Investment Management: How To Optimise Your Portfolio And Reduce Taxes

how to manage your investment portfolio

You’ve made your investments. What now? You’ll probably want to keep an eye on your portfolio. Because you still need to stay on top of all the different risks that might arise. You need to know how to manage these risks, as well as how to approach reinvestments. It’s also time to throw away the garlic and the crucifix.

In this chapter, you’ll learn all about investment management. Or how to keep the taxman away and optimise your tax savings. And we show you the best practices for taking back money from your investment honey pot.

Rebalancing your investment portfolio

8.1 Rebalancing Your Investment Portfolio

Why rebalance?

The biggest reason for rebalancing? Reducing risk. When you originally allocated your capital, you were probably careful not to put too much into a single asset or market. Clever thinking. But, over time, the value of this single asset or market will most likely change. It may decrease or increase. And that means that the amount you have invested in it has also increased or decreased.

Let’s assume you invested in a portfolio of two funds: 50% in bonds and 50% in equities. The economy did well. And this meant your equity rallied too. As a result, your portfolio has changed to 40% bonds and 60% equities. This means it’s become riskier. You’re now exposed to more equities than you initially wanted.

What happens when you rebalance?

When you rebalance, you move the extra capital from the part of your portfolio that increased to the part of the portfolio that decreased. In other words, you’ll move capital from equities to bonds. By doing this, you return the level of risk for your portfolio back to the levels that you initially had.

This isn’t the only benefit of rebalancing. You’ll also increase your returns. You know that selling high-risk winners and buying low-risk losers is an investment strategy that pays off. It makes a lot of sense from a theoretical point of view. But how do you know which assets are the winners and which are the losers in the market? Well, you don’t. But there is a trick to finding out.

Take another look at the portfolio above. The markets did well and you have an investment that’s 40% bonds and 60% equities. If you return the balance to 50/50, you’ll sell the winners that made your equity increase. And you’ll invest it in the losers that made your bonds shrink.

When do you rebalance?

There are rules about when you need to change the oil in your car. There are recommendations on how often you replace your toothbrush … But there is no real consensus when it comes to rebalancing your portfolio. This actually makes sense; there are different motivating factors for rebalancing.

You’ll find investors who choose to rebalance based on a threshold. If they had originally planned on allocating 50% to bonds and 50% to stock, they might rebalance whenever the balance reaches 45% bonds and 55% stock, or 40% bonds and 60% stock.

It might be when the amount of capital devoted to a single asset or market reaches a certain figure that seems too high for comfort. And there are other investors who prefer to rebalance based on timeframes: monthly, quarterly, annually or even biannually.

All these reasons are perfectly fine.

However, there is a reason why you might choose to rebalance less frequently. Any time you change your portfolio, it involves fees, costs, possibly even taxes and all those other things you don’t want to pay for. The more often you rebalance, the more often you pay for the privilege of doing so. Add that to the time you need to devote to rebalancing … Time is probably something else you don’t want to lose.

At the end of the day, there is no frequency or threshold that is universally optimal for rebalancing. You’ll find plenty of investment gurus who recommend rebalancing about once a year, but you should use your personal investment goals and circumstances to determine the frequency that is most suitable for you.

Reducing risk, planning for retirement and recapturing lost ground

When you rebalance, you don’t need to return to the same allocations. In fact, it’s the perfect opportunity for setting new allocations. If you’re close to retirement, you may move a high percentage of capital from high-risk to low-risk investments or into a recognised retirement fund.

Especially if you planned to reduce your balance from 50% stock and 50% bonds to 40% stock and 60% bonds at a certain point on your path to retirement. Rebalancing gives you the perfect opportunity to do this.


8.2 Reinvestments

Let’s start with the easy stuff. When you invest capital in an asset, you make an investment. The capital in the investment will hopefully earn more money in the form of dividends, capital gains, or interest. You might choose to receive this as a cash distribution. Or you might choose to put this money straight back into the asset. This is called reinvesting.

If your returns come from stock, you reinvest the returns to purchase additional shares. If you’re set to receive distributions and dividends from a mutual fund, you purchase additional units in the fund. Distributions from a limited partnership company, REIT or another pooled investment are put straight into common units or shares in a fund.

This makes reinvesting look very sweet and simple. However, we have taken a very superficial view of it here. It’s time to add a bit more detail by examining the pros and cons of reinvestments.

The pros of reinvesting

There are quite a few reasons for reinvesting:

1. First and foremost? It’s very easy. A lot of different assets will automatically reinvest returns for you.
2. Reinvesting saves you time. Especially if it’s done automatically.
3. It also saves you money. How? The asset you’re reinvesting in will often waive transaction costs when you reinvest.
4. On top of this? Many assets offer discounts if you reinvest returns.
5. Keeping your shares in a specific asset makes the asset itself more stable.
6. Reducing risk to buy at high prices via Dollar-Cost-Averaging (see Chapter 7 about building your investment portfolio).

There are also potential fiscal benefits. This will depend on the particular investment and even the specific market, but they are certainly worth investigating. You’ll often find there are no tax consequences for dividend reinvestments that come from and stay in retirement plans.

The cons of reinvesting

Would it be fair to say every silver lining has a cloud? There are certainly a few elements about reinvestments that might put you off:

1. If you continually reinvest, you increase the amount of capital in that single asset. This means you increase the potential loss you’re facing.
2. Tax. Just as reinvesting may offer tax benefits, it’s also possible there will be elements of the tax law that work against you. It will depend on
your specific situation, so please make sure you consider this before you sign any contracts.
3. When you reinvest, you don’t receive the returns as cash payouts. Depending on your situation and goals, this could be a huge negative.
4. The discounts associated with reinvesting make it sound pretty attractive. But this doesn’t mean the price of new stock is low, attractive or even
affordable. If you’re reinvesting in an asset that’s proven to be hugely successful, there’s a pretty good likelihood that the share price has
increased. If the price at which you originally purchased stock was far lower than the discounted price you’re currently being offered, then the
discounted price might not actually be a bargain at all.

In the long run …

Does reinvesting look like the right approach for you? Or are you convinced that a different path would be better? Maybe you’re still unsure … And that’s fine. Because the benefits of reinvesting don’t reveal themselves overnight.

You’ll typically reinvest for the long term. If you make a decision one way or another, you’ll still have plenty of time to change your mind, take a different approach and reap the benefits of that approach. Remember, it’s all about doing what works best for you and makes you feel the most comfortable.

tax optimisation

8.3 Tax Optimisation

No one likes paying tax. No one really expects you to like paying tax. And when we say no one, we mean no one at all. Governments themselves don’t expect you to be happy about paying tax. This is why they’ve created a veritable cornucopia of ways to avoid paying taxes. We aren’t talking about loopholes here, but specific tax breaks and tax incentives. You’ll find them in plenty of areas, but especially in investments.

By doing a little homework, you’ll discover that these tax breaks differ from one type of investment to another. And please remember: tax laws differ from country to country and sometimes even region to region. What we’re discussing here is definitely not universal. It’s up to you to find out whether you’ll be able to benefit from the different approaches to tax optimisation.

The basics – Tax brackets

Tax rates usually apply to specific brackets. The lowest bracket is often completely tax-free. This means that income up to a certain amount is entirely tax-free.
In the lower brackets, your income is taxed at lower rates. If you exceed the limits of a bracket by just one euro, that single euro will be subjected to the higher tax rate in the higher bracket. The rest will still be subjected to the lower tax rate applied for the lower tax bracket or brackets.

Bob’s tax return

Every year, once all the different tax deductions have been made, Bob earns a net amount of £40,500. This income is taxed at different rates in different brackets:

£0 – £10,000 = 0% tax.
£10,000 – £30,000 = 20% tax. Bob owes £4,000 in this bracket.
£30,000 – £40,000 = 30% tax. Bob owes £3,000 in this bracket.
£40,000 – £50,000 = 40% tax.

Only £500 of Bob’s earnings fall into this bracket. As such, he pays £200 for what he earned in this bracket.

In total, Bob needs to pay £7,200 in tax.

Capital Gains Tax

This is the tax you pay on the profits you make when you sell an asset. For example, say you spend £100,000 on an antique Porsche. Five years later, you sell it for £300,000. The taxman sees this as meaning you have £200,000 that needs to be taxed.

However, suppose this asset wasn’t a Porsche. Instead, you invested the same £100,000 in a fund which is going to pay you £300,000. You’ll have to pay Capital Gains Tax on the £200,000. But you won’t need to withdraw the entire £200,000 profit at once. And there’s a good reason not to.

It comes back to the tax brackets discussed earlier. Divest only a small amount from the fund. This means your income will only qualify as being in the lower tax brackets. And you’ll only have to pay a small amount of tax. Do the same the next year and the year after that and so on … If you play your cards right, you won’t need to pay much tax at all.

Marriage and tax

The tax-free threshold and the different tax brackets apply to every individual person. They are valid for an entire year. This means that if you have a £10,000 tax-free threshold, you are allowed to earn £10,000 tax-free every year. Great!

And if you’re married or in a legally recognised civil partnership? You have the tax-free threshold and your partner has the tax-free threshold. Which means that between you, you’re able to earn £20,000 without paying a cent of tax. Wonderful!

Of course, you’ll have to check what the current, local tax-free threshold is and what the tax brackets are. And if you’re not actually married, but are in a civil partnership, it’s probably best to check whether this is legally recognised, or find out what you’ll need to do to make sure you qualify.

The return of the dividends

The returns from dividends are considered to be income. This means you need to pay tax on them. Although, there are exceptions. Depending on where you’ve invested, you could be exempt from paying tax.

  • You may not need to pay tax if you fall into a low enough tax bracket. This would mean that your earnings fall under a certain threshold. You’ll have to check what’s valid and current for your tax regime.
  • Do you own shares in a foreign company? You may be able to consider the income as coming from your country of origin. It will depend on which countries are involved and the amount of the income from the dividend returns. There’s likely to be a threshold.
  • If the dividends from foreign shares exceed this threshold, things are going to become complicated—which is bad news. Basically, the tax will be based on the tax rates of the country in which these shares are owned. But, there’s also good news. Most online tax calculation systems take the worries and complications out of international tax for you. And the best news? Depending on the tax rates in the foreign country and the country in which you’re paying tax, you might actually receive tax back.

Income tax and the pension pot

The taxman likes people investing in their pensions. In fact, he absolutely loves it. If you invest your earnings straight into a pension fund, you’ll quite possibly not have to pay any tax on this money until a much later date.

Does that sound too good to be true?

All the more reason to do your homework. You’ll want to check out a few variables:

  • Whether the tax laws applicable to you allow you to do this. What’s accepted in the UK might be different to what’s accepted in Saudi Arabia and different yet again in Mexico. However, you’ll usually receive some kind of benefit for investing in a pension fund.
  • Your pension fund will most likely have to be approved by the government. If your current fund doesn’t have the thumbs up? There’s no stopping you from moving elsewhere.
  • There may be limits to how much of your earnings can be invested tax-free. This might be a percentage of your income, a set amount, or it could be unlimited. Find out what applies to you and use it to your advantage.


Tax-free! No tax! We pay the tax for you! You’ll see these promises a lot when you start investing. It’s probably best to ignore them completely. Why? Because many of these supposedly tax-free investments will turn out to not actually be tax-free.

And if not? The various fees and costs involved, as well as the potentially low return rates, could end up meaning you would have been better off paying the taxes.


8.4 Divesting

We had a look at capital gains tax. It’s the tax you pay on the increased value of an asset. If you withdraw the increased value of an asset from a fund all at once, the taxman hits you with a painful bill.

Divest it slowly over time and you’ll be able to make the most of tax-free thresholds and the lower tax rates in lower tax brackets. When you divest the capital you previously invested, it’s best to take a similar approach.

Divesting your pension fund

Remember how the taxman liked you to invest fresh earnings straight into a pension fund? And how you didn’t need to pay any taxes on them? The taxman will come back when you’re retired. And he’ll have his hand out.

When you divest your pension fund, you’ll have to pay tax. After all, the money in there is money you’ve earned and which you haven’t yet paid any tax on. The good news is that now you’re retired, your earnings are probably not going to be in the high tax bracket they were in years earlier. And this means the money you withdraw from your pension fund will only be taxed at whatever tax rate you currently reach.

Bobs’ revised tax return

Bob earned £40,500 every year. Under normal circumstances, he would pay £7,200 in tax. But he was allowed to invest 15% of his income, £6,075, straight into his pension fund. There was no need for Bob to pay any tax on this £6,075 until withdrawing it.

This means that after investing, Bob was taxed on earnings of £34,425:

£0 – £10,000 = 0% tax
£10,000 – £30,000 = 20% tax. Bob paid £4,000 in this bracket.
£30,000 – £40,000 = 30% tax. Bob paid £1,327.50 in this bracket.
£40,000 – £50,000 = 40% tax. Bob didn’t pay anything in this bracket.

In total, Bob needs to pay £5,327.50 in tax. This means he would originally have paid £1,872.50 in tax on the £6,075 he invested in his pension fund.

When he retires, Bob earns £20,000 from his government pension. At that time, he divests the £6,075 he invested many years ago. This means the taxman looks at Bob’s income as being £26,075:

£0 – £10,000 = 0% tax
£10,000 – £30,000 = 20% tax. £16,075 of Bob’s earnings fall in this bracket. Bob owes £3,215.

This also means that instead of paying £1,872.50 in tax on the £6,075 he invested in his pension fund, Bob has only paid £1,215. It’s a saving of £657.50.
This might not seem like much. But, Bob keeps making these investments every year, for thirty years. This means that if he keeps withdrawing at the same pace, he will save a total of £19,725 over this time. Plus, the money he has invested has had wonderful returns.

Inheritance taxes

Only two things in life are certain: death and taxes.
Benjamin Franklin

You’ve been clever. You’ve invested and invested and you have now developed a nice little nest egg to fall back on in the years to come. The only problem is … you suddenly die. Sorry.

Apart from the annoyance of your being dead, your next of kin also have the annoyance of the taxman to deal with. And if you haven’t been careful, they may find the taxman seems to have left his empathy in his other pants: inheritance taxes vary from country to country, but they are usually extremely high.

In fact, they are so high that you may want to reconsider how you’ll approach your investment and divestment plans. Before you do, take a look at:

  • Inheritance tax rates. These can vary based on how old you are when you die. If you die before a certain age, you could be taxed at a different rate. Therefore, you will divest more—or less—quickly depending on how many candles you have on your next birthday cake.
  • Tax rates for income.
  • The different assets that will become part of your estate and be subject to inheritance taxes.
  • Whether you have a dependent who will be drawing an income from your pension fund. The inheritance tax could be reduced or even eradicated in this situation.

If there is no inheritance tax on a recognised government pension fund, you might want to start moving your capital across to this fund as you grow older. And if there is inheritance tax? You might want to look for options that will enable your next of kin to avoid paying inheritance taxes. But don’t be too drastic. You want to have this capital at hand if you need it. After all, the most important rule is that you’re comfortable.

And now?

8.5 And now … ?

Now you know why, what, where, when and even how to invest. What happens next is entirely up to you. After all, you might see certain advantages to one method of investing that others completely disagree with. You might find easier ways to decide on which assets to invest in. And this is fine too. Because at the end of the day, it is your money and you’re investing for your own interests in pursuit of your own goals.

If you do have any questions about the information in this guide, please don’t hesitate to contact us at Swanest. If you would like to find out how we might be able to help you with your investments, once again, we are happy to help.

Wherever your investment path might bring you, we wish you the absolute best and every success possible. Good luck!

8.6 Additional Reading

This guide is for educational purposes only, and should not be seen as financial advice.

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