What caught my eye this week.

A year ago, we added membership to Monevator. Our Mavens and Moguls memberships are basically two tiers of special members-only content, like you see with the wildly-popular SubStack newsletters.

I won’t deny I was nervous about launching this.

Yes, I’d spent nearly two decades collecting hundreds of ‘thank you’ emails from readers – vastly more than for any other work I’ve done – and I’d turned down lots of unsolicited offers of cash, whether to support the site, or to buy my co-blogger @TA some thermal socks.

But we’d been free forever. Moreover we’d spent those years urging readers to save reflexively and to spend wisely. Not to mention we were in a wicked cost-of-living crisis. Or that we needed this new business model to work to keep the lights on at Monevator Towers.

So I wondered if we’d be writing articles exclusively for my mum to not read twice a month.

Happily I needn’t have worried.

My mum still doesn’t read our Monevator member emails. But many hundreds of you do. Nobody has to sign-up to pay for content in a tough media world where everyone is now asking for subscriptions, but loads of you guys have.

After a year in which countless more independent websites have thrown in the towel, we’re still standing.

We can’t thank you enough! Every member is ensuring the future of Monevator.

Content to please you

Happily I’ve enjoyed the content side of membership, too.

The Accumulator can nerd out even more so than usual – free from the tyranny of search engines – and Mavens has motivated him to start a new decumulation model portfolio just for members.

No small commitment given he’s been managing the original Slow & Steady for 15 years already.

Meanwhile, with Moguls I’ve been exploring some of the naughty active investing strands I originally started Monevator to pull on, before deciding to be responsible and to triple-down on highlighting passive investing into index funds as the best solution for most people.

My Moguls articles are far too long – the lengthiest over 5,000 words – and partly because of this the publishing schedule isn’t rock solid. But the feedback to my pieces, Mavens, and guest star contributions from Finumus have all been very heartening.

Frankly, a membership newsletter feels like blogging in the good old days.

There’s no thousands of daily spam comments and emails. The discussion threads are entirely positive and constructive. There are no trolls. And it’s so much nicer writing for real people happy to support you with a few quid a month than for search engines – let alone for AI training models threatening to do away with you altogether.

It’s tempting to make Monevator members-only and to switch off the free content. Life would be easier.

But then I remember why we actually wrote those 2,000-plus free articles in the first place. And also all those thank-yous from people we (or let’s face it, mostly @TA) have helped into the world of investing.

The good vibes still far outweigh the frustrations.

Besides, I know that many of you who signed-up for membership are explicitly supporting us not only for yourselves but also to help us to get the sensible investing message to as many as possible.

Which is both incredibly generous and an executive order for us to keep at it.

Any other business

A couple of quick housekeeping reminders on membership, as it’s been a while.

Firstly, if you’re having any sort of log-in problems it will almost certainly be a cookies issue or because you’re using an ad-blocker.

The membership software needs to use cookies to tell you’re logged in. And there are no ads for members browsing the site anyway.

So far in every case enabling third-party cookies, deleting stored cookies, and/or disabling the ad-blocker for Monevator has solved any log-in problems.

Secondly, there are still a couple of dozen members who are not getting member emails. Some may prefer to read us on the website. But I’m sure others would rather be getting our content in their in-box.

The solution here seems to be to make sure you’re signed-up to our free emails. Use this link to ensure you are. If you’re still having problems then please let me know via our contact form. I can then get you manually re-added to the email list. GDPR regulations mean I need your explicit permission to do so.

Remember there are dedicated Mavens and Moguls article archives.

Finally, I’m thinking of adding a Discord discussion forum for Monevator member investing chat. Do you think you would use it? I’ve resisted calls to add a forum due to the admin headaches, but it might work with members.

Okay, thanks again everyone who signed up for – and renewed – their Monevator membership. You have made all the difference!

Have a great weekend.

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Many Monevator readers rightly strive to shave tenths of a percent from the running cost of their portfolios. But some people – especially wealthier savers – ought to think even harder about tax-efficient investment.

That’s because the impact of paying taxes on share gains or dividends can dwarf all your cost-curbing in the long run.

Which is precisely why I bang on about mitigating your tax bill more than is entirely seemly.

Investment tax in the UK is a rich person’s problem

If you’re paying capital gains tax (CGT) on profits from share trades or on dividend income, you may be throwing away money.

For a minority of investors, regularly paying taxes on investments is inevitable. Perhaps they’re wealthy enough to have money leftover outside of their tax shelters, for example, yet not loaded enough to call on the UK’s legions of tax specialists to get creative.

But those lucky few aside, most of us can postpone, reduce, or even entirely avoid paying taxes on our investment gains by using ISAs and pensions.

We can also become knowledgeable about taxes on dividends and bond income, and hold our different assets in the most tax-efficient way.

If needed we can even judiciously manage our capital gains and losses every year on unsheltered assets, and defuse gains where possible. (Albeit the scope for the latter has been much reduced by the whittling away of the annual CGT allowance).

Like this, even if you can’t escape paying taxes on some of your investment returns, you might still try to delay the bulk until you’re retired, when you’ll probably be taxed at a lower rate.

How tax reduces your returns

How big a deal is paying tax on investments anyway?

Let’s consider two investors, Canny Christine and Flamboyant Freddie.

(Sorry if these names are too cute. As members of the Financial Writer’s Union we’re officially required to pick kitschy sobriquets when illustrating long-term returns with an example.)

Let’s assume Christine and Freddie both inherit £10,000 each. Nothing to be sneezed at, certainly – though Freddie isn’t against shoving a crisp £10 of it up his nose in the right circs – but also not enough to see HMRC unleash a plainclothes officer and a tax evasion detector van. (Not that we’ll be suggesting anything dodgy, of course.)

Now, when it comes to tax Flamboyant Freddie can’t be bothered to know.

Freddie thinks ISAs and pensions are for people who buy Tupperware in bulk from mail order catalogues. He regularly turns over his shares in a no-cost share trading app. He boasts about his wins to his friends who put up with him because he’s always good for a pint.

Freddie is my kind of drinking buddy, but he’s not my kind of investor.

Enter Canny Christine.

Christine uses ISAs from day one. She can easily put the whole £10,000 into a shares ISA right away, meaning her investment is entirely protected from tax forever more. And so she does just that

What happens to their respective loot after 20 years?

Two decades later

Everyone’s tax situation is different. The rate of tax on dividend income and capital gains depends on how much you have and what you earn. There’s no point me doing specific calculations.

Tax rates change all the time, too.

So let’s simply and arbitrarily assume:

• Our heroes each make 10% a year returns. We’ll ignore costs.

• Freddie pays tax on his returns at a rate of 25% every year.

• Canny Christine has no tax to pay.

Here’s how their money compounds over 20 years:

Year	Freddie (taxed)	Christine (no tax)
0	£10,000	£10,000
1	£10,750	£11,000
2	£11,556	£12,100
3	£12,423	£13,310
4	£13,355	£14,641
5	£14,356	£16,105
6	£15,433	£17,716
7	£16,590	£19,487
8	£17,835	£21,436
9	£19,172	£23,579
10	£20,610	£25,937
11	£22,156	£28,531
12	£23,818	£31,384
13	£25,604	£34,523
14	£27,524	£37,975
15	£29,589	£41,772
16	£31,808	£45,950
17	£34,194	£50,545
18	£36,758	£55,599
19	£39,515	£61,159
20	£42,479	£67,275

(Note: You can also envisage this by comparing annual returns of 7.5% and 10% using a compound interest calculator).

Paying taxes on gains every year makes a stunning difference:

• After 20 years, Freddie’s pot is worth £42,479. He feels pretty good about quadrupling his money, thank you very much.

• But Canny Christine has £67,275!

Christine has an enormous 58% more money than Freddie. That’s entirely due to her prudence in sheltering her portfolio from tax.

Even if Christine’s returns were taxed in the end – maybe if you were modelling pensions not ISAs – and at the same rate as Freddie, she’s still ahead.

A 25% tax charge on Christine’s £57,275 investment gain takes her final pot down to £52,956.

By deferring her taxes and keeping her capital unmolested to grow until Year 20, she’s left with very nearly 20% more money in her pot than Freddie.

Tax-efficient investment in practice

This theoretical example isn’t over-burdened with realism.

In reality, returns from investment – and hence whether and how you’re taxed – won’t be smooth.

Most investors will invest far more than £10,000 over their lifetimes. So capital gains tax and dividend tax will become more of an issue as portfolios grow.

An investor’s personal tax profile will also change over time. Not least due to investment gains and dividends if they invest large amounts of money outside of tax-efficient investment shelters! But also because they’ll probably earn an increasing income at work.

Most salary earners who are canny enough to start investing in their 20s will end up as higher-rate taxpayers. And tax rates than might seem trivial as a basic-rate payer, such as dividend tax, ramp up with your salary.

Gimme shelter

So don’t get obsessed about the details above. Again, everyone’s exact tax profile and financial journey will be different.

Instead focus on the takeaways:

• Paying tax on dividends or share gains can take a big chunk out of your returns.
• Most of us can and should use ISAs or pensions. We might be able to shield all our investments from tax, or at least postpone taxes until retirement. (Part of your pension withdrawals will almost certainly be liable for income tax eventually, niche scenarios aside.)
• Those with large sums invested outside of ISAs or SIPPs should read my articles on defusing capital gains and offsetting gains with losses to lessen the pain.
• Big into your cash hoard? At the time of writing gilts can be more tax-efficient investments for higher-rate taxpayers, as opposed to relying on cash ISAs. Switching up could free more ISA space up for assets such as equities or higher-yielding bonds.
• Think about the return on paying off your mortgage from a post-tax perspective. The ‘return’ of even cheap debt reduction may be higher than the taxed return from unsheltered cash.
• Are you maxing out your ISA allowance and yet you can’t or don’t want to put more into a pension? Then think hard about which assets you should really must shelter, versus those better able to withstand taxation. Capital gains tax, for example, isn’t due until you sell an asset and book the gain. You might be able to buy and hold some kinds of investments – properties, companies, investment trusts – and defer capital gains for decades. (Note that accumulation funds are liable for tax on their income though).

Pensions are more tax-efficient investment wrappers than ISAs

The core tax benefits of ISAs and pensions are theoretically the same. But pensions do have a few perks that make them slightly more attractive from a tax perspective – crucially the tax-free lump sum, and for higher-earners the likelihood of paying a lower tax rate in retirement – at the cost of restrictions on accessing your money.

For my part, I use a mix of ISAs and pensions. But I’ve begun to favour the latter with new money as I’ve inched closer to the age when you can access a private pension, and also as the old pension constraints were loosened.

A tax-efficient investment strategy is not too taxing

Hopefully you think this is all perfectly obvious and you already use ISAs and pensions yourself.

Subscribe to Monevator if you’ve not yet done so. You clearly belong here!

However I do sometimes still hear people saying they don’t need a tax shelter – often flagging small initial sums or extra admin hassle as justification.

This is wrong-headed. If you’re going to be a successful investor, you need a tax-efficient investment strategy from day one. It will benefit you many decades down the line!

Note: I’ve updated this article from 2012 to reflect our shining modernity in 2024. But the reader comments on Monevator have been retained, and may reflect out-of-date tax law. Check the comment dates if you’re confused.

What caught my eye this week.

Bad news! Not only are the machines now coming from our cushy brain-based desk jobs, but our best response will be to hug it out.

At least that’s one takeaway from a report in the Financial Times this week on what kinds of jobs have done well as workplaces have become ever more touchy-feely – and thus which will best survive any Artificial Intelligence takeover.

The FT article (no paywall) cites research showing that over the past 20 years:

…machines and global trade replaced rote tasks that could be coded and scripted, like punching holes in sheets of metal, routing telephone calls or transcribing doctor’s notes.

Work that was left catered to a narrow group of people with expertise and advanced training, such as doctors, software engineers or college professors, and armies of people who could do hands-on service work with little training, like manicurists, coffee baristas or bartenders.

This trend will continue as AI begins to climb the food chain. But the final outcome – as explored by the FT – remains an open question.

Will AI make our more mediocre workers more competent?

Or will it simply make more competent workers jobless?

Enter The Matrix

I’ve been including AI links in Weekend Reading for a couple of years now. Rarely to any comment from readers!

Yet I continue to feature them because – like the environmental issues – I think AI is sure to be pivotal in how our future prosperity plays out. For good or ill, and potentially overwhelming our personal financial plans.

The rapid advance of AI since 2016 had been a little side-interest for me, which I discussed elsewhere on the Web and with nerdy friends in real-life.

I’d been an optimist, albeit I used to tease my chums that it’d soon do them out of a coding job (whilst also simultaneously being far too optimistic about the imminent arrival of self-driving cars.)

But the arrival of ChatGPT was a step-change. AI risks now looked existential. Both at the highest level – the Terminator scenario – and at the more prosaic end, where it might just do us all out of gainful employment.

True, as the AI researchers have basically told us (see The Atlantic link below) there’s not much we can do about it anyway.

The Large Language Models driving today’s advances in AI may cap out soon due to energy constraints, or they may be the seeds of a super-intelligence. But nobody can stop progress.

What we must all appreciate though is that something is happening.

It’s not hype. Or at least for sure the spending isn’t.

Ex Machina

Anyone who was around in the 1990s will remember how business suddenly got religion at the end of that decade about the Internet.

This is now happening with AI:

Source: TKer

And it’s not only talk, there’s massive spending behind it:

Source: TKer

I’ve been playing with a theory that one reason the so-called ‘hyper-scalers’ – basically the FAANGs that don’t make cars, so Amazon, Google, Facebook et al – and other US tech giants are so profitable despite their size, continued growth, and 2022-2023 layoffs, is because they have been first to deploy AI in force.

If that’s true it could be an ominous sign for workers – but positive for productivity and profit margins.

Recent results from Facebook (aka Meta) put hole in this thesis, however. The spending and investment is there. But management couldn’t point to much in the way of a return. Except perhaps the renewed lethality of its ad-targeting algorithms, despite Apple and Google having crimped the use of cookies.

Blade stunner

For now the one company we can be sure is making unbelievable profits from AI is the chipmaker Nvidia:

Source: Axios

Which further begs the question of whether far from being overvalued, the US tech giants are still must-owns as AI rolls out across the corporate world.

If so, the silver lining to their dominance in the indices is most passive investors have a chunky exposure to them anyway. Global tracker ETFs are now about two-thirds in US stocks. And the US indices are heavily tech-orientated.

But should active investors try to up that allocation still further?

In thinking about this, it’s hard not to return to where I started: the Dotcom boom. Which of course ended in a bust.

John Reckenthaler of Morningstar had a similar thought. And so he went back to see what happened to a Dotcom enthusiast who went-all in on that tech boom in 1999.

Not surprisingly given the tech market meltdown that began scarcely 12 months later, the long-term results are not pretty. Bad, in fact, if you didn’t happen to buy and hold Amazon, as it was one of the few Dotcoms that ultimately delivered the goods.

Without Amazon you lagged the market, though you did beat inflation.

And yet the Internet has ended up all around us. It really did change our world.

Thematic investing is hard!

I wouldn’t want to be without exposure to tech stocks, given how everything is up in the air. Better I own the robots than someone else if they’re really coming for my job.

But beware being too human in your over-enthusiasm when it comes to your portfolio.

The game has barely begun and we don’t yet know who will win or lose. The Dotcom crash taught us that, at least.

Have a great weekend!

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