I’m firmly in the passive investing camp.
Without going into much detail, my first ever investment was a leveraged disaster held through a partnership structure. It didn’t work out. My second investment was an index fund.
At first I found index trackers confusing – unit trusts vs ETFs, physically replicated vs synthetic, full replication vs sampling, Fantastic Investment Manager A’s vs Fantastic Investment Manager B’s funds. I wish that Monevator’s friend Accumulator had written this handy guide a couple of years earlier.
Two years ago, after long procrastination followed by a solid day of googling, I picked my first index fund and found myself talking to a lady from HL about a regular investment plan. I told her how much I wished to invest and quoted the fund’s ISIN, and then she asked me whether I wanted income or accumulation units. Thewhatprettyplease? Which are better? I see. Let me think about it and get back to you.
And back to Google it was, seeing as this handy guide wasn’t available either. That Accumulator chap was slack back then. 😉 In the end I settled on accumulation units. It works for me, and here’s why:
1. I’m lazy
Accumulation units automatically reinvest my share of the fund’s income. That’s one less thing for me to do.
I invest monthly and rebalance quarterly by adjusting the following month’s purchase allocation. Since accumulation units don’t go ex-div, when I rebalance I don’t have to care where in the distribution cycle each of the funds are, and whether a dividend payment will mess up my freshly rebalanced asset allocation.
Accumulation units also save me some spreadsheet legwork. All broker platforms I’ve used show life to date capital gains and losses per investment as standard. If you only hold accumulation units that’s your cummulative actual return before platform fees.
2. I’m tight
I don’t like transaction costs as a matter of principle. Stamp duty is my favourite bugbear, but dealing fees annoy me as well. Wouldn’t it be the same if, say, the FT sold you an annual subscription and then tried to charge you 50p each time you wanted to read an article?
The value of my S&S ISA is low enough for it to stay with a percentage fee broker where I can trade funds for free. But the SIPP is on a fixed fee platform, and each investment purchase costs me £2 a pop. Am I too cheap to pay £2 without having to moan about it? It turns out that, sadly, I am.
Only two of the funds I invest in have a bid/ask spread, but the spread is c.5%. That’s a lot. If I took income in cash and reinvested it into these funds, I’d pay the spread on the reinvestment. Accumulation units allow me to bypass it.
3. I have years to go until I’m able to retire
The convention is that you should buy accumulation units throughout your working years, and then transition to income units when you retire and start to draw income from your investments.
For now I have at least nine years before I reach any sort of financial independence. As I (hopefully) approach The Day and start reducing my allocation to equities, I’ll probably start gradually moving money into income units. We’ll see.
4. There’s less temptation to tinker
Investor know thyself, they say. And I do.
My borderline ADD personality means that I manage many areas of my life by alternating between utter neglect and killing it with care. My garden is a good example of that. 😉
When it comes to investing, a monthly investment plan via a direct debit plus a written rebalancing strategy keeps me on the straight and narrow. If I had cash from distributions sitting there (staring at me) I know there’d be times when I’d find it impossible to resist tinkering.
5. All my investments are in tax wrappers
There is no difference in how accumulation and income units are taxed, albeit income units will provide you with cash for when the tax man turns up with a bill.
Since all my investments are in tax wrappers, tax is not an issue. If I did have large amounts invested in taxable accounts, I might see a reason for holding some of that in income units. Yet even then, given the £5k dividend allowance, there’d have to be a lot of yield for this to become relevant.
But what if I’m neither lazy nor cheap and am about to retire?
Ultimately, it all depends on your individual circumstances and preference.
I’ve heard that some people derive a lot of joy from seeing dividends roll into their accounts. Some others say that being physically paid investment income serves as a positive reinforcement tool and motivates them to keep investing. I’m not one of those people, but if you are, then more power to you. By all means, go for income units, colour your spreadsheets gold, whatever floats your boat and/or helps you in your journey to financial freedom.
Keep on trudging up that metaphorical mountain; it will be worth it in the end. It is Known.
- Right now the portfolio value is small enough so I can rebalance with new money only. I’m aware that this may not always be possible going forward.
- The entire concept of a stamp duty is positively medieval. I can understand the rationale for it in a society where wages were often paid in kind: given the difficulties that such a system would pose for Their Majesties collecting PAYE, a transaction tax payable on transfer of a legal title to property was a practical solution to a complex problem. Nowadays, however, transaction taxes are nothing but blatant second-dipping: taxing the deployment of income that’s already been taxed.