Your Investments: Your portfolio post-election

My philosophy is to give up a percent or two of potential profits to make sure that a portfolio is in tune with the actual victor. Now that we have a clear winner, what should you do?

By AARON KATSMAN
November 7, 2012 22:51
3 minute read.
Obama celebrates election win

Obama celebrates election win. (photo credit: Kevin Lamarque / Reuters)

 
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As some people come out of their shock that President Obama was re-elected, and others clean up the egg on their face (and some of us do both – at least I am honest!), it’s time to try and determine how investors should plan their portfolios for the next four years.

Assuming that some kind of deal can be struck to avert falling off the fiscal cliff that is fast approaching, investors should start taking stock and position their portfolios for the future.

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While I may have been wrong in my prediction, I did tell clients to wait and see for the election results, as opposed to try and get ahead of the election and position based on what they thought would happen. My philosophy is to give up a percent or two of potential profits to make sure that a portfolio is in tune with the actual victor. Now that we have a clear winner, what should you do? Think global Based on Obama’s declared “economic plan,” which is more of the same, investors should look for a potentially falling dollar. Along with a friendly Federal Reserve, it looks like the printing presses will continue running 24/7.

The fact of the matter is that interest rates in the US are at historically low levels, and the Federal Reserve has come out and said they are in no hurry to change that. For fixed-income investors, the 1 percent to 2.5% that bonds are yielding doesn’t cut it.

As such, investors may want to take advantage of potentially strengthening currencies and higher yields. If a 2% return is not enough to meet your needs, take a look at bonds that trade in foreign currency. While it used to be difficult to buy these bonds, nowadays most brokerage firms have the ability to purchase bonds in various currencies.

For example, a highly rated (AAA) bond in Brazilian Real can yield over 8%. A similar bond in Australian dollars will be over 4.5%. What makes these bonds even more attractive is that the currencies have been weak of late against the US dollar. As such, not only do you get the high interest rate, you also have the potential to profit from the appreciation in the currency if some normalcy returns to the market.

Preferred stocks As I mentioned earlier, the stated policy will be to hold the interest rate low. Preferred stocks are a good way to receive enhanced income by taking advantage of the low rates. Preferred stocks are like a hybrid between regular common stocks and bonds. Each share of preferred stock is normally paid a fixed, relatively high dividend, and in case of bankruptcy, it has priority over the common stock in terms of claims against a company’s assets. In exchange for the higher income and added safety, preferred shareholders miss out on large potential capital gains. There are many preferred stocks available from well-known issuers that yield anywhere form 4% to 8% annually.



But there are risks. Preferred stocks are considered to be like long-term bonds in the way they trade. As they can be quite volatile, this means the same preferred stock that started at $25 can end up trading much higher or lower than its issue price, based mostly on interest rates.

If they can be so volatile, why would they be appropriate for risk-averse investors? The answer is because interest rates are likely to be held steady for the next two to three years. Outside of financial deterioration of the issuer, the major reason the price of a preferred stock would plummet is because interest rates are on the way up, and that doesn’t seem likely over the next few years.

Obamacare With the re-election, the president’s Affordable Care Act now looks like it will be the law of the land. Health-care stocks should reap benefits. Since the law was passed, they have done well, and now that it won’t be repealed, the sector should continue to do well.

Construction As inventories of homes have been largely worked through, new homes will need to be built. Throw into that the damage in the northeastern US from Hurricane Sandy, and the construction industry looks like it has the potential to be a big winner.

Speak with your financial adviser to make sure your portfolio is set for four more years.

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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