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about to take the plunge for the 1st time

Investment discussion for beginners. Why you should invest your money, get help getting started
umeca74
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about to take the plunge for the 1st time

#117782

Postby umeca74 » February 13th, 2018, 7:52 am

after lots of reading I am about to start my passive ETF investing experiment. I have shortlisted saxo and interactivebrokers as investment platforms

my question is about buying ETFs or any other stock for that matter. I read about limit orders. However when I start I will have quite a sum to invest and I only plan to buy 1-2 ETFs, so how do I go about doing it? If I put an order for 20K worth, is that considered too much? (will it drive the buy price up?) Should I buy in small chunks? What's the advice?

do you guys wait for a good time in the day (low price) to buy? I guess this downturn is a good time to buy compared to a month ago!

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Re: about to take the plunge for the 1st time

#117793

Postby tjh290633 » February 13th, 2018, 8:33 am

If you are going in for passive investing, then things like limit orders ought not to feature in your plans. Being passive means that you leave it to the market and the managers and do not intervene.

Were you intending to hold a single ETF or a number, with different emphases? If you are going for a market tracker, there is little point in spreading it around several managers. Probably better to go for geographical and sector funds, alongside a tracker.

Your platform will charge you fees, both for holding your investment and for dealing. Look carefully at those, because a low flat fee will probably be better than a percentage fee.

I prefer individual shares to funds, in which case having 20 or more diverse shares is vital. ETFs are diversified, so the question does not arise. You can't time the market but you can invest in stages. It's a matter of luck which is best. With your £20k, four or five tranches may make sense. Drip feeding monthly can also make sense.

Best of luck.

TJH

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Re: about to take the plunge for the 1st time

#117801

Postby JohnB » February 13th, 2018, 8:54 am

In the long term you want to diversify across markets, fund providers and brokers, to reduce risk, but to start off I'd stick to one provider, one broker, and a big fund provider like Vanguard, iShares, Blackrock etc. Their passive funds are so big that £20k investments will be trivial to place. You might want to put a lump sum in 3/4 trades to make you happier about marking timing, but generally its not worth worrying about it, just feed in the money when you have it (make sure you find a broker who reduces trading fees for regular investments, otherwise those tenners add up). If you buy when the market for your ETF is closed, you will be encouraged to place limit orders, but its much easier just to trade when the market is open, and you get the spot price.

(Regular investing outside a SIPP/ISA is horrid for reporting capital gains, use lump sums there)

With initial small sums, %age fees are better than flat, the reverse for large sums of course. ETFs can have lower broker fees than funds.

I'd not buy individual shares, because you'd need 20+ for diversity, would worry about picking them, and spend all you time dealing with a torrent of annual reports, agms, dividend slips and share splits.

umeca74
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Re: about to take the plunge for the 1st time

#117827

Postby umeca74 » February 13th, 2018, 10:39 am

perhaps I didn't make myself clear, so here goes a clarification

say I have fixed myself to buy Vanguard Total World Stock ETF (VT) and I have 20K to invest. It has a small bid-offer (buy/sell) spread. What I read is that the "large" end of the range (the price I buy) is only indicative for small buys. If I buy "big" (not sure if 20K is big), then I may end up paying more for the shares. At least that's what the article I linked above claims.

so how do I buy my VT, in one go or bit by bit?

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Re: about to take the plunge for the 1st time

#117831

Postby swill453 » February 13th, 2018, 10:58 am

£20K isn't big, a transaction like that won't affect the price.

There may of course be other reasons to spread the purchases though, for example to mitigate against further movement in the market.

Scott.

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Re: about to take the plunge for the 1st time

#117845

Postby GeoffF100 » February 13th, 2018, 11:45 am

£20K is not much for an ETF trade. I did two ETF trades of that size a couple of weeks ago. However, ETFs, particularly bond funds, are prone to price spikes and wide spreads on occasions. OEICs are more idiot proof. Given that you are a beginner, I suggest that you open an IWeb account and buy Vanguard Life Strategy. All you have to do then is decide what percentage you want in bonds. Your age as a percentage in bonds is a common rule of thumb. The world's stock markets are near an all time high. You make money by buying low and selling high. Most private investors do the opposite. You would be wise to err on the side of caution at the present time, and not skimp on the bonds.

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Re: about to take the plunge for the 1st time

#117846

Postby AleisterCrowley » February 13th, 2018, 11:48 am

The world's stock markets are near an all time high

Bonds are hardly cheap at the moment- yields are tiny

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Re: about to take the plunge for the 1st time

#117859

Postby GeoffF100 » February 13th, 2018, 1:18 pm

Bonds are hardly cheap at the moment- yields are tiny

Nothing is cheap at the moment, but he will get less burned in bonds if the market falls.

Bond yields are currently about 2%. World equities also yield about 2%. The equity risk premium is about 4% at most, so equities are probably going to give a long term total return of 6% at most. 50/50 equities and bonds might give a total return of 4%, but that might not beat inflation. It will be worse if he is buying at the top of the market. Not a good time to be investing.

umeca74
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Re: about to take the plunge for the 1st time

#117894

Postby umeca74 » February 13th, 2018, 3:51 pm

top of the market was 2 weeks ago, now it's falling. I will wait a while to see how low can it go before I place any orders

swill453
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Re: about to take the plunge for the 1st time

#117900

Postby swill453 » February 13th, 2018, 3:58 pm

umeca74 wrote:top of the market was 2 weeks ago, now it's falling. I will wait a while to see how low can it go before I place any orders

It's far too early to conclude that. This could be a slight hiccup before carrying on like a raging bull. Or the start of a huge drop. Or something in between. Or something entirely different.

Scott.

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Re: about to take the plunge for the 1st time

#117913

Postby hiriskpaul » February 13th, 2018, 4:36 pm

As others have said, a £20k trade will be fine. If you try placing a £100k online trade you may ring alarm bells at your broker, particularly so if it is a new account. This happened to me at IG a few years ago, so best to warn your broker if you intend to place a large (100k+) order. Otherwise large and liquid ETFs, such as VT will easily trade in £100k+ sizes without much of a change in price.

One possible warning about VT. The dividends paid on this will be subject to US withholding tax of 30%. For UK residents this can be reduced to 15% by filling in an appropriate form, but I understand you are resident in Cyprus? In this case you might like to assess the tax situation, including withholding taxes before you invest. It may turn out that you would be better off buying an Irish domiciled ETF, such as VWRL or VEVE as the dividends on these should be paid to you free of withholding taxes. However, the Irish ETFs themselves would have paid 15% US withholding tax on the contained US shares before paying the dividend to you, so the most tax efficient way to invest is not always clear. Watch out for US estate taxes as well. Again, these can be avoided by investing in Irish domiciled ETFs.

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Re: about to take the plunge for the 1st time

#117914

Postby GeoffF100 » February 13th, 2018, 4:44 pm

It occurs to me that we know nothing about the OP's circumstances. It may be that he needs the money, and equity investment makes no sense for him at all. It may be that he has a mortgage, in which case buying bonds with a yield of 2% makes no sense, particularly as interest rates are likely to go up. If he has a mortgage, he would effectively be borrowing to buy equities at near an all time high, which is highly questionable. On the other hand, he may have a very secure income, no debts, and £20K to invest every year.

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Re: about to take the plunge for the 1st time

#117952

Postby GeoffF100 » February 13th, 2018, 7:12 pm

However, the Irish ETFs themselves would have paid 15% US withholding tax on the contained US shares before paying the dividend to you, so the most tax efficient way to invest is not always clear.

Are you sure that is right? My understanding was that the EFTs (and UK and Irish OEICs) paid the full 30% withholding tax. I believe that these funds can be bought by people who fall out of the scope of the tax treaty, and there is no W-8BEN to fill in. I believe that their are funds that are transparent to the tax status of the holder, but they are not the common or garden ones that are sold to us.

umeca74
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Re: about to take the plunge for the 1st time

#118039

Postby umeca74 » February 14th, 2018, 8:52 am

hiriskpaul wrote:One possible warning about VT. The dividends paid on this will be subject to US withholding tax of 30%. For UK residents this can be reduced to 15% by filling in an appropriate form, but I understand you are resident in Cyprus? In this case you might like to assess the tax situation, including withholding taxes before you invest. It may turn out that you would be better off buying an Irish domiciled ETF, such as VWRL or VEVE


thanks for the heads up. So many pitfalls! Aren't ETFs supposed to be "tax efficient"?

the VT product information page lists a 5 year average annual return of ~11%. How do I know if this is inclusive or exclusive of such dividends? Because if it is inclusive and I only get 70% of (a part of) this 11% then we are talking about a different figure! It's so bad that the vanguard website only has telephone numbers for customer support, how am I going to call from Cyprus to US? Do you know a telephone for vanguard (irish branch)?

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Re: about to take the plunge for the 1st time

#118048

Postby swill453 » February 14th, 2018, 9:13 am

I guess the problem is that you're in Cyprus, asking on a UK board, about a US ETF. Taxation is bound to add complexity!

And I'm not sure adding Ireland into the equation is going to help.

Sorry for being no help :-(

Scott.

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Re: about to take the plunge for the 1st time

#118091

Postby hiriskpaul » February 14th, 2018, 10:58 am

umeca74 wrote:
hiriskpaul wrote:One possible warning about VT. The dividends paid on this will be subject to US withholding tax of 30%. For UK residents this can be reduced to 15% by filling in an appropriate form, but I understand you are resident in Cyprus? In this case you might like to assess the tax situation, including withholding taxes before you invest. It may turn out that you would be better off buying an Irish domiciled ETF, such as VWRL or VEVE


thanks for the heads up. So many pitfalls! Aren't ETFs supposed to be "tax efficient"?

the VT product information page lists a 5 year average annual return of ~11%. How do I know if this is inclusive or exclusive of such dividends? Because if it is inclusive and I only get 70% of (a part of) this 11% then we are talking about a different figure! It's so bad that the vanguard website only has telephone numbers for customer support, how am I going to call from Cyprus to US? Do you know a telephone for vanguard (irish branch)?

Taxes are a can of worms and ETFs are no more tax efficient than most other collective investment schemes. Some offshore collective investments will roll up income so investors are not liable to income tax on dividends until brought onshore, but they typically do not escape withholding taxes.

Historical performance information always includes reinvested dividends, even for ETFs that pay out dividends. If you want to know what the historical dividends were look at the Distributions tab. In the case of US ETFs, these dividends are before any income or withholding taxes are taken off, but as some of the shares held in VT are non-US shares, some of the dividends received by VT will already have been subject to withholding taxes. The level of withholding tax applied will vary from country to country and according to the various tax treaties. Dividends from UK companies will have been paid to VT without any withholding tax taken off. To see the capital performance, just look at the price history.

To see Vanguard's Irish domiciled ETFs, go to vanguard.co.uk. Select the Financial Advisers tab for more detailed information of their products. VWRL is a similar ETF to VT. Dividends collected by VWRL will have had withholding taxes deducted according to various tax treaties between Ireland and the domicile of the companies. For US shares, this will be 15%. Dividends paid out by VWRL will be done without withholding taxes, because Ireland does not levy withholding taxes on ETFs - one of the reasons ETFs are domiciled there. But of course, you may pay tax on those dividends.

If you want a World ETF that is accumulating, look at SWDA on the UK iShares site. As has been mentioned, UK investors are still liable for income tax on the rolled up dividends, details of which are in the Reportable Income documents. I have no idea what the situation is in Cyprus with respect to reportable income.

Just one other point on withholding taxes. If you do invest in US listed ETFs and suffer withholding tax, you might be able to offset the tax against other taxes. This is allowed to a limited extent in the UK. For example, if $1000 in dividends is paid by a US listed ETF, UK residents will receive $850. $150 being the withholding tax according to US/UK tax treaty. The $1000 is also subject to UK income tax, which is 7.5% for basic rate taxpayers, but basic rate taxpayers can offset the 15% withholding tax ($150), gone to the IRS, against the tax liability $75. In effect this discharges the UK income tax liability. However, no refund is available and the withholding tax cannot be used to offset any other tax. For the pedantic out there, I am assuming that the basic rate taxpayer has already used up the nil-rate dividend tax allowance.

umeca74
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Re: about to take the plunge for the 1st time

#118101

Postby umeca74 » February 14th, 2018, 11:29 am

thanks for the detailed information
I know that I'm asking too much but on an "average" world ETF, what percentage of the growth reported is dividend accumulated? 10%? 50%?

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Re: about to take the plunge for the 1st time

#118112

Postby hiriskpaul » February 14th, 2018, 12:08 pm

In the past 5 years the capital value of VWRL has increased by 43% in dollar terms (59% in GBP) and has paid out 12% in dividends. Total return (dividends reinvested) in dollar terms was about 69%, 95% in GBP. However, that was an exceptional 5 year period. Long term I think a more reasonable assumption would be around 5% per year in capital, 2% in dividends. Obviously the capital increase can vary a lot and go negative.

umeca74
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Re: about to take the plunge for the 1st time

#118135

Postby umeca74 » February 14th, 2018, 12:39 pm

I did some research and this article presents figures that the part of the growth due to dividends is 30-40%, i.e. considerable. If we can believe Wikipedia though, everywhere except hong kong they tax dividends

of course one expects to pay tax on income, but taxing a flat rate at source without giving you a chance to use your allowances is very off putting!

just to put this into perspective, if I buy an ETF that is UK based and traded in London stock exchange, and given that I am "overseas", what's the dividend tax? will they withhold it automatically?

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Re: about to take the plunge for the 1st time

#118178

Postby hiriskpaul » February 14th, 2018, 3:17 pm

umeca74 wrote:I did some research and this article presents figures that the part of the growth due to dividends is 30-40%, i.e. considerable. If we can believe Wikipedia though, everywhere except hong kong they tax dividends

of course one expects to pay tax on income, but taxing a flat rate at source without giving you a chance to use your allowances is very off putting!

just to put this into perspective, if I buy an ETF that is UK based and traded in London stock exchange, and given that I am "overseas", what's the dividend tax? will they withhold it automatically?

As I mentioned before, there should no deduction of a dividend tax on an Irish domiciled ETF held at a UK broker. You may well be liable for tax on dividends in Cyprus, but that will be a matter for you to sort out. The ETF itself will have dividend withholding tax taken off before it receives dividends from the underlying companies and this depends on the domicile of the underlying companies. It will be 15% for US companies.

30-40% growth due to dividends sounds about right, but this is due to reinvested dividends, not necessarily the dividends themselves. Reinvested dividends pay more dividends, but also are subject to capital gains, so taxes on the dividends may not drag total returns by as much as it would first appear. Comparing 2 Vanguard S&P 500 ETFs, one listed in the US, one in London shows total returns in dollar terms of 105% for London listed, 109% for US listed. The return on the London listed ETF is after 15% dividend withholding tax has been paid and has a slightly higher fund management charge. The benchmark S&P 500 index with a 30% dividend tax returned 103%.

It is often dangerous to let the tax tail wag the dog, but you could reduce the dividends by investing in companies with lower yields. Growth ETFs for example. Or buy Berkshire Hathaway shares, a kind of diversified conglomerate, which pay no dividends!


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