Avoiding the Custom House
Walking past the old Custom House during a recent trip to Victoria I was taken back 200 years, and looking through the lens of a merchant, thought how they might have endeavoured to avoid the Custom House. Charting parallels to the present day, there are in fact approaches that allow today’s investor to go about the same business.
Through the implementation of an indexing strategy, that is the use of low cost, well diversified Exchange Traded Funds, as opposed to attempting to beat the market by picking stocks, the investor of today can avoid what merchants of old went to great lengths to circumvent; the payment of taxes, commissions, and other transaction costs. Here’s how:
- Limiting the turnover of investments via the implementation of an indexing strategy will, ceteris paribus, defer taxable capital gains when compared to a similar risk-adjusted actively managed portfolio.
- The purchase of an ETF allows the investor to have a diversified portfolio according to the mandate of the fund/ makeup of the index. This enables exposure to a broad base of holdings which can be constructed with a limited number of trades, reducing commissions when compared to building and maintaining a portfolio via individual security selection.
- Tracking the index will reduce transaction costs, such as the markup typically built into bond prices for retail investors. While bonds are not typically sold with a commission, there is a cost associated with their purchase or sale, though not particularly transparent.
Today the Custom House can be viewed as a symbol for where many of the traditional brick and mortar investment firms are headed. The emergence of efficient, low cost investment vehicles such as ETF’s is what the steam engine was to the tall ship. The investor of today can now motor into the wind, avoid the entrenched costs associated with the old guard, and have enough time left over for tea at the Empress.