Recently, I was asked the question, “Given the most recent situation, how should individuals invest over the next four years?” I’ll start by saying, when investing, it is important to pause, breath, and take a macro view of the economic environment.
The results of U.S. elections leave a divided government for at least two more years. Politicians on both sides of the aisle must learn to work together for the citizens present and future. They have their work cut out for them to avoid the “fiscal cliff” in the short-term. Bipartisan agreement on debt reduction, taxes and spending would go a long a way toward giving individual investors confidence and spurring economic growth.
I am not going to speculate on future events.
When facts are unclear—as they are now—you can expect many people spreading opinions, selling investment newsletters and services that incite fear of the worst-case scenario. They may claim insights and historic success to gather investors to follow their strategies of what may or may not happen.
My advice is to ignore them.
Following fear tactics can cause more harm to your wealth than if you simply managed a globally diversified portfolio of no load, low expense ratio, registered investment company securities, and then rebalanced your strategic asset allocation periodically.
Look long term.
Ignore the chatter about which sectors and industries “that will do well or suffer as a result of the president’s re-election.” Hot topics include health care reform, defense spending, alternate energy, The Dodd-Frank Wall Street Reform Act. Remember, both parties have a long history of protecting programs that benefit their constituents and campaign donors. Keep in mind, that legislation requires compromise on where to spend political capital. It is certainly difficult to plan projects if you don’t know what your tax rates will be.
Uncertainty does bring opportunity. The capital markets work. Security prices reflect available information and the aggregate opinions of market participants. Ignore the “gurus” who sell fear and greed. Focus on investing, not forecasting. Diversification is essential. It helps reduce volatility. Concentrated investments add risk, with no additional expected return. Risk and return are related. Exposure to meaningful risk factors determine expected return. Asset allocation along size, value, and market dimensions primarily determines the returns of a broadly diversified portfolio. Control what you can. Maintain discipline and have a long-term view of investing. Consider expenses and tax efficiency of investments.
Five words of advice:
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Chris Bryant is an American financial advisor.