Starting investment in index funds

rkelly174

I am starting regular employment for the first time in September and am looking to take this opportunity to save money per month and invest it (euro cost averaging). I recently read 'Unshakeable' by Tony Robbins in which he states the power of compounding and advises to invest in index funds such as the s&p 500.

This book is based at an American audience, and am looking for advice on how I can apply this to opening an account in Ireland. Should I invest in the s&p 500 or an Irish equivalent here? What is the best broker to go with? DeGiro seem to be the cheapest, I will only be investing in the one fund so don't exactly need to be spending more money on financial advice.

Any advice greatly appreciated, thanks.

gavmcg92

rkelly174 wrote: »

I am starting regular employment for the first time in September and am looking to take this opportunity to save money per month and invest it (euro cost averaging). I recently read 'Unshakeable' by Tony Robbins in which he states the power of compounding and advises to invest in index funds such as the s&p 500.

This book is based at an American audience, and am looking for advice on how I can apply this to opening an account in Ireland. Should I invest in the s&p 500 or an Irish equivalent here? What is the best broker to go with? DeGiro seem to be the cheapest, I will only be investing in the one fund so don't exactly need to be spending more money on financial advice.

Any advice greatly appreciated, thanks.

The most important point for an Irish investor that you will not see from books like the one you listed above is the taxation issue for ETFs. At the moment ETFs domiciled in the US seem to be the most tax efficient strategy.

http://www.matheson.com/images/uploads/publications/Tax_Treatment_of_Exchange_Traded_Funds_May_2015.pdf

http://www.revenue.ie/en/companies-and-charities/documents/exchange-traded-funds-guidance-note.pdf

Keep in mind that US domiciled funds will open you up to the currency issue. For example if you invested in $SPDR at the start of the year your USD investment would be up about 10%. If you cashed out, you would be down 1% EUR.

rkelly174

gavmcg92 wrote: »

The most important point for an Irish investor that you will not see from books like the one you listed above is the taxation issue for ETFs. At the moment ETFs domiciled in the US seem to be the most tax efficient strategy.

http://www.matheson.com/images/uploads/publications/Tax_Treatment_of_Exchange_Traded_Funds_May_2015.pdf

http://www.revenue.ie/en/companies-and-charities/documents/exchange-traded-funds-guidance-note.pdf

Keep in mind that US domiciled funds will open you up to the currency issue. For example if you invested in $SPDR at the start of the year your USD investment would be up about 10%. If you cashed out, you would be down 1% EUR.

Got you, thanks for that. I think you just saved me a lot of money! Could you advise me on any similar-philosophy index funds in the EU? Even a point in the right direction would be much appreciated.

Edit: Re-read your post, why are US-domiciled ETFs more tax efficient than Irish ones?

Blacktie.

gavmcg92 wrote: »

Keep in mind that US domiciled funds will open you up to the currency issue. For example if you invested in $SPDR at the start of the year your USD investment would be up about 10%. If you cashed out, you would be down 1% EUR.

I always think this is a strange one when brought up. I mean even if your ETF is in euro if it's a fun that's similar to the S&P500 it's going to have a lot of majority dollar countries in it which just indirectly exposes you to the currency risk.

Francie Barrett

rkelly174 wrote: »

I am starting regular employment for the first time in September and am looking to take this opportunity to save money per month and invest it (euro cost averaging). I recently read 'Unshakeable' by Tony Robbins in which he states the power of compounding and advises to invest in index funds such as the s&p 500.

If I ever read a contrary indicator, I think this is it.

Tony Robbins is a self-help guru, not an experienced financial adviser.

td2008

Is it worthwhile with the 8 years disposal rule?

7. Deemed disposal provisions
In the case of ETFs in paragraphs 1 and 2 that come within the investment funds tax provisions, it should also be noted that a taxable event is deemed to take place on the ending of the 8 year period beginning with the date of investment in the ETF, and on every subsequent 8 year period. This is known as the “Deemed Disposal" and it applies to all investments that come within the special tax regime for investment funds, including ETFs. The effect of this provision is that the investor is obliged to account for tax on the same basis as would apply if the investment had been disposed of by the investor on that deemed disposal date.

rkelly174

td2008 wrote: »

Is it worthwhile with the 8 years disposal rule?

7. Deemed disposal provisions
In the case of ETFs in paragraphs 1 and 2 that come within the investment funds tax provisions, it should also be noted that a taxable event is deemed to take place on the ending of the 8 year period beginning with the date of investment in the ETF, and on every subsequent 8 year period. This is known as the “Deemed Disposal" and it applies to all investments that come within the special tax regime for investment funds, including ETFs. The effect of this provision is that the investor is obliged to account for tax on the same basis as would apply if the investment had been disposed of by the investor on that deemed disposal date.

This 8 years disposal rule means you pay tax of 40% every 8 years?

topper_harley2

rkelly174 wrote: »

This 8 years disposal rule means you pay tax of 40% every 8 years?

41% actually, even worse! And its not just on profit, you can end up paying tax even if you have not made a profit, due to the stupid way Ireland handles UCIT funds for tax.

You need to think about waaaaaaaaay more stuff before investing. See http://www.boards.ie/vbulletin/showthread.php?p=101568775 for similar thread, and questions you need to be asking yourself.

To be honest, IMO, forget investing for now. If this is your first regular job, you need to save before investing. Have a read of this post: https://www.askaboutmoney.com/threads/35-and-only-starting-to-think-about-saving-now.204141/#post-1521114. It advises how you should begin if you are just starting to save (which I assume is your scenario, if you are just starting a first regular job). You should also consider starting a pension before investing post-tax.

Why save? Because you cannot sell investments at the drop of a hat if you need money ASAP (since you could end up selling them at a large loss) - you need a buffer, which is where savings come in.

Once you have all that digested, there are loads of threads in this forum already about DIY investing, tax (in-)efficiency, its all been covered to death already e.g. http://www.boards.ie/vbulletin/showthread.php?t=2056532008.

wordofwarning

Francie Barrett wrote: »

If I ever read a contrary indicator, I think this is it.

Tony Robbins is a self-help guru, not an experienced financial adviser.

Warren Buffett advises everyone to buy low cost index funds such as Vanguard S&P 500 funds. Burton Malkiel who wrote the famous "A Random Walk Down Wall Street" advises everyone to invest in index funds too.

It is funny how in the latest edition of A Random Walk Down Wall Street, Malkiel talks about how people back in 1973 dismissed his advice. Various experienced financial advisor were still telling people to buy actively managed funds. If you listened to these 'experienced financial advisers' instead of Malkiel or self help gurus telling you to buy index funds, you would have lost 50% of potential wealth by investing in active funds than passive funds.

You don't need a PhD in finance to know index funds like the S&P500 are the best investment over the long run. Even 'experienced financial advisers' have just been misleading the public on what is the best investment

Francie Barrett

wordofwarning wrote: »

Warren Buffett advises everyone to buy low cost index funds such as Vanguard S&P 500 funds. Burton Malkiel who wrote the famous "A Random Walk Down Wall Street" advises everyone to invest in index funds too.

It is funny how in the latest edition of A Random Walk Down Wall Street, Malkiel talks about how people back in 1973 dismissed his advice. Various experienced financial advisor were still telling people to buy actively managed funds. If you listened to these 'experienced financial advisers' instead of Malkiel or self help gurus telling you to buy index funds, you would have lost 50% of potential wealth by investing in active funds than passive funds.

You don't need a PhD in finance to know index funds like the S&P500 are the best investment over the long run. Even 'experienced financial advisers' have just been misleading the public on what is the best investment

I never said indexing was bad, also I never said you had to put money into actively managed funds. The notion that everyone should pile into the S&P 500 (a flawed index) is the point I take umbrage with.

Why is it flawed? Well, you are supposed to be buying a weighted index of the largest 500 companies in the US. Except you're not really buying that at all. The S&P 500 is actually a float adjusted index. That means that the weight a stock has in the index is adjusted downwards based on the amount of shares it has that are in free float. This ridiculous concept means that the S&P is underweight in quality companies with high insider ownership (like Berkshire Hathaway). This is not just me making it up, academic studies have shown that firms with high insider/founder/family ownership outperform others, the S&P penalises this sort of practice!

Also, buying at any price just seems crazy to me. I am certainly not saying that people should time markets, but at the same time it strikes me that index investors really need to be more price sensitive. It stands to reason that investors should be overweight the undervalued markets, and underweight the overvalued markets. Yet here we are, with even Warren Buffett advocating that the S&P 500 is all anyone will ever need. This market is already at historically high levels. Investors are being conditioned to completely ignore fundamental factors and buy at any price. I think this is dangerous.

rkelly174

topper_harley2 wrote: »

41% actually, even worse! And its not just on profit, you can end up paying tax even if you have not made a profit, due to the stupid way Ireland handles UCIT funds for tax.

You need to think about waaaaaaaaay more stuff before investing. See http://www.boards.ie/vbulletin/showthread.php?p=101568775 for similar thread, and questions you need to be asking yourself.

To be honest, IMO, forget investing for now. If this is your first regular job, you need to save before investing. Have a read of this post: https://www.askaboutmoney.com/threads/35-and-only-starting-to-think-about-saving-now.204141/#post-1521114. It advises how you should begin if you are just starting to save (which I assume is your scenario, if you are just starting a first regular job). You should also consider starting a pension before investing post-tax.

Why save? Because you cannot sell investments at the drop of a hat if you need money ASAP (since you could end up selling them at a large loss) - you need a buffer, which is where savings come in.

Thanks for the advice. I'm starting working for the Dept of Education so I don't need to worry about a pension, I'm more concerned with doing something productive with the extra disposable income.

gavmcg92

Do you have a 3-6 month emergency fund set up as well? That should also be a priority. If you are unable to work tomorrow, would you be able to financially support yourself from the get go. This is something that you should also be considering.
As for your question in relation to Irish domiciled ETF funds, check out a post from ask about money that sums it all up quite well.

"My understanding of revenue's guidelines is that Irish and EU domiciled ETFs for both income from dividends and gains on disposal are taxed at a standard capital gains or income tax rate of 41% but PRSI and USC do not apply to dividend income. For a US domiciled ETF you pay standard CGT (I think 33%) on the gain but on dividend income you also pay PRSI and USC. It should be noted though that when buying non EURO ETFs that the currency will have a large effect on the amount you finally receive when you dispose of them. If you are unlucky and the currency fluctuates the wrong way then the effective rate of loss with CGT could be at least 41%.

wasabi

My approach to index investing is to use US based ETFs for my stock allocation (mix of US and international investments - something like VT would work).

I also keep 15% in cash (in Euros) and 15% in European bond and REIT UCITS ETFs. This protects at least part of my portfolio from currency risk, and allows some rebalancing after big currency swings as well.

I figure this is the best of both worlds taxwise, most of the stocks returns are capital gains (so I get the 33% cap gains rate on US domiciled funds), and most of the bonds/REIT returns are in dividends (so I avoid USC and PRSI on these, as UCITS funds).

If I sustained a large loss on my European UCITS ETFs I guess I'd be sad, but large capital losses should be less likely in bonds/REITs than in equities. I acknowledge this is a calculated risk. There is also the fact that US domiciled Eurozone bond and REIT ETFs don't really exist.

wasabi

rkelly174 wrote: »

Thanks for the advice. I'm starting working for the Dept of Education so I don't need to worry about a pension, I'm more concerned with doing something productive with the extra disposable income.

If you're saving for anything short term (<10 years) then the stock market may not be the best home for your money, due to the chance that it might be down when you want to withdraw. If you're thinking house deposits, for instance. The longer your money is in the market, the better the chance of a positive return.

wordofwarning

Francie Barrett wrote: »

Why is it flawed? Well, you are supposed to be buying a weighted index of the largest 500 companies in the US. Except you're not really buying that at all. The S&P 500 is actually a float adjusted index. That means that the weight a stock has in the index is adjusted downwards based on the amount of shares it has that are in free float. This ridiculous concept means that the S&P is underweight in quality companies with high insider ownership (like Berkshire Hathaway). This is not just me making it up,

Also, buying at any price just seems crazy to me. I am certainly not saying that people should time markets, but at the same time it strikes me that index investors really need to be more price sensitive. It stands to reason that investors should be overweight the undervalued markets, and underweight the overvalued markets. Yet here we are, with even Warren Buffett advocating that the S&P 500 is all anyone will ever need.

The point about buying the S&P500 index is that it low management fees and highly diversified. It is expensive and difficult for a small investor to have a solid portfolio. This "solid portfolio" will tend underperform the market. The point about buying the S&P 500 index is that you can't outperform the market in the long run by active investing. So just invest in the entire market.

Yes, there is other types of ETFs taking advantage of as you said, that firms with founding families with large ownership and board membership tending to outperform the general market. There is of course the Fama-French five factor model, etc etc. These can all be brought by small investors. Although the fees on these ETFs tend to be a lot higher than massive Vanguard funds which have management fees of around 0.1%.

Warren Buffett has a long term investment outlook, which I imagine comes from the intelligent investor. It does not matter what price you buy a stock at as long as it makes fundamental sense. BH is hoarding cash, which seems to suggest he thinks the market is a bit overpriced. If you aim on holding an index fund for 50 years, it does not really make a difference when you brought the stock initially.

Dardania

I encountered this topic in a book lately, on how the public are guided on various choices, their pension assets being one of them - and there was discussion about the Swedish pension system.

It pointed to this fund: Name: AP7 Equity Fund
http://www.morningstar.se/guide/quicktake?id=0P0000O4CX

which shows some pretty good returns over the long term, with a high emphasis upon very low fees. They also echo the idea that: "It does not matter what price you buy a stock at as long as it makes fundamental sense."

Next step, try get an Irish broker to trade this fund...