Recently i've been digging into investing, saving and personal finance. I'm a 25 y/o Belgian working my first job, so I figured it was about time to do so! I've read the Intelligent Investor by Benjamin Graham, hung around the Bogleheads wiki and caught the general vibe of long term index fund investing.
Now specifically I'm reviewing my pension fund investment. The Belgian government has legislation where if you invest into a government approved mutual pension fund, you can deduce 30% of that amount from your taxes.
I'm talking about this specific mutual fund. Keeping my valuable insights from The Intelligent Investor in mind I notice the following:
- Average return of 5,56% over 10Y
- TER of 1,34%
- max amount of 940 euros / year. I can deduce 280 of that from my tax-return
That's plain bad. It's an actively managed fund, it performs under the index AND it has high costs!
So my question now is; How do I compare this to a portfolio of index-tracking ETF 's of my selection? I've tried it like this:
Imagine a portfolio like this:
iShares $ Corp Bond UCITS ETF USD (Dist)
- 6,91% over 10Y
- 0,20% TER
iShares MSCI World UCITS ETF USD (Dist)
- 5,90% over 10Y
- 0,50% TER
If i put them together in 60% equity and 40% bonds it adds up to a historical 6,3% (right?). But wait! Past performance is no indicator of future performance!
So then i subtract the TER's from the historical yield and compare with what I have now:
- tax-deducable, acitvely managed fund 5,56% historical - 1,34% TER = 4,22% net yield
- My proposed portfolio of index tracking ETF's: 6,91% historical - 0,38% TER = 5,92% net yield
Now, there's the tax bonus!
If I invest the maximum amount of 940 euros in a year I can deduce 280 euros from my taxes. So I've invested 940 while the outflow of my books is only 660.
So If I then run these numbers through a compound intrest calculator over 40 years I get the following results (I'm ignoring inflation) :
Tax-deducable fund that returns, suppose, 4,22% (= historical minus TER): 98K
My proposed fund that returns, suppose, 5,92% (= historical minus TER): 106K
The proposed fund performs better, now doesn't it!?
To make things worse there's a tax of ~8% on the tax-deducable fund when you cash out. I'm not sure what the situation with ETF funds would be but I do know that as a Belgian citizen it would be advantageous to invest in accumulation funds domiciled in Ireland. Dividends are taxed by 27% here.
Now; Is there a major flaw in my reasoning? Other than my using the historical yields to predict future yields. According to my calculations the tax-deducable fund is bullocks for long-term Boglehead investing. amirite? Not only to mention that the limit for the deducable amount is 30% of 940. I can save more than 940 per annum on my current income.
Thank you so much!