The Game Has Changed: How To Adapt Your Investment Strategy

Investment Strategy

Despite the fact that 59% of Americans oppose President Obamas plan, according to CNN, and more than 48% oppose the plan, according to CBS News, the President and his minions have passed healthcare reform in the House. Reconciliation with the Senate is next and this process is likely to increase, not decrease, the tax burden on Americans for this new socialization of U.S. medicine.

So what is the bottom line for Americans, this bill will provide health care to those previously unable to receive healthcare, but someone will have to pay for this added cost to insurers. That someone is every American earning more than $200,000 and every household earning more than $250,000 per annum.

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So what is a high income investor to do who worries about their financial security, questions their ability to outlive their retirement savings and now has their own government proposing additional taxation that discourages them from saving for these contingencies? The answer is we must rethink how we play the game and how we structure our portfolios.

Central to this rethink is to develop a core/satellite approach to the markets whereby you have tax efficient core holdings and you surround them with satellite investment strategies in tax free or deferred rappers that are not as tax efficient. What specifically do I mean by this?

1) Although dividend paying investments are the rage today in this low interest rate environment, you must now shift your focus to low tax, growth investments for your taxable accounts. Depending on your age, this could include an investments in small capitalization stocks that historically are high growth and rarely distribute dividends;

2) You should build a core/satellite investment approach and use low cost ETFs or mutual funds to make your core investments. Again this should be invested for growth, not dividends or income (unless its tax free);

3) Fund retirement savings accounts to the maximum allowable. Not only will this save you tax dollars, but it will allow you to move tax inefficient investment strategies to these accounts, thereby avoiding the 3.8% tax on investment income and gains;

4) If you have sufficient liquidity and a long time horizon, consider putting a portion of your taxable savings into an annuity or variable life insurance policy. Here again use these accounts to the extent possible to hold your tax inefficient investments;

5) Protect these long only, buy and hold strategies with non-correlated strategies in your tax deferred accounts. One of my favorite, and of course I am biased, is to use a trend following strategy as a return enhancer and as full or partial hedge for your core position in bear markets. Trend following strategies tend to do well in both markets that trend strongly up and down.

Let me just highlight how important number five is to the wealth equation because we are unfortunately in a secular bear market. If you look at a monthly chart of the S&P 500 index as an example, we are trading in a huge trading range that is likely to hold for the next 10-20 years.

So at some point we will again enter a bear phase of the market and head towards the bottom portion of this trading range. So saving taxes is great, but as we saw in 2000-2003 and again in 2007-2008, its also important to protect what you have. Dont let the tax dog wag your investment tail. Pairing strategies, such as trend following strategies, that have the ability to follow both up and down markets with less sophisticated strategies, like buy and hold, can really smooth, diversify, and enhance your long-term returns.

About the Author

www.intrustadvisors.com for a number of free resources including a powerful guide to investing called Make the Trend Your Friend.