Financial Effectiveness Repository

I get a very different result when I run these numbers. I'm not from the UK so I may be interpreting the tax rules incorrectly, but here's the logic chain I used to model it (year one, so that it can be duplicated and logic verified);

• If I invest 100,000 and pay the .5% stamp, I actually invest 99502.49
• Dividends for the year would be 1990.05, of which I lose 746.27 to tax, leaving 1243.78 for reinvestment
• Expected capital gains would be 4975.12 (99502.49 * 0.05)
• Reinvesting the dividends of 1243.78 loses 0.5%, leaving 1237.56
• Expected value at end of year 1 is 105715.2 (99502.49 + 4975.12 + 1237.56)

At the end of year ten, I expect 182334.10 in my account, which I then sell/crystallize.

The amount of tax I would pay is based on the "adjusted cost base" (google couldn't answer what term is used in the UK, but basically the amount paid for the shares). I work this out to be 118275.5, essentially buying the dividend-reinvested shares at the expected 5% growth rate during the 10 years. I then subtract the total stamp taxes paid, which I work out to be 580.43. This gives me a tax burden of 182334.10 - 118275.5 - 580.43 = 63478.17. I then deduct the 11,000 capital gains allowance. This results in a tax payment of 52478.17*0.28 = 14693.89.

Final net value of the sale is therefore 182334.10-14693.89 = 167640.21

In real terms, this is 134996.70, or a real rate of return of 3.2%

I believe the major difference in our numbers comes from the tax rate on gains.

In terms of sensitivity, I get a return of 4.84% with zero taxes (dividend and capital gains), whereas an increase to 9% (each div and cap rates at +1%) expected return gives 4.2%. This is under the assumption of the worst possible tax rates and scenarios (full sale at maximum rates). There are lots of timing methods to reduce the tax impact.

Granted, this is based on my knowledge of Canadian taxes, but I verified the UK equivalents as best I could and the differences are primarily in the stamp taxes. Most of the data is from https://www.gov.uk/tax-sell-shares/work-out-your-gain (and the related links).

This probably applies mostly when you do not have enough liquid assets to winter times that might force you to sell.

Why are home-country government bonds more liquid than stocks? Publically traded stocks can be sold quite fast.

Be careful with this advice if you're clumsy or destructive or prone to losing things. A more expensive item only lasts longer under circumstances where it's able to be used the whole time.

It should be noted that there's a nonobvious opportunity cost here; specifically, money spent on the more expensive product can't be invested.

For example, mechanical keyboards seem like something that costs more up front that's cheaper in the long run. They cost about an order of magnitude more than membrane keyboards, but last about ten times longer, so you only need one mechanical keyboard to ten membrane keyboards, so the cost equals out in the end. Since the typing experience is much better on mechanical keyboards, by paying more up front, you essentially get a much-improved typing experience for free.

But, the extra money you spent on the nice keyboard could've been invested (or used to pay down debt) instead. If there's a an annual real interest rate of 10%, then buying 10 membrane keyboards at $10 over 10 years and investing the money you didn't spend nets $45, not counting re-investing (1). Note that these numbers are made up to make the math simple; in particular, the real real interest rate isn't that high.

Also, the membrane keyboard you buy in year 10 isn't going to be the membrane keyboard you buy in year 1.

(1) Using present value, in year 1, instead of paying $100 (cost of the mechanical keyboard, ten times the cost of the membrane keyboard), I pay $10 and invest $90 which, at 10%, yields $9. In year 2, you pull $10 out of the investment to buy the second membrane keyboard, so now you have $80 invested, yielding $8 returns. 9+8+...+1 = (9^2 + 9)/2 = 45.

Also, the system does need some active management - passive investors are freeloading and not aiding price discovery, so if the whole market went passive then active investment would win handily.

The kind of people who do well at price discovery are big banks with complex computer models and expert analysts. Why do you think that an individual has a got chance at playing that game?

"active investment with an advisor is empirically superior to passive non-advised investment for most people." Can you source this?

Unmoderated finance repository could be harmful

Is financial effectiveness about using money effectively (as your posts about making donations seem to imply) or is it about making money in the financial markets (as your top-level writeup seems to imply)?

I'm not sure I understand. Can't I give advice on how not to waste money because I am not a 50 year old war veteran who has traveled through three continents? Since not wasting money is the most effective thing the average person can do to change the difference between income and spending in the better direction.

It's difficult to coordinate moderators on these threads but there may be other means.

Do you think it would help if there were a rule that comments should be down-voted (in these kind of threads) if they are not backed by hard evidence (i.e. solid advice by experts). A requirement that is not unusual around here anyway.

Actually I requested evidence in the OP and will right now go throu my votes and check.for this condition.

Yeah, keep sharp and pointy ideas away from aspies. Can't allow them to play unsupervised, y'know...