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After months of buildup, the
presidential election is finally over. Now that the dust has
settled, it’s important to understand how the results might
affect your portfolio, both now and down the road.
Since the beginning of the year, the stock market has been
in one of the longest trading ranges in history. After
gaining 25% in 2003, the S&P 500 index is currently trading
close to where it began in 2004. Don’t let that deceive
you—2004 was a volatile year.
There were declines of 8% during the year in the S&P 500,
19% in the NASDAQ, 11% in the S&P 400 Midcap Index and 14%
in the Russell 2000 Smallcap Index. Even though these
indexes have recovered from their losses, it’s been a roller
coaster ride for many investors.
The stock market doesn’t like uncertainty and there’s been
plenty this year. Much of that uncertainty centered on
taxes, as Bush and Kerry had very different plans in mind.
For instance, President Bush lowered the taxes on dividends
and capital gains to a maximum of 15% during his first term.
He made clear his desire to make these cuts permanent, which
would affect companies’ decisions concerning dividends.
Bush also promised to make the cuts in the capital gains tax
permanent, which affects the value investors and analysts
place on companies and the markets as a whole.
Income tax rates affect the timing and amount of investment
decisions as well. The higher the income tax rate, the
greater the incentive to invest in tax-deferred retirement
programs or tax-free municipal bonds.
Adding to the uncertainty, Wall Street was concerned over
the possibility of another disputed election like we saw in
2000. The makeup of the Congress was also important since
that would affect the ability of whoever won the
presidential election to implement their agenda.
On November 3rd, much of this uncertainty was erased. It
became clear that President Bush won re-election. And the
markets reacted by going up. I believe the markets would
have gone up regardless of who won since the uncertainty was
removed and investors could factor the results into their
decisions.
Looking ahead, President Bush has stated he intends to
reform Social Security. Most believe that this will include
the ability of younger workers to direct a portion of their
Social Security tax into an account for which they’ll make
investment decisions.
The more likely private Social Security accounts become, the
more the stock market will go up. When I became a broker in
1987, very few people had 401(k)s. Now almost everyone does.
Much of that money is invested in the market. I believe that
is one of the main reasons the markets have gone from 3000
on the Dow Jones Industrial Average to 10,000 over the last
decade. It stands to reason that private Social Security
accounts would have an even greater impact.
The President will encourage saving for retirement by
proposing Retirement Savings Accounts. Company retirement
programs may be reformed and simplified as a result.
Proposed Lifetime Savings Accounts will allow after-tax
money to be accessible and earnings tax-free. These too will
have a dramatic impact on the stock market.
On the other hand, there is concern that these proposals
will increase the deficit. That’ll cause interest rates to
go up. When interest rates go up, bond prices go down. The
result is that bonds may return far less over the next five
years then they did in the last five years.
So how should you invest? For those younger saving for
retirement 5-10 years from now, the stock market should
allow you to grow your wealth and reach your goal sooner.
For those retired it is important to divide your portfolio
between cash, bonds, real estate and equities. The
percentages in each will depend on your particular comfort
levels and financial situation.
For my clients, we had greatly decreased the amount they had
allocated to equities over the last few years. Looking
forward, we are now increasing those amounts. Of course, I
actively manage monies devoted to equities to make sure that
a small loss doesn’t turn into a devastating one. If your
advisor doesn’t, it will increase your potential for loss
when investing in stocks.
Questions? Concerns? I’d be happy to provide clear, unbiased
advice free of charge.
Mr. Voudrie is a Certified Financial Planner and the
President of Legacy Planning Group, Inc., a Private Wealth
Management firm in Johnson City, TN. For more information
call 1-877-827-1463 or email
jeff@guardingyourwealth.com. |
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