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.
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 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. Risk level and Return level are inseparable: Over longer time periods, stocks outperform bonds, but not in all time periods. Over longer time periods, bonds outperform cash, but not in all time periods. It is also true that small stocks, over time, outperform large stocks, but not in all time periods - and over time Value stocks outperform Growth stocks, but not in all time periods. To obtain the higher long term returns one must accept the higher risk of higher performing asset classes.
5. Portfolio Structure Explains Performance: Asset allocation along size, value, and market exposure dimensions primarily determines the results of a broadly diversified portfolio. In other words, to increase the expected return of your portfolio under an Obama Presidency, own low cost, globally diversified asset class mutual funds that are over weighted to smaller and more value oriented stocks. If an all stock fund portfolio is too volatile for you, add some short term bond funds to damper the volatility.
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. - 15224
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 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. Risk level and Return level are inseparable: Over longer time periods, stocks outperform bonds, but not in all time periods. Over longer time periods, bonds outperform cash, but not in all time periods. It is also true that small stocks, over time, outperform large stocks, but not in all time periods - and over time Value stocks outperform Growth stocks, but not in all time periods. To obtain the higher long term returns one must accept the higher risk of higher performing asset classes.
5. Portfolio Structure Explains Performance: Asset allocation along size, value, and market exposure dimensions primarily determines the results of a broadly diversified portfolio. In other words, to increase the expected return of your portfolio under an Obama Presidency, own low cost, globally diversified asset class mutual funds that are over weighted to smaller and more value oriented stocks. If an all stock fund portfolio is too volatile for you, add some short term bond funds to damper the volatility.
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. - 15224
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 ripped off his clients for $50 Billion. You don't have to let it happen to you. You can also find other articles at CharlesLStanley.com.
