After all the noise, we're left with one inescapable fact; President Obama has been reelected to a 2nd term and investors need to recognize that portfolios and strategies will be impacted by 4 more years of the current administration.
Here are a few brief thoughts on positioning strategies::
1. Taxes are going up: Position for efficiency
I've been saying for some time that taxes will likely rise regardless of who was elected. With the election of the president to a 2nd term, I believe it is now not just likely but virtually a certainty that income and capital gains taxation on some level will increase (especially for all the so called "rich" people out there). Reposition your strategy for a higher tax environment. Convert to capital gains income if possible. Make tax savings a huge mission now; tax rates are going up.
2. Estate tax rates will increase: Gift now
With huge deficits and an administration that believes that wealthy Americans should pay more tax than at current levels, estate tax rates will be increasing. Consider gifting assets this year to capture gifting provisions in the current tax law. Remember to be careful when gifting assets because any gift made to another party transfers your cost basis to them. In other words, your heirs do not receive a step up in basis upon your death and can be a major tax surprise.
3. Dividend stocks will be under pressure: Valuation matters as much as income
There is a reasonable chance that dividend tax rates will rise from their current historically low levels. It's our view, after discussions with Washington insiders, that dividend tax rates will not rise to ordinary income tax levels. Still, an increase of 5% has a reasonable chance of being implemented. Make sure that any dividend assets you invest in are screened for valuation and not just income. Dividend stocks that have growth potential will survive a market downdraft related to increased dividend taxation. Do not buy dividend stocks just for the dividend unless you are comfortable with capital losses if tax law changes.
4. The dollar will be weaker: Multinationals are appealing
Post election, the dollar has fallen in value relative to other currencies as concern rises that the status quo will continue a path of higher deficits and lower interest rates. A weak dollar is a positive for US multinational corporations such as McDonald's, Starbucks, Coca-Cola , and other US multinationals that have significant overseas operations. Additionally, companies with global footprints have the potential to capture emerging market opportunity which will likely fuel earnings growth.
5. Fiscal cliff uncertainty: Be careful about beta names
With fiscal cliff brawling about to begin, equities will likely be under pressure. For that reason, consider reducing risk in your portfolio strategy and move towards slightly more defensive names and sectors that you believe have tailwinds. A DWM , we employ a strategy we call Thematic Allocation Strategy (TAS). This process seeks to identify sectors of the economy that will likely do well because of fundamental shifts in business and consumer behavior. Apple, for example, will capitalize on an increasing emerging economy affluence as well as the trends towards mobile and wireless technology. Nuance, a company focused on voice recognition technology, will participate in the slow erosion of keyboard use. These are just 2 technology examples but others exist in mny other sectors. Define the trends you believe will emerge in the next 5 years and invest towards these assets.
6. Equity fluctuation will continue: Don't panic
Depending on your political leanings, you might be tempted to sell everything because the political outcome causes you concern. While volatility certainly will increase on the short-term, we believe a binary reaction to liquidate everything and head for the hills is a mistake. Presidents have huge impact on social policy. They have some impact on financial and economic conditions. But despite concerns some have regarding healthcare reform and higher taxes, the United States economy is shockingly resilient. With low interest rates and a jobless picture that appears to be stabilizing, withdrawing from the financial system for many investors will prove to be a losing proposition. In 2009, huge swaths of investors liquidated to cash and then missed a historic rally. I don't expect this type of rally now but there's every reason to believe based on valuation, dividend rate, total global growth, and healing balance sheets for businesses and consumers, that the economy will not implode and equity returns will beat cash in the mattress over a longer period of time.
Investing, of course, is far more complex than the 6 points listed above as one seeks to adapt an investment strategy to the current environment. And whether you agree with these strategies are not, that's really not the point; inaction is really the key behavior to avoid. As tectonic shifts occur in the market and economic environment, you must take action to adapt. The path of least resistance is simply to do nothing. But that path is fraught with danger and given that your investment strategy impacts your future lifestyle, portfolio inaction can have significant negative consequences.
(Read More: For Investors, More Fed Easing, Cliff 'Heart Attack')
Much will be written about the direction the country is headed after last night's election. And while this dialogue is useful and interesting, the bottom line is you need to adjust to the reality we face today. Your strategy requires attention and this is a good day to stand back and decide what adjustments are necessary in a post election world.
Michael Yoshikami, Ph.D., CFP, is CEO, Founder and Chairman of the DWM Investment Committee atDestination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.