How To Keep & Grow Your Money #5

In this letter we analyse the Vanguard Total Stock Market Index Fund ETF

Ticker: VTI | Price: $269.69 | Market Cap: $220.7B | Average 10-Year Annual Return: 12.10%

What is it (short): The ETF tracker of the entire US Market, not just the S&P 500.

What is it (long): The Vanguard Total Stock Market Index Fund ETF is a popular exchange-traded fund designed to provide investors with broad exposure to the entire U.S. stock market. Here’s a beginner-friendly summary:

• Diversification: VTI includes a wide range of stocks, covering large-cap, mid-cap, small-cap, and micro-cap companies. This means investors are effectively investing in the entire U.S. stock market.

• Objective: The fund aims to track the performance of the CRSP US Total Market Index, representing approximately 100% of the investable U.S. stock market.

• Management Style: It employs a passive management strategy, meaning it aims to replicate the index performance rather than actively selecting stocks.

Our thoughts: This ETF is great if you’re trying to invest in the US stock market as a whole, instead of just focusing on the biggest large-cap companies like the popular S&P 500.

Do your own research and if you would like to take our free course to learn how to invest into ETFs and Index Funds at Index Institution™ go here.

Countries with 0% Corporate Income Tax

When considering relocating your business to benefit from lower corporate taxes, several countries offer extremely favorable tax environments with a corporate income tax rate of 0%. Here are some top contenders:

1. Cayman Islands: No corporate tax, income tax, or capital gains tax. Businesses pay only a licensing fee.

2. Jersey: Offers a 0% corporate tax rate except for certain sectors like property development and large retail.

3. Tokelau Islands: A New Zealand territory with a 0% corporate tax rate, focusing on sustainable tourism and renewable energy.

4. Bahamas: No taxes on income, dividends, or capital gains. Businesses pay licensing fees and VAT.

5. United Arab Emirates (UAE): Recently introduced a 9% corporate tax on profits above AED 375,000, but remains favorable for many businesses with no other income taxes​ (OECD Pillars)​​ (Tax Foundation)​​ (Investopedia)​.

Countries with High Corporate Tax Rates

In contrast, some countries impose very high corporate tax rates, which can significantly impact business profitability:

1. Comoros: The highest corporate tax rate globally at 50%.

2. Puerto Rico: 37.5% corporate tax rate.

3. Argentina: 35% corporate tax rate.

4. Brazil and Venezuela: Both have a corporate tax rate of 34%, among the highest in South America​ (Tax Foundation)​​ (Investopedia)​.

Choosing the right location for your business can make a significant difference in tax obligations and overall profitability. Countries like the Cayman Islands and Jersey offer very low tax rates, making them attractive for business relocation and investment​ (Investopedia)​.

Read more on this here and if you would like to explore legally paying less taxes and maximizing your freedom check out Global Optimizer™ or click here.

Financial concept to learn in this edition: Leverage

What Is Leverage, and Why Is It important?

Financial leverage involves using borrowed funds to increase the potential return on an investment. It is a common strategy for both businesses and investors who aim to enhance their financial outcomes through debt.

Key Points

1. Amplifying Returns: Leverage allows individuals and companies to invest more than they could with their own capital, potentially leading to higher returns. This can significantly boost the profitability of successful investments.

2. Business Growth: Companies use leverage to finance growth initiatives, such as expansions, acquisitions, or new projects, without needing to issue new stock, which might dilute existing shareholders' equity.

3. Investment Strategy: Investors use leverage through various financial instruments like options, futures, and margin accounts to increase their market exposure and potential gains.

4. Leverage Ratios: To evaluate a company's financial health, analysts use leverage ratios like debt-to-assets and debt-to-equity. These ratios measure the extent of a company's debt relative to its assets or equity.

Risks of Financial Leverage

While leverage can magnify returns, it also amplifies losses. If an investment does not perform as expected, the losses can be significantly higher than if the investment was made using only the investor's own funds. A highly leveraged entity is more vulnerable to economic downturns and financial instability.

Example: Business Use of Leverage

Imagine a company, Tech Innovators Inc., wants to invest in new technology to increase its production capacity. Instead of issuing new shares, it borrows $1 million. If the new technology leads to significantly higher sales and profits, Tech Innovators can pay back the loan and enjoy higher profits than if it had only used its own funds. However, if the technology fails, the company still needs to repay the debt, which can lead to financial strain.

Example: Leverage in Trading

Consider an investor, Jane, who has $10,000 and wants to invest in stocks. Without leverage, she can only buy $10,000 worth of stocks. However, using margin trading, she borrows an additional $10,000 from her broker, allowing her to purchase $20,000 worth of stocks. If the stocks increase in value by 10%, she earns a $2,000 profit on her $20,000 investment, doubling her return compared to if she had only invested her own $10,000. But if the stocks decrease in value by 10%, she incurs a $2,000 loss, which is double the loss she would have faced without leverage.

Summary

Financial leverage is a powerful tool that can enhance growth and returns. However, it also comes with increased risk, making it crucial for businesses and investors to manage leverage carefully. Understanding how leverage works and its implications helps in making informed financial decisions.

To learn more about Leverage read more on Investopedia here.