Whether you are an Obama fan or an Obama opponent, since he has become our newest President of the United States his policies will have an affect on the financial markets, both domestically and internationally. He wants to bring change to the United States which by extension means world markets because we have such a huge economic foot print.
So, what do you need to think about with an Obama Presidency regarding how you structure your investment portfolios " both taxable and 401(k)/IRA, etc.?
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. Capital Markets Work: There will be those gurus who will tell you they know which sectors or industries will boom under Obama and which will tank. Academic studies have shown over and over again that such attempts to combine stock picking with a market timing element almost never outperform the broad market (in fact they generally under perform) and when they do it is usually nothing more than luck and is thus not repeatable. 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 information hits the wires.
3. Diversification increases your success rate: The way to consistently win the investing game, whether under an Obama Presidency or not, is to hold long term very broad globally diversified, low cost, asset class mutual funds. Risk is really the uncertainty about the future returns of your portfolio. Diversification reduces uncertainty. If you have a mutual fund that has about 3500 names in it, and it happens to contain a Bear Stearns and Lehman Brothers, it will hardly create a ripple to your portfolio as they go out of existence. Don't be caught with concentrated portfolio mutual funds or separately managed accounts. They contain a great deal of "non-systematic" risk that you can diversify away. Reduce your uncertainty with diversification.
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 Structure Determines Performance: Investing your portfolio along size, value and market exposure dimensions is primarily what determines the results of a diversified investment portfolio. To increase the expected results of your portfolio, own low cost, globally diversified asset class mutual funds that are over-weighted to small and more value oriented stocks. If a 100% stock portfolio is too risky for you, add some high quality short term bonds to it to reduce the volatility - of course, it will also reduce your expected return.
Winning the loser's game is as simple as following academically sound investment principles. Dont give in to the sirens of Wall Street who have proven their ability to separate you from your money, quickly and permanently.
So, what do you need to think about with an Obama Presidency regarding how you structure your investment portfolios " both taxable and 401(k)/IRA, etc.?
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. Capital Markets Work: There will be those gurus who will tell you they know which sectors or industries will boom under Obama and which will tank. Academic studies have shown over and over again that such attempts to combine stock picking with a market timing element almost never outperform the broad market (in fact they generally under perform) and when they do it is usually nothing more than luck and is thus not repeatable. 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 information hits the wires.
3. Diversification increases your success rate: The way to consistently win the investing game, whether under an Obama Presidency or not, is to hold long term very broad globally diversified, low cost, asset class mutual funds. Risk is really the uncertainty about the future returns of your portfolio. Diversification reduces uncertainty. If you have a mutual fund that has about 3500 names in it, and it happens to contain a Bear Stearns and Lehman Brothers, it will hardly create a ripple to your portfolio as they go out of existence. Don't be caught with concentrated portfolio mutual funds or separately managed accounts. They contain a great deal of "non-systematic" risk that you can diversify away. Reduce your uncertainty with diversification.
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 Structure Determines Performance: Investing your portfolio along size, value and market exposure dimensions is primarily what determines the results of a diversified investment portfolio. To increase the expected results of your portfolio, own low cost, globally diversified asset class mutual funds that are over-weighted to small and more value oriented stocks. If a 100% stock portfolio is too risky for you, add some high quality short term bonds to it to reduce the volatility - of course, it will also reduce your expected return.
Winning the loser's game is as simple as following academically sound investment principles. Dont give in to the sirens of Wall Street who have proven their ability to separate you from your money, quickly and permanently.
About the Author:
Get your free copy of a Special Report by Charles L. Stanley CFP ChFC AIF titled "How to shield Yourself from being Madoff'd". This report contains little understood techniques for how to shield yourself from crooks like Bernie Madoff, the Wall street broker who allegedly ripped off his clients for $50 Billion. You don't have to let it happen to you. You will also find other articles at CharlesLStanley.com.
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