Invest for the Recovery Under Obama
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 will matter: We still don't have the details of how the tax code will be changed, but indications have been that at least some of the population (which targets the investing population) will see an increase in taxes on dividends and capital gains. If, for example, you pay a 20% or 25% rate of tax on capital gains instead of a 15% (or less), it is clear that there will be less money to reinvest or to live on after taxes are paid. Dividend rated could go up as high as 35% which will really kill the benefit of dividend paying stocks and bonds. So, you may want to consider the incorporation of tax free municipal bonds (but then with municipalities gong broke, be sure you look before your leap). Discuss tax management with your Advisor on the rest of your portfolio. Tax managed passive mutual 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 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.
In order to win the loser's game, follow academically sound investment principles will allow you to win during an Obama Presidency. Don't give in to the Wall Street marketing gurus who have proven just how effective they are at separating you from your money, quickly and permanently. Can anybody say, Bernie Madoff?
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 will matter: We still don't have the details of how the tax code will be changed, but indications have been that at least some of the population (which targets the investing population) will see an increase in taxes on dividends and capital gains. If, for example, you pay a 20% or 25% rate of tax on capital gains instead of a 15% (or less), it is clear that there will be less money to reinvest or to live on after taxes are paid. Dividend rated could go up as high as 35% which will really kill the benefit of dividend paying stocks and bonds. So, you may want to consider the incorporation of tax free municipal bonds (but then with municipalities gong broke, be sure you look before your leap). Discuss tax management with your Advisor on the rest of your portfolio. Tax managed passive mutual 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 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.
In order to win the loser's game, follow academically sound investment principles will allow you to win during an Obama Presidency. Don't give in to the Wall Street marketing gurus who have proven just how effective they are at separating you from your money, quickly and permanently. Can anybody say, Bernie Madoff?
About the Author:
Be sure to 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 simple steps for how to shield 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 articles at CharlesLStanley.com.
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