Today we’re going to look at purchasing an index tracker fund.

Next stop, the world – muhaha!

(Oops, did I say that out loud? I meant to write: ‘Next step, a globally diversified passive portfolio’…)

What is an index tracker fund?

An index tracker fund is typically an Open Ended Investment Company (OEIC).

In normal-person speak, this means a tracker fund is set-up as a company that you can buy and sell shares of.

Index trackers are ‘open-ended’ because the number of shares in the company will rise and fall when investors buy or sell them from the manager of the fund. ¹

Some tracker funds are still set up as Unit Trusts. These are structured as a trust rather than a company, and investors buy and sell units in the trust. Like OEICs these are also ‘open-ended’.

From an everyday investor’s point of view, the two flavours mostly amount to the same thing.

We’ll focus on OEICs, which we’ll refer to simply as index funds from here.

Pricing

Before buying anything, it’s important you know how the market works.

Index funds are priced by a set formula based on the value of their assets.

Unlike ETFs or shares, a single-priced index fund has one published price for buyers and sellers. The price is calculated at a set time – called the valuation point – which for most funds is once each working day.

To complete your trade on a given day, you must do so before a cut-off time:

• If you place an order before the fund’s cut-off time, you’ll normally receive the price calculated at that valuation point.
• If you place your order after the cut-off, then your trade will go through at the next valuation point.

Note this means you might mistakenly think you’re invested before your money has actually gone into your chosen fund. For example, you could put in a buy order on Tuesday afternoon. But it could be executed, say, at midday on Wednesday.

Normally being out of the market for a few hours doesn’t matter much. But if markets are making huge moves up or down, it might!

You can find an index fund’s valuation point in its documentation, or on your investment platform’s research page under ‘fund facts’ or ‘dealing deadlines’.

I’ll trade yer…

Let’s say you know what fund you want to own. For instance, you want to put £1,000 into the Fidelity Index World (Acc) fund. (Here is its webpage).

You’re ready to put your money to work.

First you need to locate the fund you want to buy into. To find a fund, search for the fund’s name or identifier – such as its ISIN, ticker, or platform fund code – on your platform.

Be persistent! Broker search tools can be shonky. A fund name can often be the easiest way to find a fund, rather than trying to hit on the required code. You might even have to resort to a Google search of your platform to find the fund page on its website, and then go from there. In all cases, triple-check the details to make certain you’ve got the fund you want.

Deal with it

Here’s that Fidelity World Index Fund located at Hargreaves Lansdown:

You can see the Buy and Sell prices are the same. That’s because Fidelity Index World is a single-priced fund ². More on that below.

Note that this quoted price is the last traded price – not the price we’ll pay.

As we saw above, an index fund is generally valued once a day, at its valuation point. Hence you’ll only know the exact price you paid when your trade completes.

Having logged into the platform and clicked through to Invest Now, we see this screen:

Notice we’re only confirming the total order value – here it’s £1,000 – and no price. Again, we won’t know the exact price we paid until the deal is done.

Because OEICs have a single published price, there isn’t a conventional bid-ask spread in the way there is with an ETF. The transaction costs are embedded in the fund’s pricing, rather than through a spread. ³

You’ll also see that Hargreaves Lansdown will charge us £1.95 to do the deal.

Who pays for all the underlying buying and selling?

Here’s some slightly geeky details.

When you buy or sell units in, say, an equity index fund, your fund manager may have to buy or sell the underlying company shares on your behalf. These transactions cost money – racked up by things like dealing spreads, commissions, and the market impact of large trades. ⁴

Now, if transaction costs were simply absorbed by the fund, then existing investors could end up paying for the trading activity of other investors.

That’s called dilution, it’s not really cricket, and so fund managers – and regulators – have devised ways to make sure the people who create the costs actually pay them.

For example, a fund might apply an explicit dilution levy.

Or, commonly with a single-priced fund, it can use swing pricing – also known as a dilution adjustment – to nudge the fund’s published price up or down to reflect the estimated costs of dealing in the underlying investments.

The point is that while an OEIC may show one price rather than an ETF-style bid-offer spread, that doesn’t mean buying and selling is costless. The costs of trading the underlying investments must still be paid somewhere.

The swing pricing mechanism is designed to protect long-term investors from subsidising other people’s trading. The FCA’s rules require any dilution adjustment or levy to be operated fairly and solely to reduce dilution – which is nice.

(Incidentally, if you Googled ‘swing pricing’ to read about the cover charges when throwing your keys into a bowl at a certain sort of party in Surbiton, well, each to their own.)

What will the trade cost you?

Many good brokers don’t charge a dealing fee for trading index funds. Historically, this usually made index funds cheaper to buy than ETFs, where dealing fees were levied.

However with today’s zero-commission platforms, ETFs can also be bought without an explicit dealing charge.

Meanwhile some platforms do charge a fee for index fund dealing, as we saw above.

Other investment costs will usually apply either way, so scrutinise fee structures before you pick your platform. Even trivial charges add up over time. Find what’s best for you.

Assuming you’re not getting badly stung some other way – be particularly wary of annual percentage-based charges on large investment pots – then paying no trading fees is a nice benefit, especially when you’re starting out.

Have a look at the Monevator broker comparison table to compare charges.

Doing the deed

Continuing our example, we click along to the final confirmation screen.

Pressing ‘Place a deal now’ will do the deed and commit your cash:

Then it’s just a matter of sitting back and waiting for our order to be fulfilled. The buying bit on our side is done.

As with our ETF purchase in the previous article, we’ll have to wait a while for the trade to settle, but in practice you’ve committed your investment into the fund.

Your broker should supply you with a contract note for your records.

That’s all folks

Buying and selling index funds can feel easier than trading ETFs, if only because there’s not the pressure of a countdown and you don’t need to worry about spreads.

True, you do have to wait to know the exact price you paid with index funds, unlike ETFs.

But for long-term passive investors putting money into broad index funds, that’s no big disadvantage.

Price fluctuations on a day-to-day basis are essentially random. We’re growing our investments for decades.

Inspired? If you’re after ideas about what index tracker funds to buy then check out The Accumulator’s overview of low-cost index trackers. Note that comments below might refer to an older version of this article.

1. In contrast, an investment trust is ‘closed-ended’. It has a fixed number of shares that you trade on a stock exchange.
2. i.e. There’s no bid/offer spread.
3. Some Unit Trusts do still have two prices, like ETFs, but most have switched to single pricing.
4. That one is more of an issue for the likes of Warren Buffet than you or me!

The post How to buy and sell index tracker funds appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: Who’s Balkanised now? appeared first on Monevator.

For the best part of three decades, any idiot could make money in UK property.

And, for a while, this one certainly did.

September 2025

Agent: “It’s rent review time. The current rent is £740 pcm. We’re proposing £850.”

Me: “No. I really don’t want to go into the new rent control regime on an under-market rent. Let’s ask for £880–£890. Comparables are £1,000, but I acknowledge starting with a nine might cause sticker shock.”

Agent: “We don’t recommend that large an increase.”

Me: “Tell them £880. Doubtless they’ll negotiate down to £850 anyway.”

The agent tells the tenant we are going up to £880.

Agent: “She says she can’t afford that. She could do £777?”

Me: “WTF? Housing benefit, which I’m pretty sure she’s on, is £825. FFS. Counteroffer £810.”

Agent: “£790 is the best they can do.”

Me: “Okay then. Whatever.”

This is not a masterclass in rent optimisation. This is the tenant whose rent I went roughly 20 years without raising.

I changed it once. Downwards.

The tenant has paid on time, every month, for more than two decades. I’ve had enough experience of the other sort of tenant to know this is worth something.

And for much of that time, the mortgage cost me only £50–£80 a month. The rent covered the bills. House prices went up. Why stir things?

The tenant quite reasonably has me down as a soft touch.

Unfortunately, the government has decided to cure me.

Previously, on Finumus Does Property (Badly)

In the first article in this series, I explained how buy-to-let was a wonderful trade if you bought early enough, borrowed enough, and then mistook falling interest rates for signs of your genius.

In the second, we saw how Section 24 turned mortgage interest into a fiscal practical joke. Meanwhile Tower Hamlets decided my normal house was an HMO because three unrelated adults lived in it.

I explained in part three how my remaining non-London property produced a real post-tax return that was acceptable only if you put a heroic value on learning about mould.

Since then, the policy risks long floating about in the distance have moved into the building.

The Renters’ Rights Act is live. Making Tax Digital has arrived. Property income tax is going up. And London property has spent another couple of years looking less like an unstoppable wealth escalator and more like an expensive, illiquid, politically-managed bond, with plumbing.

The old buy-to-let dream was that your tenants bought you a house.

The new experience is that your tenants, HMRC, the council, the letting agent, the mortgage lender, and the First-tier Tribunal all hold a committee meeting in your bank account.

The good landlord tax

My arrangement with my long-standing tenant was simple.

If she paid on time, looked after the place, and the property roughly washed its face, I would not optimise every last pound of rent.

That bargain relied on two things:

• Capital growth doing the heavy lifting
• My retaining the option to move the rent towards market if the numbers stopped working

Neither of these can now be relied upon.

As already mentioned, the Renters’ Rights Act changes took effect on 1 May in England. Section 21 ‘no-fault’ evictions became a thing of the past. Assured shorthold tenancies became assured periodic tenancies. Landlords now need a statutory ground for possession.

The Act also put rent increases onto a revised Section 13 process. A landlord must use Form 4A, give at least two months’ notice, and you cannot increase the rent more than once a year. The proposed figure is supposed to be the open-market rent.

The government says this is not rent control – but it is rent control.

A £47 one-way option

A tenant who thinks the proposed increase is above market can apply to the First-tier Tribunal.

As of July 2026, the application costs £47, with help available for people on low incomes or certain benefits. The tribunal can determine a rent below the landlord’s proposal or the same as it. It cannot set a higher one.

If the decision comes after the proposed start date, the new rent will usually begin from the next payment date after the decision. The increase is not normally backdated to recover the landlord’s lost rent.

So, ignoring the value of the tenant’s time, £47 buys them a rather attractive one-way option:

• Heads: the proposed rent comes down
• Tails: the rent does not go above the landlord’s number
• Edge: any tribunal delay is largely financed by the landlord

Perhaps the system will be brilliantly staffed and ruthlessly efficient? Perhaps the First-tier Tribunal will become the Amazon Prime of residential property disputes?

Who knows?

But the path for a rational landlord is obvious. Never again allow a reliable tenant’s rent to drift materially below market. Raise it every year. Keep comparables. Preserve evidence. Behave more like the spreadsheet.

Congratulations – you have made the soft-touch landlord more commercial.

Section 24 enters its baroque period

Section 24 already made the tax treatment of an individually owned, mortgaged rental property absurd.

In the old days, rent came in, running costs and mortgage interest went out, and the remaining profit was taxed. This was quaintly known as taxing profit.

Now an individual landlord cannot deduct residential finance costs in the normal way. Instead, the rent after non-financing costs is taxed. The landlord receives a basic-rate tax reduction for qualifying finance costs.

Here is a deliberately simple example. Assume an additional-rate tax paying landlord has:

• £20,000 of rent after all non-financing costs
• £15,000 of mortgage interest
• £5,000 of actual economic profit

For 2026/27, the tax is:

The property made £5,000 before tax. It lost £1,000 after tax. The effective tax rate on the real profit was 120%.

This is not a typo. It is a policy outcome!

From 6 April 2027, England, Wales, and Northern Ireland get separate property-income rates of 22%, 42%, and 47%. For me, the relevant number is naturally 47%.

One small mercy: the final policy also raises the finance-cost tax reduction from 20% to the 22% property basic rate. The Section 24 gap therefore remains 25 percentage points instead of widening to 27.

The same example for 2027/28 becomes:

The after-tax loss is now £1,100. The effective tax rate on the £5,000 economic profit is 122%.

Because both rates rise by two percentage points, the extra £100 tax in this simple example is exactly 2% of the genuine £5,000 profit.

That is almost elegant.

Only a government could preserve a tax distortion with such immaculate symmetry.

Refinance, repay, or run away

So, as we’ve seen I still own two investment properties. Both need mortgage decisions within the next 12 months, which is far from ideal timing.

My pointless-commuter-town terrace has reached the stage where the mortgage must be replaced or paid off. Paying it off would improve the cashflow, but a 22% tax credit is better than no tax credit at all.

The London property is the ex-local-authority freehold house in Tower Hamlets, currently let to Ukrainians.

Tower Hamlets treats it as an HMO because it is occupied by three sharers, even though it is let jointly as a normal house. My existing lender tolerated this by grandfathering the loan. Ordinary best-buy lenders are not so relaxed.

This makes the refinance expensive. It also makes the sale price more theoretical than any figure suggested by Zoopla.

Problem child

Who is the natural buyer for an ex-local-authority house with licensing weirdness attached?

Not a young family wafting through the door with a scented candle and a mortgage-in-principle.

Nope – it’s another landlord.

And that landlord buyer would get today’s mortgage rates, today’s Section 24, today’s Renters’ Rights regime, today’s compliance costs, and the additional property stamp duty surcharge on entry.

Clearly the property is worth whatever price induces someone else to voluntarily inherit my problem.

I see four broad choices:

1. Refinance and accept that the house is a geared long option on London.
2. Repay the mortgage and own a low-yielding, unwrapped, politically exposed property bond with plumbing.
3. Sell, pay the tax, and buy something sensible with what little equity is left.
4. Complain, procrastinate, and call it optionality.

Reader, you know me too well.

London doubled and went nowhere

Every year in our Family Finances Annual Report, I seem to write a version of this:

The total value of property assets was marked down again, based, as usual, on the bottom of the Zoopla range. Property fell as a share of family wealth, helped by a combination of ‘property down’ and ‘other assets up’.

Whilst ‘fraction of wealth in property’ is a KPI we’re trying to manage down, I would prefer to get all of it from the ‘other assets up’ department.

According to the UK House Price Index data, the average London property cost £262,793 in April 2006.

Twenty years later in April 2026, it costs £552,655.

Excellent! London property more than doubled. Break out the prosecco and start a property podcast.

Except… the RPI measure of inflation rose from 196.5 to 414.4 over the same period. Put the April 2006 price into April 2026 pounds and we get:

So 20 years of average London capital growth, after RPI inflation: approximately minus 0.3%.

Nominally, London more than doubled. But in real terms it went slightly backwards.

British property! Now available in nominal!

At least it’s not leasehold

This is an index, not my house. It ignores rent. The April 2026 figure is provisional. RPI is not the only possible inflation measure. And individual streets, houses, and flats behave differently.

Indeed, that last point matters. In the year to April 2026, the average London terraced house rose 0.7%, whereas the average flat or maisonette fell 4.3%.

Thank God I never bought leasehold.

One of the best pieces of financial advice my father gave me 30 years ago was simply: “Never buy leasehold.”

My London house is an ex-local-authority shithole. I say that with affection, and a spreadsheet full of repairs. But it is a freehold ex-local-authority shithole.

No cladding bill. No lease extension issues. The ground rent wheeze was not my problem. There’s no mystery service charge. And no managing agent charging me £300 to reply to an email explaining why it costs £300 to reply to an email.

‘London property’ is not one asset class. A freehold house in a development constrained part of London is not the same thing as a leasehold flat in a tired block or an off-plan shoebox flogged off overseas as a portable Swiss bank account with a concierge.

That distinction is one reason I have not sold.

A long-dated option on London recovering its mind

The first decade of my investment property ownership benefitted from an enormous tailwind.

London was on a Thatcherite/Blairite tear. The City boomed. The UK was open, liberalising, financialising, and unusually good at attracting global talent and global money.

London became the de facto financial capital of Europe. We had economic growth! (Something my now-adult children have sadly never experienced.)

Alas, then came the Global Financial Crisis. Property owners ought perhaps to have learned something about leverage. Instead, interest rates collapsed and asset owners were rescued by duration.

Then came Brexit, extra stamp duty, tax creep, planning paralysis, non-dom reform, and a national agenda that shifted from ‘build, trade, and get rich’ to ‘who can we tax to pay benefits to others?’

Maybe London will eventually remember how to be London. Owning a freehold house is a long-dated option on that possibility.

It’s not my base case. It may not even be my sensible case.

But nobody is forcing the option to expire today.

Making Tax Digital: making landlords grumpy

Just when I thought one annual tax return was enough interaction with HMRC, HMRC characteristically disagreed.

Making Tax Digital for Income Tax (MTD) began on 6 April 2026 for sole traders and landlords whose qualifying gross income from self-employment and property exceeded £50,000 in 2024/25.

The threshold falls to £30,000 from April 2027 and just £20,000 from April 2028.

Affected taxpayers must keep digital records in compatible software, submit quarterly updates, and then complete their year-end tax return in that software.

HMRC has taken an annual indignity and given it seasonality.

Landlord limited

In fairness, I already keep records. I have accountants. I can use software. This will not break me.

But that is not the point.

Small landlordism increasingly resembles a business with:

• Safety and regulatory obligations
• Licensing and possession risk
• Financing risk
• Tenant risk management
• Software compliance
• Tax complexity
• Political risk

…but all without the scale, limited liability, pricing power, professional management, and/or tax treatment that could make such a business attractive.

Equity is not what Zoopla says it is

Why not sell the London house and put the proceeds into an ISA over several years?

Because I do not have the £300,000 of equity that the simple subtraction suggests.

Using the rounded numbers from last time:

• Current value: £600,000
• Mortgage: £300,000
• Apparent equity: £300,000
• Original cost: £100,000

The mortgage reduces my cash on sale. But it does not reduce the capital gain. And there’s capital gains tax (CGT) to pay.

For 2026/27, the annual exempt amount for CGT is £3,000 and the higher CGT rate is 24%.

Ignoring selling costs, capital improvements, available losses, and any reliefs, the exit looks like this:

My apparent £300,000 equity becomes about £180,720 of cash – before estate-agent and legal costs.

Past-Finumus remortgaged the property to extract cash and buy more houses. He has, in effect, already eaten a large part of the cake.

Present-Finumus is left holding the plate and HMRC’s bill.

Taxing matters

This is the difference between a good historical investment and a good prospective investment. People confuse the two all the time.

It is also why CGT creates lock-in. Selling a mediocre asset crystallises a very non-mediocre liability.

Also, because this is residential property, the disposal must generally be reported and the CGT paid within 60 days of completion.

It must then appear on Self Assessment, where HMRC’s systems can renew their acquaintance and pretend not to recognise each other.

What if CGT changes?

No increase in the CGT rate on residential property has been announced. The current higher rate is 24%.

However I own a leveraged, illiquid asset pregnant with a large nominal gain and a holding period measured in governments. Regime risk is part of the investment case, whether or not it fits into a discounted-cashflow model.

Suppose – purely as a stress test – that a future government decided to align CGT with the 45% additional rate of income tax.

How ‘fairly’ would this be implemented?

With full RPI-style indexation from 1996 to May 2026, my £100,000 cost would become roughly £272,000.

Without indexation, my cost would remain £100,000.

That difference is not cosmetic:

The indexed version is annoying. The no-indexation version is a mugging.

Here’s the maths assuming indexation was introduced:

And if not:

These are deliberately simplified scenarios. Actual CGT payable depends on ownership, dates, acquisition and sale costs, capital improvements, losses, and reliefs.

Get professional tax advice before doing anything expensive.

Under current rules, death itself is not a CGT disposal and inherited assets generally acquire a market-value base cost at the date of death. The estate may face IHT instead. That interaction is another source of lock-in – and another rule a future government could change.

I am not going to invent a combined future CGT-and-IHT bill to stress test. (I don’t want to encourage them.)

Hold, sell, or sulk?

So what am I going to do?

Probably some combination of hold and sulk.

The non-London property still has the same excellent tenant. I do not want to evict her. However I do not want to subsidise her forever, either. So the rent will therefore keep moving up, however reluctantly, because the alternative is to operate a small private welfare state with a damp problem.

My London house is more interesting. It is a poor-looking yield investment. It’s tax-inefficient. It has refinancing risk and local-authority weirdness. And it occupies mental space out of all proportion to its value in the Finumus household balance sheet.

But it is also a freehold house in London. Which may be a terrible reason to hold it. It may also be the only reason that has mattered for the past 30 years.

It doesn’t add up

The old buy-to-let equation was simple:

Tenant rent + mortgage leverage + time = wealth

The new equation is messier:

Rent − costs − Section 24 − tax − MTD − repairs − refinancing − tribunal delay − CGT anxiety + possible London comeback − guilt = shrug

I appreciate this new version may not catch on in personal finance textbooks.

If you’re thinking about starting from scratch, I wouldn’t bother. My returns came from buying before the boom, using leverage, enjoying falling interest rates, having inflation erode the debt – and not being wiped out by tenants, repairs, or policy at the wrong moment.

I was not clever. I was long houses, short sterling debt, and born at the right time.

A new buyer gets today’s price, today’s mortgage rate, today’s stamp duty, today’s tax rules, today’s regulation, no ISA or SIPP shelter, no liquidity, concentrated asset risk, and a lingering suspicion that the answer to every political question that asks “who should pay?” will eventually conclude “the landlord”.

Could buy-to-let still work? Obviously. Property is local. Some landlords buy well, add value, operate efficiently, or use companies sensibly. Circumstances and tax positions vary. This is a personal case study, not financial, tax, or legal advice.

But ‘buy any London property, gear it up, wait, and become rich’ is no longer an investment strategy. It’s now an historical anecdote.

Doubtless some readers in the comments will explain that all of this is a skill issue.

Fair!

Any idiot could make money in property once. Doing it under the new rules may require competence.

This is worrying.

If you enjoyed this, follow Finumus on X (Twitter) or read his other articles for Monevator.

The post Buy-to-Let: the landlord trap tightens appeared first on Monevator.

I don’t know about you but I breathed a sigh of relief when the cash-like asset rules for stocks and shares ISAs were announced. They were nowhere near as bad as I feared.

Money market funds (MMFs) are the only investment HMRC has defined as a cash-like asset.

The post How cash-like assets perform in a stocks and shares ISA [Members] appeared first on Monevator.

What caught Frugalist’s eye this week.

The post Weekend reading: Don’t sweat the details appeared first on Monevator.

Congratulations! You’ve just inherited £100,000 from Great Uncle Bertie.

Good old Bertie. Always liked him.

Naturally, you’re going to invest this for your future financial well-being. The pleasantly unexciting Vanguard LifeStrategy 60 will do nicely.

Your tax allowances are already spoken for. So, at least for now, you’ll need to resign yourself to paying tax on your gains in a General Investment Account (GIA).

You also know that investing everything ASAP is statistically the best approach.

However, (our hypothetical) today is the 31 March and the fund goes XD tomorrow.

Should you invest today or wait until tomorrow? What is XD? Does any of this even matter?

If you don’t want the detail, then the short answer is it matters a bit in terms of tax but for the most part you can ignore it.

But if you don’t want the detail then why are you reading Monevator?

Let’s get into it.

Dividends

Most funds generate regular dividends. They could be paid annually, bi-annually, quarterly or monthly.

The dividends are either paid out to you in cash if you hold the income (inc) unit class or are rolled up in the fund if you hold the accumulation (acc) class.

Dividend dates

There are two key dates associated with a dividend payment:

• The XD (ex-dividend) date
• The payment date

If you buy before the XD date, you are entitled to the dividend payment. Whereas if you buy on or after the XD date, you must wait for the next cycle to receive your first dividend.

The payment date, when the cash is paid out, is usually a month or so after the XD date.

The unit price of the inc class will usually drop on XD date to compensate for the cash payout. Thus, the inc and acc unit prices will gradually diverge over time – even though the total return is the same.

Vanguard’s LifeStrategy 60% fund pays a dividend just once a year, currently of around 2%. The last XD date was 1 April and the payment date was 29 May.

Tax

I’ve been liberally using the term dividends, but the specific tax classification of income distributions depends on the type of fund:

• Distributions from funds investing predominantly in equities are taxed as dividends.

• Funds holding more than 60% of their assets in interest-bearing investments, such as bonds or cash, instead pay interest distributions, which are taxed as savings income.

Your LifeStrategy 60 distributions will therefore be taxed as dividends.

The tax treatment of inc and acc classes is the same. You still pay the same amount of dividend tax – regardless of whether you get paid the dividend in cash or it gets rolled up in the fund.

Many investors choose to hold the inc class in a GIA. It’s easier to see what’s going on and, if you must pay tax, it’s nice to have some cash hitting your bank account.

Of course, if you have all your investments in ISAs and pensions then you don’t need to worry about dividend tax.

Equalisation

Now, those fair-minded fellows at HMRC recognise that if you only bought the fund just before the XD date then it would be a bit mean to charge you tax on the whole dividend payment.

In effect, you are just getting some of your own money back with the dividend – a return of capital as it’s known.

So your first dividend payment on a fund holding is part ‘equalisation’ (on which you don’t pay dividend tax) and part dividend (on which you do).

You will see this distinction in the annual consolidated tax certificate from your platform.

But you’ll need to take the equalisation amount off your purchase price when you come to calculate capital gains on any disposals.

In other words, equalisation just means you pay a bit less dividend tax but a bit more capital gains tax. The tax man will get you one way or another.

Note that equalisation applies to UK authorised funds – for example, OEICS and unit trusts – but not generally to ETFs.

Group 1 and Group 2

You may occasionally see reference to Group 1 and Group 2 units.

Group 1 units are those you bought before the current dividend period began. (The dividend period runs from one XD date to the next.)

Group 2 units are any bought inside this period.

Once the XD date is reached, your Group 2 units become Group 1 units.

The equalisation rate per unit is calculated by the fund manager based on what they reckon Group 2 holders on average paid for the accrued income versus Group 1 holders.

But this is just an average. Every Group 2 holder gets the same equalisation rate regardless of when they bought the units.

So the equalisation for investor A who bought on the last XD date is the same as the equalisation for investor B who bought the day before the current XD date.

Back to Bertie’s money

Finally, back to the original question. Does it matter if you invest pre-XD or post-XD?

The table below compares the two scenarios: buying pre-XD and buying post-XD.

We’ll assume an investment of £100,000, a distribution yield of 2%, an equalisation for Group 1 units of half the total distribution, an initial price of 100p, and a final price of 103p:

You end up with roughly the same returns in both cases: Pre-XD gets some income, but post-XD gets more capital gain.

The extra £100 gain for the post-XD case is offset in the pre-XD case by the early £2,000 distribution in dividend and equalisation, which can be reinvested elsewhere for most of the following year.

In tax terms, the difference between the scenarios looks like this:

The pre-XD taxable capital gain is £4,000 because the £1,000 equalisation must be deducted from the purchase price.

In summary then, there is negligible difference in the returns you get, but when investing pre-XD you are swapping some capital gains tax for dividend tax.

Does that make much difference? Depends on your tax situation.

Tax impact of going ex-dividend

The table below shows the approximate difference in the tax you pay for various tax situations. (There is no case for 0% capital gains tax as the £3,000 capital gains allowance is more than used up by the gains in either scenario):

I’m using the new 26/27 dividend tax rates as dividends are taxed in the tax year in which the payment falls and not necessarily the XD date.

(As an aside, who decided we needed tax rates specified to two decimal places?)

If you’d held on to the investment for longer, then there would also be a difference in when you pay the tax.

The initial dividend tax must be paid for this tax year whereas the capital gain tax could be deferred until later tax years by not selling.

Price fluctuations

There’s a lot of detail I’ve glossed over.

Most notably, I’ve assumed that, on the XD date, the unit price of the fund drops by the same amount as the dividend paid.

In reality, it will not be the same, as it will also be affected by fluctuations in the prices of the assets in the fund.

In scenario two you are buying a day later. Might the price change on that day have a bigger effect than the different tax rates? Who knows.

Or maybe the price goes down over the year, so the bigger capital gain becomes a smaller capital loss.

So what?

Some of you may enjoy the thought of saving a few quid in tax with some judicious ex-dividend timing.

I suspect that most, though, will be thinking that this is all just noise when considered against investment returns – and you’re probably right.

So whilst it’s worth knowing exactly how you’ll be taxed on dividends if you have assets outside of a tax wrapper, it’s probably not a good idea to spend time trying to game the tax system at the risk of losing investment gains.

But, looking on the bright side, I think we can all agree that stuffing all the investment fun stuff – dividends, tax, and equalisation – into just one short article is a joy to behold.

You’re welcome!

The post Pre-XD vs post-XD: Does dividend timing matter? appeared first on Monevator.

I‘ve read many personal finance articles that claim you can save big by ditching your car and jet-packing, hover-boarding, or *shudder* walking everywhere instead.

Monevator published a good one recently, which prompted car-swerving frugalista The Investor to claim he could have spun his savings into £300,000 to £450,000, just by ploughing them into a global equities tracker these past 30 years.

If that’s right, then hopefully he’s gonna cut us in because The Accumulators regularly ferried TI and his glow-sticks around sundry West Country amenities during the 1990s. If you’re thinking the bear-baiting and badger hassling, well, I can neither confirm nor deny.

So how big a payout did I forgo by keeping my pedal to the metal instead? Can you really rake in nearly half a mil in exchange for 30 years of hanging about for buses?

Put another way: can you buy yourself a nice house by investing your car money instead?

Real numbers

Let’s do the sums. Except this time, let’s use some proper hardcore FIRE numbers. We’ll skip the silly money that most finance bloggers claim Joe Average throws at their transport problems.

Monty Mercedes or whoever does not read FIRE blogs. Only aspiring money mavens are into FIRE, and they’re unlikely to be subsidising the car industry in the first place.

Instead, those pursuing financial independence on wheels will do savvier stuff:

• Buy used motors with a reputation for reliability and a global surfeit of spare parts.
• Avoid dick extensions that command a premium just for the badge.
• Drive ‘boring’ cars if needs-be. We’re on a mission here!
• Profit from other people’s depreciation.
• Drive the thing for as long as possible so you don’t keep resetting the depreciation curve (but getting rid once bits start falling off.)
• Don’t buy more car than they need. No armoured vehicles, no automated parking, no lane assist, no heated seat subscriptions. Just own a car you can actually drive, and stay on the right side of tax and insurance costs.
• Reduce their car habit by turning to alternative remedies like walking, cycling, and catching the bus, where possible.

All of which keeps costs down to a degree that can surprise hand-waving automobile avoidants.

So with the stage set, what can you really save if you don’t own a car when two budget ninjas ¹ enter the ring?

In the red corner

Introducing the West Country Wonga Worrier: The Accumulator-tor-tor!

…Weighing in with annual car costs of 3,312 pounds.

Vital statistics:

• Mileage: 6,000 p.a.
• Next car cost: £1,000 p.a.
• Taxes, fines, breakdown cover: on request

In the blue corner

It’s the lift-cadging, thrift-meister himself: The Invest-oooooor!

…Weighing in at 1000 to 1500 pounds per annum.

Vital statistics:

• London Transport: A mystery
• National Rail: A mystery
• Global city home ownership premium: Let’s not worry about that
• Shoe leather: Sunk costs!

Judge’s ruling

The Accumulator’s annual poundage is a fully itemised, all-in figure. It’s the average of the last three years of car-related expenses, rebased to 2026 prices.

The Investor’s costs, meanwhile, are as impenetrable as the mask he wears.

A fully-qualified member of the finger-in-the-air school of expenses-tracking, we’ll just have to rely on TI‘s best recollections. He assures me he has an excellent memory.

Sounds reasonable. Ahem.

What I’ll do then is calculate the match-up as a range of outcomes and leave it to the reader to decide which is closest to the truth.

Fight!

Round One

TI’s car-free costs are deducted from TA’s motoring bill:

• £3,312 – £1,500 = £1,812 annual savings go to our Shanks’ Pony jockey at 2026 prices.

(I’ll do the top-end of TI’s range first, then come back.)

Round two

Calculate the saving in 1996 prices. Or rather outsource the task to the Bank of England via its excellent inflation calculator.

• £1,812 in May 2026 = £877.46 in 1996.

Okay, so horseless carriage hater TI would have trousered £877.46 some 30 years ago with his strap-hanging ways.

Round three

How much then would TI be sitting on now if he’d committed the inflation-adjusted equivalent of £877.46 per year for 30 years into a global tracker fund?

• £74,298.77 at 1996 prices

That number comes from dividing the annual saving by 12 to get a monthly contribution of £73.12.

Compound that by 6.06% for 30 years.

6.06% is the 30-year real annualised return of the MSCI World GBP. ²

The final round

Now we have to pump up £74,298.77 to 2026 prices to goggle at the size of TI’s treasure chest in today’s money. ³

• £74,298.77 in 1996 is worth £153,429.98 in May 2026.

Or, if TI’s low-ball £1,000 annual costs are accurate: £195,774.30.

Post-match analysis

It’s not quite the jackpot The Investor imagined. On the other hand, who would say no to an extra £150,000 to £200,000 in their account?

Driving is the norm in the UK so few people are likely to consider designing a lifestyle that squeezes it out.

But what if a wizened savings sensei told your younger self that a tidy six-figure sum was at stake?

Maybe they could make it work?

Take it steady,

The Accumulator

Bonus caveats

The Accumulators’ costs are shared between two. In theory that means TI’s savings are only worth half as much per person in a two-person, single-car household.

Then again, if TI diverted the dosh into his pension pot he’d earn tax relief unavailable to the rubber-burning Accumulators.

TI’s commuting costs were low to minimal for most of his life but so were The Accumulator’s. Let’s say that balances out.

There surely is a premium to pay for living in an area well served by public transport. (On the other hand, if you own your home then TI would argue it’s an investment.)

But you may be able to offset that outlay some other way. Perhaps you can dispense with having a garden, or living near great schools, or some other ‘must-have’ lifestyle choice that, for you, just isn’t.

TI would also likely claim a health benefit over most drivers – because his favoured mode of transport is his own fine pins.

FIRE in the whole

The compounded number is much less impressive if you’re dashing for FIRE in ten years. However, the money will continue to compound for so long as you’re saving.

One way to look at it in those circumstances is to divide the saving by your sustainable withdrawal rate, then subtract that amount from your target figure.

For example, car savings of £1,500 per year enable you to reduce your FIRE number by:

• £1,500 / 0.04 = £37,500 (Assuming a 4% withdrawal rate.)

How dependable is the investing route?

Inflation-adjusted equity returns can vary a great deal – even over 30 years.

The current 30-year real annualised range is 2.4% to 9.9% (1900-2025). The mean average is 5.7%.

For the record

Finally, my full list of car-related expenses includes:

• Maintenance (repairs, service, MOT)
• Insurance (including breakdown cover)
• Taxes (car tax, drivers’ licence renewal, registration fees)
• Petrol
• Parking
• Fines (2023 was a bad year)
• Cost of the next car (£1,000 per year)

Right to reply by TI

The Investor here…

Okay, I hope we’ve all had our fun, but I’m commandeering the reins – perks of the publishing button – to add a final bit.

When we discussed this piece, I asked gas-guzzling petrolhead The Accumulator to include a nod to typical car ownership costs in his attempt to ridicule substantiate my six-figure savings claims.

Looking back, it was a poor sign that he shouted something back down the line about not being able to hear me as Mrs TA had the hairdryer on and by the way he was “off on a mini-break, starting now, bon voyage!” before terminating the call.

So for the record, the latest Pension Living Standard’s report puts ‘motoring’ costs in the range of £4,000 to £5,000 a year.

That’s for typical retirees, remember, not for wannabe Jeremy Clarksons.

Moreover it’s easy to find estimates – such as this one from breakdown cover specialist AutoHome – that put the annual cost of a car in the £5,000 to £8,000 ballpark, all-in.

Now I’m not going to second-guess TA’s figures, nor gainsay his frugality.

I’ve waited too many times in vain at the bar for that – coughing and waving an empty pint glass around while TA has taken an unusually deep interest in his shoes / WhatsApp messages / something in the distance a few centimetres above my head.

So yes, as a globally recognised titan of the FIRE movement, TA’s numbers should look good! And no doubt those following in his footsteps can keep their costs down, too.

But I still stand by my benchmarking against the average car owner, not a savings ninja. That’s what we do when we’re weighing up other FIRE lifestyle choices, after all.

Not owning a car saved me a fortune. Albeit at the cost of some friends’ patience, surely.

Bonus bonus BONUS bit by TA

Somebody forgot they gave me access to the publishing button for “emergencies”, eh?

Fortunately I’m the bigger man around here.

Plus I’m right and TI smells yahboosucks!

THE END.

1. In every sense.
2. May 1996-May 2026.
3. Because we compounded in real-terms, that £74,298.77 does not include the inflation froth that your investing returns actually include. We want to know how much bigger a non-car owner’s investment account would look after 30 years, so we need to add inflation back in.

The post Can not owning a car buy you a house? appeared first on Monevator.

The first Weekend Reading every month can be read by anyone on the Monevator website. Subscribe for free to our email newsletter or become a member to ensure you see the rest.

What caught my eye this week.

Would you be happy handing over the reins of your portfolio to a robot? Given most of you will be regular Monevator readers and email subscribers, I can guess the answer – if not the specific gentle expletive added for colour…

Of course, the typical Monevator reader (rightly) invests passively in index tracker funds. And those funds are managed by software – albeit usually with some kind of human oversight to determine which companies go in and come out of a given index, as we saw with the recent controversy over SpaceX.

However it’s one thing to use software to follow a well-established and diversified benchmark via what’s now very mainstream index fund investing. It’s another to toss the keys to a novel AI agent with a cheery, “have it it, call me if you blow the kids’ inheritance!”

Okay, in practice any self-driving portfolio is going to have guardrails. But even so, you can easily imagine countless robot investing edge cases that are the financial equivalent of a self-driving car facing a hotdog cart trundling into the road, or the driver in front falling asleep at the wheel.

Or consider the market madness proxy of gridlock and traffic jams, when movement (liquidity) evaporates.

Think back to the crazy ride that was the Covid crash. How would a cheapo trading robot cope?

Investing under the AI influence

Naturally, just because we don’t need self-driving portfolios, that doesn’t mean we won’t get them.

Innovation in financial services is driven by what sells, not what is good for us.

Only this week CNBC reported that:

Larger brokerages are moving in [this] direction. Robinhood in May introduced tools allowing third-party AI agents to connect with customer accounts. Brokerage firm Public, meanwhile, is developing AI agents in-house that can automate investing workflows within its platform.

“What this era of agentic is doing … it goes away from just being able to research something by yourself and then make up your own ideas and then trade the way you’ve traded where it’s now becoming automated and where AI agents can actually execute investment strategies on your behalf,” said Leif Abraham, Public’s co-founder and co-CEO.

The article paints a breathless future of AI agents turning private investors into DIY hedge fund managers. There’s nary a mention of fees and costs, though – although to be fair the piece does conclude with caveats about the risks of letting Clippy 2026 trade stocks.

That latter sentiment is echoed by a blog from the CFA Institute, which reviewed the *cough* mixed results from research into trading via LLMs.

It concluded:

The evidence for multi-agent and LLM-augmented portfolio construction is promising. The failure literature does not invalidate this, but it does suggest that the gap between a research prototype and a production-grade institutional system is larger than the paper acknowledges.

The human overseer […] cannot yet take a purely passive safeguard role.

But who am I kidding? The reality is tens of thousands of retail investors are already experimenting with AI trading, whether through financial service scaffolding such as  RobinHood or via the – hopefully judicious – interrogation of their nearest chatbot.

Top gear

As far as I can tell, this era’s Warren Buffett – part-man, part-machine, all alpha – has yet to reveal himself.

But if enough people do it then we’ll probably get an AI-enabled self-made trader billionaire someday, just thanks to the law of averages.

Famously, a few quant shops like Renaissance have smashed the market for years by force feeding gargantuan amounts of data into supercomputers. However that’s very different from Joe Day Trader setting a few rules in an AI-enabled investing account.

Yet even a few traditional stock picking active managers do beat the market, at least for a while, and no doubt so will some AI agents.

The odds have always been against it however – active investing is a zero-sum game – and AI cannot change that.

Have a great weekend.

From Monevator

The Slow & Steady Passive Portfolio update: Q2 2026 – Monevator

A deep dive into FX hedging – Monevator [Moguls]

From the archive-ator: Compound interest can save our pensions – Monevator

News

Chancellor announces his first Budget will be on 28 October [Sigh] – BBC

Bank of England holds rates at 3.75% as inflation fears mount – Guardian

One million more Britons set to pay income tax – Which

Ban foreign stocks from Isa wrapper, says top pensions boss – City AM

BP puts its North Sea business up for sale – This Is Money

London only English region to see population fall – BBC

It now takes 216 days to move home – This Is Money

UK millionaires fall to 442,000, lowest since 2008 – Business Matters

House prices up just 0.1% in July, says Nationwide – Mortgage Strategy

Jim Leaviss, Bond Vigilante, 1971-2026 – FT

We’ve moved from income world to wealth world [Paywall] – FT

Kospi’s boom-bust-boom mini-special

South Korean bubble bursts, erasing $2.2trillion in value – Mugglehead

Minister apologises as leveraged ETF investors suffer deep losses… – CNBC

…while AI fund Situational Awareness dumps holdings to Citadel… – CNBC

…and then the Kospi closed up a record 18% in a day on Friday – Korea Times

It’s all because the AI boom creates a lot of uncertainty – Noahpinion

Products and services

^{Disclosure: Links to platforms may be affiliate links, where we may earn a commission. This article is not personal financial advice. When investing, your capital is at risk and you may get back less than invested. With commission-free brokers other fees may apply. See terms and fees. Past performance doesn’t guarantee future results.}

Is your annual travel insurance still worth it? – Which

The fake Spotify emails that put you at risk of fraud – Guardian

Paragon Bank cuts five-year buy-to-let mortgage rates – Mortgage Strategy

Get £100 to £3,000 cashback when you open an Interactive Investor SIPP. Minimum £20,000 deposit. Terms and fees apply, affiliate link – Interactive Investor

Does Saga’s best buy interest rate for over-50s live up to the hype? – Which

A sea view could cost you up to £220,000 more – This Is Money

Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley

European wildfires and travel insurance – Which

Save up to 47% on your home by doing the postcode switch – What Mortgage

Charming homes for sale with family gardens, in pictures – Guardian

Comment and opinion

Scotland’s 48p tax rate may be losing money – Tax Policy Associates

Britain has tried War Bonds before, and savers paid the price – CNBC

How to think about the ‘full price’ – Best Interest

What 125 years of data tells us about investing – Behind the Balance Sheet

The wickedness of wealth management – The Net Worthwhile Weekly

Market indicators – Humble Dollar

Now show Japan – A Wealth of Common Sense

The problem with optionality – Of Dollars and Data

Retirement income security and more [Podcast] – Morningstar

Naughty corner: Active antics

IPOs have been a losing bet since 2019 – Apollo

SpaceX, PE, VC, and quacking ducks – The Falling Knife

Investment wisdom culled from old clip outs – Cove Street Capital

Cashing in on Japan’s cross-shareholdings – Verdad

Copart: from scrap to scale – Fiscal.AI

Picking stocks in a bloodbath – A Wealth of Common Sense

When size falls short – Novel Investor

Kindle book bargains

What They Don’t Teach You About Money by Claer Barrett – £0.99 on Kindle

Taxtopia by The Rebel Accountant – £0.99 on Kindle

The Savvy Spender by Megan Mickelwright – £0.99 on Kindle

The World for Sale by Javier Blas and Jack Farchy – £0.99 on Kindle

Or read one of the all-time great investing classics – Monevator shop

Environmental factors

New solar panels in Great Britain at 15-year high as fuel costs soar – Guardian

French climate lawsuit a window into next global legal fight – The Conversation

AI, authors, and writing mini-special

How AI books sneak their way into stores – New York Times

ChatGPT is blocking requests to copy an author’s style – Ars Technica

AI has made the ‘dead Internet’ theory come true – Futurism

Robot overlord roundup

Anthropic’s soaring AI revenues compared to some famous other brands – Axios

What will more intelligence actually do for us? – Noahpinion

How to lose AI in ten days – Spyglass

Not at the dinner table

The US economy is just a VIP list now – Your Brain on Money

In defence of gerontocracy – The Argument

The masculinity scam – The Atlantic [h/t Abnormal Returns]

Donald Trump keeps losing the Iran War – Drezner’s World

The Putinization of the American military – Paul Krugman

Off our beat

Could a single pathogen bring down civilisation? – Next Big Idea Club

How a near-death experience led to finding sea dragons in Wales – Guardian

Sell the company for $400m? He’s giving it away instead – N.Y.T.

Why America’s super rich have embraced British football clubs – CNBC

The light narrows – Aeon

Poor countries are aging fast but can’t keep up with the cost – W.S.J.

Scientists rethink sun exposure risks and benefits – Scientific American

An uncomplicated man [On The Odyssey movie] – London Review of Books

How to exist – Raptitude

Who dares ridicule Gianni Infantino? – Guardian

And finally…

“Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.”
– J.L. Collins, The Simple Path to Wealth

Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: Buckle up for self-driving portfolios appeared first on Monevator.

All investors with holdings in foreign assets are doing macro investing – but very few have decided which macro trade they are actually running. So argues long-time Monevator reader and commenter Ho Simpson in this special guest Moguls post on FX hedging for retail investors.

The post A deep dive into FX hedging [Members] appeared first on Monevator.

I forgot to update the portfolio! I’ve been leaning so hard into my passive investing persona that I fell asleep at my spreadsheet and didn’t twig when the 1 July Q2 deadline sailed by.

The markets are a distant background rumble to me right now. Oil price up, oil price down. Another day, another prophecy of AI doom.

It’s not that I don’t care. It’s just that the question being asked, it cannot be answered.

The question? Always being some variant of, “What’s the next big thing?”

Answers on a postcard

Here’s the story of the year so far, told in straight lines:

Data from justETF. The chosen ETFs are proxies for the Slow & Steady portfolio’s holdings, plus gold and commodities.

Gold is the loser year-to-date, commodities the winner.

Meanwhile, previously unloved emerging markets and property are the cream of the equities crop.

Who had that marked on their card for 2026?

Here’s the story again, told in wobbly lines of uncertainty:

Gold (red line) hit a new high in early March before dropping 23%.

Buying opportunity or time to get out?

Commodities (grey line) looks like it’s commanded by the Grand Old Duke of York. The changeable duffer perpetually marching his hard assets up and down hills. You want some?

Emerging markets (blue line) have now beaten the MSCI World over the last three years. That’s a comeback worthy of the WWE, given how the new challengers had been roundly pummelled by the developed market champs for 15 years following the Credit Crunch.

Me? I’m happy to own it all and let the chips fall where they may.

Portfolio-o-vision

Here’s the portfolio holdings and long-term annualised returns since kick-off in 2011.

The Slow & Steady is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,360 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts in the Monevator vaults. Last quarter’s instalment can be found here.

All returns in this post are nominal GBP total returns unless otherwise stated. Subtract about 3% from the portfolio’s annualised performance figure to estimate the real return after inflation.

The full growth picture looks like this:

In real-terms, the portfolio is still 2.6% below its December 2021 peak. Another quarter or two of progress could push it to higher ground once more.

It has to be said though that we’re coming up for five years underwater since inflation spiralled. By contrast, recovery from the Global Financial Crisis took less than three years for a 60/40-type portfolio.

Unfortunately, trad 60/40 portfolios have a history of suffering like this during severe bouts of inflation. Consider adding some additional protection to yours.

New transactions

Every quarter we plough another £1,360 into the market’s black earth and hope we’ll harvest plenty of corn later. Our stake is split between our seven funds, according to our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter, so the trades play out as follows:

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.18%

Fund identifier: GB00B84DY642

New purchase: £108.80

Buy 40.8946 units @ £2.66

Global property

iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%

Fund identifier: GB00B5BFJG71

New purchase: £68

Buy 25.5016 units @ £2.67

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

New purchase: £503.20

Buy 0.5631 units @ £893.61

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

New purchase: £68

Buy 0.18 units @ £377.84

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

New purchase: £68

Buy 0.1189 units @ £572

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £285.60

Buy 2.1189 units @ £134.79

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £258.40 + £118.92 dividend

Buy 343.9562 units @ £1.097

New investment contribution = £1,360

Trading cost = £0

Average portfolio OCF = 0.17%

User manual

Take a look at our broker comparison table for your best investment account options.

Or learn more about choosing the cheapest stocks and shares ISA for your situation.

You might also enjoy a refresher on why we think most people are best choosing passive vs active investing.

Take it steady,

The Accumulator

The post The Slow and Steady passive portfolio update: Q2 2026 appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: Roll with it appeared first on Monevator.

I often wax lyrical about bargain hunting among investment trusts trading at a discount – that is, trusts whose shares trade for less than Net Asset Value (NAV).

Think buying £1 coins for 90p.

We’ve also written reams over the years on investment trusts as a potential source of steady income.

Former Monevator contributor The Greybeard had a lot to say about it – although he grew frustrated by the relentless pushback from hardcore passivistas.

More recently I’ve launched an investment trust income model portfolio for Moguls members.

I won’t rehash the whole active/passive debate with respect to income today. If you’re a passive investor but you have an open mind, I’ve written a Mavens post on using ETFs to do much the same.

But if you’re a global equities tracker and drawdown diehard, probably best to wait for the next article!

Give peace a chance

Just briefly for those on the fence – or simply confused – I’m not saying the average person would do better stock picking investment trusts to grow their capital.

I’m not even saying they would do better – certainly not that they’d see higher total returns – living off the natural yield from income investment trusts in retirement.

Rather, I see advantages to an actively managed income approach (less stress and income volatility, no planned capital depletion, lower infirmity risk) that make it worth considering. To the extent that I’ll probably go down this route myself when I do throw my portfolio into decumulation mode.

Okay, enough said. Let’s now consider where my hobby of investment trust dumpster diving could dovetail with an investor’s income goals.

Discounts and income from investment trusts

Firstly, a quick reminder about how discounts work:

It’s often the case that the share price of an investment trust trades at less than its NAV per share.

Remember, the NAV is – in theory – the best estimate of what the trust owns, minus any debts.

Clearly, buying shares for less than they are worth may present an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.

For instance, the fictitious Monevator Investments plc may trade for £1.20 a share, despite its NAV per share being £1.60.

In this case, a buyer is getting £1.60 of underlying assets for just £1.20.

Bargain! The share is trading at a discount to NAV:

The discount is (£1.60-£1.20)/£1.60 = 25%

In principle, you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price back up towards the NAV and amplifying your returns.

So much for – fingers crossed – capital gains from discounts.

But what about income?

Yielding to the discount

The crucial thing to grasp is that any cash paid out by a trust is unaffected by the discount. ¹

Let’s say Monevator Investments has a NAV of £1.60 per share, as above, and that it pays an annual 8p per share dividend.

If you were to calculate the yield based off the NAV, this represents a yield of 5%:

• Dividend/NAV = 8/160 = 5%

However this trust is trading at a 25% discount. We can buy the shares for £1.20.

Yet the dividend payout is still 8p per share. So for someone buying the shares today in the market, the yield they’ll get on their investment is:

• 8/120 = 6.7%

All things being equal, this higher yield is locked in. Provided the cash payout remains at least 8p, then this investor’s annual yield on cost of their Monevator Investments shareholding will be 6.7% – regardless of whether the share price rises or falls, or whether the discount closes.

Of course, dividends from decent income investment trusts tend to rise over time, as do their NAVs. Though sometimes dividends can be cut, too.

That’s a discussion for another day. The point is the chunky discount here has boosted the purchasers’ starting income yield, compared to if they were buying the shares at NAV – let alone a premium.

Note that in both cases – whether the shares are priced at NAV or at a 25% discount – the underlying assets (represented by the NAV) generate enough income for the trust to pay an 8p dividend per share.

When you buy for only £1.20 due to the 25% discount to NAV, you are getting the same 8p at a cheaper price. But because each share costs only £1.20 instead of £1.60, the same lump sum investment would buy more shares – and therefore more of those 8p dividends.

For example:

• No discount (£1.60): £10,000 buys 6,250 shares × 8p = £500 income
• 25% discount (£1.20): £10,000 buys 8,333 shares × 8p = £667 income

Happy days.

A striking hypothetical example of higher income returns

Generally investment trusts trading on discounts don’t draw attention to the fact. Their annual reports will wave their hands about what they’re doing to close the gap, and direct your attention to graphs of rising NAVs over time, or photos of employees from portfolio companies curing cancer or drilling for oil.

So the following illustration in a recent presentation from an investment trust I hold – Canadian General Investments Trust (LON:CGI) stood out:

Source: Canadian General Investments

For a cluster of reasons we don’t need to get into, Canadian General’s whopping 40% discount to NAV is pretty much out of its control. ²

While CGI has sometimes traded at NAV – usually during commodity booms – a big discount is typical.

Hence management has a reason to turn this bug into a feature with this table. And what it’s illustrating is exactly what I’ve explained above.

The table simplistically assumes a 10% annual return – high but less than CGI’s long-term track record – split between 7% capital gains and a 3% dividend. All the income is presumed to be paid out.

If you were to buy $100,000 of Canadian General as a hypothetical open-ended / mutual fund – that is, with no discount – then for your hundred grand you’d get $3,000 paid out as a dividend income.

• That is, 3% of $100,000 = $3,000

However at a 40% discount to NAV, your $100,000 is buying you $166,667 of Canadian General’s assets:

• 3% of $166,667 = $5,000

Your income is higher from day one, just as we’ve already seen in my example above.

From there, the company compounds NAV at 7% and holds the 3% payout (of NAV) steady. The discount stays at 40%:

By year 20:

• 3% of $602,775 = $18,083

We can also work out the ongoing yield on cost of your initial $100,000 investment:

• $18,083/100,000 = 18% on your original purchase price.

A very nice income if you can get it.

Discounts are a bonus for income investors

There’s plenty of slips betwixt cup and lip and all that. Dividends can be cut. Canada is an odd place to put a lot of your money. Canadian General’s exposure to US assets muddies the picture.

But that’s all for another discussion. Here I’m just focused on the mechanics of discounts and income.

You see, readers often ask me why I should expect a discount to close.

The simplest answer is that most usually do, eventually, at least for a time and in the absence of structural impediments such as those at Canadian General.

But the point here is that if you’re an income investor after natural yield, then it doesn’t matter. You can simply aim to buy and lock-in a high starting yield and then let the income roll in. (Touchwood!)

Buy in the sales

Unfortunately, the top flight of dedicated UK equity income trusts rarely if ever trade for anywhere near 25% discounts. Their income underpinnings, steadier investments, and decent long-term records tend to curb such extreme dislocations.

However they can reach discounts of 10% or so when out of favour, or in wider times of distress.

Still, the same income-enhancing argument holds for more specialist trusts, too, where we have seen much chunkier discounts.

For years even income seekers bought infrastructure trusts on a premium, for reasons I never understood. However as I covered on Moguls, in early 2025 they were trading on 25-30% discounts. That meant income yields of 8% or more for new money buying the likes of HICL (LON: HICL).

Such super-wide discounts have now closed, though you can still bag HICL at a 15% discount. (Disclosure: I hold.)

Property trusts and many REITs are still on big discounts to NAV, for what that’s worth.

And there remain a few – troubled – renewable trusts on big discounts touting very high yields for the brave.

Despite misgivings, I’ve dipped a little toe in with Greencoat UK Wind (LON: UKW), currently on a 22% discount and yielding 10%.

Looking to the long-term

Infrastructure, property, and even renewable investment trusts have all traded at premiums to NAV in the past. I’m not saying they will again (especially not renewables). But as we’ve seen, for braver income seekers that might not matter, just so long as the dividends keep flowing.

Still, I’m more confident about the very long-term with Ye Olde UK equity income trusts – those of the much-vaunted (and debated) Dividend Hero variety.

Anything else is a bit of a special situation when it comes to long-term income.

And yes, to belabour the point: this is active investing. Nobody needs to pipe up that a global tracker will outperform in the long run or that discounts might be flagging bigger risks or mention Neil Woodford.

I get it and I mostly agree. So should anyone who goes down this path. Do your own research!

But personally, I’m starting to think I might smooth the transition from accumulation to decumulation by opportunistically buying – and then looking to hold – these income trusts as I head towards drawdown.

That would probably be much less stressful than switching overnight from an accumulation to decumulation portfolio – albeit likely at some cost to my returns.

Indeed as I get closer to the end than the beginning, I have started making tentative stabs at building up a natural yield again. Ironically this takes me back – philosophically – to where I started as an investor.

True, I’m still finding it hard not to trade when the discounts close, or some other shiny object pops up…

But as I transition at least a chunk of my portfolio towards income, maybe that illustration from Canadian General will help me stay my hand.

1. As a rule. A board might raise or cut dividends for reasons related to a persistent discount, but those are second-order effects.
2. Think: Canadian taxes limiting buybacks, huge insider ownership, small free float.

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