You've undoubtedly already heard about the recent passing of John Bogle, the legendary founder of $5 trillion fund management company, Vanguard.
Through Vanguard, Bogle provided the ordinary investor with a compelling alternative: Instead of paying excessive fees to ordinary fund management companies, they could save most of that money and instead invest (and reinvest) the savings.
Throughout the decades that it takes to save up for retirement, these savings on fees add up to a LOT. Which is why Bogle, in his timeless "Eight Basic Rules for Investors" (see the end of this article) placed the importance of minimizing fees at the no. 1 spot.
I personally love this list but would add a ninth rule: "Minimizing the amount of taxes you pay on income and investments."
The (inconvenient) single biggest determinant of your financial future
Britain currently charges the highest tax rates in 30 years: 33.3% of the average Briton's income goes to the government.
This pales in comparison to France, where people pay 46.2% of their income in taxes.
The average across all 37 OECD countries is 34.2%.
I salute anyone who makes an effort to save the 1% p.a. (or thereabouts) that conventional fund managers charge for looking after your money. Every penny saved takes you a penny closer to financial independence, a happy retirement, or whatever else you are saving and investing for.
But why do most people give up so easily when it comes to saving taxes on income or investment gains? After all, this is where the biggest amounts of money can usually be saved.
There are countless ways to reduce taxes, including when it comes to income and capital gains generated from investing.
My own approach (radical, as I freely admit)
To minimize taxes, I took a step that isn't easy to replicate, but which nicely demonstrates the sheer scope of available options.
I moved my home to Sark, one of the British Channel Islands off the coast of Normandy. As a self-governing island, Sark has been independent since 1565. It creates its own laws and as part of that, sets it owns taxes.
Obviously, everyone wants to enjoy the benefits of civilization, which is why some taxation is necessary.
I have always said: "20% tax rate is fine. I am willing to work for the government on Monday. The other workdays of the week need to be for my benefit, and weekend work has to be tax-free in any case."
On Sark, we pay for civilization through a property tax. Each January, we fill out a one-page form, which takes about two minutes. The amount of property tax is determined by the size of the property you live in, and it's capped at a maximum of GBP 7,000 (only four people on the island pay quite that much). No further personal disclosures are necessary, and no one ever faces a tax audit or similar nuisances.
There is no capital gains tax. All investments you accumulate over your life are tax-free.
The attractive tax situation even extends beyond your own demise, because there is no inheritance tax either.
As far as taxes on investments are concerned, a base on Sark is the "Vanguard approach." You pay next to nothing, and your investments accumulate a lot faster for that reason.
After all, independent from where you live, almost anyone can do it!
Some more options to lower your taxes on (investment) income
Obviously, few people are willing or able to move to a small island in the wind-swept English Channel. But you don't really need to.
Much as it's mind-boggling how much taxes most Western countries levy nowadays, there is usually an almost equally mind-boggling array of options to reduce your overall burden. Including the ones that relate to investing.
E.g., Britain has what I consider an INSANELY attractive scheme for investing in British early-stage companies. The so-called "Enterprise Investment Scheme" basically gives you an immediate tax benefit when you invest; if things work out you pay very little taxes on your gain, and if they don't work out you get a second round of tax benefits. Irrespective of whether one should really invest in early-stage companies, I have always described this scheme as too good to be true as far as taxes are concerned. Not even a minimum investment is required.
The US also charges high tax-rates, but it has more tax loopholes in its 51 States and different territories (such as Puerto Rico) than anyone can keep count of. The old adage still holds true: "The US is the biggest tax haven in the world."
I can't offer you tax advice, not the least because my readers are dispersed across many jurisdictions around the world. Which is why I can really only touch on the general importance of the point.
You have probably already heard the old saying that it's often more profitable to spend an hour thinking about money than it is to spend a day working for money.
If you don't already do it anyway, you should apply the same kind of thinking to the amount of taxes you pay on your investment gains, and what you might be able to do about it.
Taking charge of your financial destiny is what it's all about
This blog has gotten off to a really fantastic start since I relaunched it 4 weeks ago.
A big thank you to all the readers who signed up for my Weekly Dispatches; who decided to join as full members for $49 p.a. to receive my extensive research reports, and who sent me feedback as well as critical comments.
Over the coming months (and years!), you'll see the content of this website expand further.
Regular articles and special reports about some of the lesser-known aspects of investing will be part of that – accessible for most anyone, no matter how much (or little) money and experience they have. If you aren't very experienced with investing yet, stay tuned. I am working on a few ideas to lend you a hand while you get comfortable with the subject.
There is plenty in the pipeline for Undervalued-Shares.com.
And as this website expands and evolves, I do always welcome any form of reader feedback. Feel free to drop me a line on [email protected].
John Bogle (1929-2019)
Eight Basic Rules for Investors
1. Select low-cost funds
2. Consider carefully the added costs of advice
3. Do not overrate past fund performance
4. Use past performance to determine consistency and risk
5. Beware of stars (as in, star mutual fund managers)
6. Beware of asset size
7. Don't own too many funds
8. Buy your fund portfolio – and hold it