View Full Version : Compound growth - looking for some advice
Hi Folks
I want to retire early and stop working in about 20 years and figured that my best way of getting there is through investing in ETF / PIE funds and letting the compound/exponential growth do the work.
I'm thinking of investing 250k initially, and then 50k per year for 20 years, and I estimate the growth to be somewhere between 10% and 15% average across the 20 years, which would mean I would end up with a figure between 4.8m to 10.7m at which point I should be able to comfortably retire.
My investment would be weighted evenly across 5 different ETFs / PIEs as I don't want to be exposed to a single market or fund manager etc. I haven't made a decision on which ETFs / PIEs, but I was considering the following:
Piefunds - Australasian Dividend Growth
Smartshares - US Large Growth (USG)
Kernel wealth - S&P Global 100
Kernel wealth - S&P NZX20
yet to be determined
I'm making the following assumptions:
Growth funds work in the same way as compound interest e.g. if one was to invest 50k in a growth ETF and get 10% growth year on year then it will grow in first few years to 55k, 60.5k, 67k etc. as it will grow based on both the principal and also exponentially with the increase in value of the fund.
If my above assumption is correct, then we would see the same application for dividends being reinvested.
There are ETFs / Funds that could return between 10% and 15% growth per annum across 20 years (this would be averaged as I'm taking into account there will be some years in the negative and some years above 15%)
Questions:
Is my assumption #1 correct?
Would 50k at 10% growth per year increase by 55k, 60.5k, 67k, or;
Am I wrong and that it is only principal amount would grow e.g. 55k, 60k, 65k?
Is 10% to 15% growth per annum feasible? (taking into account the management fees etc.)
Is investing in these ETFs / PIEs via a provider like smartshares or piefunds etc. secure/safe? i.e. will the investment be in my name in the off chance the provider folds?
Any thoughts/feedback on my selection of funds?
Just looking for some advice to avoid any newbie mistakes, so any tips/help would be much appreciated.
You have some very high assumptions that are far from reality.
I'm thinking of investing 250k initially, and then 50k per year for 20 years, and I estimate the growth to be somewhere between 10% and 15% average across the 20 years, which would mean I would end up with a figure between 4.8m to 10.7m at which point I should be able to comfortably retire.
The ETF guru and founder Jack Bogle (below) has summed it that for the next decade, expect returns of maybe 6% per year.
https://youtu.be/lJeTZIzsWfk?t=53
My investment would be weighted evenly across 5 different ETFs / PIEs as I don't want to be exposed to a single market or fund manager etc.
Warren Buffet's right hand man Charlie Munger quoted,
"The idea of diversification makes sense to a point if you don’t know what you’re doing and you want the standard result and not be embarrassed, why course you can widely diverse. Nobody’s entitled to a lot of money for recognizing that because it’s a truism it’s like knowing that two and two equals four. But the investment professionals think they’re helping you by arranging diversification. An idiot could diversify a portfolio! Or a computer for that matter. But the whole trick of the game is to have a few times when you know that something is better than average and to invest only where you have that extra knowledge. And then if you get just a few opportunities that’s enough. What the hell do you care if you own three securities and J.P. Morgan Chase owns a hundred? What’s wrong with owning a few securities?"
https://www.youtube.com/watch?v=JHAQtMdjzew
So what exactly are you expecting and getting when you invest in multiple ETFs from different markets around the world?
Questions:
Is my assumption #1 correct?
Would 50k at 10% growth per year increase by 55k, 60.5k, 67k, or;
Am I wrong and that it is only principal amount would grow e.g. 55k, 60k, 65k?
This is how you calculate compound interest returns: https://www.thecalculatorsite.com/articles/finance/compound-interest-formula.php
2. Is 10% to 15% growth per annum feasible? (taking into account the management fees etc.)
No - above all the most misleading point you have to factor (and is not well discussed in the NZ Financial industry, is the overall tax implication on these investments). The publicised returns are gross figures and do not factor taxation. Too much emphasis has been given to investors in picking managed funds or ETFs that have the LOWEST management fee which is only half of the story
3. Is investing in these ETFs / PIEs via a provider like smartshares or piefunds etc. secure/safe? i.e. will the investment be in my name in the off chance the provider folds?
Nothing in life is safe. You could have money in a bank account in NZ and lose it all in a bankruptcy as NZ banks do NOT have depository insurance (a common protection in overseas banks). A lot has changed in terms of investor protection since the coming of the FMA. I will regard all those providers in NZ as safe and nothing compared to buying cryptocurrencies on an unregulated exchange.
4. Any thoughts/feedback on my selection of funds?
Yes. I would say it's way over diversified. But that's just my opinion. The problem I have with investing in NZ is we have a problem with taxation. In my many rants in the past, we have a system that rewards those taking risks in the NZ housing market, but disadvantaging those that choose to invest elsewhere like in the sharemarkets. Here is the reality, a person who is able to mortgage and buy their 2nd or 5th residential home (leverage) is ALWAYS going to do better because in a long term plan (you say 20+years?) the person buying houses will not pay any capital gains tax when they sell the houses. Every year the house grows in value tax free.
Hop on over to a PIE (28% max tax rate) and you have a situation where you can't leverage. The tax issue is no matter what you invest in these ETFs or managed funds, you are paying paper gain taxes. The PIE fund taxes a max of 28% (so if you're a high income earner in the 39% bracket, that fund you invest in only pays max 28%). But the crux of the issue is we are talking 28% tax on PAPER GAINS! You simply don't have this situation when you buy another house (other than the rates you pay).
The situation also applies when you invest in foreign shares like in the US equities. So you buy an S&P500 ETF, the gains are subjected to FIF which typically is 5% of the paper gain, becomes taxable income and is taxed at the tax bracket you are in. So your generalisation of 10% is far from it reality from a NZ perspective. If you dig deeper into Jack Bogle's understanding, the overall loss in compound interest is very high when management fees are taken out of the ETFs. Citing:
“What happens in the fund business is that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact.”
Frontline interviewed index fund pioneer John Bogle, who compared the performance of two hypothetical equity portfolios – one earning 7 per cent, and the other earning 5 per cent (7 per cent less 2 per cent in fees).
Two per cent may not seem like much in any given year. But over a long time period, the impact is enormous: Assuming a 50-year horizon, the second portfolio would have lost 63 per cent of its potential returns to fees, Mr. Bogle said.
"What happens in the fund business is that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It's a mathematical fact," he explained.
Thanks SBQ for the detailed response.
How does the 28% PIE tax work? is it a tax on dividend only? or on growth also?
Below is an example I took from the quarterly fund update for piefunds Australasian dividend growth.. Why is it that after tax is only less than half a percent less? Shouldn't tax be much more considering it's 28%?
Average overpast 5 years
Past Year
Annual return (after deductions for charges and tax)
18.27%
35.91%
Annual return (after deductions for charges but before tax)
18.71%
36.25%
stoploss
20-03-2022, 01:37 PM
Hi Goat ,
This is a great aim you have . I have been in many of the Piefunds.co.nz , Funds.
Very happy with the long term performance . Be prepared with all your investments for negative years .
Milford would be another place I’d trust my money with .
Maybe 10 years down the track look at an investment property , this would give you some leverage as well .
Sometimes it’s not about that 20% return , but protecting your money in a big downturn .
Hi Goat ,
This is a great aim you have . I have been in many of the Piefunds.co.nz , Funds.
Very happy with the long term performance . Be prepared with all your investments for negative years .
Milford would be another place I’d trust my money with .
Maybe 10 years down the track look at an investment property , this would give you some leverage as well .
Sometimes it’s not about that 20% return , but protecting your money in a big downturn .
Thank you for the advice.
I just had a look at Milford asset funds, looks like they have lower fees compared to piefunds. Their top performing fund (Dynamic Fund) has a 14.76% at 5 year pa return (after fees and taxes) which seems to be extremely good.. unfortunately for me, it looks like they closed that fund for new investments. I will definitely consider their other funds, it looks like they have a relatively new 'aggressive fund' but without a way to benchmark results, I would probably have to go with one of their other funds.
Thanks SBQ for the detailed response.
How does the 28% PIE tax work? is it a tax on dividend only? or on growth also?
Below is an example I took from the quarterly fund update for piefunds Australasian dividend growth.. Why is it that after tax is only less than half a percent less? Shouldn't tax be much more considering it's 28%?
Average overpast 5 years
Past Year
Annual return (after deductions for charges and tax)
18.27%
35.91%
Annual return (after deductions for charges but before tax)
18.71%
36.25%
RWT or portfolio tax ? Both are very different. The figures they are showing are almost meaningless, only pertaining to the tax paid on certain sources (ie bond income or preferred share income that come under different tax treatment). They have nothing to do with the individual RWT which varies a lot and from year to year. So let's say you're in the 33% tax bracket, if the fund made 10% return in 1 year, then 1/3rd of that 10% gain would be taxed at your end. Regardless of what fund you invest in, NZ's taxation is applied throughout the investment period because at retirement or when the funds are disbursed out, the amounts withdrawn have no tax liability, even if you choose to withdraw the entire balance.
These tax distortions must be considered in any investment. If the fund operates in Australia (where tax rules differ greatly to NZ), they are not going to report 2 different tax treatments. Australia has capital gains tax while NZ does not have a formal CGT. The Australian invested in the same managed fund will always have a tax liability at retirement or when the funds are disbursed out. So to save confusion, these ETFs and funds will only report on a gross return basis.
Again, I suggest having a serious watch to my previous YouTube links. It's the kind of info financial advisers don't want to hear because they only want to get paid for showing no investment skill whatsoever.
RWT or portfolio tax ? Both are very different. The figures they are showing are almost meaningless, only pertaining to the tax paid on certain sources (ie bond income or preferred share income that come under different tax treatment). They have nothing to do with the individual RWT which varies a lot and from year to year. So let's say you're in the 33% tax bracket, if the fund made 10% return in 1 year, then 1/3rd of that 10% gain would be taxed at your end. Regardless of what fund you invest in, NZ's taxation is applied throughout the investment period because at retirement or when the funds are disbursed out, the amounts withdrawn have no tax liability, even if you choose to withdraw the entire balance.
These tax distortions must be considered in any investment. If the fund operates in Australia (where tax rules differ greatly to NZ), they are not going to report 2 different tax treatments. Australia has capital gains tax while NZ does not have a formal CGT. The Australian invested in the same managed fund will always have a tax liability at retirement or when the funds are disbursed out. So to save confusion, these ETFs and funds will only report on a gross return basis.
Again, I suggest having a serious watch to my previous YouTube links. It's the kind of info financial advisers don't want to hear because they only want to get paid for showing no investment skill whatsoever.
I did watch the youtube videos, but I don't think I'm in a position to invest in single companies and be confident in my decisions.. I want to invest for the next 20 years, and also be able to sleep well.
I'm more confused now than before around the taxes.
Ok, let's take a look at page 2 as an example from Milford asset's growth fund: https://milfordasset.com/wp-content/uploads/2018/10/Milford_Active_Growth_Fund_Feb22.pdf
The 5 year (p.a.) is 11.66% (gross of tax) and 10.85% (at 28% tax).
If I understood you correctly, is that companies like Milford (and others) don't provide the additional figures which would be the 33% RWT.. so the 10.85% is misleading as it doesn't include all the tax figures, and a third of that would be cut down, so essentially the 5 year p.a. is actually 7.29%. Did I understand that correctly? If not, how would we figure out what the 5 year p.a. is for Milford Assets active growth fund?
I did watch the youtube videos, but I don't think I'm in a position to invest in single companies and be confident in my decisions.. I want to invest for the next 20 years, and also be able to sleep well.
I'm more confused now than before around the taxes.
Ok, let's take a look at page 2 as an example from Milford asset's growth fund: https://milfordasset.com/wp-content/uploads/2018/10/Milford_Active_Growth_Fund_Feb22.pdf
The 5 year (p.a.) is 11.66% (gross of tax) and 10.85% (at 28% tax).
If I understood you correctly, is that companies like Milford (and others) don't provide the additional figures which would be the 33% RWT.. so the 10.85% is misleading as it doesn't include all the tax figures, and a third of that would be cut down, so essentially the 5 year p.a. is actually 7.29%. Did I understand that correctly? If not, how would we figure out what the 5 year p.a. is for Milford Assets active growth fund?
What Mr Munger was getting at is not for you or anyone to choose specific companies to bet on. What he was getting at is the idiocies of these various managed or passive funds that offer nothing more to their clients than if the clients were to buy the index ETF directly. I see a lot of these managed funds in NZ that do nothing more than buy the Vanguard VOO SP500 ETF but in doing so, they're charging THEIR cut of fees in the deal. There's a better way to get what Munger has done - just go and buy Buffet shares "Berkshire Hathaway" ; that's done far better in the past multi-decade than the S&P500 index ETF. I've seen countless of these fund prospectuses and they're just window dressed as they pick and choose things. Did you understand about Jack Bogle's 2% mgt fee off the 7% return in the market, that over 50 years, you would lose 63% of the returns? That Milford I see charges 1.25% + a performance fee on top. That's pretty high compared to Vanguards ETF family with an average fee of 0.08%
Regarding the tax situation, that Milford does show the different net % return for each tax bracket. For eg. 5 year gross is 11.66% and on the 28%, it's 10.85%. Looking at it you may think it's not much difference. What you are not seeing is that the wee difference in % does amount a lot taking off your ending balance. Recall again on the above paragraph. On a 7% return, taking 2% off (for mgt fee, taxation?) makes you lose 63% of the gains over 50 years (this is a mathematical fact on compound interest as Jack Bogle said). So 11.66% vs 10.85% to me would say this small difference would have a similar impact on the overall compound returns. Anotherwords, that 11.66% is going to have a hell of a larger balance after 50 years than the 10.85% by a significant margin. All because of the magic of compound interest (that is the portion of the fees and RWT you pay is ALSO compounded in returns to IRD).
Since the fund comprises mostly NZ equities, what you should be doing is taking the NZX50 index return and match it's cumulative return to this Milford fund. Does it beat the market return? how consistently?
Oh I should add, how did that Milford Fund come to using this 10% return target figure? That is not the basis of how fund managers perform. In industry the measuring stick is how often they beat the market index return such as the S&P500. Have a look at this video where Buffet rants at all these managed / hedge funds for 'non performance':
https://youtu.be/xp9KUCel778
Watch it from the beginning to the end... and then watch it again!
What Mr Munger was getting at is not for you or anyone to choose specific companies to bet on. What he was getting at is the idiocies of these various managed or passive funds that offer nothing more to their clients than if the clients were to buy the index ETF directly. I see a lot of these managed funds in NZ that do nothing more than buy the Vanguard VOO SP500 ETF but in doing so, they're charging THEIR cut of fees in the deal. There's a better way to get what Munger has done - just go and buy Buffet shares "Berkshire Hathaway" ; that's done far better in the past multi-decade than the S&P500 index ETF. I've seen countless of these fund prospectuses and they're just window dressed as they pick and choose things. Did you understand about Jack Bogle's 2% mgt fee off the 7% return in the market, that over 50 years, you would lose 63% of the returns? That Milford I see charges 1.25% + a performance fee on top. That's pretty high compared to Vanguards ETF family with an average fee of 0.08%
Regarding the tax situation, that Milford does show the different net % return for each tax bracket. For eg. 5 year gross is 11.66% and on the 28%, it's 10.85%. Looking at it you may think it's not much difference. What you are not seeing is that the wee difference in % does amount a lot taking off your ending balance. Recall again on the above paragraph. On a 7% return, taking 2% off (for mgt fee, taxation?) makes you lose 63% of the gains over 50 years (this is a mathematical fact on compound interest as Jack Bogle said). So 11.66% vs 10.85% to me would say this small difference would have a similar impact on the overall compound returns. Anotherwords, that 11.66% is going to have a hell of a larger balance after 50 years than the 10.85% by a significant margin. All because of the magic of compound interest (that is the portion of the fees and RWT you pay is ALSO compounded in returns to IRD).
Since the fund comprises mostly NZ equities, what you should be doing is taking the NZX50 index return and match it's cumulative return to this Milford fund. Does it beat the market return? how consistently?
I agree with you, but if I invest directly into overseas ETFs (over 50k) then I will need to spend time figuring out tax laws etc. I would prefer to invest directly into Vanguard VUG rather than smartshares equivalent (USG) and avoid the 0.51% charge but I don't know anything about FIF tax implications. Perhaps if the government simplified the tax system, we would have more people investing in stocks rather than houses, which could fix the housing crisis.
Bjauck
21-03-2022, 08:32 AM
I agree with you, but if I invest directly into overseas ETFs (over 50k) then I will need to spend time figuring out tax laws etc. I would prefer to invest directly into Vanguard VUG rather than smartshares equivalent (USG) and avoid the 0.51% charge but I don't know anything about FIF tax implications. Perhaps if the government simplified the tax system, we would have more people investing in stocks rather than houses, which could fix the housing crisis. You have hit the nail on the head there. Part of the reason for NZers preference for investing in houses is because of NZ's tax laws. The comparative tax treatment (with different effective tax burdens on total returns) of Kiwisaver and pension funds, overseas investments, returns from NZ company investments and returns from real estate has helped shape NZers preferences for various asset classes, with real estate still remaining top of the list.
JBmurc
21-03-2022, 11:33 AM
Hi Folks
I want to retire early and stop working in about 20 years and figured that my best way of getting there is through investing in ETF / PIE funds and letting the compound/exponential growth do the work.
I'm thinking of investing 250k initially, and then 50k per year for 20 years, and I estimate the growth to be somewhere between 10% and 15% average across the 20 years, which would mean I would end up with a figure between 4.8m to 10.7m at which point I should be able to comfortably retire.
My investment would be weighted evenly across 5 different ETFs / PIEs as I don't want to be exposed to a single market or fund manager etc. I haven't made a decision on which ETFs / PIEs, but I was considering the following:
Piefunds - Australasian Dividend Growth
Smartshares - US Large Growth (USG)
Kernel wealth - S&P Global 100
Kernel wealth - S&P NZX20
yet to be determined
I'm making the following assumptions:
Growth funds work in the same way as compound interest e.g. if one was to invest 50k in a growth ETF and get 10% growth year on year then it will grow in first few years to 55k, 60.5k, 67k etc. as it will grow based on both the principal and also exponentially with the increase in value of the fund.
If my above assumption is correct, then we would see the same application for dividends being reinvested.
There are ETFs / Funds that could return between 10% and 15% growth per annum across 20 years (this would be averaged as I'm taking into account there will be some years in the negative and some years above 15%)
Questions:
Is my assumption #1 correct?
Would 50k at 10% growth per year increase by 55k, 60.5k, 67k, or;
Am I wrong and that it is only principal amount would grow e.g. 55k, 60k, 65k?
Is 10% to 15% growth per annum feasible? (taking into account the management fees etc.)
Is investing in these ETFs / PIEs via a provider like smartshares or piefunds etc. secure/safe? i.e. will the investment be in my name in the off chance the provider folds?
Any thoughts/feedback on my selection of funds?
Just looking for some advice to avoid any newbie mistakes, so any tips/help would be much appreciated.
Well if you can put $250k in shares ETF etc and $50k per year I'm sure you will build quite a nest egg...
I started with $40k- 20yrs ago and have turned that into more than 2mill NZD .. but I've taken a much higher risk time consuming traders road of much stress and suffering .. looking back I could have done the same if not better just buying Res property ... but thats the problem we just don't know have the future will play out the next 20yrs might well be very different than the last in say NZ property .. I don't see the 1000%+ growth in RES values we have seen .. I don't see kiwis happy to pay 8-9mill for an average home in 2042 etc .. well unless a every else has keeped up with inflation and we have $700-800k av income households....
Personally I think this decade will continue to be a Resources Bull market well lease till 2028 ... so If a young guy with $250k came to me wanting to invest the funds to secure his retirement in 20yrs etc .... I'd recommend he did much research into some companies I believe will do very well and some others I don't know about and make his own decision up on least 8-10 companies on say the ASX ...
Then for the other $50k pa .. I'd say yes invest that into your ETFs
And IMHO that 250k if smartly invested in Resources stock will return 5x min what the ETF will by 2042 ...
But I am Bias as thats the sector I've focused on for the last 20yrs ... so DYOR
But at 44yrs old I'm a Full-time Investor/Trading
kiora
21-03-2022, 06:18 PM
Good synopsis JB & from experience too. The benefits of starting relatively young and putting an early nest egg to work?
I agree with you, but if I invest directly into overseas ETFs (over 50k) then I will need to spend time figuring out tax laws etc. I would prefer to invest directly into Vanguard VUG rather than smartshares equivalent (USG) and avoid the 0.51% charge but I don't know anything about FIF tax implications. Perhaps if the government simplified the tax system, we would have more people investing in stocks rather than houses, which could fix the housing crisis.
If you keep your investing simple, FIF is not that complicated. I tell starting investors with an interest in buying US equities is to buy direct because you have the $50K threshold to start with. For someone young, that could take some years to get to that $50K total capital invested and all future gains would be tax free. When the time comes you invest more that pushes you over the $50K limit, then you can lock in the gains and invest into something decent or just go in with an ETF.
Something you should know is that the minute you invest with a managed or passive fund in NZ, regardless of the amount you start with, FIF will apply. $1,000 or $100K to that Milford Fund will attract FIF. That's because all funds that make any foreign investment will have to pay FIF (of course there are some ASX listed companies that are exempted from FIF) - but the matter of fact i'm getting at is the individual investor that buys those shares directly has an initial advantage that the fund managers can not provide to their clients. If you're married, your partner can also do the same thing = $100K threshold.
To buy Vanguard VUG directly would mean you need to find an overseas / US broker. However, in recent times it's very difficult to do as most US brokers (typically the large ones) have been scared off by NZ's FMA sending them nasty letters. The rule by FMA is they have to be licensed by them if they want to open foreign clients living in NZ. The hassle is not worth it so they just simply don't bother. My aunt is with MacQuires and they charge horrendous monthly 'account management fees' (I believe Jarden is not different). So if you bought VUG from a NZ broker, you'll find they too have ways of extracting fees ; I would say the 0.51% may be the lowest in industry here in NZ.
stoploss
21-03-2022, 11:27 PM
If you keep your investing simple, FIF is not that complicated. I tell starting investors with an interest in buying US equities is to buy direct because you have the $50K threshold to start with. For someone young, that could take some years to get to that $50K total capital invested and all future gains would be tax free. When the time comes you invest more that pushes you over the $50K limit, then you can lock in the gains and invest into something decent or just go in with an ETF.
Something you should know is that the minute you invest with a managed or passive fund in NZ, regardless of the amount you start with, FIF will apply. $1,000 or $100K to that Milford Fund will attract FIF. That's because all funds that make any foreign investment will have to pay FIF (of course there are some ASX listed companies that are exempted from FIF) - but the matter of fact i'm getting at is the individual investor that buys those shares directly has an initial advantage that the fund managers can not provide to their clients. If you're married, your partner can also do the same thing = $100K threshold.
To buy Vanguard VUG directly would mean you need to find an overseas / US broker. However, in recent times it's very difficult to do as most US brokers (typically the large ones) have been scared off by NZ's FMA sending them nasty letters. The rule by FMA is they have to be licensed by them if they want to open foreign clients living in NZ. The hassle is not worth it so they just simply don't bother. My aunt is with MacQuires and they charge horrendous monthly 'account management fees' (I believe Jarden is not different). So if you bought VUG from a NZ broker, you'll find they too have ways of extracting fees ; I would say the 0.51% may be the lowest in industry here in NZ.
Is your Aunt Irish ?
Is your Aunt Irish ?
No. If you would like to know more about their services: https://www.macquarie.com/nz/en.html
There are plenty of others to pick as your broker in NZ. Forsyth Barr, Jarden, easy to Google search. But you can bet none of them will operate in the manner of best interest to their clients. As for Vanguard, there's a reason why so many choose their funds over other. $7.2 Trillion under management, most people in NZ never heard of the name Vanguard.
If you keep your investing simple, FIF is not that complicated. I tell starting investors with an interest in buying US equities is to buy direct because you have the $50K threshold to start with. For someone young, that could take some years to get to that $50K total capital invested and all future gains would be tax free. When the time comes you invest more that pushes you over the $50K limit, then you can lock in the gains and invest into something decent or just go in with an ETF.
Something you should know is that the minute you invest with a managed or passive fund in NZ, regardless of the amount you start with, FIF will apply. $1,000 or $100K to that Milford Fund will attract FIF. That's because all funds that make any foreign investment will have to pay FIF (of course there are some ASX listed companies that are exempted from FIF) - but the matter of fact i'm getting at is the individual investor that buys those shares directly has an initial advantage that the fund managers can not provide to their clients. If you're married, your partner can also do the same thing = $100K threshold.
To buy Vanguard VUG directly would mean you need to find an overseas / US broker. However, in recent times it's very difficult to do as most US brokers (typically the large ones) have been scared off by NZ's FMA sending them nasty letters. The rule by FMA is they have to be licensed by them if they want to open foreign clients living in NZ. The hassle is not worth it so they just simply don't bother. My aunt is with MacQuires and they charge horrendous monthly 'account management fees' (I believe Jarden is not different). So if you bought VUG from a NZ broker, you'll find they too have ways of extracting fees ; I would say the 0.51% may be the lowest in industry here in NZ.
I could buy into Vanguard ETF directly from the NYSE on Sharesies. It has a small transaction fee, and another 0.4% exchange rate fee.. but once I buy into it, then there wouldn't be any additional management fees apartment from the small fee that Vanguard charges which would work for me long term.
If I was to invest 49k and avoid FIF, and let's say the value of my investment grows to 60k. I wouldn't need to pay any FIF tax on the first year. However, what happens on the second and subsequent years? Is FIF determined based on the total foreign investment at the start of each year? or the initial cost?
Snoopy
22-03-2022, 01:36 PM
If I was to invest 49k and avoid FIF, and let's say the value of my investment grows to 60k. I wouldn't need to pay any FIF tax on the first year. However, what happens on the second and subsequent years? Is FIF determined based on the total foreign investment at the start of each year? or the initial cost?
The FIF threshold is based on the initial cost of your investment.
https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-income/foreign-investment-funds-fifs/foreign-investment-fund-rules-exemptions
SNOOPY
I could buy into Vanguard ETF directly from the NYSE on Sharesies. It has a small transaction fee, and another 0.4% exchange rate fee.. but once I buy into it, then there wouldn't be any additional management fees apartment from the small fee that Vanguard charges which would work for me long term.
If I was to invest 49k and avoid FIF, and let's say the value of my investment grows to 60k. I wouldn't need to pay any FIF tax on the first year. However, what happens on the second and subsequent years? Is FIF determined based on the total foreign investment at the start of each year? or the initial cost?
As Snoopy showed, this threshold is based on your cumulative initial cost. What ever gains it grows to in 1 or 10 or 20 years is tax free. Yep a clear winner for the small investor ; however, not something you can rely on in terms of retirement nest egg at the end. Unless you hit something really insane such as buying Bitcoin at the right time, $50K can't compound enough if you look at 5% or 10% per year returns over 20 or 30 years. This was the question brought up when I was at a Jarden seminar where they were seeking new clients. A person asked them about the Sharesies platform of low cost commissions and investing. Their reply was that was not their game, what they were seeking is people with $500K+ range to invest so they can ensure them multimillionaire status at retirement. At the time of that seminar, I think my Berkshire (Class A) stock was around $300K (the seminar was IRC was 2019 just before Covid). Now BRKA has closed at $525K. I often wonder if the same $300K handled by Jarden would net me a better return in less than 3 years.
JBmurc
22-03-2022, 10:50 PM
As Snoopy showed, this threshold is based on your cumulative initial cost. What ever gains it grows to in 1 or 10 or 20 years is tax free. Yep a clear winner for the small investor ; however, not something you can rely on in terms of retirement nest egg at the end. Unless you hit something really insane such as buying Bitcoin at the right time, $50K can't compound enough if you look at 5% or 10% per year returns over 20 or 30 years. This was the question brought up when I was at a Jarden seminar where they were seeking new clients. A person asked them about the Sharesies platform of low cost commissions and investing. Their reply was that was not their game, what they were seeking is people with $500K+ range to invest so they can ensure them multimillionaire status at retirement. At the time of that seminar, I think my Berkshire (Class A) stock was around $300K (the seminar was IRC was 2019 just before Covid). Now BRKA has closed at $525K. I often wonder if the same $300K handled by Jarden would net me a better return in less than 3 years.
Interesting ... I might flick someone like "Jarden" $500k see how they go..... if next few month are going be as good as I expect >> ...would be good to have someone else deal with some of the excess funds ..
As Snoopy showed, this threshold is based on your cumulative initial cost. What ever gains it grows to in 1 or 10 or 20 years is tax free. Yep a clear winner for the small investor ; however, not something you can rely on in terms of retirement nest egg at the end. Unless you hit something really insane such as buying Bitcoin at the right time, $50K can't compound enough if you look at 5% or 10% per year returns over 20 or 30 years. This was the question brought up when I was at a Jarden seminar where they were seeking new clients. A person asked them about the Sharesies platform of low cost commissions and investing. Their reply was that was not their game, what they were seeking is people with $500K+ range to invest so they can ensure them multimillionaire status at retirement. At the time of that seminar, I think my Berkshire (Class A) stock was around $300K (the seminar was IRC was 2019 just before Covid). Now BRKA has closed at $525K. I often wonder if the same $300K handled by Jarden would net me a better return in less than 3 years.
Thanks for your insights.
Yep, I think I will split the 49k into a very few high growth companies which I think will do really well over time. Then with the rest of my money, I can put into funds like Kernel Wealth which only charge 0.29% (which is good compared to other NZ fund providers).
I appreciate all your advice.
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