09 November 2016
Donald Trump won the presidency. What can we expect from the investment economy? All companies should do well from small cap value to large cap growth. This will occur by the proposed cutting of the corporate tax rate from the current 36% (the highest rate in developed countries) to 15% and by cutting back layers of regulations that are currently hindering American businesses. Also tax rates would be lowered, the number of tax brackets reduced and the current tax code would be simplified. High taxes and too much regulation can stifle growth and prosperity. This will create a robust economy for jobs, stock value increases, and corporate expansion.
Allocations should continue to increase into the global and foreign sectors and reduce on US stock and bond sectors. Over the past 5 years, the developed foreign markets index (as measured by EAFA) has averaged a 7.0% annual growth rate while the Dow Jones Industrials Index has averaged a 13.6% annual growth rate. That is a 7% difference per year. Every 4 to 6 years the US stock markets and developed foreign markets change leadership. This has been a consistent cycle going back to the early 1970’s. Currently, the trend favors foreign over the US markets for the next 4 to 6 years. (Source: Morningstar.com) As for bonds, the likelihood of significant interest rate increases in the short term is minimal. The bright spots for the bond sector continues to be tax-exempt municipal bonds and high yield corporate bonds.
Keys to successful portfolio management:
- Invest more in weak sectors and less to strong sectors,
- Focus on 4 to 6 year cycles
- Look at your portfolio once a year, but no more than quarterly. Frequent monitoring of your portfolio causes doubt, second-guessing, and reactionary movements often lead to bad timing.
- Severely limit your exposure to business news and financial publications. They are meant to create fear, excitement, and increase viewership.
- Be patient and do the opposite of what you feel. If you feel euphoric from a large increase in your portfolio, trim back. If you feel pessimistic or panicky from a large downturn, invest more.