Grab yourself a cup of tea and a biscuit – because Lars Kroijer is here again with more answers to your burning questions.

As regular readers will know, this is a collaboration between Monevator and Lars’ popular YouTube channel.

Every month Lars picks a few of your questions and then answers them individually, in video and transcript form, as below.

We’ve already got enough questions to last us a year or two, so sit back and enjoy!

Note: embedded videos are not always displayed by email browsers. If you’re a subscriber over email and you can’t see the videos, head to the Monevator website to view this Q&A with Lars Kroijer.

How should one make tax efficient withdrawals?

Our first question this week comes from Barn Owl who asked: “Given UK tax laws on pensions, ISAs, capital gains tax and so on, how should you manage your portfolio withdrawal in a tax efficient way?”

Lars replies:

Now, I want to try to answer this question without really giving a good answer! Tax advice is typically incredibly jurisdictional in specifics and also highly personal.

I personally find it very frustrating that financial advice from people like myself often comes completely separate from tax considerations, which obviously can skew the results of any good financial allocation decision. On the other hand I sometimes find that tax lawyers can make relatively simple things appear far more complex than they have to be because, you know, they are not exactly paid to keep things short and simple when they are paid by the hour!

With that all said, you probably do need advice for your specific situation and it does not have to be expensive. You can prepare the questions in advance, go online, look for specific answers and then contact tax lawyers with very specific questions that they will probably have good answers for – or at least answers that are up-to-date with the current legislation.

Generally, I would say try to avoid paying tax sooner than you have to.

If you can, defer tax payments. Imagine you have a £100 where £40 is due in tax. Well if you defer payment even just for one year that means you are earning interest or capital returns on £100 instead of the resulting £60 after tax for that one year. So that is a benefit. Of course in the world of negative interest rate there are complications to this rule but generally I think that still holds true.

I’d also say pay attention to the rumblings of change. There are elections coming right now in the UK and there could be a change in government. It could be quite important to understand how a new government would impact the tax set-up and if there is anything that makes sense to do before an election.

In terms of withdrawals, think about your portfolio allocation when you do withdraw. Let us say you have decided on an allocation of 50% bonds, 50% equities but your current portfolio is 55:45. In this case you can use the withdrawal to realign your portfolio so it is more in line with what you want to do. Here you should sell and withdraw from the bonds, which will get you closer to your 50:50 desired allocation without having to incur trading charges that you otherwise would.

Another thing I would mention is there is in some people’s portfolio certain liquidity windows . If you have investments that may only be liquid every so often, it is certainly worth keeping in mind – even if it is sub-optimal from perhaps even a tax or other financial perspective. If you have a liquidity window perspective and there is an opportunity to get some cash out then I find that is often a very good thing to do.

Normally I’d say I hope that answers the question, but I know this time it sort of didn’t! I wanted to give you a flavor for the kind of thinking that goes around tax and why I think it is important to get good specific tax advice.

Further reading on Monevator:

• Tax-efficient investing in the UK
• UK capital gains tax
• How UK dividends are taxed

Should you adjust your portfolio to reflect the climate emergency?

Our second question comes from the blogger DIY Investor. Keen Monevator readers may have noticed we’ve linked to several of his posts over the past year describing his shift to what he considers a more appropriate way of investing in the face of the climate emergency.

Perhaps not surprisingly, this question reflects such concerns:

Lars replies:

The question in this video comes from DIY Investor who asked for my views on the climate emergency and how that will impact the global economy in the next decade and whether we should adjust our investment portfolio as a result of that.

Now, in my view climate change will impact a tremendous number of things and, absolutely it will in all sorts of predictable ways. In fact, personally, I am devastated by how some politicians does not seem to embrace the obvious science behind climate change. I think the regulatory framework can therefore be a little slow to change to reflect the reality of climate change.

But moral and climate change issues aside, in general, I would say you should not be investing differently as a result of it.

Let’s say you are trying to profit maximize or risk return to maximize your portfolio by excluding oil and gas and related sectors from your portfolio. You are really saying I am doing this to make more money or have a higher return on my portfolio, but you are also saying I think I know something that the multi trillion-dollar global financial market does not know. Namely that the oil and gas sectors are going to under-perform the wider market going forward.

Now that is a pretty bold statement and for most people that is not a statement that they are able to make. Most people are not able to outperform the wider financial markets and have great insights that thousands and thousands of equally or better-informed investors have not seen.

I know that is a bit of a boring answer. It seems obvious perhaps to some people that something as dramatic and big as the climate catastrophe should lead to amazing trading opportunities and I am not saying that’s not the case. I am just encouraging you to think about what is it exactly that you know that the rest of the world has not seen, has not understood – what is your edge? If you go ahead and make those investments, continue to ask yourself that question. And if you do make money, make sure that it was not because you got lucky but it was actually because of the things you thought would happen did in fact happen.

For most people I say do not do it unless you have issues other than profit maximizing in mindset – i.e. moral or other issues. I would say stay away from it.

What if you do go ahead and deselect these sectors? I don’t think it’s the end of the world, as long as you still have a portfolio that is diversified across all sorts of other sectors and geographically diversified. You are probably going to be fine.

One minor note: let’s say that oil and gas sectors represent 10% of the overall market and you are deselecting those from the portfolio. Make sure you are not paying much higher fees for owning what is close to the same thing – 90 percent overlap. You’re could be paying a lot of money for that deselection. Just keep that in mind when you when you’re looking into this.

More from Monevator:

• SRI investing: What you need to know
• Environmental degradation: The biggest thread to your long-term wealth

Until next time

Just those two questions this month – and the answers were a bit less definitive than those we’ve seen previously, so as ever feel free to add to Lars’ answers in the comments below.

Watch more videos in this series. You can also check out Lars’ previous Monevator pieces and his book, Investing Demystified.

What caught my eye this week.

Hey you! Yes – you! Are you someone who would like to grab a free share in a publicly traded company?

Perhaps you’re a passive investor who wants to dabble with a little ‘fun money’ portfolio on the side, to stop you straying with the big stash?

Or maybe you’re an active investor – like me for my sins – and you’re sick of spending thousands in fees?

Maybe you’re jealous of all this no-fee trading in the US that you keep reading about?

We’re often asked: Is it better to invest a big lump sum of money all at once, or to drip-feed your cash into the market?

And there happens to be an easy answer…

Statistically you’re more likely to boost your returns by going all in at once.

A Vanguard paper titled Dollar-cost Averaging Just Means Taking Risk Later found that lump sum investing beat drip-feeding around two-thirds of the time in the UK and US.

This was true across multiple decades and asset allocations – because more often than not equities and bonds trump the returns from cash.

Here’s a snapshot of Vanguard’s findings:

Many other studies have shown the same thing.

The logic is simple. Equities beat cash. Bonds beat cash. (Eventually!)

Equities and bonds are riskier asset classes than cash and investors can expect to be rewarded for bearing that risk. Historically this has come to pass. Over most time periods your investments will therefore beat your bank account.

So the sooner your money is cast into the market, the more likely it is to benefit from the greater potential of equities and bonds to grow.

Indeed, the longer you spend drip-feeding (or pound-cost averaging1), the more likely it is that you will pay for your caution as your cash returns are outshone by the fizzing fireworks of equities.

Yes but, no but…

Wait – what about that one third of the time when drip-feeding wins?

Well, you’ll be glad you chose to drip-feed if the market relentlessly falls over the course of your 12 easy installments. This way every time you buy a punnet of equities, you’re buying them at a cheaper rate than the last time.

You’ll also be glad if, in a parallel universe, you’d have been that shell-shocked investor who threw in your whole £200,000 lot at once and then watched it shrink in a bear market crash like Lake Chad in the face of a population explosion.

So the real question is not about returns. It is could you handle it if luck was against you and your inheritance or bonus or compensation payout – your one life-changing windfall – got vaporised by 50% in a matter of months?

It’s monkey in the mirror time again and drip-feed investing works because it helps prevent that person from going nuts.

I’ve been there

Many first-time investors hang around the edge of the investing pool, unable to dive in.

I know I did.

I couldn’t bear the thought of watching my maiden punt lose – even though my rational brain knew that it didn’t matter because I was committed to investing for the long term.

Every piece of bad news heightened my dithering because, well, if I waited a bit longer then maybe I could buy a little cheaper… but really I just didn’t want to see my money tank.

It was an inauspicious start for a guy who doesn’t believe you can time the markets.

Market timing is not your friend

It’s precisely because we can’t predict the markets that drip-feeding is a useful psychological tool.

We can gather all the opinions we like, check out the P/E ratios and fret about geopolitics, but that kind of rune-reading is little better than superstition. It might salve a troubled mind but it makes no difference to the outcome – which is decided by a game of chance.

Drip-feeding breaks the brain-jam because it promises to cushion risk averse investors against the (less likely) downside.

If the market moves against us early on, then at least we’re not fully exposed, and later drips will buy more shares at a cheaper price.

So drip-feeding (aka pound-cost averaging) is useful, but it’s useful as a psychological crutch, not because it’s likely to boost returns. It isn’t.

If you think drip-feeding is the best way forward for you, there are various methods to try. You might consider investing equal installments over:

• 12 months (never longer according to maths professor Bill Jones)
• Six months
• Four quarters

Or else put in half now and half over the next six months.

Passive investing writer Rick Ferri also has some interesting ideas on drip-feeding techniques, including favouring pound-cost averaging if your cash heap is worth more than 20% of your current wealth.

Your bottom line

Remember, the potential difference in outcomes between lump sum investing and pound-cost averaging is the performance of the market versus cash over your drip-feeding period.

We saw that according to Vanguard’s paper, the lump sum approach wins two times out of three.

But by how much? Well:

In the United States, 12-month dollar cost averaging led to an average ending portfolio value of $2,395,824, while lump sum investing led to an average ending value of $2,450,264, or 2.3% more.

The results were similar in the United Kingdom and Australia: UK investors [who chose lump sum investing] would have ended with 2.2% more and Australian investors with 1.3% more, on average.

Personally, if I doubted my risk tolerance then I’d choose the technique that was more likely to keep me in the game, rather than stretch for 2.2% upside.

That’s because the worst outcome is panicking in the face of a bear market, selling at the bottom, and then being scared off investing for life.

Take it steady,

The Accumulator

P.S. Remember this question has nothing to do with pound cost averaging from a regular income like your monthly salary. That’s just an accident of circumstance. Your money arrives as a series of monthly lump sums, and you’ll buy more equities on the dips and less on the highs. But, as market timing is not consistently possible, you’re best off investing it as soon as you can.

1. Or dollar-cost averaging as our US chums would have it [↩]