An Obama Presidency: How to Invest Now!
Regardless of your attitude toward President Obama, his policies will have an affect on the financial markets, both internationally and domestically. His desire to bring change to the United States will, by extension, bring change to the world due to our huge economic foot print.
How do you need to think regarding your investment portfolio - both taxable and retirement accounts - now that we will have new policies under President Obama?
1. Taxes definitely matter: With all the spending that is going on, eventually taxes will go up. That seems to be a given. How much and who will pay are the only questions that remain. If your capital gains rate goes from 15% to 25%, it doesn't take a genius to realize that there will be a lot less to either spend or reinvest after taxes are paid. A dividend rate of up to 35% has been floated by the Obama folks - although not much has been said lately because they are all too busy trying to spend trillions of dollars to hopefully turn the economy around. Good luck on that. It it weren't for the fact that so many municipalities are going broke (or at least they claim to be), tax free municipal bonds would be a good addition. Be sure your Advisor is implementing solid tax management with your portfolio. Tax managed passive mutual funds (like index funds) have an extremely low tax impact.
2. You can't fool Mother Nature or the Capital Markets, they work: Turn on your TV any week-end and you will hear the "gurus" announcing which sectors or industries will boom under the Obama Administration and which will go bust. Academicians have shown over and again that such attempts to combine stock picking with market timing almost never outperform the broad market - the truth is they generally underperform. When they do outperform it is usually just plain luck rather than skill that can be exploited for profits and this it is not repeatable. Financial markets are essentially efficient and any attempt to regulate trade or change tax policy will end up being priced into the securities as soon as the news hits the wires.
3. Diversification is Key: The way to consistently win under an Obama Presidency is to hold very broadly diversified, global, low cost, asset class mutual funds. Diversification reduces uncertainty. If you hold a mutual fund of US securities with about 3500 stocks in it and one of them happens to be a Bear Stearns or Lehman Brothers, it will hardly make a blip in your portfolio as it goes out of existence. Dont be caught with concentrated position mutual funds or with individual securities. You will be carrying too much risk that you can diversify your way out of.
4. You can't separate Return from Risk: This is the principal that everyone wishes weren't true. But, it is. Over time, stocks outperform bonds. Over time, bonds outperform cash. But this isn't true at all times, just over time. In 2008, cash outperformed stocks. But, over any extended time period, stocks outperform cash and bonds. Stocks are also more volatile. You can't separate this kind of higher risk and higher return. Small stocks outperform large stocks. Value stocks outperform Growth stocks, not always, but over time.
5. Portfolio Performance is determined by Portfolio Structure: Asset allocation (choosing how much of a portfolio to commit to what asset class) along equity market exposure, value and size dimensions primarily determine the performance over time of a broadly diversified portfolio. Stated another way, under an Obama Presidency - or any Presidency for that matter - own low cost, globally diversified asset class mutual funds that are more heavily weighted to smaller and more value oriented stocks. You are exposing yourself to higher performing asset classes but are protecting yourself from uncertainty through broad diversification. If an all stock portfolio is too volatile for you, add some short term high quality bonds to reduce the volatility. Of course, it will also reduce your expected return.
Following academically sound investment principles will allow you to win the losers game during an Obama Presidency. Dont give in to the Wall Street marketing gurus who have proven their ability to separate you from your money, quickly and permanently.
How do you need to think regarding your investment portfolio - both taxable and retirement accounts - now that we will have new policies under President Obama?
1. Taxes definitely matter: With all the spending that is going on, eventually taxes will go up. That seems to be a given. How much and who will pay are the only questions that remain. If your capital gains rate goes from 15% to 25%, it doesn't take a genius to realize that there will be a lot less to either spend or reinvest after taxes are paid. A dividend rate of up to 35% has been floated by the Obama folks - although not much has been said lately because they are all too busy trying to spend trillions of dollars to hopefully turn the economy around. Good luck on that. It it weren't for the fact that so many municipalities are going broke (or at least they claim to be), tax free municipal bonds would be a good addition. Be sure your Advisor is implementing solid tax management with your portfolio. Tax managed passive mutual funds (like index funds) have an extremely low tax impact.
2. You can't fool Mother Nature or the Capital Markets, they work: Turn on your TV any week-end and you will hear the "gurus" announcing which sectors or industries will boom under the Obama Administration and which will go bust. Academicians have shown over and again that such attempts to combine stock picking with market timing almost never outperform the broad market - the truth is they generally underperform. When they do outperform it is usually just plain luck rather than skill that can be exploited for profits and this it is not repeatable. Financial markets are essentially efficient and any attempt to regulate trade or change tax policy will end up being priced into the securities as soon as the news hits the wires.
3. Diversification is Key: The way to consistently win under an Obama Presidency is to hold very broadly diversified, global, low cost, asset class mutual funds. Diversification reduces uncertainty. If you hold a mutual fund of US securities with about 3500 stocks in it and one of them happens to be a Bear Stearns or Lehman Brothers, it will hardly make a blip in your portfolio as it goes out of existence. Dont be caught with concentrated position mutual funds or with individual securities. You will be carrying too much risk that you can diversify your way out of.
4. You can't separate Return from Risk: This is the principal that everyone wishes weren't true. But, it is. Over time, stocks outperform bonds. Over time, bonds outperform cash. But this isn't true at all times, just over time. In 2008, cash outperformed stocks. But, over any extended time period, stocks outperform cash and bonds. Stocks are also more volatile. You can't separate this kind of higher risk and higher return. Small stocks outperform large stocks. Value stocks outperform Growth stocks, not always, but over time.
5. Portfolio Performance is determined by Portfolio Structure: Asset allocation (choosing how much of a portfolio to commit to what asset class) along equity market exposure, value and size dimensions primarily determine the performance over time of a broadly diversified portfolio. Stated another way, under an Obama Presidency - or any Presidency for that matter - own low cost, globally diversified asset class mutual funds that are more heavily weighted to smaller and more value oriented stocks. You are exposing yourself to higher performing asset classes but are protecting yourself from uncertainty through broad diversification. If an all stock portfolio is too volatile for you, add some short term high quality bonds to reduce the volatility. Of course, it will also reduce your expected return.
Following academically sound investment principles will allow you to win the losers game during an Obama Presidency. Dont give in to the Wall Street marketing gurus who have proven their ability to separate you from your money, quickly and permanently.
About the Author:
Make sure you get your free copy of a Special Report by Charles L. Stanley CFP ChFC AIF titled "How to Protect Yourself from being Madoff'd". This report contains simple steps for how to protect yourself from crooks like Bernie Madoff, the Wall street broker who allegedly stole from his clients for $50 Billion. You don't have to let it happen to you. You will also find other resources at CharlesLStanley.com.
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