Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8,184

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ronaldo

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With the US Dollar currently sitting at just over €0.68, I thought I'd revisit the area of investing with Interactive Brokers as opposed to Quinn Life.

At the bottom of this post is my analysis of several different scenarios and a comparison between the costs involved. Bear in mind that, with Quinn Life, you will be purchasing index trackers whilst, with Interactive Brokers, you will be purchasing individual shares.

In order to ensure that your investment is as passive as possible, you could develop a strategy where you list the shares in whatever index you wanted to invest in, e.g. Eurostoxx 50, in order based on whatever criteria you choose, e.g. Market Cap or Dividend Yield. You could then select a specified number of shares from top to bottom. In order to achieve diversification, you could set a rule that you select no more than 2 shares from any one sector.

An example of using the above strategy could involve listing the 100 shares of the FTSE 100 in order of market capitalisation and noting the sector that each share belongs to. Then you'd select the top, e.g. 15, shares ensuring that you pick no more than 2 from each sector. Using this strategy, your portfolio would consist of a maximum of 13.3% in any particular sector. You'd then proceed to buy each share from the top of your list to the bottom. If you had a lump sum to invest, you could purchase shares in all 15 in the one go and then add to your holdings with your monthly savings. The more likely (and cost effective) scenario is that you'd purchase shares in one company per month and, after 15 months, you'd have a holding in each of the 15 companies selected. You could then proceed to buy another batch of shares in your choice of the 15 companies selected. To automate this selection, you could decide to buy another batch of shares in the company whose shares have dropped by the highest percentage. This would include an element of the Buy-Low, Sell-High strategy in your portfolio.

Compared to the Quinn Life index tracker where everything is handled automatically by direct debit, until you decide to sell, the only additional work involved with the above strategy would be to lodge the money in your Interactive Brokers account and buy the next share on your list once a month. This can all be done online.

Advantages: The above strategy achieves better diversification than purchasing an index tracker as most index trackers are heavily weighted towards a particular sector, e.g. banking. Also, you would avoid the new 8-year rule from eating into your gains - this is the rule where, with Index Trackers, you are required to pay taxes on all gains 8 years after purchasing the units, regardless of whether you sell or not. Over the long term, this can have a dramatic effect on returns. There are also cost advantages which are outlined in the two scenarios below:

Scenario 1 - Lump Sum: €0 Monthly Amount: €500

In this scenario, you will be purchasing €500 worth of shares in one of your chosen companies per month. As Interactive brokers charge €4 per trade in European shares but have a minimum monthly commission of $10 (€6.82), your monthly charges will be €6.82 - €81.84 annually. Quinn Lifes 1% annual management charge is worked out below.

Charges:

----------Interactive Brokers ----- Quinn Life
Year 1 ------- €81.84 -------------- €32.40
Year 2 ------- €81.84 -------------- €91.80
Year 3 ------- €81.84 -------------- €150.62
Year 4 ------- €81.84 -------------- €208.84
Year 5 ------- €81.84 -------------- €266.49
Year 6 ------- €81.84 -------------- €323.56
Year 7 ------- €81.84 -------------- €380.07
Year 8 ------- €81.84 -------------- €436.01
Total -------- €654.72 ------------- €1,889.79

As you can see, the first years charges with Quinn Life are cheaper. However, after just three years, you are €29.30 better off with Interactive Brokers. The savings from then on start to increase dramatically. After 8 years, you would have saved €1,235.07 with Interactive brokers. The above figures assume that your shares grow at 0% and you get no dividends. Obviously, when your shares grow in value and you reinvest dividends, the savings will be greater. Also, at this point, with Quinn Life, you would have to pay tax on the gains from your first years investment with Quinn Life. When using Interactive Brokers, you can leave your money invested. This makes a huge impact on your profits when you eventually do sell.


Scenario 2 - Lump Sum: €10,000 Monthly Amount: €1000

In this scenario, you will be purchasing €1000 worth of shares in one of your chosen companies per month. However, you will also be investing an initial lump sum of €10,000. The figures below assume that you use the initial €10,000 to purchase €1,000 worth of shares in each of 10 different companies.

Charges:

----------Interactive Brokers ----- Quinn Life
Year 1 ------- €115.02 ------------- €164.80
Year 2 ------- €81.84 -------------- €283.60
Year 3 ------- €81.84 -------------- €401.24
Year 4 ------- €81.84 -------------- €517.68
Year 5 ------- €81.84 -------------- €632.98
Year 6 ------- €81.84 -------------- €747.12
Year 7 ------- €81.84 -------------- €860.14
Year 8 ------- €81.84 -------------- €972.02
Total -------- €687.90 ------------- €4,579.58

In the above scenario, the charges are always cheaper than Quinn Life. In the 8 year term, you would have saved €3,891.68 in charges, achieved better diversification and would not be forced to start paying taxes on your gains - All for about 15 minutes effort per month = 24 hours effort over the 8 years = €162.15 savings per hours effort.

The above assumes that you're investing over an 8 year period. Below is the savings you'd make in each of the 5 subsequent years (these are savings in charges and ignore the losses made as a result of taxes being automatically detucted from your Quinn Life policy):

Year 9 €983.45
Year 10 €1092.49
Year 11 €1200.26
Year 12 €1306.95
Year 13 €1412.57
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

Ronaldo,

your note appears to be a cost comparison of buying an index tracker versus a stock picking scheme based on an apprehension of an index tracker being overweight in particular sectors.

here's a few points for consideration:
- you could choose a cheaper index tracker option than Quinn e.g an ETF which would have costs of perhaps 0.5% per annum rather than Quinn with a charge of 1% per annum.
- you discount the taxation of distributed dividends from the IB option which could be a significant factor in expense over time
- if you're concerned with being overweight in certain sectors, you could (in the sense of possibility not of recommendation!) buy sector ETFs or invest in managed funds that invest across sectors (e.g. Eagle Star 5x5 funds which invest in 5 stocks across 5 sectors across various geographic markets).
- it's not clear why you believe that your stock picking will beat/match the market: many experts believe that this is unlikely over the long term
- balancing/rebalancing your portfolio could be difficult and could require disposals esp over time as your investment capital increases in proportion to monthly investment.


regards,
M.

p.s. Shanegl, I disagree that the 8 year rule doesn't apply to ETF's. I believe that it at least can (depending perhaps on the underlying ETF structure/legal framework). See my response to your note in the other topic.
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

maturin said:
Ronaldo,

your note appears to be a cost comparison of buying an index tracker versus a stock picking scheme based on an apprehension of an index tracker being overweight in particular sectors.

here's a few points for consideration:
- you could choose a cheaper index tracker option than Quinn e.g an ETF which would have costs of perhaps 0.5% per annum rather than Quinn with a charge of 1% per annum. This is true. However, the stock picking method would still work out alot cheaper in the above two scenarios - especially over the long-term.

- you discount the taxation of distributed dividends from the IB option which could be a significant factor in expense over time. A valid point also. The dividend yield for the Eurostoxx 50 as of 31/12/07 was 2.53%. If we assume that you are a higher rate taxpayer, this means that you'll have income tax of 1% of the fund value to pay each year. However, you'll only have to pay 20% on gains (not including dividends - as this tax is already paid) when you sell as opposed to the 23% on gains (including dividends) that you'd have to pay using an index tracker or ETF. In brief, with an ETF, you'll have 3% extra tax to pay on the increase in the value of the shares and 17% less tax to pay on the dividends.

- if you're concerned with being overweight in certain sectors, you could (in the sense of possibility not of recommendation!) buy sector ETFs or invest in managed funds that invest across sectors (e.g. Eagle Star 5x5 funds which invest in 5 stocks across 5 sectors across various geographic markets). - Agreed (although this would involve just as much work as the above approach)

- it's not clear why you believe that your stock picking will beat/match the market: many experts believe that this is unlikely over the long term
- balancing/rebalancing your portfolio could be difficult and could require disposals esp over time as your investment capital increases in proportion to monthly investment. - The purpose isn't to beat the market as such, it is to minimise charges and avoid the 8 year rule which would force us to pay taxes every year after the eigth years investment. Obviously, noone can predict the future direction of the market (or any individual share for that matter). Therefore, all we can strive to do is control the factors that we know for a fact will help our investment returns.


regards,
M.

p.s. Shanegl, I disagree that the 8 year rule doesn't apply to ETF's. I believe that it at least can (depending perhaps on the underlying ETF structure/legal framework). See my response to your note in the other topic.
Click to expand...
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

I'm only going to comment on costs here.

Firstly, let's look at the 8 year rule. Take an example of an initial investment
of 10000 with 12000 added per annum. Assume investment growth of 6% (incl dividends).
Take a time period of 16 years (2x8 year periods). Compare the final sum for both
options (one tax bill at 16 years versus one at 8 years followed by another at 16 years with a credit
for tax already paid). I think they'll be quite close. (I know I am ignoring inflation here).

Next compare ETF costs of say 0.5% per annum versus the extra tax you will pay on dividends by
investing directly. Say dividend rate of 2.5%. Extra tax on dividends by investing directly
(top rate v 23%) approximately is 0.5%. And you miss the growth on that extra tax.

So, I'm not convinced that there is all that much difference in costs/charges/taxes.
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

Hi Ronaldo,

I think you need to redo your sums to assume a much higher true expense figure for Quinn. While they quote an annual fee of 1% of your portfolio, my understanding is that this is not the true total cost of your expenses. It excludes transaction costs and a number of other expenses which are not termed 'management ' expenses.

In your calculation for your own portfolio you are including these costs so you need to recalculate the comparison.

I estimate the true cost of Quinn to be in the region of 1.7% p.a.
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

maturin said:
I'm only going to comment on costs here.

Firstly, let's look at the 8 year rule. Take an example of an initial investment
of 10000 with 12000 added per annum. Assume investment growth of 6% (incl dividends).
Take a time period of 16 years (2x8 year periods). Compare the final sum for both
options (one tax bill at 16 years versus one at 8 years followed by another at 16 years with a credit
for tax already paid). I think they'll be quite close. (I know I am ignoring inflation here).

Next compare ETF costs of say 0.5% per annum versus the extra tax you will pay on dividends by
investing directly. Say dividend rate of 2.5%. Extra tax on dividends by investing directly
(top rate v 23%) approximately is 0.5%. And you miss the growth on that extra tax.

So, I'm not convinced that there is all that much difference in costs/charges/taxes.
Click to expand...

But is it not the case that you will pay taxes EVERY year after year 8 with ETF's - which involves the extra work of filling in tax returns, i.e. in year 8 you will pay taxes on gains in the units purchased in year 1, in year 9 you will pay taxes on gains in the units purchased in year 2, in year 10 you will pay taxes on gains in the units purchased in year 3 and so on???

Lets take your example of 10,000 with 12,000 added per annum. Assume that the 12,000 is added at the start of each year as opposed to monthly to simplify the calculations and assume 2.5% dividend growth and 4% capital growth figures - bringing the total growth to a quite conservative 6.5%.

For a higher rate tax payer, after 25 years you'd end up with €577,117 after tax with the direct shares method. This assumes that, after withholding the amount owed in tax from each dividend, you reinvest the remainder. It assumes that you take €81.84 out of each years €12,000 contribution for trading charges - as these will be incurred when purchasing shares or ETFs.

Using the ETF method, you'd end up with €583,541 - €6,424 or 1.1% extra.

If the capital growth rate was increased to 6% and the dividend was reduced to 2% - giving a total estimated return of 8% per annum, the figures would increase to €723,722 and €708,731 respectively. In this case, the direct share method would return an extra €14,911 - 2.1% extra.

For a lower rate taxpayer, using the 4% growth and 2.5% dividend method, you'd end up with €619,807 and €583,541 respectively - meaning that investing directly in shares would leave you €36,266 or 6.2% extra.

Conclusion

For higher rate taxpayers, the difference in the final fund values of the two methods shouldn't be taken into consideration as they will be very similar - depending on growth and dividend levels.

Both methods will involve lodging your money into your broker's account and purchasing the shares or ETF's. Both will involve selecting which shares or ETF's to purchase - which, in both cases, can be done in a mechanical manner.

After year 8, the ETF method will require taxes to be calculated and paid on an annual basis - regardless of whether you sell or not. With shares, you need to calculate your tax on any dividends.

With shares, you also have the opportunity of using your capital gains tax-free allowance - which equates to a potential saving of €1,270 per year.

All in all, it's a coin flip between the two methods and no choice is right or wrong.
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

ronaldo said:
But is it not the case that you will pay taxes EVERY year after year 8 with ETF's - which involves the extra work of filling in tax returns, i.e. in year 8 you will pay taxes on gains in the units purchased in year 1, in year 9 you will pay taxes on gains in the units purchased in year 2, in year 10 you will pay taxes on gains in the units purchased in year 3 and so on???
Click to expand...

I think tax is deducted automatically and there is no tax return required
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

Only with an ETF domiciled in Ireland surely?
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

Ronaldo, I don't think you've factored in the charges involved in funding a US account with such a small monthly amount. A transfer within the Eurozone would be free.
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

I agree that charges in Ireland on passively managed indexed funds (trackers) are crazy.
That is the reason I did move my money outside the pension to the US broker where I bought cheap ETF's (mostly from Vanguard) so paying not even 0.2% in management charges + $10 to buy each of them.
I am exposed to the $ more then I would like to but that may also be a good diversification too.

Still, my pension money is here in Ireland invested in passive indexed funds for 0.75% with IL.
I am not sure 0.75% are all charges neither but I did not find anything better in Ireland for the pension money :)

If I have 100k I would probably be invested in Vanguard Ireland and pay 0.1% charges.
I hope soon the competition will bring the charges down and we will be able to invest our money passively for 0.2% or similar.
 
Re: Quinn Life v' Interactive Brokers - Interactive Brokers cheaper 4 portfolios > €8

shanegl said:
Ronaldo, I don't think you've factored in the charges involved in funding a US account with such a small monthly amount. A transfer within the Eurozone would be free.
Click to expand...

That is a very good point.
You loose on the money conversion and transfer.
You usually pay around e20-30 on transfer + euro to $ conversion spread.

Also the risk of being invested in $ (that may be a plus too but do not know to quantify neither side).
 
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