How to Invest Your Portfolio Since Obama Won the Presidency
Because the United States has such a huge economic foot print, the policies of change being put forward by President Obama will bring change to the whole world. This will have an affect on the financial markets both in the United States and around the world.
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 Matter: We don't yet know the details of how he will handle taxes on dividend income and capital gains. It is clear that at least some of the investing population will see an increase in taxes on those forms of investment returns. If you pay a 20% rate on capital gains that means you will have 20% less money being reinvested to grow and get the affect of compounding. Dividend rates could go up as high as 35% and that will really kill the benefit of dividend paying stocks. So, one can use tax free bonds for at least a portion of the fixed income portion of a portfolio. Second, you should make sure you are having your investment advisor use tax management in the investment and management of your portfolio. Tax managed passive mutual funds have an extremely low tax impact.
2. Don't fight the Capital Markets, they work: Most of the Wall Street types fight the capital markets thinking they can beat the market. The do this by some form of stock picking and/or market timing. Unfortunately for them (and their investor clients) all the academic research says the markets are essentially efficient and you simply can't beat the market with consistency. You are better off not trying to outperform and investing to always get the market return. I know that sounds a little scary right now, but the data are showing that this passive approach (with asset class funds and index funds) is in fact outperforming the majority of active managers even in this really tough market.
3. Remove uncertainty by Diversification: Risk is really the uncertainty of future outcomes when investing. Diversification will reduce the uncertainty of a given portfolio. Lets assume you have a fund with 3500 stocks in it. A couple of those happen to be Bear Stearns and Lehman Brothers. With that many companies in your portfolio, you will hardly notice it as those two companies go out of existence. On the other hand, if you have a mutual fund of only financial companies, you will feel it big time. See what I mean? You can reduce the risk of uncertainty through very broad 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 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.
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.
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 Matter: We don't yet know the details of how he will handle taxes on dividend income and capital gains. It is clear that at least some of the investing population will see an increase in taxes on those forms of investment returns. If you pay a 20% rate on capital gains that means you will have 20% less money being reinvested to grow and get the affect of compounding. Dividend rates could go up as high as 35% and that will really kill the benefit of dividend paying stocks. So, one can use tax free bonds for at least a portion of the fixed income portion of a portfolio. Second, you should make sure you are having your investment advisor use tax management in the investment and management of your portfolio. Tax managed passive mutual funds have an extremely low tax impact.
2. Don't fight the Capital Markets, they work: Most of the Wall Street types fight the capital markets thinking they can beat the market. The do this by some form of stock picking and/or market timing. Unfortunately for them (and their investor clients) all the academic research says the markets are essentially efficient and you simply can't beat the market with consistency. You are better off not trying to outperform and investing to always get the market return. I know that sounds a little scary right now, but the data are showing that this passive approach (with asset class funds and index funds) is in fact outperforming the majority of active managers even in this really tough market.
3. Remove uncertainty by Diversification: Risk is really the uncertainty of future outcomes when investing. Diversification will reduce the uncertainty of a given portfolio. Lets assume you have a fund with 3500 stocks in it. A couple of those happen to be Bear Stearns and Lehman Brothers. With that many companies in your portfolio, you will hardly notice it as those two companies go out of existence. On the other hand, if you have a mutual fund of only financial companies, you will feel it big time. See what I mean? You can reduce the risk of uncertainty through very broad 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 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.
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 Protect Yourself from being Madoff'd". This report contains little understood 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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