Fail Safe Investment Strategy for an Obama 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. 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. 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 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.
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. 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. 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 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.
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:
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 resources at CharlesLStanley.com.
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