares than the ETF? You should assume that they are the same.

And maybe show the investment charges separately? Or would that make it unwieldy?
 
How is it unattainable?

It’s not wildly out of step with long-term returns from global equities.
 
As ever, the caveat about looking at returns over a specific start/end date period of time applies, but...

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If my calculations are correct, the relative merits of each option is not that sensitive to the total return that you assume. Using either 5% or 8% does change things but only a little.

The relative outcome is much more impacted by the spilt in gain from dividends vs capital growth.
The marginal rate of tax that you expect to pay on distributions and dividends is also a big factor.
 
Gordon Gekko said:
How is it unattainable?

It’s not wildly out of step with long-term returns from global equities.
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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 it
 
I think the caveat should be in bold at the beginning of the post, not at the end.

The calculations look all wrong. The EFT one only calculates the first 8 years and then claims that's the growth for 20 years. Whereas the share calculation is for the full 20 years. So totally misleading figures.
In fact, I don't think you should post it at all, without doing some basic due diligence of your own first.
 
3CC said:
I have assumed that the shares will return 0.5% more than an ETF due to lower charges, but I might be wrong.
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I would default to all having same growth performance. And model cost seperately.

If we are trying to model cost, I guess it depends on how good a model we are trying to build. or which lifecycle investment we are trying to model, e.g. lump-sum investor, accumulating investor, drawing down investor etc.,

I think there is potentially a few categories, not sure if we need them all though.

I think there is probably original investment/setup cost, onging investment maintenance cost, re-investment (or additional new investment) cost, drawdown costs

e.g. a buy and hold share investor, has some setup cost, has ~0 ongoing maintenance cost, had some cost to invest new money, and has some cost to drawdown from investment.

Alhough even then, if the dividend income > drawdown, then there would be no drawdown cost!

It might be simplest to assume we are focussed on the investor who has a lump-sum, or a lump-sum and accumulating more.
 

In this old post (by @Brendan Burgess highlighting content from @Steven Barrett ) and commented on by @Gordon Gekko, it was suggested that the split should be roughly 2% (dividend) and the rest (4% or 5%) growth. We probably can find actual data for a given index, but I think that would be good enough to start. @AJAM also features in that thread too
 
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Hi Everyone,

Thanks for all those constructive comments. I have updated the sheet now and I think I have addressed everything raised.

The only thing that I have not included is the dealing charges of selling at the end. It's not hard to add this in but it's probably similar across all options so does not have a big influence on the result.



Just one thing I need to verify. Are Income ETFs subject to deemed disposal every 8 years? I had assumed not but now I am questioning that.

Thanks.
 
Yes, Distributing ETFs are subject to deemed disposal

CGT has no effect on ETFs - all distributions (dividends, deemed and actual disposals) are subject to Exit Tax only
 
Reactions: 3CC
Assuming the purpose of this exercise is to help ordinary people (so not AAM pros) decide which will give them the best chance of a higher after-tax return between investing in an index via an ETF or by buying a basket (say 20) of individual shares from the index, there are two other rows for the spreadsheet that could do with some discussion, I think.

The first is how closely the basket of shares follows the index/ETF. The obvious factor is that you could be unlucky, and a number of your picks could drop and stay down (sectoral issue, geographic issue, etc.), which will tend to have less impact in a 500-1500 constituent index/ETF. Less obvious factors include:
  • Not rebalancing frequently enough and becoming overexposed in certain areas.
  • Rebalancing too frequently and incurring extra transaction fees.
  • Insufficient understanding/research to properly diversify across sectors, geographies, or accurately mimic the index.
  • Allowing emotions to trigger a buy in a sector you 'like' (AI/crypto a good example today) or a sell after bad news/languishing (Apple in the 90s, Microsoft in the 00s, Ford in the 2010s).
It is difficult to put a firm number on this, but I presume we all agree it is not 0%? I came across this:
So perhaps +0.6% return to ETFs would be a good conservative guesstimate given the samplers in this study are pros?


The other factor is the cost of one's time, which is consumed in some of the following ways when not using an ETF:
  • Learning is required upfront to figure out the basics of how to diversify stock picks and understand the makeup and behaviour of the index you're trying to replicate.
  • The portfolio needs to be assessed, say once a year, and research done to decide if rebalancing is required and if so, how much of which stocks to buy/sell.
  • From experience, there is quite a bit of administrative overhead involved in holding 20+ global shares, for example, US W-8BEN foreign investor forms every few years, lodging dividend cheques, documenting dividend withholding taxes, transferring all of this to your accountant every year and answering questions, reading through notifications about splits, rights-issues, delistings and wondering if you'll be impacted.
  • An eye will need to be kept on estate planning rules in certain countries usually included in global indices in case they shift out of your favour.
  • While perhaps not applicable to AAM pros, the average person will spend a non-zero number of hours worrying about why a stock they chose has gone down, how it impacts them and should they take action, or one going up they overlooked - this will generally occur around 3am-4am in my experience, a time I tend to value highly for sleep.
While one might overlook much of this for a small investment, when it reaches life-changing numbers (which I assume is what we're talking about here), none of it can be avoided. It's just a matter of whether you manage it in 4 hours a year, 10 hours, 20 hours. I'm curious the number others might put on this, but I think 10 hours per year is conservative, so a cost of €500? Instead of adding that as a fixed figure, which will impact smaller portfolios harder it might be better to say something very conservative like 0.35% of the portfolio as you are likely to spend more time the bigger it gets.
 
That's an interesting point @Zenith63 .

I have heard the argument that an ETF will produce better returns and/or lower risk than a basket of shares due to better diversification but I never knew how to estimate the value of that in hard figures.

I have not invested in shares myself but it's a fair point about the time required to manage things. There is an admin overhead for ETFs also but this is only every 8 years and can be reduced substantially if you avoid a drip fed approach to investing.

From my calculations, ETFs would need to return ~ 0.6% pa more to make up for the better tax treatment with shares, which is coincidentally the same as your figure above.

For my own part, I am starting to conclude that:
1. ETFs are taxed more heavily than shares but this might be offset by better performance.
2. There is an admin overhead for both options. I suspect most people will just favour the option that they are already familiar with. Both are manageable if you are organised.
3. There is the annual CGT allowance which favours shares but the value of this is limited (especially for larger investments) and is being eroded each year by inflation .
4. The big distinguishing factor is the fact that CGT is reset on death for shares. So if you plan to leave a large legacy, shares are probably the way to go.
5. If you expect to play lower rate tax when receiving dividends, shares are better.

Like many things, it's not a clear cut thing. For me shares probably come out slightly ahead but I am little put off by the potential additional admin.
 
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