By SJS Chief Investment Officer Tom Kelly, CFA.
We’re just a few days in to 2021, and the excitement has already begun. With the Senatorial runoff election in Georgia, the next leaders of Washington are set to be sworn in. It appears that Democrats will control the White House, Senate, and House of Representatives.[1] Naturally, the question many clients have been asking is “What does this mean for my portfolio?”
First, we want to emphasize that this has happened before. As the chart below shows, Democrats have controlled the Presidency and Congress (House & Senate) for a combined 16 years since 1960.[2]
While we believe that speculating about short-term market movements is futile due to the noise and thousands of variables that go into market movements, it never hurts to take a look at the data. If the past is any indication of what is to come, your portfolio will do just fine. Since 1926, the average annualized return of the S&P 500 when both the President and Congress were held by Democrats is over 15%.[3]
Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. In US dollars. See Important Disclosure Information.
Nevertheless, we believe that recent election results will lead to significant consequences for investors. For example, we would not be surprised if federal income tax rates for high net-worth individuals, federal capital gains & dividend tax rates, and the U.S. corporate tax rate increase. From a financial planning perspective, we believe these potential changes would make tax management even more important.
Through MarketPlus Investing, we do all of these tax smart things for our clients:
Use Tax-Advantaged Investment Accounts
Via tax-deferred (401(k), 403(b), 457, IRA, Keogh, etc.) and / or tax-exempt (Roth 401(k), Roth 403(b), Roth 457, Roth IRA, 529, HSA, etc.) investment accounts, eligible investors can use tax-advantaged investment accounts to decrease intermittent tax payments, thus allowing more time for investments to compound.
Choose Tax-Aware Investments
In order to lower taxable capital gains and dividend distributions, we typically advise taxable clients to invest in lower turnover, broadly-diversified, tax-aware mutual funds and ETFs.
Long-Term Investing Focus
Within the U.S., higher net-worth investors tend to have lower capital gains and distribution marginal tax rates if they hold an investment for more than one year. Additionally, investing for the long-term allows investments to compound with potentially lower intermittent tax payments.
Asset Location
In order to maximize after-tax expected returns, we believe that tax-inefficient investments should be invested in tax-advantaged accounts when possible. We work with clients to design personalized asset location strategies based on their available options and limitations.
Tax Loss Harvesting
As part of a robust rebalancing process, opportunistically realizing losses in your portfolio can help to offset current and future realized gains, thus potentially lowering short-term tax payments and allowing more time for your investments to compound.
Charitable Contributions
Many investors have charitable intentions. By creating a well-designed financial plan for charitable giving, and using available tax-advantaged techniques (such as donor-advised funds), investors can increase the wealth that goes to the causes that they care about.
Source: Dimensional Fund Advisors. In US dollars. Growth of wealth shows the growth of a hypothetical investment of $1 in the securities in the Fama / French US Total Market Research Index. See Important Disclosure Information.
Ever-changing economic, political, and investing environments inspire SJS professionals to continually improve upon our investment processes, controlling what we can in efforts to maximize our clients' after-tax share of returns. We have been doing this for over 25 years, and it’s what we love to do. Regardless of election outcomes and political landscape in Washington, we believe that your SJS MarketPlus Investing strategy is designed to handle market movements of all kinds.
If you have any questions on how potential upcoming legislation may impact you, please reach out to us. We are always here to listen and assist.
Important Disclosure Information And Sources:
[1] “Updating: The Latest From Washington — And Georgia.“ FiveThirtyEight, 06-Jan-2021, fivethirtyeight.com.
[2] “Divided government in the United States.“ Wikipedia, en.wikipedia.org.
[3] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
The growth of wealth chart begins with the start of the first full presidential term (March 4, 1929) for which Fama / French Total US Market Research Index data is available and ends on June 30, 2020. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.
The Fama / French Total US Market Research Index is a value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.
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