Investment Portfolio Split

[Brendan Burgess]

The only logical reason an investor would prefer a concentrated portfolio is a conviction that they can beat the market.

Not at all.

A smaller portfolio of shares is easier and cheaper to manage.

I have around 10 shares. If you convinced me that this has a much greater risk of losing money over a sustained period of time than a much larger portfolio, I could do one of the following:

1) But 90 more shares - but you probably would still not be happy, but I would spend all day administering my portfolio.
2) Buy and ETF and face the tax disadvantages which I am not prepared to do.

Brendan

 

[Sarenco]

A smaller portfolio of shares is easier and cheaper to manage.

What could be easier to manage than an index fund! It's the ultimate buy and forget investment.

The cost issue is a red herring. Since inception, the Vanguard S&P500 ETF has lagged its benchmark by 0.04% and that ETF can currently be acquired by Irish investors on a commission free basis.

How much does it cost to construct and maintain your 10-stock portfolio?

Tax is also largely a red herring. Firstly, there is absolutely no difference in the tax treatment of a US-domiciled ETF and any other US security. Zero.

Even with EU-domiciled ETFs, it is far from clear-cut that a portfolio of directly held shares is more tax effective than an index tracker in every scenario. In most cases, when you run the numbers, making reasonable assumptions regarding the source of returns, the difference is minimal.

In any event, it is a truism of investing that you should never, ever let the tax dog wag the investment tail.

 

[Brendan Burgess]

The cost issue is not a red herring. I manage my own portfolio of 10 shares. If I were to buy 100 shares, I would have higher commissions. And a lot of extra work.

There have been extensive discussions of the tax treatment of ETFs. I was not aware that it had been 100% clarified.

Is the tax treatment of my Irish shares the exact same as a US domiciled ETF which invests in Irish shares? Is it the same as my shares in the UK and in Europe?

In any event, it is a truism of investing that you should never, ever let the tax dog wag the investment tail.

Not at all. I have an ETF from a few years ago which is underwater. I can't set the losses against gains in other shares.
Going along with your truism, I should not worry about this.

Tax is an essential part of investment decisions.

Brendan

 

[Sarenco]

I do not mind the "risk" of underperforming the market if it's balanced by the opportunity of outperforming the market.

Hi Brendan

I think this is the key point that you're missing - your risk of underperforming the market with a concentrated portfolio is not balanced by the opportunity of outperforming the market.

Let me try and explain it a different way-

Dispersion measures the average difference between the return of an index and the return of each of the index’s components. However, dispersion is skewed - a small number components have a disproportionate impact on the index return.

In other words, the chances that your random selection of stocks will include "winners" are considerably lower than your odds of picking "losers" - it's not a coin toss.

A lot of investors suffer from what is sometimes called the "lottery effect" where they are prepared to accept below market returns in the hope that they will hit the jackpot with one of their stock picks. That's obviously fine but it's not a sensible investment strategy.

 

[galway_blow_in]

Hi Galway

Absolutely. But that does not stop you gradually accumulating 5 or 10 blue chip shares over time.

Brendan

most people are not well informed enough to pick the right shares , many blue chips have underperformed the market this past fifteen years , perhaps its better in this case to go the route of a managed fund , you pay a professional to seek out growth , studies however show that an index fund which tracks the likes of the s + p will beat four out of five managed funds most years

 

[Sarenco]

The cost issue is not a red herring. I manage my own portfolio of 10 shares. If I were to buy 100 shares, I would have higher commissions. And a lot of extra work.

Who said anything about buying 100 shares? Obvious straw man argument.

An Irish investor can currently buy an ETF that replicates the performance of essentially the entire global equity market with trivial tracking error for zero commission.

There have been extensive discussions of the tax treatment of ETFs. I was not aware that it had been 100% clarified.

http://www.askaboutmoney.com/thread...ce-notes-on-the-tax-treatment-of-etfs.195443/

I'm not aware of any substantial remaining ambiguities regarding the Irish tax treatment of ETFs.

Tax is an essential part of investment decisions.

Of course - I never suggested otherwise.

However, if you let tax considerations dominate the decision making process then the (tax) tail is wagging the (investment) dog.

 

[MrEarl]

Hello Mr. Burgess,

...

Do you accept that it would be very unwise for someone with total wealth of €1m to invest it all in one share?

Do you accept that for someone with €1m in cash to invest €1,000 in one share would be less unwise?

Brendan

Sure.

If we look specifically at the ISEQ and you pick the 10 biggest caps, then by virtue of the fact that they represent so much of the overall ISEQ (on a weighted basis), then I can see where you are coming from - obviously one could not implement the same approach of only buying 10 shares on the LSE or NYSE thuogh, without increased risk.

Thereafter, I have come to the conclusion that you have simply made a decision to invest in a lesser number of different shares, accepting "slightly" increased risk in return for the hope of "slightly" incresed returns (or potential losses, if things go wrong). Thats fine as your chosen strategy, but does not reflect the approach I would think appropriate for those looking to hold the most efficient (best return, for least risk) portfolio.

 

[Brendan Burgess]

Who said anything about buying 100 shares? Obvious straw man argument.

Hi Sarenco

The OP has said that he is building up a portfolio. I have pointed out that a portfolio of 10 shares built up over time which is a small part of his overall wealth is adequately diversified. I have argued that there is no need for 100 shares as managing 100 shares is more expensive and more time consuming.

If I understand you correctly, you are saying:

• There is no tax difference at all between investing in a US domiciled ETF and investing directly in equities - dividends and Capital Gains are taxed exactly the same as investing in shares. That this is absolutely clearly written down by Revenue and not open to challenge by them?
  
• The additional cost of investing in the US domiciled Vanguard ETF is immaterial
  
• I presume that there is no additional underlying exchange risk if you choose a US domiciled ETF which invests in shares in the Eurozone?

If all those conditions are true, then I would recommend to people to invest in this over directly investing in shares.

No one should be investing in unit linked funds with 1% management charges. No one should be investing in non US domiciled ETFs.



Assuming I have understood you correctly, could you maybe write a Key Post or FAQ on this? It is effectively a clear Best Buy?

1) Fund description
Actual names of the different funds

• Eurozone funds
  
• US shares
  
• World funds
  
• Emerging markets
  
• etc

2) How to buy it
From VAnguard? Through a stockbroker?
Minimum amounts if there are any
I presume that there are no external costs of holding it, or no significant costs.

3) Tax treatment for an Irish resident
Dividends
Capital Gains Tax
4) Advantages over a non US domiciled ETF
5) Avantages over an Irish unit linked fund
6) Advantages over directly held shares