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
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