Don't Invest Based On Tax Policy Shifts

NEW YORK (TheStreet) -- The S&P 500 shed nearly 5% in the two weeks following the news of President Obama's reelection, and a number of concerns have been cited for the sell-off.

I wrote about the fiscal cliff last week in Fiscal Snooze, noting that I wasn't particularly concerned about it, and I feel the same way about this week's subject: the threat of higher taxes.

Many investors appear to have worked themselves into a tizzy about the increased likelihood that they'll soon be paying higher taxes. Given the historically low tax rates that Americans are enjoying right now and the precarious state of the public coffers, tax hikes have long seemed inevitable. The election results have confirmed this for many, and the president's legions of passionate critics are no doubt feeling especially emotional about it.

No one knows exactly what's around the corner right now in terms of fiscal policy, but a bevy of potential tax hikes are on the table. The 15% capital gains rate could go up -- one factor widely said to be weighing on shares of Apple (AAPL), which is down about 19% since mid-September.

The 15% dividend tax rate could rise. Tax deductions might be cut back. Obamacare comes with a 3.8% Medicare tax for high-earners, and estate and gift taxes could also increase.

Of course, they might not, and investors who make rash decisions in reaction to the political headlines of the moment could wind up paying a heavy price for it. Taxes certainly have a material effect on investment performance, but I'm skeptical of those who think they can react to the national political scene and thread the needle of tax policy changes in their portfolio of stocks and bonds.

If you've been contemplating taking a capital gain, then now may be the time to pull the trigger, but I would be wary of anyone suggesting that you should change your investment strategy in any substantial way due to the threat of higher taxes.

The New York Times recently reported (Investors Rush to Beat Threat of Higher Taxes) that John Moorin, the founder of a medical equipment company near Indianapolis, said he sold about $650,000 in dividend-paying stocks like McDonald's (MCD) and Coca-Cola (KO) after the election.

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