Will New Administration Affect Your Investment Moves?

Next week, President-elect Obama will become President Obama. Like people across the country, you will no doubt be greatly interested in how his actions will affect a wide variety of domestic and foreign-policy issues. But from a personal point of view, you may also be thinking about what an Obama Administration will mean for your investment strategy.

In reality, the actions of any administration generally have only a limited impact on the financial markets. In our complex, interconnected world, a variety of factors — from actions of the Federal Reserve to corporate profits to oil prices to political instability abroad — all play a key role in determining the fortunes of the stock and bond markets.

Consequently, you need to take a truly global perspective on your investment strategy — and avoid getting caught up in the potential ramifications of who’s in charge in Washington. Nonetheless, you may still want to pay some attention to potential changes introduced by the new administration.

Here are a couple of areas to consider:

• New legislation— You may want to follow the progress of new legislation proposed by the Obama Administration. For example, will a successful push toward “green” energy benefit renewable energy companies? Right now, no one can answer this question. In fact, even if these changes are enacted, it will take some time to sort them out to determine what, if any, impact they could have on various market sectors. So, your best bet is to watch the course of legislation and its aftermath.
• Investment taxes — It seems likely that the Obama Administration and Congress will allow the Bush tax cuts on capital gains and dividends to expire. While you need to be aware of this development, you don’t necessarily have to make major changes to your investment strategy. In the case of capital gains taxes, you can delay them by simply holding on to your stocks for the long term — which you should be doing anyway, as stocks are a long-term investment. And even if the dividend tax increases, dividend-paying stocks may still be good investment choices, because they usually represent solid, profitable companies that seek to reward their investors. However, if you are concerned about the effect of higher capital gains and dividend taxes, you might want to consider an investment such as tax-exempt municipal bonds. You’ll benefit most from these “munis” if you’re in one of the higher tax brackets.

As you review possible changes in your investment strategy due to moves made by the new administration, you may want to take the opportunity to “rebalance” your portfolio by adjusting your investment mix. Under normal circumstances, such rebalancing could involve capital gains considerations, since you might be selling appreciated assets. However, given the steep market decline of recent months, it’s quite possible that you can now sell part of your assets at a loss to offset any gains you might have — and if you don’t have any gains, you can carry the loss forward to future years.

So, pay attention to what’s happening in Washington, and, at the same time, look for opportunities to rebalance. But keep in mind that your long-term investment strategy should be based on your individual needs, goals, risk tolerance and time horizon. And that’s true in all political and economic environments.