ENDE Find your number1 min

Level 5 of 712 min+100 XP

Don’t break it

Tax, crashes, inflation and your own brain. Four things that wreck a working portfolio, and the rules that stop you from helping them.

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A good machine fails through its operator#

You built a simple portfolio in level 4. It needs almost nothing from you. The hard part is giving it exactly that.

Four things can break it: tax surprises, crashes, your own reactions and inflation. Two of them come from the state, one from the market and one from the person in your mirror.

Tax: the state wants its cut#

Almost every country taxes investment income: dividends, interest and gains when you sell. You invest money the state has already taxed once, and it would like a second helping of whatever that money earns. How much, when, and with which allowances depends on where you’re tax resident. Not on your passport, and not on where your broker sits.

Three principles apply nearly everywhere:

  1. Tax is due on gains, not on what you paid in.
  2. Deferral helps. Money that stays invested instead of going to the tax office keeps compounding.
  3. Trading triggers tax. Every sale with a gain is a taxable event. Buy and hold is also a tax strategy.

Everything else is local. Five questions to answer for your own country, once, in writing:

  1. The rate. Is there a flat rate on capital income, or does it go on top of your salary at your income tax rate?
  2. The allowance. Is there a tax-free amount per year or a tax-favoured account? And do you have to apply for it?
  3. Funds that don’t pay out. Are accumulating funds taxed only when you sell, or a bit every year?
  4. The paperwork. Does your broker withhold the tax, or do you declare it yourself?
  5. The payout. How are withdrawals taxed later, and how are private pension products and the state pension taxed? Usually that’s three different rulebooks.

Your tax authority’s website answers most of it. Search for “capital gains tax” and “investment funds” plus your country, and read the official page before you read a forum.

How different can it get? Cross one border. Austria takes 27.5% on gains and dividends from securities, and the domestic bank withholds it.

Tedious? Yes. Tax law wasn’t written to be read, in any language. If Germany is your country, the German version has the details with worked examples.

Crashes are part of the deal#

The return of shares is a payment for sitting through the drops. No drops, no payment.

Here’s what the MSCI World, an index of global equities, has done. All numbers are in US dollars with dividends reinvested, before costs and tax.

Guess first

PeriodResult
31 October 2007 to 9 March 2009−57.46% from peak to bottom
Calendar year 2018−8.20%
Calendar year 2022−17.73%
Calendar year 2023+24.42%
End of 1987 to August 2026, per year+9.08%

Read the last row again. The 9.08% a year includes the 57% crash and every other bad year in between. Of the 14 calendar years from 2012 to 2025, three ended with a loss.

Historical returns are not promises. But history shows the pattern: long climbs, interrupted by falls that feel endless while you’re stuck in them.

I expect the next big fall sooner rather than later. My full crash plan is in The everything bubble.

The behaviour gap#

A fund has a return. The investors in that fund often earn less, because they buy after prices have risen and sell after they’ve fallen. That difference is called the behaviour gap.

The mistakes are always the same:

  • Panic selling: turning a temporary loss on a screen into a permanent one.
  • Performance chasing: buying what did well last year.
  • Tinkering: adding a fifth, sixth and seventh fund because a video said so.
  • Waiting for the right moment: holding cash for a dip that comes after prices have doubled.

None of this is stupidity. It’s how brains work under stress, and an entire industry earns its living by stressing yours. So don’t rely on discipline. Rely on rules.

Stop checking the app#

Share prices move every second. Your goal is decades away.

The more often you look, the more often you see a loss, and losses hurt more than gains feel good. Check daily and you’ve turned a good long-term investment into a daily mood swing with a login.

So kick the broker app off your phone’s home screen. Bury it on the last page, next to the apps you forgot you had. Check the portfolio on your rebalancing date, and once a quarter for your net worth if you must.

Write your crash rules now#

Decide in advance what you do when the portfolio is down 30%. Write it down. For example:

  1. The savings plan keeps running.
  2. I do not sell equities to “wait until things calm down”.
  3. I rebalance on my fixed date, not before.
  4. Before any change, I wait 30 days and reread this list.

Inflation: the tax nobody voted for#

Inflation doesn’t send a letter. It just makes your money buy less every year.

The European Central Bank aims for 2% inflation a year over the medium term. If you earn zloty, koruna or francs, your central bank has its own target, and it’s worth looking up. Let that sink in: the official goal is that your money loses value every single year. They call it price stability.

Guess first

That’s why the emergency fund has a size limit, and why long-term money belongs in productive assets. It’s also why your plan should always be in today’s money.

This lesson is education, not investment, tax or legal advice.

Next level: saving has a floor, income has no ceiling – you pull the entrepreneurial lever.

Mission

Quiz · 3 questions

Q1 How large was the biggest drop of the MSCI World from peak to bottom between 2007 and 2009?
Q2 What is the behaviour gap?
Q3 At 2% inflation, what is €10,000 in cash worth in today’s money after 30 years?

Sources#

level 5

Done reading?

Tick the mission, answer the quiz, then claim your XP. Or just claim it, I’m not your teacher.

Level 6: Earn more

Education, not advice. I don’t know your situation, and past returns promise nothing. Check my numbers, then make your own call. You’re a grown-up.