Asset shift

Before we moved back, our assets were split per the below chart:

Our home made up the majority of our equity (66%), then our Canada ETFs and Irish stocks (Mr. MH’s old work scheme) made up 11% each and our Irish ETF portfolio made up 7%. We kept a cash buffer to cover a few months of living expenses, making up 3% and our car made up 2%.

For now, our new asset breakdown looks like this:

79% of our equity is now made up of our Canadian ETF portfolio. 12% remains in our Irish stock account which we will start to sell off when we start to withdraw from the portfolio. 5% is the value of our car and 4% remains in cash as an emergency fund.

In terms of existing assets, I wasn’t going to sell them off and trigger a tax event unnecessarily so for now our portfolio will look a bit more complicated than it needs to be. Eventually, as we start to sell off funds when we start to withdraw, we will sell off the funds we no longer want to hold first and our portfolio will get simpler over time.

Detailed Canadian ETF Breakdown

Once we moved, we had to decide how to restructure our assets. I didn’t want to have assets in 2 countries as I didn’t want to have to keep filing taxes in both as well as to continue managing multiple investment accounts and portfolios. I’m a big fan of the keep-it-simple approach.

As mentioned in my last post, we decided we would rent instead of buy a new home for the time being and so we wouldn’t be needing any large sums any time soon and even if we do want to buy again, we’ve decided we’d like to save up and start again, leaving the rest of our assets invested to grow.

To start building out our new portfolio, I did up a budget, figuring out how much cash we would need to cover the next twelve months including the purchase of a new car and other setup costs. I also figured we needed to leave some cash in our Irish account as we had plans to travel to France, Portugal and Ireland within the next twelve months and there was no point converting the cash only to convert it back again a few months later. Once I knew how much we needed to leave out, we took the money from the sale of our Irish home, sold our Irish ETFs and moved the money to Canada. From there I took the opportunity to apply the knowledge I’ve acquired in investing so far and made up a new consolidated ETF portfolio.

Initially, I was just going to continue replicating the ETF portfolio I already had. It has performed well enough and has good diversification, but when it came to investing the largest sum of money I will probably ever invest at one time, I thought about all the other long-time FIRE bloggers that I follow. All of the American bloggers have said time and time again to just invest in VTSAX (Vanguard Total US Stock Market Fund) and block out the noise about anything else. J L Collins says he plans to never sell and just live off the dividends.

The bloggers I follow worked to reach their full FIRE number before retiring early but have way more now than they will ever need, partly because they never really stopped working. They just work how and when they want to work now, on things that they are passionate about. Working for money is optional for them but if you have the drive to reach FIRE, you are not going to be the kind of person to sit back and never earn money again. Looking at my investment portfolio and own journey to FIRE in this light gave me new perspective. I decided I would follow suit and take a bit more risk than I previously would have by investing in one ETF with exposure ONLY to the US stock market.

Consideration 1: VTSAX is not available in Canada. After some research, I found a very similar fund. This post gives a good comparison. In summary, if you buy VUN (Vanguard Total US Stock Market ETF), it’s made up of the same underlying stocks as VTSAX but it is purchased in Canadian Dollar. Unfortunately, the annual management fee is 4 times higher than if you were in the US (0.16 instead of 0.04) :(, I suspect this is due to currency conversion costs.

I could have converted my Canadian Dollar to US Dollar and bought VTI or VUS (other similar funds in USD) but that added more complexity, more currency hedge risks and would subject me to US withholding taxes which I’d have to track and claim back at tax time. Again, I’m all for the Keep It Simple approach which just means I’ll pay a slightly higher annual fee.

Consideration 2: Not all of this money is mine alone, some belongs to Mr. MH and so he had to agree with the latest shift. He bought his previous ETF portfolio after me and although his was made up of the same funds as mine, the timing meant that his portfolio dipped for much longer and his best-performing fund during the pandemic was VCE (Vanguard FTSE Canada Index). Because of this, he felt more comfortable keeping at least some of the portfolio invested in a Canadian stock market ETF.

This meant that our target portfolio allocation was going to look something like 95% VUN and 5% VCN (Vanguard FTSE Canada All Cap Index) – this is a newer, broader ETF than VCE.

I started off by investing the proceeds of our house first. I bought mostly VUN and a small amount of VCN per the plan. Then as we were moving over the proceeds from our Irish ETF portfolio my nerves started creeping in about how over-exposed to the US markets we were. I decided I wanted to build back in some regional diversity and looked for another fund or two to help round out my portfolio. As we add more money we will purchase the other funds to balance it out a bit more.

Previously our ETF portfolio was made up of 5 funds. Now I think I can get the diversification I’m comfortable with in 3.

Our new target is something like 80% US, 15% Developed Markets excluding US, 5% Emerging Markets

This should give us a weighted MER of 0.19%, estimated annual growth of 12.02% and estimated annual dividends of 1.58% (based on returns since inception per current fact sheets).

Our current portfolio including our Irish stocks currently looks quite disorganised but I’m ok with that as the estimated returns of the portfolio are slightly better than the above projections. Our current weighted MER is 0.18%, estimated annual returns are 12.28% and dividends of 1.37%.

Once you get to a certain level of funds, you can start to see really fun gains or really scary losses on a daily basis. This has been an interesting experience. Our life’s savings are literally all in the stock market. We signed up to an account which lets you consolidate all of your investment accounts into one dashboard with reports. So far our Canadian accounts have gone like this:

The blue line is contributions and the green line is value of investments. So in August, we lumped in our house proceeds and we saw a nice uptick, very shortly followed by a downturn which didn’t go below our initial contributions but was still a drop of 24,000$ in the span of a few weeks. Thankfully, this has now gone back up to above where it was at the previous peak but before you go putting large sums into investments, be sure you are committed to the buy and hold strategy as the smallest drop in your share price can result in big drops in your portfolio. If you sell when it dips, you are locking in your loss, but if you hold on for long enough it will recover.

The current year to date returns are coming in at 14.53% not including dividends.

Different accounts

Another thing I haven’t gone into yet are the different investment accounts available in Canada. As soon as we got back, we opened up a number of new accounts under each of our names in order to maximise our tax benefits. Below are the different accounts we currently hold in each of our names.

• Tax-Free Savings Account (TFSA)
• Register Retirement Savings Plan (RRSP)
• First Home Savings Account (FHSA)
• Margin Account

The TFSA gives you a certain amount of money you can invest per year tax free. This is after tax income but grows tax free and is tax free on withdrawal. Unfortunately for us, your contribution room stops growing once you are out of country so we only have a portion of the 88,000$ room other Canadians have. Still it’s a great account to have.

RRSP’s are similar to Irish pensions in that they are tax-deferral accounts with annual contribution limits where you contribute to them in your higher earning years to reduce your taxable income, the investments grow tax free until withdrawal, at which time you pay your marginal income tax rate. The benefit Canadian RRSPs have over Irish pensions is that you can easily open an account and manage the funds yourself and there is no minimum age for withdrawal.

FHSA’s are tax-free savings accounts to help people save for their first home. There are annual contribution limits up to a maximum of 40k, contributions are tax-deductible, growth is tax-free and withdrawal is tax-free. Contrary to what the name implies, if you have NOT owned your primary home in Canada in the last 4 calendar years, you are still eligible for an account. If you do not decide to buy a house in the end, you can roll the money into your RRSP without impacting your RRSP contribution limits. Your contribution room only starts growing once you open an account so even if you don’t intend on investing/saving for a home, it might be a good idea to open an account just in case you do in the next few years.

Margin accounts are your usual taxable after tax investment accounts.

As we’ve been out of country for 9 years, our contribution room in our TFSA and RRSPs are not as high as they could be but something is better than nothing. So for now, we have maxed out our TFSAs, RRSPs and FHSAs and lumped the rest in our Margin accounts. As I haven’t worked much this year, this may seem like a waste as I won’t have income tax to reduce but getting the money invested and allowing it to grow as soon as possible will outweigh the tax savings I would have made if I had spread it out over higher income earning years.

There is also a Registered Education Savings Plan (RESP) we may look into for our son but I’m not 100% sold on the benefits vs. restrictions. Should our son not go to third level education in Canada, your marginal income tax is charged on withdrawal PLUS a 12-20% withdrawal penalty. For now I’ll just keep investing in our other accounts and use those funds to pay for college if needs be.

As Forest Gump once said: That’s all I got to say about that.

Of note:

• I submitted my citizenship application!
• we finished off our back garden renovations which involved a bit more work by us than we had planned
• I ripped up some old carpet and prepped, sanded and stained the floor boards
• we got a “new” car which required a good bit of research
• we took a week off to visit family and have been spending a bit more time catching up with friends now that we are vaccinated

I have plans to write up a bit more on our renos and the car research but this weekend I started researching the security of my investments in terms of where they are held and I wanted to document it so I don’t forget. Hopefully, it’s of use for you too as a consideration for your own long term due diligence. Caveat: I’m in no way an expert and my findings should be taken with a grain of salt and I’m happy to be corrected if my understandings are inaccurate.

Lesson 1: Securities lending

When signing up for a Degiro account you are given the choice of a Basic account or a Custody account. The main difference is that the basic account allows Degiro to lend out your shares which lowers your fees.

But what does this really mean and why do they do it?

This sent me down a rabbit hole.

What is securities lending?

Lending out shares is also known as securities lending. This is where stocks, commodities or other securities are loaned out to other investors or firms.

Benefits of securities lending for the lender (you)

The benefit to the lender (you) is that the borrower is charged interest on what they borrowed. This results in an extra income stream for the fund/investment firm on top of capital gains and fund fees which is usually passed onto you. In the case of a Degiro Basic account, this results in lower fees than the Custody account where securities lending is not done.

Benefits of securities lending for the borrower

The borrower typically borrows securities in order to short stocks. Ultimately they believe that they can make more money by shorting stocks than the cost of the interest from borrowing the stocks.

Risks of securities lending

This practice has different regulations depending on where the investment firm is located. I believe the location of the investment firm determines the regulations rather than the location or domicile of the funds themselves but I’m happy to be corrected. For investment firms regulated within the EU, I believe borrowers need to secure the loan with non-cash collateral of equal value to what they are borrowing. In the US, there is slightly more risk as cash can also be used as collateral which can be easily spent but they also need to put up 102% of the value being borrowed as collateral. The collateral regulation reduces the risk to the lender (you).

Another thing I learned is that most low free brokers operate with something called an omnibus account. What this means is that individual stocks/shares that you purchase are not technically in your name, instead a type of ledger is used to keep track of who owns what but the share remains in the brokers name so that they can loan them out for securities lending. I’m not 100% sure on the true risk here but have seen on reddit forums that some people have had very long delays getting money out of some of these brokers which I can only assume are somewhat related to securities lending through this omnibus structure.

Who does securities lending?

Most low fee brokers do securities lending. Even exchange-traded funds (ETF’s) do securities lending.

Stocks, commodities and other securities

Degiro Basic account, Trading 212, Bux Zero all likely do securities lending.

ETFs

No matter who you buy ETFs through, my understanding is that the firm themselves cannot lend out the underlying funds but the ETF fund manager can and usually does. You can see the level of securities lending done by each fund on their annual report.

From what I can tell, Vanguard do LESS securities lending than other funds like iShares. Additional reading on securities lending in ETFs in the EU here.

As an example: The Vanguard 2020 Annual report here, shows that for the Vanguard S&P 500 there are 24 trillion in net assets and 7.1 million lent out for securities lending. This means that only 0.029% of the net assets are lent for securities lending. On page 557 you can see that of the 7.1 million lent out, there is 7.5 million in collateral held against that mostly in AA and AAA bonds (less volatile). On page 585 you can see that across all the Vanguard funds, only 6-9% (14,000) of the securities lending income (146,000) goes to the lending agent with the rest going into the fund. Only 0.009% of the income for the year came from lending securities (146k of 1.6 trillion).

Who doesn’t do securities lending?

Interactive brokers, Degiro Custody account (for non-ETF securities like stocks and commodities)

Take away

As I’m investing mostly in ETFs through Vanguard, I’m happy to leave my account in a low fee broker as the securities lending is managed and regulated through Vanguard rather than the investment company and I’m comfortable with the level of risk as the level of securities lending done by Vanguard is relatively low.

If I was investing more heavily in individual stocks, I would probably move to an Interactive Brokers tiered account which seems to have lower fees for an account that does NOT do securities lending according to this analysis by the Poor Swiss.

Lesson 2: Delayed withdrawals

In addition to lending shares, most low fee brokers operate in the Stock Exchange with Chi-X (known as Chi square), which allows significant cost savings. As Chi-X’s market share is small, they have less liquidity and volume compared to others, which usually results in delays for both buying and selling as far as I can tell, so it can take longer for you to access your money if you need to sell but I’m not sure how long these delays can take. Degiro’s site for example says it takes 2-5 business days to process withdrawals. I can confirm that I have withdrawn large sums in this time frame with no problems but something else to consider in due diligence for the longer term.

Lesson 3: Security of investment firm

The second rabbit hole I went down was the security of the investment firm themselves. As I eventually plan on having a large portfolio that will fund our livelihood I want to be comfortable that my money is secure in the off chance the broker/investment firm goes into liquidation/bankruptcy or mishandles my money.

While some people may say the chances of this are very slim, it has happened three times in Ireland alone since 1999 with Money Market International, W&R Morrogh stockbrokers and Custom House Capital Limited.

In the W&R Morrogh case, some investors lost between 50,000£ and 500,000£.

Firms that provide investment services are under a statutory obligation to segregate their own capital from their customers’ investment assets. This ensures that such assets are kept safe if anything should go wrong. However, if a failing firm has not sufficiently segregated these assets, it runs the risk of taking investors’ assets down with it. 

If for example, the investment firm owes more in debt than it has in assets and it goes into liquidation its existing assets go towards paying its creditors which include investors (you), but in some cases, there are not enough assets left to repay everyone.

In 1998, the Investor Compensation Scheme was brought into existence. This is an insurance scheme that investment firms pay into in the case they or other firms go into liquidation. If after the creditors are paid, you are still at a loss, you can claim 90% of your net loss up to a maximum of 20,000€ from this compensation scheme.

The ICS only pays you compensation when:

• A firm is put into liquidation by the High Court or
• The Central Bank determines that the firm is unable to meet the claims of clients

The ICS doesn’t pay compensation if:

• You incur losses due to receiving bad investment advice
• Your investment is poorly managed or
• Your investment performs poorly due to market conditions or other economic forces.

Each EU country has its own scheme regulated by its central bank equivalent. I believe Degiro falls under the German scheme, while Bux 0 falls under the Dutch scheme while Interactive Brokers Ireland falls under the Irish scheme. In the UK, their scheme covers up to 85,000£ per person per firm though I’m not sure if as an Irish resident you can open an investment account in the UK?

In Ireland, the scheme is run by the Investor Compensation Company Limited and regulated by the Central Bank of Ireland. I can only assume there is a similar structure in other EU countries. The success of this scheme relies on the successful running of the holding company as well as the contribution into the fund by the investment firms themselves. You can see if your investment firm is covered here. At the moment this seems to be going well per the 2020 annual report, but that may not always be the case and cannot be taken as a given.

Additional CPCC guidance here.

Although I could not confirm this for Ireland, it seems the ICS scheme in other EU countries is per person per firm including if you hold a joint account.

The investment compensation scheme is separate from the Guaranteed Deposit Scheme which covers up to 100,000€ per person per institution in uninvested cash held in bank accounts.

Take away

No matter what you invest in there will be risks, both with the investment themselves but also with who you invest through. To help hedge our risks on the investment firm front, I think both myself and Mr. MH will each hold our own investment accounts or at least hold a joint account in multiple investment firms preferably covered by multiple counties’ investor compensation schemes. This will not only hedge the risk of all of our funds being managed by one company but also the risk of all of our funds being subject to the successful operation of one ICS company.

If we each have our names on 3 different accounts in 3 different investment firms covered by investment compensation schemes in multiple countries we are reducing the overall risk of any one of those companies going into liquidation including the investment compensation scheme operator themselves. We also increase our maximum compensation from 40,000€ (20k each) to 120k (60k each).

The downside to this is managing 3-6 different accounts both in terms of asset allocation and tax reporting but that is a price I am willing to pay for more security on our livelihood longer term.

This approach also hedges our risks of there being delays in withdrawing money if one firm has delays as we will have access to money in a different firm if needed.

Did I miss anything?

What are Investment Trusts

Investment trusts are closed-end funds, typically in the UK and Japan. They are publicly listed companies that invest in financial assets or the shares of other companies on behalf of their investors. You can read more about these here.

Diversification

Investment trusts are a great way to get diversification by buying one “stock”.

Looking at some info on F&C Investment Trust as an example: The first-ever investment trust, launched in 1868. A diversified portfolio gives exposure to most of the world markets. Invests in more than 400 companies in 35 countries. Among the largest investment trusts in its sector.

F&C is invested in a mix of stocks and bonds of companies listed publicly on the stock market, a max of 5% in unlisted securities (not traded on an exchange) and a max of 20% in private equity (direct investments into companies rather than via stock holdings).

Derivatives (investment contracts between the Company and counterparties, the values of which are derived from one or more underlying assets) may be used for income enhancement and efficient portfolio management. Borrowings, which may be short or long-term, in sterling or foreign currencies, would normally fall within a range of 0% to 20% of net assets.

Of the publicly listed companies, it’s invested in companies like: Amazon, Microsoft, Google, Facebook, Apple, Paypal, Mastercard, Visa, Alibaba, Netflix and SAP.

This is actively managed fund and results in higher fees. F&C for example charges 1.18%

Performance

The average annual return for the last 5 years of the F&C has been 14.46%. I believe this is before annual management or purchase fees, inflation and taxes.

The FTSE World Index‘s performance for the same period was 12.8%.

If we take 1.18% fees and 1.9% inflation brings it down to 11.38%. This still does not include stamp duty, currency exchange fees and brokerage purchase costs.

The S&P 500s last 5 years average return was 13.88%. No stamp duty applies. Minus 0.07% fees and 1.9% inflation = 11.91%. If you bought this as an accumulating ETF on Degiro the fees would be 2€/transaction plus 0.03% of the total purchase.

Taxation

The main draw to IT’s in Ireland is the taxation. As you are investing in a company, who in turn invests on your behalf, these are treated as individual stocks and NOT as ETFs.

This means you will be charged 33% tax on capital gains and your marginal income tax rate on dividends instead of 41% exit tax on gains and dividends along with the 8 year deemed disposal rule that comes with ETFs outside of a pension.

Investment trusts are also eligible for 1,270€/year in CGT allowance per person. Not the case for ETFs.

You can also carry forward capital losses from current for previous years to be applied against any future capital gains taxes. Also NOT the case for ETFs.

When you die, if your portfolio exceeds £325k (which a retirement pot typically would be) your beneficiaries may be liable double-taxation on inheritance tax.

Comparison

Assumptions:

Accumulating ETF

Performance: 11.91% after fees and inflation.

Dividend yield: 1.6%

Taxes: 41% exit tax on gains and dividends, exit taxes applied to both gains and dividends from year 8 due to deemed disposal rule. Dividends are automatically reinvested in the fund and no exit taxes applied for the first 8 years due to accumulating ETF.

Purchase costs on Degiro: 2€/transaction + 0.03% of purchase

Investment: 3,000€/month, bought monthly for 20 years (2,997.10€/month after fees)

Value after 20 years: 2.242 Million – Assuming all taxes incurred for like for like comparison.

Investment Trust

Performance: 11.38% after fees and inflation.

Dividend yield: 1.6%

Taxes: 33% on gains, 52% on dividends (assuming higher income tax bracket and all tax credits applied to employment income)

Purchase costs on Degiro: 0.5% stamp duty, 4¢/transaction + 0.05% of purchase + 0.1% currency conversion (Degiro’s AutoFX rate) on purchase and the manual rate of 0.02% on sale.

Investment: 3,000/month, bought monthly for 20 years (2,976.50€/month after fees)

Value after 20 years: 2.248 Million (+0.3% more than the ETF portfolio) – Assuming all taxes incurred for like for like comparison.

Other Considerations

General risk

Personally, I don’t fully understand the risks with investment trusts, in that I don’t understand who actually owns the underlying assets. My understanding is that you are buying a stock in a company and that company is investing on your behalf. So if that investment company goes under, your “stock” in that company at risk.

Based on the KID document for the F&C Investment Trust – this seems to be the case:

“The Company’s shares are listed on the London Stock Exchange. Should the Company be liquidated, the amount you receive for your holding will be based on the value of assets available for distribution after all other liabilities, but before shareholders, have been paid. Shareholders in this company do not have the right to make a claim to the Financial Services Compensation Scheme in the event that the Company is unable to pay out.”

If this is the case, a good investment rule of thumb is to only have 5% of your portfolio in any one company’s stock. As I plan to build a sizeable portfolio which will passively cover my living costs, I do not think that a portfolio made entirely of investment trusts is sustainable if even spread across multiple ITs.

Complexity

If you read through the various fact sheets for ITs, you will see mention of discount rates and NAV (Net Asset Value) performance. From what I can make out, you can buy ITs at a discount to the NAV on some days or more than the NAV on other days. The same applies to when you sell.

So if you buy at more than the NAV and sell at less than the NAV, you will realise less value than if you bought at a discount and sold at a higher value.

I’m not going to pretend I know any more about it than that. I haven’t factored any of this into my analysis as I wouldn’t even know where to begin.

Suffice to say, this adds complexity to both accumulation and withdrawal strategies. Something you may know I like to avoid.

Currency exchange risk

Investment trusts are traded in GBX (British pence) which means you are subjecting yourself to currency exchange risk. But what does this actually mean?

If you look at the historical currency exchange between EUR and GBP here are the highs and low:

• In the last 12 months: 0.94 and 0.83 = 11% fluctuation
• In the last 5 years: 0.92 and 0.72 = 16% fluctuation
• Between 1999 and today: 0.96 and 0.59 = 37% fluctuation

So if the bulk of my portfolio is in GBP which I plan to live off of in retirement (converted to EUR) in say 15 years time, I could have marginally more in growth compared to an ETF portfolio but anywhere from 11%-37% less in value at ay given time due to the difference in currency value.

Even within a given year, if I wanted to withdraw my full years expenses at the beginning of the year to reduce risk, I could lose 11% off the bat to currency difference.

As far as I know, currency exchange “losses” cannot be carried forward as capital gains losses can.

Tax changes

While the tax on investment trusts is currently more favourable to ETF exit tax and deemed disposals every 8 years, as far as I know, Revenue haven’t actually confirmed the taxation of investment trusts and therefore is more likely to change.

If you had built your portfolio around taxation benefits, any changes in this area could drastically devalue your portfolio overnight.

Also exit taxes were once 23% and fund managers are lobbying to have this reduced in line with at least DIRT and CGT. If this should change, ETFs would quickly become an even stronger winner (though I’m not holding my breath).

Final thoughts

As with all of my analysis to date, I keep coming back to the keep it simple approach.

ETFs still tick a lot of boxes for me:

• easy diversification (hundreds or even thousands of company’s stocks in one ETF)
• less maintenance (no studying individual company reports, valuations etc)
• less effort to rebalance (compared to a larger pool of individual stocks/ITs)
• less currency exchange risk and fees (though still some as underlying assets are in other currencies)
• low fees to purchase, hold and sell
• liquid (I can sell off at any time and access at any age, unlike a pension)

I may sound crazy but my goal for financial independence is the freedom of time and peace of mind. If my the cash flow from my passive assets cover my expenses and I have financial security and peace of mind, I don’t really care if my portfolio is worth 1 million or 10 million. Enough is enough for me.

This is why I keep coming back to the simplicity of ETFs.

Detailed calculations

And for those who want to dig into the numbers:

ETF growth

(*) assumes all remaining exit taxes for the 20 years is applied in the final year for like for like after tax comparison

Investment Trust Growth

(*) assumes all capital gains taxes for the 20 years is applied in the final year for like for like after tax comparison

On a high level, even though you pay more tax with an ETF, your real rate of return isn’t much lower than stocks as stocks have higher purchase costs. This results in a somewhat comparable portfolio even though you will have paid more in taxes.

This post has been edited as when I first did the analysis, I forgot to drag the formula down to include the stock dividends. This resulted in ETFs winning in the comparison. That’s what you get for doing analysis at 10PM!

An added benefit of this blog is that my analysis and assumptions can be peer reviewed, usually within a day or so of posting. It’s so great to be part of an active community that’s as interested as me in finance.

Read on for the details.

ETF Pros:

• ETF’s are index funds which are made up of hundreds if not thousands of different stocks/companies. This gives huge diversification with little effort.
• They can be a set and forget and lazy investment option meaning you don’t need to read up on company performance reports and continually watch individual stocks.
• They have low fund management fees.
• They are cheap to buy in terms of commissions. Brokers often have some ETF’s which you can buy commission free.

ETF Cons:

• High taxes
  • 41% on gains
  • 41% on dividends
• Subject to 8 year deemed disposal rule
  • Reduces compounding effect
  • Increases tax filing burden
• They do not allow you to carry forward any losses to be used against future gains

ETFs are often down played or even avoided due to their high taxation in Ireland as well as their being subject to the deemed disposal rule.

A few years ago we used to have access to US ETFs which had a better tax treatment similar to stocks.

When I first started reading about investing I was annoyed that we no longer had this option and considered trying to replicate the ETF make-up manually by buying the top 10 stocks in each in order to avail of the better tax treatments.

This post will show why I’m no longer going to worry myself with this annoyance.

Deemed disposal

The concept of deemed disposals was brought in in 2006. The idea is that on the 8th anniversary of you holding an investment you must pretend to have sold it at the market value in that year. You must pay the exit tax on those gains.

This tax acts as a credit which you will use against your actual sale of the ETFs. If the market value is worth more when you sell than it was when you paid your deemed disposal, you will pay the difference. If it is worth less, you will get a refund.

If you hold distributing ETFs which pay out dividends each year, then you will need to pay taxes each year from year 1, regardless of if you reinvest those funds into the same ETFs or if you withdraw the cash for current use.

If you hold accumulating ETFs which automatically reinvest the dividends into the same ETF, you will need to pay the exit tax in the 8th year on both the gains and the dividends.

Worth noting is that exit tax was once as low as 23% from 2001-2008. Fund managers are lobbying to the government to bring the current rates of 41% back down at least in line with CGT and DIRT at 33%.

If this were to happen, ETF’s would fare better than stocks.

Stock Pros:

• Lower taxes:
  • 33% on gains
  • Marginal tax rate+USC+PRSI on dividends
    • You would need to be earning 120,000€ per person in order to have a net tax rate of 41% or higher so anything below this will mean you pay less on stock dividends than ETFs
• You can carry forward losses to offset taxes on future gains
• You get a tax exemption of 1,290€ on gains per year any year you sell stocks

Stock Cons:

• Expensive to purchase
  • 1% stamp duty on Irish shares, 0.5% stamp duty on UK shares. Some shares are exempt from stamp duty, such as Irish shares listed on the Enterprise Securities Market (an offshoot of the Irish Stock Exchange).
  • 2.40€ charge to buy 1,000€ worth of shares
• Lack of diversification
• Active reviews, research and monitoring required

This article shows how the assumptions I am using are the lowest possible in terms of fees for buying stocks. If you are using expensive brokers with annual account fees and high purchase charges this example would be even further exacerbated.

Comparison

Assumptions

• Investing 12,000€/year (1,000€/month) in ETFs
• Investing 11,851.20€/year (987.60€/month) in stocks due to there being 1% stamp duty and a 2.40€ commission for purchasing 1,000€ of shares on Degiro. This is MUCH higher on some other brokers as this article points out
• ETF performance 100% equities at 10% minus 0.19% management fees minus 1.9% inflation = 7.91% real rate of return
• Stock performance at 10% minus 1.9% inflation = 8.1% real rate of return
• Dividends for both 2% paid from year 1 (non-accumulating)
• Marginal net tax rate for stock dividends = 26% (gross income of 50,000€ for single person or 100,000€/couple)
• 20 year investment term
• Selling all assets at the end of the 20th year and paying all taxes due.
  • Although this is highly unlikely it is the only way I could compare the net effect of all taxes simply. This approach doesn’t take into account the stock gain exemption either which would also increase the stock output if selling little amounts each year of retirement.
  • I might look at a more comprehensive analysis including staged withdrawals at some point.

Outcome

So over 20 years, you end up with 70,291€ more in stocks than you would in ETFs with 28,000 less in taxes. This is a difference of 3,500€/year or the stocks earning a real rate of return of 0.31% more than the ETFs.

If you change any of the assumptions this comparison could swing in the other direction.

Even though stocks fare better, for now, I’m laying to rest my annoyance over not being able to get access to better tax rates for ETFs as I feel the pros of diversification and passive investing outweigh the potential additional gains of a stock portfolio.

I’m also hopeful that the hedge funds lobbying to bring the exit tax rates back in line with DIRT and CGT will be successful.

If that were to happen the above scenario would result in the ETF having 550,000€ as the end portfolio, paying 152,000€ in tax. And resulting in only 27,000€ less than the stock portfolio (or 1,350€ less per year).

What do you think? Have I missed something?

A while back I did a post on all I’d learned to date on investing in Canada. This post will summarise how to invest in Ireland.

Investing your hard earned money can be scary! I read up on investing extensively for 2 years before I took the plunge.

I suffered from something called analysis paralysis. The more I read the more I was unsure how and where to start.

By hesitating I lost out on 2 years of having my money work for me. Instead I lost money to inflation in my account.

My hopes for this guide will be to help people get off the fence and start investing.

Warning: This is a LONG post but I wanted it to be a one stop shop. You can check back and re-read all in one place, as you need to, instead of keeping track of multiple links.

To help you skip around, here is a table of contents

Preamble

This post covers a high level summary of investing concepts. A lot of the concepts could have full blog posts of their own. If you want to know more about any of them, you can research further. However, this post should give you the overall concept at a high level.

There are tons of resources out there for US folk but very few in Ireland. This guide will focus what I’ve learned on investing in Ireland to date. That said, aside from the tax specifics and investing platforms, a lot of what I talk about here is applicable anywhere.

This guide includes references to reaching financial independence. This is where your portfolio is large enough (25 times your annual expenses) to cover your annual expenses by withdrawing only 4% per year. While this may not be your goal, this guide applies to everyone who wants to start investing.

Start by paying off existing debt

If you have existing debts, it’s best to focus on those first as they typically have higher interest rates than you will achieve in an investment account. For example: If you have 100€ and you pay down your credit card you will save 21€ of interest (at 21%). If you invest that 100€ instead you may only make 7€ (at 7% real rate of return after inflation). So that same 100€ is making you 14% more by paying down your credit card.

Focus on the debt with the highest interest rate first – typically in this order

• credit cards
• car loans
• student loans

Mortgages are usually lower than what you can get in an investment account. This means that mortgages can be an exception to this rule. A good rule of thumb is if your mortgage rate is over 4% you would be better paying it down before investing.

See if you can consolidate your debt into products with lower rates. There are a lot of credit cards that offer 0% interest for the first 6 months. Or get a line of credit with a lower rate (say 5%) to pay off credit cards with a higher rate (say 21%).

Remember the power of compounding is working against you when you have existing debt. Using the rule of 72 (a calculation used to figure out how many years it will take for your money (or debt in this case) to double), a typical credit card of 21% left unpaid will double every 3.4 years or quadruple every 6.8 years!

What to invest in and why

Why traditional investments aren’t great

A lot of people (including me before I found a better way) think of their home as their retirement plan or invest in products sold to them by the bank or their employer. There are major downsides to this approach.

Your home can certainly go up in value over time but it can also go down. There are also plenty of costs associated with owning a home that you wouldn’t have while renting. I’m not going to go into the rent vs. own debate here as that warrants a post in itself but banking on your home as an investment puts all your eggs into one basket which is very risky. It’s also very illiquid and doesn’t give you many options should you need to free up equity.

Your home also doesn’t generate passive income. Unless you avail of the rent-a-room scheme which allows you to generate 14,000€/year tax free. By far the most tax efficient “investment” option in Ireland at the moment.

Bank and employer investment products are usually products that work out best for the bank or employer rather than for you. They typically have much higher fees or lower returns than you could get on your own using something called index investing.

Fees are often brushed over but they become very important when compounding over time. For every 0.25% of a fee you lose out on 5% of your overall portfolio’s value. So if you pay the average 2.18% for an Irish pension fund (as per a 2012 report which has since been archived), your portfolio will be worth almost 43.6% less than it would be if you had invested in a fund with lower fees! This means the fund manager is taking almost half of your profits regardless if they have made you any money.

A common misconception is that management fees are charged as a percentage of your profits. This is not the case. They are charged as a percentage on your total portfolio whether you make any money or not. So in a year where the markets are down and you lose 5%, the fund manager still takes their 2.18%. This means that you are down 7.18% that year instead of 5%.

What is index investing and why is is better?

Index investing is a way for you to essentially bet on the whole stock market.

An example of an index fund is the S&P500. This is an active index where the value of the 500 largest US publicly traded companies is calculated and tracked. Over 15 year time periods, the S&P500 has never lost money, and has had a median return of 12.2%.

There are many passive funds with lower management fees which try to mimic and track these underlying active funds. There are also many other funds which track other sections of the market. You can pick and choose a diversification you are comfortable with.

Since the inception of the stock market, it has always recovered from every downturn given enough time. If you have time to leave your investments grow, you don’t need to overly worry about market downturns. You do need to have the confidence to leave your money invested, especially in a downturn. That said, there are ways to mitigate losses which I will cover below.

Main selling points of index funds are:

• lower fees
• they outperform actively managed funds by 85%
• they allow for passive investing, in that you can invest and forget. Aside from re-investing dividends and rebalancing once a year
• you can access them as needed without penalty

Figuring out your comfort with risk

The two main elements of a balanced portfolio are stocks (equities) and bonds (fixed income).

• Stocks are shares in a specific company usually with higher risk and higher gains
• Bonds are essentially loans where the investor (you), loans governments or corporations money and they agree to pay you back in fixed income by a certain date. These are lower risk but also lower return. Bonds are used to balance out the risk of a stock heavy portfolio. They are one of the ways to mitigate against stock market crashes.

A typical investment rule of thumb is to keep bonds in the percentage of your age. So if you are 30 years old you should have a portfolio with 70% stocks and 30% bonds. This reduces your risk as you near retirement but keeps your portfolio growing with higher percentages in higher performing stocks.

I have read mixed reviews of this for early retirees with some maintaining 100% stock portfolios to achieve maximum gains. Even in early retirement they maintain higher risk knowing they will keep working and therefore do not need a mitigation strategy.

Others are more risk averse and even though they are retired in their 30s, maintain a 60% stock/40% bond split for the first 5 years of retirement. Even after 5 years they will only go as high as an 80% stock/20% split even though they are continuing to make money from passion projects.

At the end of the day you need to figure out which split works for your own risk tolerance.

You can see my portfolio, which indexes I have invested in and why here. Summary below (though stay tune in coming months as I plan to start shifting this to more accumulating funds):

I currently have no bonds but think I will up this percentage to at least 10% after reading how useful it is to weather any stock market crashes. More on that below.

Words of warning against 100% stock portfolio

It’s not all a sure thing and like any investments you need to be ok living without the money you’ve invested. As quoted from Your Money or Your Life here are some stats and recovery times on historical market crashes:

• Great Depression: Down 86 percent, 27 years to recover
• Mid 1970s: Down 46 percent, almost a decade to recover
• Late 1987: Down 32 percent in just 3 months, 4 years to recover
• Great Recession, 2007–09: Down 50 percent, 6 years to recover (or 14 years if you count from the matching dot-com peak in 1999, which had just been regained in 2007)

The two events within the lifetime of young investors, the dot-com crash and the 2007–09 crisis, were exceptions in that they took less than a decade to recover—but that doesn’t mean the cyclical nature of the market has been suspended. By contrast, bond funds are far less volatile, losing only a few percentage points when they falter.

How to Invest

Setup a brokerage account

In order to invest yourself you need to setup an online brokerage account. I use Degiro. There is also Interactive Brokers which you can check out.

Degiro offer free commission trades on some ETFs. Vanguard S&P 500 is one and Vanguard All World is another.

The Vanguard All World differs from the high yield world fund I am in so I must weigh up the fees and performance of these and may switch.

Here is the full list of commission free ETFs. You get one free trade per free ETF listed per calendar month (meaning you can make more than one free trade per month as long as it’s one per listed ETF).

If you are trying to copy my portfolio you don’t have to worry about timing it as you could buy the S&P and all world ETFs for free and the rest in my portfolio have commission so they could be bought at any time.

As per the usual disclaimer, do not invest any money you can’t live without. All investments can incur loss of some or all of your money.

I buy the Amsterdam market ETFs as they are in Euro and not subject to currency exchange fluctuations. That said, all of my dividends except VEUR are paid out in USD and converted to EUR. This means you will still have some currency exchange exposure if you want to consideration this for your own portfolio.

Degiro have an app as well which is quite good.

I went with a basic account vs custody. The main difference is that basic has lower fees and the shares in a basic account can be lent out by Degiro to 3rd parties. This can’t happen in a custody account.

Fund your account

You can transfer money to your Degiro account by adding them as a direct debit payee on your online banking, this should avoid any banking fees. Test with a small amount first just to make sure it’s setup correctly.

Buy your ETFs

Once you figure out the ETFs you want to buy and the allocation you want, you’ll need to figure out how many of each you can buy with the money you have to invest. Say you have 1,000€ to start with, I did up a spreadsheet with some basic formulas where I entered the current unit price of each ETF and figured out how many shares of each I would need to buy to make up my desired allocation split. This way each time I have money to invest I just update the unit price and it calculates what I need to buy.

For example: For the All-World ETF I wanted that to be 33% of my portfolio so 33% of 1,000€ = 330€. If the unit price is currently 48.43€ then I can buy 10 shares (330€/48.27$ = 6.81 shares). As you cannot buy portions of shares you need to round down all of your numbers in the last column.

This actually only buys you 889€ worth of shares leaving you with 111€ to buy say 2 more of the All-World.

To test the waters you can choose to buy 1 or 2 shares and watch it grow for a while to help ease your concerns. In my case, in both my portfolios (Canadian and Irish), I saw a drop in value more or less straight away but over time the market has recovered. You need to be comfortable with your portfolio losing money from time to time and rest assured that the market goes up twice as frequently as it goes down over long periods of time.

Investment options in Ireland

I did a whole post on investment options in Ireland including pros, cons, tax rates, and estimated real rates of return if you want to check that out and see what you think you’d be interested in.

Personally my investment portfolio currently consists of a property in Canada, retirement funds in Canada (invested in self directed ETFs), and self-directed ETFs in Ireland. A good chunk of money is also in our home in Ireland but I’m not counting that as an investment as we plan on staying in the home after retirement and it will not generate passive income.

I am now looking at simplifying our portfolio and selling our Canadian property at some stage in the near future. We think that we will use those funds to pay down our mortgage in Ireland. Even though mathematically it makes more sense to invest it and use the passive income to pay down the mortgage we want to reduce our cost of living so that we have more flexibility and options around staying home with our son should we wish to. It will also hedge against a recession if one of us should lose our jobs, we will be more comfortable having lower expenses.

In the coming years we plan on investing more into ETFs in Ireland.

Taxes on investments

I’ve done a number of posts on taxes on investments in Ireland.

• Investment options in Ireland
• Why taxes in Ireland get too much flack
• Tax loopholes for Irish investors

Unlike Canada and the US, there are very few ways to legally avoid taxes on investments in Ireland. Believe me I’ve scoured the internet trying to find similar withdrawal options.

I’ve now come to terms with the fact that if I want to retire in Ireland, I need to accept the limitations of where I am and suck it up. I will pay higher taxes on my investments in order to retire where I love to live. My investments will still generate enough income to cover my expenses. I will just need to work a few extra years to get there.

The other benefit of this approach is that if, later in life, we choose to move somewhere cheaper with better tax options, we will already have the most tax inefficient portfolio and larger portfolio and will have more freedom to move around.

Tax efficient options in Ireland

Rent-a-room scheme

The most tax efficient option is the rent-a-room scheme as mentioned above.

Pensions

Next to that, pensions are currently the most tax efficient, though like anything, depends on a number of factors.

Tax deferral

Pensions are a tax deferral tool which means you pay reduced taxes now in your (typically) higher earning years and pay lower taxes on the withdrawals later in your lower earning years (in retirement).

Limited tax savings

If you are already in the lower tax band and will continue to be on the same band when you retire then pensions, while savings you taxes now, only kicks the can down the road as you will pay that same tax amount back when you withdraw.

Similarly if you are already in a higher tax band say earning 50,000€ and will continue to be in a higher tax band in retirement and withdrawing 50,000€ then same concept applies. You save now but pay later.

For example:

If you earn 50,000€ and don’t contribute to a pension you effectively pay 26.4% in income tax (13,213€).

If you contribute the max 20% for someone aged 35 (10,000€) to your pension that brings your tax rate down to 18.4% (9.213€).

A savings of 8% now.

Then when you retire you withdraw 50,000€/year, and you pay 26.4% then.

Which shows that your 8% savings has just been deferred to when you retire. Albeit after age 66 you no longer pay PRSI which would reduce your taxes so it depends when you plan to retire.

In both cases though, your investments do still grow tax free until you withdraw so that is a bonus.

Some tax savings

If you are earning the higher tax band, you do save in taxes now, but Revenue have rules that ensure you are paying higher taxes on pensions withdrawals after a certain age and when your pension goes above a certain amount whether you need the income or not.

Even if you only need to withdraw an inflation adjusted 40,000€/year for a couple you will still end up paying an average of 15% or so over 40 years. This is still a savings of 25% but worth keeping in mind. If you plan on living off more than 40,000€/year and plan on using your 200,000 tax free lump sum for anything other than more investments, the savings are even less.

My case against pensions

Even though pensions are the most tax efficient, I’m still not convinced for a number of reasons.

Lack of control

Depending on your pension type, you typically don’t get a say in what it’s invested in nor can you negotiate fees or government levies.

This can have a major impact on your end portfolio.

Looking at Irish pension trends from 2007-2017, the average pension growth was -4.82% after fees and inflation based on historical average, though the report only has data from 2007 (-7.3%), 2008 (-35.7%), 2015 (4.5%), 2016 (8.1%) and 2017 (6.3%).

Even if you take out the crash in ’08 it’s still only 2.9% (or 6.98% if you add back in the 2.18% in fees/levies and 1.9% in inflation instead of 10% in the stock market).

In which case investing in an ETF portfolio, even with 41% exit taxes and deemed disposals every 8 years would have fared far better.

Your pension needs to be earning a real rate of return of 5.95% or more in order to outweigh the higher taxes of a self directed ETF portfolio. This is based on a number of assumptions fully detailed in this post.

A real rate of return is the difference between your annual return (performance) minus your management fees and inflation.

The last 30 year average inflation for Ireland has been 1.9%.

In the last recession the government also implemented a levy on pensions to get access to some of that money themselves which further reduces your growth potential. This has since been removed but would worry about it being added back again if/when the next recession hits.

Limited contributions

Depending on your pension type, you are also limited to the contributions you can make per year. The limitations are as per below:

Early retirement issues

If early retirement is your goal, pensions present 2 problems:

• You likely need to be investing more than your limited amount per year in order to reach your goal
• You can only access a pension at age 50 at the earliest (again depending on the pension type)

If you are self-employed you have quite a few more pension options in that you can contribute much more but still limited to access at age 50.

Complicated withdrawal options

There are also a number of options to consider when you’re ready to withdraw from your pension. You can convert it to an approved retirement fund, purchase an annuity and so on. Each has their own sets of conditions. Some require minimum guaranteed income from other sources. Some “die when you die” meaning that the money remaining in the pot does not go onto your family. And so on. These conditions can change over time.

With ETFs you take out the money when you want, how you want and leave it to who you want. Albeit you may need to look into estate planning either way as there are ways to reduce the capital gains taxes your children will pay.

There is a great podcast on some of your inheritance consideration options here.

Transfer pension to another country

There are options to transfer your pension to another country if you have a bonfide reason to do so (ie: you are from that country and are returning home), though it has to be transferred into that country’s approved retirement fund.

So for example I could contribute to a self-employed pension here and transfer it to Canada when I’m ready to retire. In Canada, you can access your retirement fund (RRSP) at any age as long as you pay the taxes. You will be charged withholding taxes immediately on withdrawal but you get back any overages when you file your annual return. You also lose your contribution room.

But in order to do that I’d need to move back to Canada which is not in my plans. I also haven’t looked into the full ins and outs of it and what fees may apply, but an option to keep in mind should our plans change. It’s also possible the approved fund wouldn’t be an RRSP (which I wouldn’t have enough contribution room to take my full portfolio anyway), it may need to be an annuity or some other form or retirement fund which I really haven’t looked into.

All that said, I’m personally looking at implementing the KISS method and to keep it simple silly. All of these potential loopholes are overly complex and my preference is to go with a simplified portfolio that will have predictable taxes and returns which I have more control over.

How to maintain your investments

Don’t worry about timing the market

When it comes to investing, hindsight is a wonderful thing, if only you could know when the market was going to rise or fall. There are people who spend their days trying to predict this but save yourself some trouble and follow either one of two approaches depending on your comfort with seeing your portfolio drop in value from time to time.

Emotional option: dollar/euro cost averaging

If you are really emotional about seeing your portfolio decrease in value, you can rely on something called dollar cost averaging. The idea is that instead of investing large lump sums on any given day you average it out over time so that you can reduce some of the risk of buying high only for stocks to crash the next day. Instead you buy little and often and you will naturally end up buying some stocks at a high but some at a low and it will average out over time.

Rational option: time IN the market is better than TIMING the market.

If you have gotten to the point where you are comfortable with seeing dips in your portfolio then rely on the fact that time IN the market is better than TIMING the market.

Other interesting stats about the market – based on the Toronto stock exchange: (courtesy of www.retirehappy.ca)

I couldn’t find any Europe specific stats but if you’re investing in world funds then these stats won’t be too far off.

1. Markets go up more often than they go down
2. Not only do markets rise more frequently, but they tend to increase in higher magnitude than the drops.

Over the last 90 years:

• Markets have gone up 73.9% of the time
• Markets have gone down 26.1% of the time
• The market gained more than 20% in 33% of the time
• The market lost more than 20% in 4.5% of the time
• The gains in positive years produce more than double the losses in the negative years

(This data is based on calendar year returns of the TSX from 1920 to 2010).

In addition (courtesy of Rob Carrick of the Globe and Mail),

• In 34 of the 37 corrections of 10%+ since 1950, the stock market was up 12 months later by 26.8% on average.
• Average decline for the 37 market plunges of 10%+ since 1950 is 19.7% or almost one every 20 months.

Either way your money will be working for you so pick the approach that works best for where you are at in your investment journey.

Keep adding to your investments

Buy as much as you can, as often as you can and watch your investments grow.

Try not to look at your portfolio too often as it can be off putting to see market dips.

Reinvest your dividends every quarter

There are some funds and accounts you can get with robo-advisors that will automatically re-invest your dividends but I have yet to delve into those options. For now I’m keeping it simple and manually re-investing my dividends. All of my ETFs pay out quarterly (you can see this on the fact sheet of each ETF), so I check back once a quarter and buy more with the dividends that are paid out.

For an Irish ETF portfolio you need to pay the 41% exit tax on your dividends on the year you receive them.

You can also get accumulating funds which means your dividends are automatically re-invested and do not incur the 41% exit tax until the 8th year. See this post for more information on what deemed disposals are.

Rebalance once a year

Throughout the year your stocks will likely outperform your bonds or certain ETFs will outperform others and your asset allocation will shift.

Say you started out with a 70% stock 30% bond split. Through the year your stocks performed really well and now they make up 80% of your portfolios value and bonds have fallen to 20%.

In order to maintain the asset allocation you are comfortable with you will need to sell some of your high performing stocks and buy some of the low performing bonds to rebalance your portfolio back to the original allocation.

This can be done once a year (I read a really good article on why any more than that actually increased your volatility while reducing your return but can’t for the life of me find it again). Keep an eye on trade commissions and creating tax events from sales.

File taxes once a year

In Ireland most people do not file taxes if you are a PAYE earner.

If you start investing, you will need to file taxes each year whether you make money or not.

If you are purchasing shares through a company share scheme you also need to be filing each year as well as every time you purchase the shares.

I am due to file my own taxes this year on my investments from last year so once I figure it out I will do a future post on both of these scenarios.

Although I’m not including details on how to file in this post, it is something to keep in mind for your own circumstances.

Revenue are extremely helpful if you need a hand you can give them a call. I think you can even book an appointment and they will walk through things with you in person as well.

Weathering a crash

When the market is crashing, it is very hard to leave your money invested but based on the facts, the stock market always recovers so the best thing for you to do is wait, alternatively there are two things you can do to lessen the blow:

Sell bonds at a high and buy stocks “on sale”

If you hold bonds as well as stocks, a crash may be a good time to rebalance as during a crash, money flows out of stocks (risky) and into bonds (safer), this devalues stocks and increases the value of bonds. So if you hold bonds now would be a good time to sell (high) and buy stocks (low) and rebalance your portfolio to your desired split. This means that once the market recovers you will own more stocks which you got “on sale” and will benefit more from the upswing in the market. If you don’t own any bonds you will simply need to wait for the market to recover (usually 2 years) as per recent trends.

This is why it’s important to hold at least some bonds as you will be in a stronger position to benefit from market recovery than if you only held stocks.

Sell at a loss to offset future gains

This is something called capital loss harvesting (or tax loss selling).

This concept is only applicable to certain investments like individual stocks including company shares purchased through benefit schemes and UK investment trusts. Unfortunately you cannot do this with EU domiciled ETFs.

The idea is that you take advantage of the downturn by selling some of your assets which have lost value compared to when you bought them. At the same time you should buy back a similar asset/stock at the lower value so that you maintain your original market exposure to ensure you can take advantage of the future gains when the market does recover. The reason you wouldn’t buy back the same stock is because there is a stipulation where you have to wait 30 days before buying the exact same thing again, or it is dismissed as a “superficial loss (or gain)”.

Capital losses can be applied to your current tax year, 3 years in the past and indefinitely in the future. This means you can basically “buy tax credits” in the down years which you can use to lower your taxable income in future years when your income may be higher.

Capital gains credit

In Ireland you also get a credit of 1,290€/year of capital gains on which you do not need to pay capital gains tax.

Mr. MH gets discounts company shares for the company he works for, we considered selling just enough each year to avail of this credit as if you don’t use it you lose it. However, the potential gains we would be losing out on on these particular stocks would far outweigh the tax savings we would make from the credit.

Again it’s trying to keep your emotions in check around tax avoidance. For me I feel obsessed with trying to get money in or out of things in a way that I pay as little tax as possible but in the bigger picture, if that investment vehicle allows you to make large gains over the long term, even though you are paying taxes on those gains, they are still gains which you would not have made otherwise.

How long to financial independence?

For those of you interested in achieving financial independence, you may be wondering how long it will take using the above investment model of ETFs in Ireland. The chart below shows how many years it will take for you to reach financial independence depending on your current assets and different monthly savings amounts. Financial independence (FI) means your portfolio is large enough to withdraw a safe withdrawal rate of 4% to cover your annual living expenses, in this case we are looking at a portfolio of 412,500€ for an annual cost of living of 16,500€ for 1 person. To apply this chart to a couple simply double the monthly savings amount in the first column to reach FI in the same number of years.

Assumptions:

• Amount of time to grow portfolio to 412,500€
• Safe withdrawal rate of 4%
• Annual living expenses on withdrawal of 16,500€ for one person
• Deemed disposals/exit tax of 41% starting in year 8
• Real rate of return used is 7.91% (average stock market performance over its lifetime has been 9-11% so I took the 10% average minus the average inflation for Ireland over the last 30 years of 1.9% minus MER fees of my sample portfolio of 0.19% = 7.91%)

So for a single person starting from 0€ in assets and saving 500€/month it will take 29 years to reach financial independence compared to 12 years if you save 2,000€/month.

If you already have 100,000€ in assets and you save 2,000€/month it will take you 8 years to reach financial independence.

This just goes to show how much of an impact your savings rate can have. It can shave years off your journey to FI. Not fast enough? There are a few more options on how to reach FI sooner.

Ways to reach financial independence sooner

There are a few other options if your time to FI is too far away. This is a quick list but you can google more on each bullet point to find many resources on each topic.

You could:

• Make more money with a passion project in order to increase your savings rate and decrease your time to FI. Google side hustles for ideas. Or check out the book Financial Freedom for a great guide on figuring out profitable side hustles. One exercise in the book is to make a list of your hobbies and a list of your skills. Take a step back and see if any side projects appear that make use of a cross between your skills and hobbies.
• Cut expenses to increase your savings rate.
• Do partial FI where you increase your withdrawal rate beyond the safe rate of withdrawal with the caveat that you would need to earn a certain amount through the year. This would no longer require a full time job, offering you and your partner more flexibility. For example: say you and your partner want to live off 40,000€/year. For a safe withdrawal rate of 4% you’d need a portfolio of 1 million. If you decide to take out 6% per year you’d only need a portfolio worth 640,000€. BUT you’d also need to top up your portfolio/investments with another 15,000€ per year to ensure it wouldn’t run out. So you or your partner could work part-time or take on contract work for a few months rather then wait your full time to FI. This approach practically cuts your time to financial independence in half while still achieving the flexibility you may want.
• Take mini-retirements once you’ve reached some degree of passive income/savings and can afford to take prolonged time away from work to pursue other things. Be it travel, time with family, going back to school etc. This is a great option if you want a change sooner than later. It also gives you a chance to try early retirement to see if it’s something you’d like to do full-time.
• If your job allows you to work remotely 100% of the time, consider moving to a place where cost of living is much cheaper. I know someone who contracts for a company in London, earns GBP and lives in Malta where there is no corporate tax. Other stories I have come across are where a couple moved from San Fransisco to Mexico while still earning US dollar from their silicone valley companies and significantly reduced their time to FI that way.

You can also check out my post here where I explored many other options to quicken my path to FI.

There are probably lots of other ways but these are the main ones I’ve come across.

How to withdraw

Once you’ve reached your version of financial independence and you’re ready to start withdrawing from your portfolio there are a few things to consider in order to protect your portfolio from something called sequence of return risk.

Protect your portfolio in the first 5 years of retirement

Your retirement portfolio is at most risk of failing in the first five years of retirement. Even if you only withdraw at the safe withdrawal rate of 4% (which has a success rate of 95%) there is a 5% chance it will fail in the long-term and your portfolio will run out of money in 30 years time. This can happen if you retire right when the market crashes and you are forced to withdraw/sell at a loss and even in the upcoming “up” years your portfolio cannot recover and eventually over 30 years you will run out of money (unless you go back to work and top it back up again). This is something called the sequence of return risk. Never fear – there are ways to mitigate this.

1: Least ideal: Go back to work to top up your portfolio

2: Slightly more appealing: Cut expenses or move somewhere cheaper so that you don’t need to withdraw as much to live off of

3: Least impact: Hold a cash cushion of 1-3 years of living expenses that is invested in something outside of the stock market (like a “high” interest savings account). Using this cash cushion for your living expenses in the down years means you do not HAVE to sell at a loss and you can wait for the market to recover keeping in mind that stock market crashes tend not to last more than 2 years of continuous declines.

1-3 years of living expenses can be a lot (say 40,000€ – 120,000€), which would further add to the time to financial independence but there is a way you can reduce the amount needed with something called a yield shield.

The idea is that you temporarily pivot your investments to high yielding (though lower performing) assets for the short term. Things like preferred shares, real estate investment trusts (REITs), corporate bonds and dividend stocks. This can mean that your portfolio goes from returning dividends of something like 2.3% to closer to 3%, which if you have 1 million in your portfolio means the difference between 23,000€ to 30,000€. So if you need 40,000€ to live on you can use the 30,000€ from your dividends and only withdraw 10,000€ from your cash cushion meaning you only need 30,000€ extra as a cash cushion to weather 3 years of a market downturn.

Holding a yield shield means your portfolio is slightly more complicated to maintain as you are invested in a larger number of asset classes but once you have passed your first 5 years in retirement you can pivot your assets back to a simpler spread of ETFs.

Taxes on withdrawal

In an ETF portfolio, as mentioned above, you will need to pay exit tax on dividends every year as well as exit tax on gains every 8 years (whether you have sold or not). Once you do actually sell/withdraw you will get a credit for the deemed disposal rate you paid on the 8th anniversary.

To clarify some terminology:

A dividend is an amount of money a company pays out to its share/stock holders at a set schedule (usually quarterly or annually). Dividends are paid at the set schedule identified in the fact sheet of the fund.

A gain is an increase in value of shares you own compared to when you bought. So if you bought something for 10€ and when you sell it it’s worth 25€ you have a gain of 15€ which you need to pay exit tax on. Typically you only realize a gain or a loss once you sell the share/stock . However in an ETF in Ireland you need to pay the tax on gains as a deemed disposal on the 8th anniversary of owning the stock/ETF.

Deemed disposals

I have not filed deemed disposals yet as I just started investing in ETFs in Ireland less than a year ago.

What I have gathered to date is that Degiro should provide an annual report showing your portfolio holdings, purchases and any gains or losses.

Keep this report until your 8th year of holding the investment. Using this report you could work out your gains for the year on those investments.

You then calculate your 41% on those gains and file and remit it to Revenue.

Repeat this process every year after the 8th year.

I believe it is a laddered approach where in year 8 you pay the exit tax on gains from year 1, in year 9 you pay the exit tax on gains from year 2 and so on.

You can pay the exit tax from your investments if you don’t have the cash to hand outside of the investments, though this will reduce your compounding effect over time.

I am not 100% on this so please correct me if I’m wrong.

Sense checking for the long haul

At the beginning of each year of retirement, it’s a good idea to re-check the chances of success of your current portfolio. There is a handy calculator called FIREcalc which cycles through 119 different scenarios based on criteria you enter and tells you the current rate of success where your portfolio will not run out of money in the next 30 years.

If the rate of success is lower than you’d like, you can always carry out some of the back up plans mentioned above in the “how to withdraw” section.

ANNNDDD that’s a wrap!

Hopefully this will be a post that you read and re-read through your investing journey. I actually learned more myself by writing it so I got something out of it too 

I’d love your feedback. If you found this helpful or if there is something you’d like me to elaborate on, please leave a comment below.

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How I Decided

Why ETFs

Firstly a little about ETFs (exchange traded funds). These are essentially funds that bundle a large number of individual stocks, commodities and / or bonds under one fund. This allows you to easily track the trend of the whole stock market with only a handful of ETFs. This makes it easy for passive/lazy investing over longer terms. ETFs also offer low expense ratios and fewer broker commissions than buying the stocks individually. Historically since the inception of the stock market returns have averaged 9-11%. By having a well diversified range of ETFs you can also achieve these levels of returns with little effort.

Even though Irish domiciled ETFs are heavily taxed in Ireland (41% tax on both gains and dividends), I am still happy to continue investing in ETFs after weighing the pros and cons outlined in this post. This may change as I discover more tax efficient/higher performing options but this is where I’m at for now. My main reason for continuing with ETFs over pensions is that I plan to be FI at least 5 years sooner than I could access an executive pension.

Please consider the pros and cons in the previous post and do your own research before investing any sums of money. What works for me and my goals may differ largely from your own situation.

Why not one simple ETF

After reading many blog posts about portfolio options I settled with a variation to the Escape Artists suggestion explained here. Some bloggers suggest a very simple portfolio where you just chuck whatever money you have, whenever you have any extra, into one Global ETF fund like the Vanguard All-World fund (VWRL) but the reason I decided against that approach is because that fund is heavily invested in US equities (55%) and I wanted something that was a bit more diversified.

According to the Escape Artist, US equities may be overpriced at the moment which may doom long-term investors to under-performance. For example: when you buy high you need to make massive gains to make up the same returns you would have gotten if you had bought low and made smaller gains.

Why 100% stocks and no bonds

Depending on your risk tolerance you may want to put a portion (say 30% or 40% for more conservative or 90% for less conservative) of your portfolio into bonds as these have less risk and lower returns but as I have time on my side to let my investments rebound from any downfalls, I decided not to keep any of my portfolio as cash or in bonds. I’m open to the higher risk of a 100% stock portfolio which may not suit most investors.

The case for holding bonds

That said: I’ve since read an argument for holding at least 10% bonds in your portfolio and that is so that you can sell bonds at a high and buy stocks “on sale” during a downturn.

A part of investing is deciding what asset allocations you are comfortable with. Depending on how those assets perform over the year you may need to rebalance your portfolio to ensure that you maintain those allocations.

For example: You have 60% of your portfolio in an S&P 500 ETF and 40% in an emerging market ETF – during the year the emerging markets ETF out performs the S&P 500 and now your asset allocation is 50%/50%. You will need to sell some of the emerging market ETFs and purchase some more S&P 500 ETFs to rebalance back to the 60/40 split.

If you hold bonds as well as stocks, a crash may be a good time to rebalance as during a crash, money flows out of stocks (risky) and into bonds (safer), this devalues stocks and increases the value of bonds. So if you hold bonds a crash would be a good time to sell (high) and buy stocks (low) and rebalance your portfolio to your desired split. This means that once the market recovers you will own more stocks which you got “on sale” and will benefit more from the upswing in the market. If you don’t own any bonds you will simply need to wait for the market to recover (usually 2 years).

This is why it’s important to hold at least some bonds as you will be in a stronger position to benefit from market recovery than if you only held stocks.

Once I’m back to work I think I will start buying some bonds just for this purpose.

Who is this for?

As I’m currently invested in 100% stocks, this portfolio mix is probably for people very early in their investment journey who have many years of contributions ahead of them before they are able to retire.

Once you are about 5 years away from retirement you’d probably want to invest in something like 30% or 40% bonds and 60% or 70% stocks with higher yields/dividends rather than higher returns.

Portfolio Make-up

Below is the make-up of my current Irish ETF portfolio. All these ETFs are with the Vanguard company (See more about them below). 47% is in an all-world fund (split between distributing and accumulating), 22% in Developed Europe, 12% in Emerging Markets and 18% in the S&P 500. These funds all have varying management fees but this make-up comes to a weighted MER (annual fee) of 0.18% with an estimated weighted return of 4.10% based on each funds’ returns since inception and 2.97% in dividends. That’s excluding taxes and inflation.

And in chart form…

About Vanguard

I like Vanguard because their core purpose is “to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success”, their average expense ratio is 0.10% as per 2018 assets under management. As per their website: “Vanguard is owned by its funds, which in turn are owned by their shareholders. Vanguard’s ownership structure means we have no conflicting loyalties. It’s in everyone’s interests—our clients’ and thus ours—to uphold the highest ethical standards every day. When making decisions, we are guided by a simple statement: ‘Do the right thing.'”

ETFs in Detail

Each ETF comes with a fact sheet which you can download from Vanguard’s website.

Fact sheets tell you things like:

• The fund inception date
• Total assets invested in the fund
• Exchange tickers for different stock exchanges
• Base currency (for example you may buy an ETF in EUR but the stocks base currency is USD. Your dividends will be paid our in USD and converted to EUR by the broker)
• Whether the dividends are accumulating (automatically reinvested) or distributed (paid out each quarter)
• What frequency the dividends are paid out (Monthly, Quarterly, Annually)
• Ongoing management fees
• Performance benchmarks and historical performance
• Number of stocks held within the fund
• Dividend yield (%) – the percentage that will be paid out. Usually high yield dividends have lower gains and vice versa. In your accumulation phase it’s probably preferable to have lower dividends and higher gains. Getting dividends also triggers taxable events which need to be reported and paid annually.
• Top 10 holdings (companies)
• Sector breakdown ie: what percentage of the fund is invested in Financials, Technology, Utilities, Health Care etc
• Market allocation ie: Which countries are the companies located in whose stocks make up the fund

Below are the highlights of my portfolio make-up so you can get a sense of the range of companies I’m invested in.

FTSE All-World High Dividend Yield UCITS ETF (VHYL) – 24% of portfolio

This fund is invested in over 1,500 company’s stocks. Below you can see the top 10 company’s this is invested in. The top 10 make up 13.6% of the funds assets.

All, bar 1 of my current portfolio ETFs are distributing. This fund pays dividends quarterly at a rate of 4.1%.

Here is the sector make-up.

And here is the country make-up.

FTSE All-World UCITS ETF (VWCE) – 23% of portfolio

This fund is invested in over 3,500 company’s stocks. Below you can see the top 10 companies this is invested in. The top 10 make up 15.4% of the funds assets.

Once I discovered accumulating funds I started putting any new contributions in accumulating versions. This fund pays dividends quarterly at a rate of 2.3%.

Here is the sector make-up

Here is the country make-up

FTSE Developed Europe UCITS ETF (VEUR) – 22% of portfolio

This is a much smaller spread with investments in just over 600 companies where the top 10 listed make up 20.8% of the fund.

This fund pays dividends quarterly at a rate of 3.4%.

Here is the sector make-up.

And the market allocation.

S&P 500 UCITS ETF (VUSA) – 18% of portfolio

This one is made up of 503 companies (hence S&P 500) where the top 10 make up 28.1% of the fund.

This fund pays dividends quarterly at a rate of 1.7%.

And here are the sectors:

The market allocation is 100% US Companies which is the nature of the S&P 500.

FTSE Emerging Markets UCITS ETF (VFEM) – 12% of portfolio

This one has stocks in over 1,800 companies with the top 10 making up 22.6% of the fund.

This fund pays dividends quarterly at a rate of 3.1%.

Here is the sector make up

And the market allocation:

Performance

To give you an idea of the volatility you should expect and be prepared for, here is how this portfolio has fared so far:

Purchased: about 15,000€ worth in May 2019 + 5,000€ in Jan 2022

As you can see, shortly after I purchased, the markets dipped. My portfolio dipped to minus 5.3% then. Even though I plan to invest for the long term, it’s very hard to stay invested when you see your money disappearing!

I stuck with it though and in January 2020 my portfolio was up by 10.57%.

Roll on COVID and at one stage I was down 30%. A month later that crawled back up to only an 11% “loss” but it was a very hard time to trust in the historical trends.

By Feb 2021 my portfolio was back up 13% overall which amounts to an annualised average return of 7.8% before tax.

Now, in October 2022, my portfolio is still up 14.82% overall but the annualised returns have almost halved since 2021 BUT my dividends have gone up from 2.32% to closer to 3%. While this doesn’t seem like much of an increase, once you have higher values invested it makes a bigger difference. For example, Right now I have about 23k in this account. 2.32% gives me 533€/year in dividends while 3% gives me 690€, a difference of 157€. If I had 100k invested it would make a difference of 678€ and if I had 1 million invested it would make a difference of 6,800€ (over 2 months of living expenses per year).

How to buy

I’ve had a few comments asking where to buy Vanguard ETFs in Ireland. You can read much more detail about how to invest and maintain investments in Ireland in this post but for a quick answer I personally use Degiro* as my online broker. Other online brokers are Interactive brokers and Trading212 if you want to check them out.

Degiro offer free commission trades on some ETFs.

Vanguard S&P 500 is one and Vanguard All World is another.

The Vanguard All World differs from the high yield world fund I am in so I must weigh up the fees and performance of these and may switch.

Here is the full list of commission-free ETFs.

You get one free trade per free share listed per calendar month.

If you are trying to copy my portfolio you don’t need to worry about timing as all the free ETFs can be purchased in the same month and the others have commission so it doesn’t matter when you buy them.

I buy the Amsterdam market ETFs as they are in Euro and not subject to currency exchange fluctuations. That said, all of my dividends except VEUR are paid out in USD and converted to EUR. This means you will still have some currency exchange exposure if you want to consideration this for your own portfolio.

Degiro have an app as well which is quite good.

As per usual, don’t invest any money you can’t live without. All investments come with risk of loss.

Updates

Based on reader feedback (thank you), I will likely be shifting this portfolio a little bit. There are ETF funds called accumulating funds which automatically reinvest any dividends into those funds.

If you don’t need the dividends right now, accumulating funds will benefit from a bigger compounding effect as you will not need to pay taxes on those dividends until the 8 year deemed disposal. Otherwise you need to pay 41% exit tax on dividends in the year you receive them even if you reinvest them.

For example I received dividends in 2019 and even though my portfolio was at a 30% loss overall at the time including the reinvested dividends I still needed to pay 300€ in tax on the dividends. That is a hard pill to swallow.

One fund I will likely be switching is the All World High Dividend (VHYL). I will be switching to VWCE which is the closest equivalent accumulating fund with lower fees. The fees are 0.22% instead of 0.29% and higher 5 year returns 6.65% instead of 6.35%, full fact sheet here. That said it’s a much higher price point (79€ per share instead of 49€) so my position will be weaker. I’ll also need to pay taxes on my gains by swapping so need to take all that into consideration.

Another reader kindly researched the other accumulating fund equivalents. I had a look at the fact sheets and they are exactly the same with the exception that one pays out dividends and the other doesn’t. Same stocks, same companies, same allocation, same fees etc.

Here is how they map out:

Here is some more information on fund examples with accumulating vs distributing ETFs if you want to read further.

Free ETF Comparison

Yet another reader pointed out that the trading platform Trading212 has VWCE as a commission free ETF. I don’t know much about that platform and haven’t figured out if there are any downsides to having funds in different platforms.

Only thing I can think of off the top of my head is it might make it harder to balance your portfolio if you need to extract money from one and move it to the other. Also harder for you to see overall losses or gains and possibly harder to compile gains for deemed disposals and other tax reporting etc.

So in terms of free ETFs in my current portfolio VWRL and VUSA are free in Degiro, VWCE is free in Trading212 but Trading212 does not seem to have the other accumulating ETFs listed above available to purchase. None of the accumulating funds I’ve listed are free in Degiro as it stands. These are recently created funds so that’s not to say Degiro won’t add some eventually.

I still think I will switch from distributing to accumulating even though they aren’t free to purchase as the money I’ll make in compounding by not having to pay taxes on dividends until year 8 will outweigh the cost of buying them once a month or once every 2 months.

Would love to hear your feedback or if you have anything else to add that other’s might benefit from do let me know and I’ll update the post.

Although this was one of the simplest posts to put together compared to some of my more extensive articles, this one seems to be one of the most popular so the more I can add that would be of use, the better for the wider audience.

* This post contains referral link where I get a bonus if you sign up at no cost to you. All investment carries a risk of loss. Do not invest any money you can’t afford to lose.

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This post documents all of my findings so far on the different investment options in Ireland along with the pros, cons, tax rates, and estimated real rates of return after inflation, fees and taxes. It may not be a complete list but I will add to it over time as I discover more.

Something to keep in mind that whatever you invest in, will result in needing to file a tax return each year, even if you are not making any money.

Also do not invest any money that you are relying on. Do your own research and get professional advice before investing any large amounts of money.

Property

Real estate

Pros:

• Potential to make large capital gains
• Most expenses are tax deductible

Cons:

• Potential to make large capital losses (just ask all those still in negative equity)
• Effort to be a landlord
• Ongoing costs usually result in negative cash flow annually and gains only realised once you sell. An example of the negative cashflow per year can be seen here.
• Potential large maintenance costs to wipe out multiple years of gains
• Higher downpayments required for investments (30%)
• Higher mortgage rates for investments (~4.75%)
• Lack of diversification
• Rent caps in place could make it difficult to cover costs
• Illiquid as it takes a lot of time, money and effort to sell and free up equity

Tax rate:

• Tax on gains: 33%
• Tax on rental income: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

Too many variables to say on this one. Each house will be different depending on length of time held, amount of downpayment paid, amount of expenses incurred, amount of rent received etc.

Rent-a-room scheme

What it is:

Under the Irish government’s Rent-a-room scheme you can rent out a spare room in your house, tax free, if the income does not exceed €14,000 per annum or €1,166 per month. The room must be attached to your house and granny flats in the back garden do not count. Check out revenue.ie for more details.

Pros:

• You can earn 14,000€ tax free!

Cons:

• If you charge 1 cent more than 14,000€ including utilities, you will pay regular income tax on the FULL amount
• You need to live with someone else
• Only applicable to long term lets

Tax rate:

• 0% up to 14,000€
• Personal income tax rate + PRSI + USC on full amount if income exceeds 14,000€

Real rate of return:

100% of the income you receive is yours to keep tax free unless you receive more than 14,000€

Short-term rentals

What it is:

You can rent out your entire house or investment property on sites like Air B&B BUT there are a few things to be aware of:

• recent legislation has been brought in for rent pressure zones limiting short term rentals. Short term lets for investment properties in rent pressure zones are no longer allowed by law. There are even rules around renting your primary residence out while you are away on holidays (you need to register for change of use with the local council and you are limited to 2 week stays up to 90 days per year). You can still rent a room or rooms in your house without limitations so that may be an option if you wanted to rent while away on longer holidays.
• insurance may not cover you in the event of an accident or damage if you have not upped the cover with them in advance

Pros:

• Potential higher returns than longer term lets

Cons:

• More maintenance to clean between guests, meet for keys, handling deposits etc. There are companies that manage short term lets but they are in high demand and may not take on your property. They also take 15-25% of your profits so you need to decide if it’s worth that vs. you managing the property yourself.

Tax rate:

• Profits after expenses: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

Similar to the property rates of return this one has too many variables and will depend on your expenses vs the return you receive.

Pensions

There are a lot of things to consider when looking at a pension depending on your personal circumstances. You can read a comparison in this post but at a high level most companies offer a pension matching scheme and if not they must, by law, provide you with an option to contribute to a pension yourself.

Pros:

• Pension matching is free money but again you need to understand your real rate of return after fees to compare against investing outside of a pension – see some examples of when this isn’t as profitable as investing outside a pension here
• This is a tax deferral tool in that you lower your taxable income now and pay lower taxes when you withdraw in retirement once you are no longer earning an income

Cons:

• Potential high fees and lower returns than self directed or other investment vehicles
• Lack of control over what it’s invested in
• Illiquid as you can only access at pre-defined age (depends on your company)

Tax rate:

• Capital gains and dividends: 0%
• Tax on withdrawal on whole amount withdrawn: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
    32% if you earn between 16,501€ and 35,300€
    52% if you earn over 35,300€

Real rate of return: Depends on your pension but a recent study showed the average 10 year real rate of return of pensions in Ireland has only been 2.9% per year after fees and inflation (though the report only has data from 2007 (-7.3%), 2008 (-35.7%), 2015 (4.5%), 2016 (8.1%) and 2017 (6.3%). The 2.9% average excludes the 2008 figure as that was due to the crash which is hopefully an anomaly. So depending on your income at time of withdrawal, the real rate of return could be:

• 2.75% if you earn less than 16,500€/year
• 1.97% if you earn between 16,501€ and 35,300€
• 1.39% if you earn over 35,300€

Employer Share Options

What it is: A lot of the big American tech and pharmaceutical companies are now in Ireland. Some of these companies offer bonuses of shares in the company or options to purchase additional shares at a discount.

Pros:

• A way to buy highly valued stocks at a discount (or free if you are given as a bonus)
• Can sell shares with gains of 1,270€ each year tax free
• Capital losses can be claimed 3 years in arrears or carried forward indefinitely
• Partially liquid as some companies require a three year vesting period before you can sell, once vested you can sell anytime

Cons:

• If you buy too many you are not very diversified
• If you eventually have a value in shares of more than 60,000$US and you have not structured your account effectively through the use of a non-US company, partnership, or trust and/or invocation of treaty benefits, you will be subject to US estate taxes (currently 40% of fair market value at time of death)
• Depending on the type of employee stock (RSUs), you may need to file a tax return EVERY time the shares are PURCHASED as well as when they are sold – I will elaborate on this in a future post

Tax rate:

• Capital gains: 33%
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return: Depends on the company’s stock value

Bank Savings

Pros:

• Secure
• Liquid

Cons: Loses money to inflation every year

Tax rate: 0%

Real rate of return: -1.9% annually (average inflation in Ireland over the last 30 years)

An Post/State Savings

What it is: There are a number of savings options here

Pros:

• Secure
• Tax free (no DIRT or capital gains)
• No fees

Cons:

• Rate of return does not keep up with inflation
• Illiquid as some options have conditions that if you remove ANY money before the term is up you forfeit all savings

Tax rate: 0%

Real rate of return: Ranges from -0.4% to -1.9% with the -0.4% being for the highest yielding account (10 year at 1.5% AER) once you account for the 1.9% inflation

Stock Market/Index Funds

Irish and EU domiciled ETFs/Index funds

Pros:

• Low cost management fees compared to active funds
• Passive investing – buy and forget
• Lower tax on dividends/income compared to other domiciles IF you intend to withdraw while you are earning above the 40% tax bracket
• Liquid as you can sell anytime

Cons:

• Higher tax on gains compared to other domiciled ETFs
• Higher tax on dividends/income IF you intend to withdraw when earning no other income or earning income below the 40% tax bracket
• Can NOT carry forward capital losses to offset against future gains
• Not eligible for annual capital gains allowance of 1,270€/year (TBC)
• Have to pay taxes every 8 years whether you sell or not (deemed disposal) – you can pay this out of your fund but significantly reduces the effect of compounding and may cause you to sell assets at a loss (which you cannot carry forward).

Tax rate:

Exit tax on gains and dividends: 41%

Note 1: Fund managers are actively lobbying the government to reduce this in line with DIRT (which is being reduced from 41% to 33% over the next number of years) but have not been successful to date. The argument has been made that DIRT and exit tax have been aligned with capital gains tax rates for the last 20 years and they are making investors choose funds based on preferential tax treatment rather than on the underlying investment’s merits. They estimate that bringing this in line would only result in an annual loss of 15 million against the exchequer. This MAY go down in future as a result but is staying put for the moment.

Note 2: For the EU domiciled ETFs, according to the Revenue, “it is not possible to give other than a general guidance” on these, although it does say that, as most of these will be similar to non-UCITS Irish domiciled funds, they should also be subject to exit tax at 41%. However, this may not always be the case, and investors can make a case to Revenue as to what tax rate should apply. There may be a case to be made that gains on such a fund could be subject to CGT, which is levied at a lower rate. “It is always open to an investor and his/her tax advisers to take a different view,” the Revenue says.

Real rate of return:

Depends on the fund but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% minus sample fund fees of 0.19 = 7.91% minus the 41% tax on gains/dividends = 4.67%

Examples:

• Ireland UCITS: Anything with UCITS in the description such as:
  • VANGUARD FTSE ALL-WORLD HIGH DIVIDEND YIELD UCITS
  • VANGUARD FTSE ALL-WORLD UCITS
  • VANGUARD FTSE DEVELOPED EUROPE UCITS
  • VANGUARD FTSE EMERGING MARKETS UCITS
  • VANGUARD S&P 500 UCITS ETF
  • iShares Core S&P 500 UCITS ETF
• Ireland non-UCITS: iShares Physical Gold ETC
• EU UCITS: iShares Core DAX UCITS ETF (DE)

US domiciled ETFs/Index Funds

This one is almost not worth going into as they are no longer available to purchase by Irish every day investors but will include for completeness sake.

Pros:

• Lower tax on gains compared to Irish domiciled ETFs
• Income tax on dividends/income is much more beneficial to long term investors who only intend to withdraw when no longer earning other income or earning income below the 41% tax bracket
• Can carry forward capital losses to offset against future gains
• Low cost management fees

Cons:

• As mentioned above these are no longer available to purchase in Ireland as an individual investor due to EU legislation, these MAY be available through professional money managers but the fees would negate the benefits, you may also access if you open a US investment account with a minimum investment of 10,000$ but I have not confirmed this and am not sure about the tax complications
• Only an issue if you die but, for any investments domiciled in the USA with a value of $60,000 or more, an Irish investor will be liable for the punitive US estate tax rate. Local estate taxes may also apply potentially raising the liability above 40%. There are potential avenues to explore that may protect a non resident US investor when using US domiciled products, these include joint tenancy arrangements and / or the establishment of on shore foreign grantor trust. Both these options have complexity and uncertainty attached.
• US withholds 30% withholding tax (15% if you complete a W8-BEN) which you need to claim back on your Irish tax return

Tax rate:

• Tax on gains: Capital gains tax at 33%
• Tax on income: Income tax + PRSI + USC
  • NOTE: if you are not earning any other income and only plan to withdraw the 16,500€/year per person this rate effectively becomes 4.9%

Real rate of return:

Depends on the fund but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% minus sample fund fees of 0.19 = 7.91%

• Real rate of return on gains: 5.29%
• Real rate of return on dividends:
  • 3.79% while you’re earning in the highest tax bracket
  • 5.38% while you’re earning in the lower tax bracket
  • 7.52% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

Example: SPDR S&P 500 ETF Trust

Individual Stocks

Pros:

• Lower tax on gains compared to Irish/EU domiciled ETFs
• Income tax on dividends/income is much more beneficial to long term investors who only intend to withdraw when no longer earning other income or earning income below the 41% tax bracket
• Can carry forward capital losses to offset against future gains
• Can sell shares with gains of 1,270€ each year tax free
• Liquid in that you can sell anytime

Cons:

• Higher risk
• Less diversification
• More work to watch markets and pick winners
• More fees to buy and sell

Tax rate:

• Tax on gains: Capital gains tax at 33%
• Tax on income: Income tax + PRSI + USC
  • NOTE: if you are not earning any other income and only plan to withdraw the 16,500€/year per person this rate effectively becomes 4.9%

Real rate of return: Depends on the company but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% = 8.1%

• Real rate of return on gains: 5.35%
• Real rate of return on dividends:
  • 3.88% while you’re earning in the highest tax bracket
  • 5.50% while you’re earning in the lower tax bracket
  • 7.70% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

Individual Bonds

What it is: Bonds are basically investments you can buy where governments or corporations borrow money from you the investor and agree to pay them back with interest at a set schedule. These are highly unlikely to default but with lower risk comes lower reward. You can choose bonds with fixed income paid throughout the loan as well as the repayment at the end OR forego the income throughout and earn higher capital gains upon payout. If you choose fixed income throughout and are still earning at the higher tax bracket you will need to pay income tax on those payments. If you are working towards financial independence within the payout time of the loan it might be better to avoid the fixed income bonds to lower your tax bill and increase your returns at a later date.

Pros:

• Safer/more stable than stocks
• There is no capital gains tax payable on Irish government bonds for Irish bondholders

Cons:

• Lower rates of return
• Some have long term lock ins where your money is not available

Tax rate:

• Capital gains: 0% on Irish bonds, 33% on non-Irish bonds
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return: Depends on the bond but the bond market since inception from 1928-2017 when looking at 10 year treasury bonds has averaged 5.21%/year minus inflation of 1.9% = 3.31%

• Real rate of return on gains: 2.18%
• Real rate of return on dividends:
  • 1.58% while you’re earning in the highest tax bracket
  • 2.25% while you’re earning in the lower tax bracket
  • 3.15% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

UK Investment Trusts

What it is:

Investment trusts are closed-end funds, typically in the UK and Japan. They are publicly listed companies that invest in financial assets or the shares of other companies on behalf of their investors. You can read more about these here.

Pros:

• Can be more tax efficient than ETFs
• Capital losses can be offset 3 years in arrears or indefinitely in the future
• Good diversification
• Potentially higher and more consistent growth in dividend pay outs
• Qualify as shares for taxation purposes so:
  • 8% less tax on gains than ETFs
  • 36.1% less on dividends if earning less than 16,500€
  • 9% less on dividends if earning between 16,501 and 35,300€

Cons:

• Actively managed meaning higher management fees ranging anywhere from 0.37% to 2.7%
• Subject to the same fees for buying and selling as shares
• 11% more tax on dividends than ETFs if dividends are paid out while you are in the highest-earning tax bracket
• Most are based in GBX (Britsh pence), and therefore subject to currency exchange fees and risk which could outweigh any tax benefits
• You are still buying “stocks” in an individual company which comes with more risk. Personally, I’m trying not to hold more than 5% of my portfolio in any one company’s stocks, this will hold true for any investment trusts I buy in future.

Tax rate:

• Capital gains: 33%
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

I couldn’t find a summary for longer historical averages but in a review of the top 14 investment funds in the last 5 years their dividends have averaged 5.54% and their returns have averaged 4.36%, if we assume an average fee of 1.5% and inflation at 1.9% that brings the real rates of return down to:

0.63% for capital gains

and the below for dividends

• 2.04% if you earn less than 16,500€/year
• 1.45% if you earn between 16,501€ and 35,300€
• 1.03% if you earn over 35,300€

Examples:

• BMO Capital and Income Investment Trust PLC (BCI)
• BMO Global Smaller Companies PLC (BGSC)
• BMO Managed Portfolio Trust PLC – Income Share Class (BMPI)
• BMO Managed Portfolio Trust PLC – Growth Share Class (BMPG)
• BMO Private Equity Trust PLC (BPET)
• BMO UK High Income Trust PLC – Ordinary Share Class (BHI)
• BMO UK High Income Trust PLC – B Share Class (BHIB)
• BMO UK High Income Trust PLC – Units (BHIU)
• F&C Investment Trust (FCIT)

Peer to Peer lending/Crowdfunding

What it is: This is something you can do to lend your money to other people or companies through an online match making and collection platform. You choose the loan type and durations you want to buy and the platform loans out the money and pays you back the principal including interest as the loans are paid back. The platform divvies up your money across multiple loans so that you are not loaning to just one person/company which reduces the risk. Loans can default so you can lose portions of your investments.

Pros:

• Higher returns
• Regular fixed income

Cons:

• Not yet regulated though certain platforms are pushing for this
• Higher risk

Tax rate:

Hard to make out exactly but according to this document from Revenue it looks like the interest received on the loans is treated as regular income and subject to your marginal rate of income tax + USC + PRSI

Real rate of return: Loans can get you anywhere from 3-25% depending on the loan type and risk. Take off inflation and that range comes to 1.1% to 23.1%. I’m not sure if there are any management fees to remove as well. I know someone who is getting 1%/month paid into their account (so 12%/year)

If we take the average of 12.1% and remove taxes, your real rate of return will be:

• 11.5% if you earn less than 16,500€/year
• 8.23% if you earn between 16,501€ and 35,300€
• 5.80% if you earn over 35,300€

Note: There may be a way to invest in P2P via a company which would bring your tax rate down but I need to look into that a bit further

Other

There are a few other options I’ve yet to look into including:

• Dividend reinvestment plans (DRIPs) (automatic reinvesting of dividends through a fund)
• Forex trading (buying and selling currencies)
• Employment and Investment Incentive (EIIS) (government scheme with tax relief similar to pensions but accessible after 4-5 years)
• Irish whiskey (quoting 12-18% annual returns)
• Christmas trees (quoting 15% annual returns with locked in capital for 5 years)

Comparison

So if we look at all of the options along with their real rates of return – how much would 100€ be worth in 10 years , 20 years and 30 years time for each?

Assumption: I took the rate of return based on income of less than 16,500€ on withdrawal with the exception of the peer to peer as those are paid every month and so I picked the highest tax bracket for that rate of return

I have not taken dividends into account as I couldn’t quite figure out how to account for these simply.

If you wish to see how 10,000€ or 100,000€ would fare over the same time frame simply multiply the below figures by 100 or 1,000.

It’s not surprising to see that the highest risk investments have the highest returns and vice versa. The key with all investments is to have a well diversified portfolio so you can realise some of the higher gains while having some more secure vehicles to offset losses or volatility.

I hope this was of some use and as usual I’ve gone on WAY longer that I thought.

Let me know if I’ve missed anything.

Spreadsheet templates

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Check out this page for more details and a sneak peek of what you’ll get if you sign up.

How I Decided

*Fact sheets updated for 2021

Why ETFs

Firstly a little about ETFs (exchange traded funds). These are essentially funds that bundle a large number (sometimes thousands) of individual stocks, commodities and or bonds under one fund so that you can easily track the trend of the whole stock market with only a handful of ETFs. This makes it easy for passive/lazy investing over longer terms. ETFs also offer low expense ratios and fewer broker commissions than buying the stocks individually. Historically since the inception of the stock market returns have averaged 9-11% so by having a well diversified range of ETFs you can also achieve these levels of returns with little effort.

Why not one simple ETF

After reading many blog posts about various portfolio options I settled with a slight variation to the Escape Artists suggestion explained in full detail in this post. Some bloggers suggest a very simple portfolio where you just chuck whatever money you have whenever you have any extra into one Global ETF fund like the Vanguard All-World fund (VWRL) but the reason I decided against that approach is because that fund is heavily invested in US equities (54%) and I wanted something that was a bit more diversified. According to the Escape Artist, US equities may be overpriced at the moment which may doom long term investors to under-performance (ie: when you buy high you’d need to make massive gains to make up the same returns you would if you had bought low and made smaller gains).

Why 100% stocks and no bonds

Depending on your risk tolerance you may want to put a portion (say 30 or 40% for more conservative or 90% for less conservative) of your portfolio into bonds as these have less risk but lower returns, something like the BMO Aggregate Bond Index ETF (ZAG) but as I have time on my side to let my investments rebound from any downfalls, I decided not to keep any of my portfolio as cash or in bonds. I’m open to the higher risk of a 100% stock portfolio.

Who is this for?

Therefore this portfolio mix is probably for people very early in their investment journey who have many years of contributions ahead of them before they are able to retire.

Once you are about 5 years away from retirement you’d probably want to invest in something like 30% or 40% bonds and 60% or 70% stocks with higher yields/dividends rather than higher returns.

Portfolio Make-up

Below is the make-up of my current Canadian portfolio. All these ETFs are with the Vanguard company (See more about them below). 33% is in a Global fund, 19% in a Canada fund, 19% in Emerging Markets, 16% in the S&P 500 and 13% in Developed Europe. These funds all have varying management fees but this make-up comes to a weighted MER of 0.23% with an estimated weighted return of 8.7% based on each funds’ last 5 years returns.

And in chart form…

About Vanguard

I like Vanguard because their core purpose is “to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success”, their average expense ratio is 0.10% as per 2018 assets under management. As per their website: “Vanguard is owned by its funds, which in turn are owned by their shareholders. Vanguard’s ownership structure means we have no conflicting loyalties. It’s in everyone’s interests—our clients’ and thus ours—to uphold the highest ethical standards every day. When making decisions, we are guided by a simple statement: ‘Do the right thing.'”

ETFs in Detail

Each ETF comes with a fact sheet which you can download from your Questrade account. Below are the highlights of my portfolio make-up so you can get a sense of the range of companies I’m invested in.

FTSE Canada Index ETF (VCE) – 19% of portfolio

This one is only invested in 64 companies where the top 10 make up 40% of the fund. The dividends on this fund are paid quarterly.

Global Value Factor ETF (VVL) – 33% of portfolio

This is a much larger spread with investments in 1,135 companies where the top 10 listed only make up 5.1% of the fund. The dividends on this fund are paid annually.

S&P 500 Index ETF (VFV) – 16% of portfolio

This one is made up of 512 companies where the top 10 make up 31.4% of the fund. The dividends on this fund are paid quarterly.

FTSE Emerging Markets All Cap Index ETF (VEE) – 19% of portfolio

This one is the biggest spread of companies with 5,256 however the top 10 make up 20% of the fund so only fractions of percentages are invested in the remaining 5,246. The dividends on this fund are paid quarterly.

FTSE Developed Europe All Cap Index ETF (VE) – 13% of portfolio

This one is mid-sized with investments in 1,323 companies where the top 10 make up 17% of the fund. The dividends on this fund are paid quarterly.

Performance

After my initial transfer from my RRSP at the end of Jan 2019 (just shy of 3 years ago) I have since made a 40.93% gain which averages 14%/year. See growth chart below.

It’s early days but I am pleased with the results so far. This is an RRSP account so I still need to pay taxes on any withdrawals at my salary rate at time of withdrawal but it’s still performing better than it had been with my old provider.

Variations

Two other portfolio options are:

1. As mentioned above a simple 1 ETF portfolio with an all world fund like the Vanguard All-World Fund (VWRL) or
2. another popular make up for more conservative investors or investors nearing their retirement date would be some mix of:

• iShares Core MSCI All Country World ex Canada Index ETF (XAW)
• Vanguard FTSE Canada All Cap Index ETF (VCN)
• BMO Aggregate Bond Index ETF (ZAG)

I’ll do another post on how to purchase these in the correct proportions at a later date.

What do you think? Willing to try your hand at investing yourself? Leave a comment below.

When I was 28 an investment/life insurance company came into my office as part of a lunch and learn on financial wellness, they offered a free one-on-one session to look at your finances and tell you how much you would need to retire, they also offered investment options to help you get there. At the time I knew nothing about investing and the fund they described looked pretty good, after all making something from my money was surely better than making nothing. However, what wasn’t mentioned was a little thing called Management Expense Ratio (MER).

MERs are management fees which are charged as a percentage against your total portfolio regardless if you make or lose money in the fund. Now I understand the people putting together and managing the funds need to get paid but there are passive tracker funds which achieve the same if not better results and only charge a fraction of the fees. These fees also compound along with your portfolio growth so they increase every year just as your portfolio (hopefully) does. These fees are not even listed on your annual statement but, bless their hearts, are available upon request.

My total investments with this fund came to 23,336 in two lump sums. Over the nearly 6 years I was invested in the fund my account averaged 4.4% growth from 2013-2018 and ended with a book value of 30,000 or nearly 6,750 in growth. Not bad but not great considering the average stock market growth is 9-11%/year. The fund also took 2.49% in MERs which I figure amounted to about 3,800 (more than half of my overall growth)!

Towards the end of 2018 I had read up a lot more on investing and was ready to make the jump to self-directed investing (where I picked my portfolio myself in order to dramatically reduce fees). Now at this time the markets were down and so my 30,000 could only get me 28,000 on the open market and I would also be charged an early withdrawal fee of 700 or so as a deferred sales charge (DSC) since the fund I signed up to was locked in for 7 years and subject to early withdrawal fees. So, I would take a nearly 2,600 hit, completely wiping out my last 2 years of gains BUT my rationale was to sell low but also buy my new investment funds low and make a bigger portion of the returns when the market recovered. This loss meant my fund actually only performed at 2.59%/year, just slightly over the 2% average inflation.

Now I could have waited another year until my 7 year term was up and save the 700 but I think that my new funds will make back my loss and then some within the year.

As of today, only a little over 2 months after I transferred in the funds, my new self directed fund is making 7.08% and I’m up 1,945$ (albeit unrealized for now) which is almost what I made in 2 years with the other fund! I will keep you posted on how they perform throughout the year and see if my fund out performs the actively managed one with the high MER.

As you can see by the graph above the overall trend is up and mirrors the trend of the overall Toronto stock exchange for the same time frame.

As I’m invested in a number of exchange traded funds (ETF) – tracker funds which track a large portion of the market – each fund has its own MER. I have calculated my portfolio’s mix to a weighted MER of 0.23%. I also estimate that my annual return will be about 8.7% based on a weighted average of the previous 5 year’s returns for each of the funds I’m invested in. I will go into more details on this portfolio and how to transfer an RRSP from a managed account to a self directed one without incurring withdrawal taxes in another post.

According to this guy’s free MER comparison calculator, even if I didn’t invest anything else into the account until I was 50 (a 22 year investment), I would have 22,000 LESS than if I invested in something with a 0.23% MER with the same 4.4% return. That’s the same value of what I put in! OR another way of looking at it, a portfolio worth 34,000 (2.49% MER) instead of 57,000 (0.23% MER). If I waited until 60 to withdraw I’d have 44,000 less just to a difference of MER never mind the better annual returns I’m hoping on achieving!

Stay tuned to see how this portfolio pans out!