Exactly How to Invest Your Portfolio if Obama Wins the Presidency!

1. Taxes Matter: We dont 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. 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. 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 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.

» left by Judi Lake

3 years 101 days ago.
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Thank you, Charles, for the information -- I think I will hide my pennies in our mattress for now... smile... Seriously, we all need to be prepared and informed. Thanks again.

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» left by Anonymous 3 years 100 days ago.

If you are currently in cash or cash equivalents, and you will need those funds in less than 3-5 years, the mattress sounds like not the worst idea for now. However, if your funds are long term - like more than 5 years away before you need to tap into them, it would probably be prudent to be ready to invest according to the principles in the article as soon as it appears we have bottomed out. The problem with waiting until we are "sure" we have bottomed out, we will probably have experienced most of the recovery. Historically, when the market begins to recover, it moves very quickly. In most instances, historically, about 1/3 to 1/2 of the recovery happens in the first two weeks or so of the recovery. Those who have long term goals that waited in cash to be sure we have bottomed out and are back in a bull market missed that initial huge run up. There is obvious risk to investing. The key is to not take risk you can't handle.

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