Portfolio Management

Portfolio management, including the cash element in the portfolio, is an equally important part of my investment strategy, in addition to stock selection and diversification.

Low cost approach

I intend to minimise taxes, expenses and trading fees as much as possible from the start. Keeping my portfolio management expenses low, i.e. less than 0.5% per year, will provide me with better long-term returns.

As a result, I have opened a stock and shares ISA with low cost online stock broker TD Waterhouse which will enable me to do just that.

Their ISA account trading charges are reasonably, though necessarily the cheapest on the market, while they also allow me to trade in companies listed on a number of foreign stock exchanges. They also do not charge any annual management fee or registration fee, or anything else.

Share portfolio structure

My initial portfolio management plan involves owning equal pound amounts in up to 25 companies. However, I won’t be rebalancing by selling shares in companies which over time take a large amount of my portfolio, but I will be adding to positions that still fit my undervalue entry criteria and which are having a lower weight in my portfolio for one reason or another.

Since I am in the accumulation phase with my dividend income growth portfolio, I may use a pound cost average strategy to enhance my positions. This should minimise some of my risk, but it will most probably also decrease my returns at least in the first several years.

ISA versus SIPP

A very important portfolio management issue is taxation. Increasingly, Britons realise that they can build pension benefits by investing in the stock market through a Self Invested Personal Plan (“SIPP”), which to a point, i.e. at entree, have tax advantages.

However, a SIPP has some severe limitations in comparison to an ISA. You can’t withdraw any money from your SIPP until you are at least 55. Following which, only 25 per cent of your then portfolio can be withdrawn tax free. In comparison to a SIPP, an ISA allows you to withdraw income at will, without any age limitation or income tax implications.

Benefits of a stocks and shares ISA

A stocks and shares ISA offers a tax-efficient shelter for a number of assets, including:

  • individual company shares
  • unit trusts
  • Open-ended investment companies (“Oeics”)
  • Investment trusts
  • Index-tracking exchange traded funds (“ETF’s”)
  • Qualifying bonds

In a self-select ISA the asset mix and investment timing are in your hands. Furthermore, you pay:

  • No additional income tax on dividends or distributions
  • No tax on income from qualifying bonds or bond unit trusts
  • No capital gains tax on any gains made within the ISA

As your stocks and shares portfolio in your ISA grows both in time and in size these tax benefits only become more beneficial.

Nevertheless, I wouldn’t exclusively use an ISA for retirement purposes if and when income and expenses permit. Overall I believe SIPP’s have a place in a broad based wealth building plan.

ISA versus share trading account

The ‘cost’ of not owning my dividend income growth portfolio in a tax sheltered account such as an ISA is that I will be:

  • taxed on my dividend income every year
  • taxed for any capital gains above the annual capital tax threshold.

Irrespective of the size of your portfolio and the dividend income it generates, I suggest you try to concentrate your dividend shares in a low cost ISA account.

What next

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