Obama and Your Portfolio

One assumption that many people make when it comes to the business and investment community is that people who are involved in these communities should vote for a Republican president because they will favor these communities. While this is true in most cases, it does not really hold true for a presidential election. The reason for this is that the president has a limited impact on the economy and they have even less of an effect on the stock market. If you look back on the stock market, you will see that the stock market has actually performed better when a Democrat was in the White House compared to when a Republican was in the White House, on a short-term basis. However, no matter who is in the White House the first two years of any new presidential term seems to be the worst years for the stock market.

If Obama actually wins the election, you as an investor need to know that there are going to be some ramifications from him winning the White House. In fact, these ramifications can actually affect your investment portfolio. What you might be wondering is if these ramifications are going to be good or bad. The ramifications are going to be a mixture of both bad and good. Nevertheless, it depends on where you have invested your money and what you plan on doing if this is going to have a bad effect or a good effect on your portfolio.

The first thing that people think about when it comes to Obama winning the White House is that it can mean that there is going to be a tax increase on the capital gains tax. As it currently stands right now, the capital gains tax sits at 15%, which is less than what most people pay on ordinary income. However, if Obama wins the White House it is said that he plans to raise the capital gains tax from 15% to 25%, which is a huge tax increase for people who invest in the stock market. Usually with an election year, the S&P rallies with an average gain of 12%, not to mention that most of that gain usually comes in the last six months of the election year. However, if Obama wins the White House rather than seeing a rally most likely, what you will see happen is an end-of-year sell-off. The reason for this is that people are going to end up selling off their stocks at the end of the year so that if Obama does raise the capital gains to 25% they can avoid having to pay that higher amount on their capital gains. Therefore, what the investors will do is take a profit in 2008 so that they can avoid that higher tax in the following year.

On a positive note if Obama wins the White House there are going to be a number of sectors that are going to get a boost from him winning. So what this means for investors is that if they currently have money invested in these markets they are going to see a gain on their investments. For those investors who do not have money in those sectors they would be smart to move some of their investments over to those sectors so that they can reap in the rewards of Obama winning the White House. The reason that these sectors are going to be positively affected by an Obama win is because of his stated policy proposals, which is what he has told the citizens of the United States that he plans to do once he is in office. The industries that have the most to gain based on Obama's policy proposals include alternative energy, generic drugs, education financing, general construction, and technology. Also based on his stated policy proposals there are also going to be some industries that are negatively affected by what he plans on doing. Which for the average investor this means you need to stay away from certain industries such as health care, which includes HMO's, big pharmacies and hospitals. In addition, defense and banking are also going to suffer from an Obama win because of the increased regulation of these industries.

Not to mention that if Obama does win the election and takes the White House, interest rates are going to rise once again. Right now interest rates are at an all time low due to the bad shape that the economy is in, but if Obama wins the interest rates are going to slowly go back up because of how he plans on getting the economy back on its feet. When the interest rates go up the only companies that are going to benefit from the higher interest rate policies are the companies that have a large pile of cash. The reason that they will benefit over other companies is because they are going to end up earning better returns on that cash and at the same time they are going to find cheaper ways to deploy it as the prices of their competitors crash. A perfect example of this would be Microsoft. Currently they have $23 billion of cash and negligible debt and because of this they are going to find numerous ways to deploy that capital and turn it into profitable business opportunities.

Another sector that is going to see benefits from Obama winning the White House is the media sector. The reason for this is that the media has discovered that it is far easier to sell products internationally when the United States has a popular president or a `rock star' president than when it has an unpopular president in the White House. The main reason behind this is that the popular presidents draw attention to the United States and it seems that all eyes are on us to see what the president is going to do. So companies will use the media to their advantage to increase their sales overseas, which in turn is going to increase how much money is being put into the media industry.

Aside from media and technology, the one area that is probably going to have the biggest benefits from Obama winning the White House is new energy companies. You can also look at older energy companies to see some benefits. The reason for this is that Obama has proposed a $150 billion alternative energy fund, so any company that wants to use a form of alternative energy can find themselves getting funding from the government, which will increase their stock prices.

Something else that Obama plans on doing that not many people understand is bringing in new investors. Obama actually wants to bring in investors from the middle of the income spectrum. What he is planning to do to get more people to invest in the stock market is offering a saver's tax credit. This tax credit would actually give families that make less than $65,000 a year $500 in tax credits if they put money aside into an IRA or a 401(K). Not to mention that Obama also plans on making saving easier for everybody because he plans on taking advantage of people's laziness. What Obama would do to increase the investing is by making it mandatory for any company that offers a 401(K) plan to sign up their employees automatically. So what you would have to do as an employee is choose to opt out of the 401(K) plan rather than having to sign up for it from the beginning. In addition to that, if the company does not offer 401(K) plans what Obama proposes to do is make them offer automatic IRA contributions to their employees and these contributions would be deducted directly from the workers' paychecks.

Therefore, no matter if you are an Obama supporter or an opponent you are going to want to learn about how to structure your investment portfolio in case he wins the election. Here are some things that you need to think about when it comes to Obama and your investment portfolio:

Number one:
Taxes matter. Nobody knows for sure yet what Obama is actually going to do when it comes to taxes on dividend income and capital gains but you need to prepare for an increase in those tax rates. One thing that you can do is use tax-free bonds for a portion of the fixed income section of your portfolio, but you also need to have your investment adviser use tax management in the investment and management of your portfolio. The reason for this is that tax managed passive mutual funds has a low tax impact.

Number two:
Diversification is important. No matter what is going on in the economy it is important to make sure that your portfolio is diversified. The main reason for this is that when you have a diversified portfolio you are reducing the uncertainty that surrounds the investment market. The reason that it reduces the uncertainty is because you are spreading out your risk among the various investment areas so if one place goes out of business and you happen to own a few shares in it you will not notice the impact as if you had everything invested in it.

Number three:
Keep in mind that risk and return are related to one another in the investment world. The more risk you have the higher your returns will be. However, even though this is usually the case it does not always hold true. Therefore, while you can invest in some of these stocks that offer high returns you also want to make sure that you invest in some lower risk stocks so that your back is covered when it comes to investments.