Tonight’s the big night!
This evening at 9:00 EST, President Trump will square off against Democratic presidential nominee Joe Biden in their first televised debate.
I’m a little embarrassed to say that I probably won’t be tuning in.
It’s not that I don’t care about what they’ll discuss. It’s just that the debate starts so late, and there’s only so much conflict I can take at one time.
So I’ll probably wait until tomorrow morning and watch a replay of the debate on high speed. That way I can cover all of the issues without spending hours watching an argument.
Of course, there will certainly be shifts in the market that will affect your retirement as we head closer to the election.
Depending on who wins the election, there could be some significant risks — and significant opportunities — for your investments.
Yesterday, we took a bit of time talking about issues that will change and others that won’t regardless of who’s in office.
Today I want to talk to you about two very important rates that affect your retirement.
One of these rates has the potential to change dramatically depending on who wins in November. So we’ll need to pay very close attention!
Two Rates That Drive the Market
Two rates affect how key areas of the market trade right now.
First, we have interest rates. And as you probably know, U.S. interest rates currently sit at their lowest levels in history, leaving investors with fewer options to generate income from their savings.
Low interest rates aren’t going to change, regardless of who wins the November election. The Fed committed to keeping interest rates low to help stimulate an economic recovery.
And at this point, neither party is debating this policy. So investors can continue to expect low rates and the economic side effects of them for years to come.
But on the other hand, tax rates are a hotly contested issue for the November election.
Republicans for the most part believe that low taxes will help stimulate the economy, create jobs and lead to better opportunities for everyone.
As evidence of this strategy working, Republicans only need to point to the tax cuts from earlier in the Trump presidency and how they led to a thriving business environment and plentiful jobs
It’s important to point out that this period included record low unemployment for minorities and workers with lower levels of education as well, groups that have historically been left behind in previous economic expansions.
Democrats, on the other hand, believe that higher tax rates are necessary (particularly on affluent citizens) to help reduce wealth inequality in the U.S.
They argue that the economic system is currently skewed to help the rich get richer at the expense of those less fortunate. So by taxing the rich and using the extra revenue to fund programs for families that need more help, we’ll create a more level playing field.
Of course, there are many nuances with these issues and plenty of different agendas from both sides of the aisle.
I’ve got some strong feelings on these issues myself. But that’s not what this letter is for.
Here at Rich Retirement Letter, our only goal is to help you live a truly Rich Retirement and manage your financial picture so you can focus on the things that matter most.
So let’s look at the best way to position your retirement in light of these different rates.
The Best Ways to Profit From Low Interest Rates
Now that the Fed has committed to keeping interest rates low for years to come, we can count on long-term profits from areas of the market that benefit from low rates.
The first area that you should participate in is the housing market.
Thanks to low mortgage rates, home prices have been moving steadily higher. And the demographic changes in our country further help to support this trend.
If you own a house, you’re already benefiting from this trend. Because depending on where you live, the value of your home should be moving steadily higher.
The good news is that you don’t have to own a home to participate in this thriving area of the economy!
You can buy shares of homebuilding companies, own stock in companies that sell home building materials and in companies that sell home furnishings and appliances.
Another area that directly benefits from low interest rates is the blue-chip dividend category.
Now that retirees are unable to generate much income from traditional places like savings accounts and treasury bonds, they naturally turn to dividend stocks.
And it’s not just individual investors who are tapping into this great source of income.
Pension fund managers also need to generate income. And in many cases, they’re moving cash into dividend stocks to tap into these lucrative payments.
Investing in companies with reliable businesses that pay generous dividends is a great way to take advantage of this trend.
If you put some of your retirement wealth into these stocks today, you’ll receive income from the company’s dividend payments.
And you’ll also see your wealth grow as prices for these stocks trade higher.
Avoiding Risk From Higher Tax Rates
The potential for higher tax rates on corporate and personal taxes has many investors starting to worry.
The election still appears to be relatively tight.
But if it begins to look like Biden will win the election or that the Democrats will take a majority of the Senate, you should start thinking about what to do with higher tax rates.
There are several different ways Democrats could hike tax rates on businesses and wealthy individuals.
In addition to taxes on profits or income, some are talking about a higher capital gains tax, a wealth tax and even a death tax (charged on an inheritance passed down to family members).
These tax strategies would likely affect different areas of the market…
If corporate taxes are set higher, we can expect an inverse reaction to the overall market’s surge following the Trump tax cuts.
Large tech stocks in particular that pay very little in tax right now could see much bigger liabilities. And this could cause a significant drop in share prices.
I’ve mentioned before that many of the most popular stocks like Amazon, Alphabet, Tesla and Netflix are trading at lofty prices that are relatively high compared to how much they earn.
Higher tax rates would bring this issue into focus and likely cause some investors to lose confidence and take profits off the table.
Smaller tech stocks, on the other hand, could do quite well in this environment!
That’s because these companies generally still have low profits, which won’t be immediately hurt by higher tax rates. Investors are excited about these companies because of the potential for future growth, not necessarily the profit levels for the next year or two.
Thinking about personal tax rates, it’s likely that higher tax rates in the future could kick off a wave of selling on Wall Street ahead of any new rates going into effect.
This would make sense for investors who hold positions with large gains that would soon be taxed at higher rates.
As an investor holding these positions, I know I’d be tempted to sell now and pay taxes on those gains at the current rate for 2020. That way I wouldn’t be penalized by higher rates if I sell in the future.
Obviously, if too many investors start to feel this way, we could see a large wave of selling hit the market.
And if that were to happen, it would be helpful to get out of some of the stocks with the biggest gains over the last few years.
Looking at the big picture, it’s still very important to have a balanced approach to markets and not to make rash decisions with your portfolio.
But at the margins, there are some important areas to invest in as election season kicks into high gear.
Tomorrow, my colleague J-Rod will share some of his favorite stocks that should do very well this election season.
So you won’t want to miss tomorrow’s alert!