Invest for the Recovery Under Obama
Regardless of your attitude toward President Obama, his policies will have an affect on the financial markets, both internationally and domestically. His desire to bring change to the United States will, by extension, bring change to the world due to our huge economic foot print.
With Barak Obama as President and the most powerful leader in the world, how should you structure your investment portfolio - both your taxable portfolio and your 401(k) or 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. 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 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 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.
With Barak Obama as President and the most powerful leader in the world, how should you structure your investment portfolio - both your taxable portfolio and your 401(k) or 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. 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 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 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.
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 techniques 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 articles at CharlesLStanley.com.
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