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

[Zenith63]

For me, this thread calls to mind a famous John Bogle (founder of The Vanguard Group) quote...

“The greatest enemy of a good plan is the dream of a perfect plan. Stick to the good plan.”

Agreed, the other issue is that people are spending so much time procrastinating over this decision they’re likely losing more money sitting on the fence than any possible tax savings their eventual decision yields.

The thing is, it’s my view that the advice AAM should be giving the average person walking in off the street asking how to invest their savings is to put it into a single World Equities ETF, without question. Advising people to dabble in share picking is trying to reach tax perfection by what is now clearly a negligible amount when everything is factored in. An ETF is cheap, easy, low stress and simple - a good plan.

 

[ClubMan]

Agreed, the other issue is that people are spending so much time procrastinating over this decision they’re likely losing more money sitting on the fence than any possible tax savings their eventual decision yields.

At the risk of boring people with the same post again, that's exactly what I did for too long...

What to do with a million euros?

Personal details Your age: 49 Your spouse's age: 54 Number and age of children: 2 aged 9 and 14 Income and expenditure Annual gross income from employment or profession: €30,000 (state job) Annual gross income of spouse/partner: €60000 (state job) Pension: have maxed AVC’s (should I also...

www.askaboutmoney.com

The problem is my view is that the advice AAM should be giving the average person walking in off the street asking how to invest their savings is to put it into a single World Equities ETF, without question. Advising people to dabble in share picking is trying to reach tax perfection by what is now clearly a negligible amount when everything is factored in. An ETF is cheap, easy, low stress and simple - a good plan.

I took a slightly different approach but it's worked out pretty well for me. There may have been an even better one, who knows...

As another famous businessman, Tony Soprano, said, "more is lost by indecision than wrong decision".

 

[Zenith63]

At the risk of boring people with the same post again, that's exactly what I did for too long...

What to do with a million euros?

Personal details Your age: 49 Your spouse's age: 54 Number and age of children: 2 aged 9 and 14 Income and expenditure Annual gross income from employment or profession: €30,000 (state job) Annual gross income of spouse/partner: €60000 (state job) Pension: have maxed AVC’s (should I also...

www.askaboutmoney.com

My experience was that I had the benefit of reading your and Brendan's posts recommending buying a basket of shares ~20 years ago. I did that for a decade or so and really enjoyed learning and the ups and downs, hours and hours spent watching the Deepwater Horizon disaster wondering how best to play it with my BP shares, hunting down SCRIP/DRIP shares to maximise compounding etc. It ultimately lead me to start a business using the money I'd invested.

Fast forward 10-15 years I had money to invest in the markets again, but this time decided to go with a single diversified ETF. The experience is utterly different - I spend no time researching companies, no emotional tugs while in that world of researching towards the latest meme stock, no time rifling through stuff like SCRIP receipts and dividend withholding tax slips to get them over to my accountant every year, no time trying to harvest annual CGT allowances, no time lying awake at night wondering if buying Vodafone was a good call or not buying Microsoft will punish me. When I buy I stick the date/price in a Google doc that my accountant can review in nearly a decades time and I look at the price on the index every week or so with interest, that's it.

While I loved the process of learning to buy individual shares I don't think it is for the vast majority of people, and having seen both sides of this I am very firmly of the view that we should be recommending a single ETF to most people off the street that ask for advice on AAM and not a basket of shares. The individual shares approach is in my view letting the tax tail vigorously wag the safe investment dog for the average punter.

 

[ClubMan]

My experience was that I had the benefit of reading your and Brendan's posts recommending buying a basket of shares ~20 years ago. I did that for a decade or so and really enjoyed learning and the ups and downs, hours and hours spent watching the Deepwater Horizon disaster wondering how best to play it with my BP shares, hunting down SCRIP/DRIP shares to maximise compounding etc. It ultimately lead me to start a business using the money I'd invested.

Fast forward 10-15 years I had money to invest in the markets again, but this time decided to go with a single diversified ETF. The experience is utterly different - I spend no time researching companies, no emotional tugs while in that world of researching towards the latest meme stock, no time rifling through stuff like SCRIP receipts and dividend withholding tax slips to get them over to my accountant every year, no time trying to harvest annual CGT allowances, no time lying awake at night wondering if buying Vodafone was a good call or not buying Microsoft will punish me. When I buy I stick the date/price in a Google doc that my accountant can review in nearly a decades time and I look at the price on the index every week or so with interest, that's it.

While I loved the process of learning to buy individual shares I don't think it is for the vast majority of people, and having seen both sides of this I am very firmly of the view that we should be recommending a single ETF to most people off the street that ask for advice on AAM and not a basket of shares. The individual shares approach is in my view letting the tax tail vigorously wag the safe investment dog for the average punter.

Good post - but I'm still happy with my BRK.B et. al. simplified approach to direct equity investment and the preferential and simplified (no dividends) tax treatment. Admittedly it's probably riskier than a more diversified ETF but less so than a manual portfolio/basket of shares approach.

 

[Zenith63]

Good post - but I'm still happy with my BRK.B et. al. simplified approach to direct equity investment and the preferential and simplified (no dividends) tax treatment. Admittedly it's probably riskier than a more diversified ETF but less so than a manual portfolio/basket of shares approach.

I probably should have said that if I was doing it all over again I would go the same route, what I learned was invaluable and as I said I loved it, even the downs. But from talking to friends and family over the years I know the average person is not like this and would much more likely have come out the far end with nothing or a deep distrust of stock market investing.

So my view is that if somebody comes to AAM asking about entrepreneurship, learning how stock markets work and expressing a tolerance for risk then we should direct them to buy a basket of shares. If they come here with their life’s savings in a bank account, no knowledge or interest in stock markets and an aversion to risk we should be recommending an All World ETF and downplay the drama about Deemed Disposal, referring them to the spreadsheets in this thread showing the returns to your pocket and lifestyle are basically the same.

 

[3CC]

For me, this thread calls to mind a famous John Bogle (founder of The Vanguard Group) quote...

“The greatest enemy of a good plan is the dream of a perfect plan. Stick to the good plan.”

Agreed. Both ETFs and shares are good options. Just pick one and go with that. They are both much better than leaving cash on deposit while you mull over the minutiae.

 

[OutlierStudio]

I probably should have said that if I was doing it all over again I would go the same route, what I learned was invaluable and as I said I loved it, even the downs. But from talking to friends and family over the years I know the average person is not like this and would much more likely have come out the far end with nothing or a deep distrust of stock market investing.

So my view is that if somebody comes to AAM asking about entrepreneurship, learning how stock markets work and expressing a tolerance for risk then we should direct them to buy a basket of shares. If they come here with their life’s savings in a bank account, no knowledge or interest in stock markets and an aversion to risk we should be recommending an All World ETF and downplay the drama about Deemed Disposal, referring them to the spreadsheets in this thread showing the returns to your pocket and lifestyle are basically the same.

More than anything, the lack of loss offset is what really grinds my gears.

Picture this.

It's 2007, you just got a windfall of 1 million. "Hurray I can retire now!". You dump it into an ETF and retire, selling off small bits of ETF as your source of income. Then 2008 rolls around and you're down 50% on your ETF. You still have to sell, you're retired after all, every sale is now 50% loss. It's 2012 now, it took 5 years for the ETF to be back to break even of 2007. Since you can't use ETF losses, that's a lot of money you will never ever see again.

Under CGT, you would use those losses against gains after 2012 and be no worse off in the end, but not under ETF tax.

I can understand 41% rate. I can understand deemed disposal.

I don't understand why loss offset are not allowed for funds only, when allowed for Income Tax & Capital Gains Tax.

Could anyone tell me the rationale behind that?

 

[Zenith63]

More than anything, the lack of loss offset is what really grinds my gears.

Picture this.

It's 2007, you just got a windfall of 1 million. "Hurray I can retire now!". You dump it into an ETF and retire, selling off small bits of ETF as your source of income. Then 2008 rolls around and you're down 50% on your ETF. You still have to sell, you're retired after all, every sale is now 50% loss. It's 2012 now, it took 5 years for the ETF to be back to break even of 2007. Since you can't use ETF losses, that's a lot of money you will never ever see again.

Under CGT, you would use those losses against gains after 2012 and be no worse off in the end, but not under ETF tax.

I can understand 41% rate. I can understand deemed disposal.

I don't understand why loss offset are not allowed for funds only, when allowed for Income Tax & Capital Gains Tax.

Could anyone tell me the rationale behind that?

Yes that is a strange one.

But just to be clear, losses within the ETF, which might include 500+ companies, will be offset automatically without being taxed. And through average costing you can effectively offset losses for the same ETF in a given year. What you’re talking about is carrying forward losses in subsequent years, which is indeed a difference from individual shares but is unlikely to be a concern to the vast majority of investors, particularly the ordinary person in the middle of their career investing for 10-20 years.

 

[OutlierStudio]

Yes that is a strange one. But just to be clear, losses within the ETF, which might include 500+ companies, will be offset automatically without being taxed. What you’re talking about is carrying forward losses, which is indeed a difference from individual shares but is unlikely to be a concern to the vast majority of investors.

I'm not quite yet convinced of that.

If you could indefinitely hold shares, then it would be very unlikely to pose a problem. Invest today, never sell and 40 years from now your oldest shares will have gained perhaps 1400%. When next 2008 rolls around, even a 50% drop would mean your oldest shares are still around 700% gain and so can be "safely" sold in retirement without worrying about losses.

However deemed disposal changes that equation. It only gives you 8 years before tax is due. If you're investing non trivial sums, it's highly unlikely that you will be able to cover the tax out of pocket and be essentially forced to sell your oldest most profitable shares to cover the tax. What remains then is the "younger" shares that are less profitable and thus more likely to go from small profit to a loss when next 2008 style 50% drop happens.

This 8 year cycle repeats, perpetually keeping you closer to break even than CGT ever would.

 

[Zenith63]

it's highly unlikely that you will be able to cover the tax out of pocket and be essentially forced to sell your oldest most profitable shares to cover the tax. What remains then is the "younger" shares that are less profitable and thus more likely to go from small profit to a loss when next 2008 style 50% drop happens.

You can use the average cost instead of FIFO which will help here.