Oct 23, 201209:22 AMOpen Mic
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Should the election affect your investment strategy?
You can’t escape the news – it is everywhere. This is an election year. And while you might be interested in the competitive aspects of the presidential and congressional races, here’s the bigger question: What happens afterwards? In particular, you might wonder how the next president and Congress will affect your investment outlook.
A look back in time provides some interesting data. For example, since the 1960s, stocks have done significantly better under Democratic administrations than under Republican ones, according to a Bloomberg Government report. However, during much of that period, the bond market did better when a Republican occupied the White House, according to a study in the Financial Services Review.
Of course, presidents don’t act alone – they must deal with Congress. But under every combination of Democrats and Republicans in Washington (i.e., Democratic president/Republican Congress, or vice versa), we’ve seen long periods in which the financial markets and the economy have prospered – and some periods in which they haven’t done well at all.
In any case, while policymakers’ political affiliations are certainly not irrelevant, history has shown that factors such as corporate earnings, consumer spending, inflation, and interest rates may be of greater importance to investors. In other words, rather than basing your investment decisions on who is in power in Washington, look at the fundamentals. If you’re considering a stock, look at a company’s profitability, its management team, and the competitiveness of its products or services. When you buy bonds, consider the impact of a possible change in interest rates. (Typically, rising interest rates will cause the prices of existing bonds to drop, while falling rates will boost prices.)
Still, politics may play a role in another element of investing: taxes. Specifically, what’s likely to happen to investment-related taxes, such as those assessed on dividends and capital gains, if President Obama is re-elected or if Gov. Romney is elected? No one can say for sure, because either one will have to go through Congress to get his plan enacted.
Consequently, you’ll need to adopt a wait-and-see attitude with regard to capital gains and dividends. Nonetheless, there’s probably less reason to be concerned than one might think. Even if the top capital gains rate were to rise somewhat, the new rate will still be far lower than its historical highs. Plus, if you follow a buy-and-hold strategy, which is often a good one for most people, you won’t have to think about capital gains taxes for many years. And even a modest increase in the tax rate on dividends won’t significantly detract from their key benefits – the ability to provide a source of regular income, when taken as cash, or as a way to increase ownership shares, when reinvested.
Ultimately, you need to build and manage your investment portfolio based on your individual needs, goals, and risk tolerance, rather than what’s happening in Washington. So, on Nov. 6, vote for your preferred candidates – but throughout your life, “cast your ballot” for proven investment strategies.
This article was provided by Lauri Binius Droster, a financial advisor at RBC Wealth Management in Madison, and was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.
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