How to Invest Your IRA Under 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.
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 definitely matter: With all the spending that is going on, eventually taxes will go up. That seems to be a given. How much and who will pay are the only questions that remain. If your capital gains rate goes from 15% to 25%, it doesn't take a genius to realize that there will be a lot less to either spend or reinvest after taxes are paid. A dividend rate of up to 35% has been floated by the Obama folks - although not much has been said lately because they are all too busy trying to spend trillions of dollars to hopefully turn the economy around. Good luck on that. It it weren't for the fact that so many municipalities are going broke (or at least they claim to be), tax free municipal bonds would be a good addition. Be sure your Advisor is implementing solid tax management with your portfolio. Tax managed passive mutual funds (like index 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. 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 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 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?
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 definitely matter: With all the spending that is going on, eventually taxes will go up. That seems to be a given. How much and who will pay are the only questions that remain. If your capital gains rate goes from 15% to 25%, it doesn't take a genius to realize that there will be a lot less to either spend or reinvest after taxes are paid. A dividend rate of up to 35% has been floated by the Obama folks - although not much has been said lately because they are all too busy trying to spend trillions of dollars to hopefully turn the economy around. Good luck on that. It it weren't for the fact that so many municipalities are going broke (or at least they claim to be), tax free municipal bonds would be a good addition. Be sure your Advisor is implementing solid tax management with your portfolio. Tax managed passive mutual funds (like index 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. 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 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 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:
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 little understood techniques for how to shield 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 articles at CharlesLStanley.com.
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