- Passive investing removes the gambling from investing
- Opening an investment account
- Understanding the triple constraints
- Breakdown of taxes that are paid on investment
Passive investment is about investing without having to pick a winner. With passive investing, you don’t have to try to time the market. For example, Investing in index funds gives you a diverse portfolio that will invest in a large segment of the market and you won’t have to focus on individual markets.
I prefer to invest in ETF mainly for the low-fees, investing in an index fund ETF can be as low as .025%. The fees that are charged by some mutual funds can be as high as 2%; this may not seem like much but in the long term it can mean the difference of thousands of Euros. There are some disadvantages though when it comes to taxes; apparently, one cannot use the loss of one ETF to offset the profit of another.
Opening up an investment account
I use Degiro.ie for investing, they have very low fees and they have access to the ETFS, Stocks, and Mutual Funds that I need. Simply register with them online and then send them the requested paperwork. Their fees are as low as €2.00 + a small percentage when purchasing. A connectivity charge occurs once per year; the maximum is €2.50 per exchange; an exchange would be the London Stock Exchange, NYSE, etc…
Once your account is opened, you can then transfer funds into your Degiro account from your bank account. Decide which ETFs you want to invest in, Justetf.com is a good resource for finding ETFs, the screener allows you to filter the ETFs that you are interested in investing.
Once you are ready to purchase an ETF, search for it in Degiro. You may find that there are a few versions of the same ETF as it can be bought from different exchanges or currencies. Check for the exchange that has the highest volume traded for the ETF. Higher volume traded ETFs will have a smaller range between the bid and ask price, and it will also help to liquidate it faster when you do decide to sell it. Of course, investing should be a long-term strategy, you should be prepared to leave the funds there for at least 10 years. Once you have purchased your ETF, keep adding to it on a regular basis. Don’t panic sell when you see the markets decrease and don’t try to time the markets. Purchasing the ETF on a regular basis will give you euro-cost-averaging, this is a tried and tested process that will get you the best price for the ETF over the long term..
When it comes to investing there are triple constraints: contribution, time, and growth. Increasing any of those elements will increase your overall goal, decreasing any of those elements will decrease your overall goal. You can increase any one of those elements and decrease another as long as you want your end goal to remain the same. For example, you can decrease the amount of time it takes to get to your goal by either increasing the contributions or increasing the growth rate.
|Time (Years)||Growth (%)||Total Balance||Goal||Goal Achieved|
|€ 100||10||6%||€ 16,570||€ 15,000||Yes|
Contributions are the monies that you invest; it is recommended that you maintain a consistent investment strategy, see my other blog about consistent savings. Set aside an x amount each month for investing, you can either invest that amount each month or hold onto it until it reaches a certain amount and then invest it.
Time is the amount of time that you are going to keep your money invested. Investing should always be a long-term game, so that the markets have time to grow. Markets are volatile, they increase and decrease daily, some days they could be up 20% and other days they could be down 20%. Overall though, if your investments are diversified then over the long term there is a high probability that they will increase in value. We can see this in the S&P 500, take any ten year period of time and you will see growth of about 7% per year.
Growth is the rate of return that you get on your investment per year.
Taxes. Capital Gains Tax (CGT) is currently at 33% in Ireland, any asset that you sell which makes money will incur tax. There are some exception but not many. You can earn up to €1,270 per year (€2,540 per couple) before paying any taxes. It is not much but it is worth taking advantage of, it’s worth considering this when you are selling any asset at a profit.
However, dividends and EU domiciled ETFs are taxed as income; 40% on the high tax band. It is worth looking for accumulating ETFs, as the dividends are automatically pumped back into the fund. Non-EU domiciled ETFs are taxed at the CGT rate; talk to a tax adviser about this prior to making any decisions.
The Irish revenue has this wonderful, tongue fully placed in cheek, system known as deemed disposal. This essentially means that if you hold an investment for eight years, you need to pay tax on it as if you had just sold it. To calculate how much is owed, take the price of the investment now minus the price when you bought it and multiply that by the quantity of shares that you purchased eight years ago.
Do your own due diligence, get financial advice before investing in anything. I am not a financial adviser nor do I give advice in any fashion. This information is provided based on my own research and experience.