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January 26, 2012

How politics can affect your investment strategies

While the election season heats up, you will hear more and more promises, claims and counter-claims from the candidates. As a citizen, you may or may not enjoy this "political theater," but as an investor, you might be concerned over all the talk about taxes, Social Security, Medicare and other financial topics. Will you need to adjust your savings and investment strategies? If so, how?

Before you think about adjusting your investment strategy in anticipation of any actions coming from Washington, keep a couple of facts in mind. First, few campaign promises become reality. And second, due to our system of government, radical shifts in direction are difficult to implement — which is why so few of them occur.

Still, we may see some smaller-scale — yet not insignificant — changes in the near future. In light of this possibility, what investment decisions should you make? Here are a few suggestions:

Consider owning investments that are taxed in different ways. No one can predict what will happen with income tax rates or the tax rates that are applied to capital gains and dividends. Consequently, it may be a good idea to seek "tax diversification" by owning investments that are taxed in different ways. For example, when you sell appreciated stocks, you pay capital gains taxes, whereas interest payments from bonds will be taxed at your individual tax rate. And it's always a good idea to take advantage of tax-advantaged vehicles, such as an IRA and your 401(k) or other employer-sponsored retirement plan.

Stick with quality. It's a good idea, when owning stocks, to invest in quality companies with diversified businesses. These companies are usually less dependent on a particular government program, and they typically have a global reach, so they may be better able to handle any changes implemented in Washington.

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