How to Invest Your Portfolio Since Obama Won the Presidency
February 8th, 2009 | by admin |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 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. 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. Risk and Return are Related: Exposure to meaningful risk factors in a diversified portfolio determines expected return. Over the long haul, stocks outperform bonds but not always; over the long haul small stocks outperform large stocks, but not always; over the long haul value stocks outperform growth stocks, but not always. Each of these outperformers has a greater volatility risk and a greater expected return.
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.
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