Beginner Investor, Part 2. Invest €300 a month: portfolio diversification and tax deferral.

Investment account (IK) is a critical tool for EU (and especially Estonian) residents, changing the rules of the game for investing €200-500 per month. When starting out with small amounts, the weight of the benefits of IK may outweigh its administrative burden. However, with medium amounts, its use is almost mandatory.

What is an Investment Account and how does it work?

An investment account is a special bank account that is subject to income tax in Estonia (and many other EU countries). payment deferral. This means that you do not have to pay income tax on your profits, interest and dividends during the investment period.

• Key advantage: accelerated compound interest. Income tax is only payable when you withdraw the excess amount (i.e. the profit) from your account. In the meantime, the profit can stay in the account and earn new profit. This gives your portfolio a significant growth advantage, as the income tax does not immediately remove the profit from the system, but gives it the opportunity to grow further.
• A practical suggestion: As you regularly invest a larger amount, do it through your Investment Account (IK). Your monthly contribution of €300 goes into the IK, buys assets and profits grow tax-free.

Note: Because tax accounting is complex, investors must keep their own records of payments and withdrawals. But this administrative burden is worth the effort for long-term tax efficiency.

Once you have €300 a month in your hand, one global ETF is no longer enough, although it should remain the cornerstone of your portfolio. You should create a strategic diversification between asset classes to manage risk and optimise returns. This is a three-layer model: Base (growth) + Stability (defence) + Tactical (local advantage).

Tier I: North - Global Equities ETF (50%-70%)

This layer will remain the backbone of your portfolio, providing a broad diversification against global economic growth.

• Strategy: Continue to regularly buy UCITS-compliant global index funds (e.g. FTSE All-World or MSCI World) with a €0 transaction fee.
• Retrieved from maximum risk diversification, automatically investing in hundreds or thousands of companies at a time (typically $3000$-$8000$ companies in a single fund). This is the engine of long-term (15+ years) growth and security for your portfolio.
• Internships: Automatically allocate €150-€200 of the €300 to this asset class.

Layer II: Stability - Bond ETFs (10%-20%)

The equity portfolio alone is volatile. When investing larger amounts, it is wise to include. buffer class, which acts as a stabiliser during stock market downturns.

• What are Bonds? These are essentially loans that you make to either governments or corporations. When stock markets fall, high-quality government bonds tend to hold their value (or even rise), offering you protection.
• Objective: Reduce portfolio volatility and offer lower yields but more stable returns.
• Internships: Consider European sovereign bond ETFs (e.g. Government Bond UCITS ETF) to your Investment Account of €30-60 per month.

Bonds as an anchor of stability: how this defence mechanism works

The aim of adding bonds is not so much to maximise returns as to hedge risk. Historically, stocks and bonds often move in opposite directions - when investors are optimistic and risk-averse, stock prices rise and bond prices fall. When markets are in panic or at risk of a recession, investors move to 'safe havens' or 'safe havens'. safe haven towards assets. These are usually US or German government bonds. Increased demand for these will drive up the bond price, thus providing an "anchor" for your portfolio, which will cushion the fall in equities. Thus, even a 10-20% bond allocation will help to keep your portfolio more stable in large falls, reducing the need to react emotionally. In other words, if the stock market falls, you have an asset class that is likely to rise, or at least hold steady, allowing you to survive a downturn without losing all the value of your assets.

Layer III: Tactical - Baltic Shares and Individual Options (5%-15%)

In this layer, you can harness your knowledge and local advantage.

• Baltic Advantage: Investing in the Tallinn, Riga or Vilnius stock exchanges gives you the opportunity to support local success stories that global ETFs hardly reflect. Baltic equities also often offer attractive dividends.
• Risk: The Baltic market is small and liquidity is low, which means that the risk is higher than with global diversification.
• Objective: Offer potential alfa (returns above the index) and the possibility to engage in active investment.
• Warning: Keep this layer small (€30-50 per month) as it requires active analysis and is the riskiest.

When the value of your investment portfolio rises to €5,000 or €10,000 (which happens quickly with a €300 a month contribution), the following changes. psychological the challenges more visible.

Avoid the temptation to overdo it

With more money, there is often a temptation to keep an eye on the market on a daily basis and constantly reallocate assets ("sell this and buy that which is doing better").

Fact: Every transaction is a cost (even for a €0 commission) and incurs a tax and administrative burden (outside the IK). Studies show that active investors who act emotionally tend to underperform in the long run those who simply make regular DCA contributions and let the portfolio grow.

A bigger loss hurts more

If a portfolio falls 10%, losing €300 from a €3000 portfolio is much more painful than losing €30 from a €300 portfolio. Be prepared for this emotional pain.

Strategy: Stick to your automation. Market downturns are an opportunity to buy good assets cheaper. Check your portfolio less often (e.g. quarterly) and focus on whether you have made your monthly contribution.

Investing in the medium term (for example €300 per month) opens the door to a more sophisticated but much more effective strategy. Your main priority should be Investment account tax deferral to allow compound interest to grow unhindered.

Create a three-layer portfolio: secure Global ETF (basic), providing stability Bond ETFs (protection) and a small amount of Baltic Shares (local advantage).

What you should remember:

1. IK is mandatory: Tax deferral is more important than transaction fees.
2. Diversification into asset classes: Don't keep all your eggs in one basket.
3. Emotion management: More money = more temptation. Be disciplined.

Next step: In the third and final article of our series, we look at how to invest more money. (1000+ € per month or large lump sums), with a focus on professional advice and the addition of real estate/alternative assets.