Newbie here. First introduction to ETFs advice

Hello Mustachian community!

I found this forum some days ago and I have been reading a lot. Very nice community here!

I also follow a blog called “The Poor Swiss” and he is also very fond of investing on ETFs. So I decided it is time for me to do some in-depth research on ETFs and start investing by the end of this year.

Before jumping with both feet in to learn as much as I can about ETFs, I would like to get some reassurement from the community that I understand it correctly. Any help will be greatly appreciated.

So for ETFs I am going to put a very simple example to see if I get it right :slight_smile:

Let´s say I chose an ETF that has an average yearly return of 10%. This means some years it will be 30%, others will be -10%. It is the average.

So let´s say that I put 10.000 CHF into this ETF and I don´t touch it for the next 10 years.

Does that mean that on average I will get 1.000 CHF per year in dividends? That simple? Of course from those 1.000 CHF I will have to pay taxes and … custody fees or similar?

And, what happens with inflation? So if I do not reinvest those 1000CHF per year on buying more titles of the ETFs, will my original 10k devaluate over time? I guess no, right? Because if it keeps growing at 10% year, it means my titles also grow in value at 10% year, so the moment I want to sell all the ETF titles, they will be worth more than the initial 10k.

Am I getting this right?

Sorry for too much questions :sweat_smile: but I just want to make sure it works like this before putting a lot of time researching it in depth and investing.

Cheers to the mustachian community!

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No, your return will usually consist of - or the value of your investment increase from both

  1. dividends (only about 1-4% each year, depending on fund and market → these are taxable)
  2. capital gains on stocks that increase in price (this will be a bit more than your dividend yield on many funds. These are usually not taxable for personal investors → good!

There are fund-like structures that may distribute both dividends and capital gains each year as cash distributions to you. But these aren’t run-of-the-mill equity ETFs.

There are “accumulating” funds that will automatically reinvest the money for you, instead of paying dividends to your account in cash. The tax office will still tax on these “retained” dividends (based on the fund’s reporting).

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  1. Sorry I don´t get it. So in my simple example I will get the 10% yearly average (i.e 1000CHF) plus a 1-4% extra each year?

  2. So this answers my question about inflation I guess. Is that the stocks increasing in price will protect my initial investment from inflation.

You buy 100 units of a distributing ETF at a price £100 each, for a total of £10’000.

A year later you will have received

  1. £3 cash distribution/share * 100 units = £300 cash dividend in total (gross, before tax) AND
  2. your 100 ETFs will have increased in price to £107 = £10’700 in total

£300 + £10’700 = £11’000. That’s a 10% year-over-year return (with a dividend yield of 3%).

EDIT: Had you bought an accumulating ETF and all other things equal, each of the your 100 shares would be worth £110. (Again, this is very simplified and doesn’t take into account tax).

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No, to take your example, you might get 1% dividends and 9% capital gain on avg.

So something like this

1st year: 1% dividends, capital gain 20%
2nd year: 1% dividends, capital loss -12%

How much is coming from dividends and how much capital gain depends on the etf. As written above, for CH, capital gains are very interesting as the aren’t taxed.

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Wow. So basically you want to retire more than on dividends… on reselling part of the stocks for a sum that still covers inflation. Right?

Because if for 10% average, only 1-3% is going to be dividends (I guess this varies from ETF to ETF, that I get it) you should have an insane amount of money invested in ETFs to generate a yearly profit that allows you to pay all month expenses, etc…

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Dividends are “irrelevant” - either your stock maintains the price, or you receive a dividend and the price drops for the same amount (in general).
In fact, in CH you would be better off if there weren’t any dividends paid out (since they are taxed as income).

And yes - you would be withdrawing/selling from your stash whatever you would need on top of the dividends, to cover your expenses once you FIRE.

3 Likes

Ok I think I’m starting to get it.

So let´s say (gross example, I am newbie) that yearly inflation is 2% and you get 10% anual from your ETF (either in dividends or on revalorization of the shares) then you would sell that 8% and live out of that.

By that you can do FIRE without losing wealth over time.

When you start to retire, it’s expected to start using up your capital, the goal is to have enough capital until you die. Also don’t underestimate the effect of compounding.

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Dude… but that means you have to put a date on your expected time of death. How do you know that? How do you know if you’ll live until 70 or until 90? Or even until 110 if medicine advances so much as it appears is.

What is compounding?

Compounding is :

1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.1^4 > 1 + (4 x 0.1)

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Not an exact date, just a “confidence interval” :grin:
You can also “overplan” it and leave an estate, inheritance, foundation, donate etc.

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Ehmmm in laymans terms? :sweat_smile:

You get the return on your returns, (if kept invested or reinvested). The second year, you get 10% on 110% of your original investment. If everything is reinvested, you get (1+annual return)^number of years.

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start year 1 year 2 year 3 year 4 year 5
1 1.1 1.2 1.3 1.4 1.5 non-compounding
1 1.1 1.21 1.331 1.4641 1.61051 compounding

With the same 10% rate of return, compounding increases total return by 22% over only five years.

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Thanks a lot guys! Really appreciated. Seems like a very good thing. Time to do more in-depth research now.

Also time to research how much should I invest so it compensates having to do tax declaration (I don’t do it now since I am taxed at source).

Cheers :slight_smile:

actually you always pay tax for either type of dividends.
https://www.mustachianpost.com/swiss-tax-guide-for-investors-in-etfs/

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What “type of dividends” are you talking about?

What I am saying is that - purely tax wise in CH - it would be “better” to hold equity which pays no dividend (e.g. Berkshire Hathaway) than equity that does.
[Assuming the math “price1 = price2 + div” holds]

I was not talking about distributing vs. accumulating ETFs, if that’s what you’re trying to refer to.

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Something been bothering me when talking about reinvesting dividends to get the sweet compounding effect. Myself I’m currently only invested in VT on IBKR. I got my first dividends distributed (17 USD yay :grin:). The thing is that I can only buy full shares of VT@~100USD. So basically it’s just sitting on my account not working for me :pensive:

How are you guys handling this?

That amount is insignificant in the grand scheme of things.
Calm down and keep building up, so when the dividends get significant you won’t have the same “problem” anymore.
By the same logic - are you worried about the 50CHF cash bill in your wallet or some coins in the cupboard “not working for you”? :grin:

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