Firstly, if you’re reading this as a recent grad with money to spare, congrats on graduating and securing your first job! I remember the first time I started making more money than I needed to live and just started wading my way into the world of investments. It can be overwhelming and scary.

I remember first starting to read about stocks and bonds and had the impression that to invest in the stock market required all kinds of time, skill and risk which I felt was beyond me at that time. If only I’d known then what I know now. If you’re here reading this, I hope you can get over the fear that I had and just make a start. The sooner you start investing, the more comfortable you become and the more you learn.

Of course all investing carries risk of loss so don’t invest anything you can’t live without, or can’t afford to leave invested to allow time for the markets to recover.

Now into my tips:

Build an emergency fund

If you don’t have it already, try to first build up enough cash at hand to cover 3-6 months of living expenses. This is a nice peace of mind cushion to have if you lose your job or need to make life changes and have a bit of breathing room.

Don’t JUST invest in a pension if at all

I know this will be a bit controversial but, once you have an emergency fund and are starting to build up more than that, as you are young, my personal preference would be to avoid investing primarily in a pension (if at all) as you will likely want to access larger sums of your investments for early life goals like a wedding, a mortgage or time off for children, if any of that is in your cards.

Currently, in Ireland, the money you put into a pension is only accessible at retirement age. This age can vary depending on the pension but at the moment it’s looking like age 55. While locking money away can be a good thing to protect it from yourself, not having access to it if you need it for other life goals has to be a factor in your decision.

Also putting it in a pension while on a lower tax band only defers your taxes rather than giving you better tax relief once you are in the higher tax bracket as you progress through your career. The way a pension works is that you get a tax break on contributions now but you will pay your marginal tax rate when you withdraw. So this is a tax deferral rather than tax savings. The biggest benefit, if you are in a lower tax band, is the tax-free growth until withdrawal but high fees and low performance can completely negate this benefit if you do not keep an eye on these in your pension.

If your employer offers pension matching, it may be worth your while to take advantage of that but you’ll need to dig into what the pension is invested in and what the fees are. Fees can be hidden under all kinds of names like annual management charge, fund management charge, allocation rate, commission and so on.

My analysis has found that a pension needs to be making a real rate of return of 5.95% in order to outweigh investing on your own outside of a pension. I also have a post here to help you determine if the employer matching is worth it based on the returns after fees and inflation. The real rate of return is the historical performance of your fund minus the fees minus inflation. The historical 30-year inflation rate for Ireland has been 1.9%.

Another thing to note is that you can only invest 15% of your gross salary until age 30 but employer matching does not contribute to this cap. So if you are earning 30k, you can invest 4.5k. If your employer contributes matching on top of that, it does not take you over the contribution limit for tax relief.

If you will be investing more than 15% of your gross salary, you will need another after tax investment solution like an online brokerage, if you’re comfortable investing on your own.

Unfortunately, Ireland does not have the tax-free investment vehicles like Canada’s tax-free-savings account (TFSA) or the UK’s ISA or US ROTH IRA.

Open a brokerage account

That really leaves a brokerage account like Degiro or Trading212, in there you can invest in individual stocks, investment trusts, bonds, or exchange-traded funds (ETFs) as an example. You can read more about each of these investment options in this post.

Determine your asset allocation

In terms of asset allocation, a typical rule of thumb for risk allocation is to carry bonds in the percentage of your age, so for example a 22-year-old would carry 22% bonds and 78% stocks/equity ETFs. The logic behind this is because you have a lot of time to leave your money invested before you need to withdraw.

There are also quizzes you can take to help you decide your own risk tolerance as well such as this one.

Buy 1 stock/ETF/bond

Starting to invest can be really scary. It took me 2 years before I bought just 1 ETF. I suffered from analysis paralysis. I wanted to know everything there was to know before I started. This does not have to be the case. Make a start and buy just 1 stock/ETF or bond. This can get you started for very little money. I first bought 1 ETF for 50€ and watched it for 3 months before I bought anything else. Taking this baby step can be a great way to get started and get you comfortable seeing the value go up and down.

Once you start investing, you will get more and more comfortable with market volatility and the process of investing. If you hadn’t come across this article yet, there are some good details included on how to get started investing.

Also check out this article in particular the point around lifestyle inflation. As you are starting out your career, be aware of the impact of increasing your spending as your salary increases.

Example of growth

Now to see how investing can grow your money over time.

Assumptions:

• Gross salary: 30k
• Net take home: 25.4k
• Annual Expenses: 12k
• After-tax investments: 13.4k
• Invested after purchase fees of 1 purchase/month: 13.02k
• Invest in a simple ETF portfolio with performance of 7.95% (average historical performance of 10% minus 0.15% fees minus 1.9% inflation)
• Dividends of 1% taxed at 21% tax rate (non-accumulating)

Growth after 15 years by the time you are 37.

Your portfolio will have grown to 426k allowing you to withdraw 17k/year to live on indefinitely without touching the principle if you use a safe withdrawal rate of 4%.

This does not take into account any pay rises but also does not take any withdrawals into account should you need it for a house, wedding etc.

If you had invested this in a pension, while the portfolio value might be higher, you would not have access to it for another 18 years.

Detailed calculations below:

Worksheets

If you’d like to play around with more scenarios and assumption you can gain access to my worksheets and calculators in my paid member’s area. These worksheet templates can help you on your financial journey.

It includes an expense tracker which is the very basis of most financial planning, it also includes a portfolio builder and a financial independence calculator where you can input a number of assumptions and see how long it will take for your investments to grow to a level where the passive income will be enough to cover your annual expenses.

I will be working on a youtube series on how to use these tools so stay tuned for that if that would be something of interest. The first one of the series can be found here.

All the best on your journey. If you have any other specific questions that would be of use to postgrads, please do comment below and I will look to update the article.

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