The man elected to lead the U.S. out of its financial crisis has experienced some financial pain himself.
Here's the good news for President Barack Obama, whose personal portfolio is partly disclosed in public filings: A conservative investing style may have saved the First Family from the deep market losses that afflicted many Americans' nest eggs.
However, based on the most recent financial disclosure forms from Obama, he still may have lost up to $248,000 in the financial markets since the beginning of 2008. His stock and bond investments may have lost 38% of their value in the past 15 months.
Pursuing a Super-Safe Strategy
According to forms filed last May but covering the end of 2007, the Obamas were keeping most of their assets —between $1.5 million and $6.1 million —in super-safe investments like bank checking accounts, money market accounts, and U.S. Treasury notes. This was exactly the place to put your money in 2008, when stocks and even many bonds tumbled in value. The Standard & Poor's 500 fell 37% in 2008 and has dropped another 15% in 2009.
Much of the Obama fortune is brand new. He earned more than $4 million from book royalties in 2007.
Mutual Funds Only
Financial disclosure forms from 2008 aren't due until May, so it will be two months before it is known whether the Obamas decided to stick with this conservative strategy or deployed more of their money in the equity or bond markets.
Assuming the Obamas made no changes last year, they still racked up considerable losses on the riskier portion of their portfolio, which may have totaled up to $660,000 at the end of 2007.
So how did the leader of the free world set up his investment portfolio? President Obama and his wife Michelle bought no individual stocks or bonds. Instead, they purchased a range of mutual funds.
Their largest fund holding at the end of 2007 was the Vanguard FTSE Social Index (VFTSX), which contained between $150,000 and $350,000. (Federal forms only require the disclosure of a range, not the exact dollar amount in each investment.)
No Alcohol and Tobacco Stocks
A low-cost index fund, it is limited to buying only socially responsible stocks as determined by the FTSE Group. That means no alcohol and tobacco firms, nor any companies with suspect environmental or labor records. Some top holdings at the end of 2008 included JPMorgan Chase (JPM), Intel (INTC), and Apple (AAPL).
Not only their largest fund holding, the Vanguard FTSE Social Index fund was also the Obama's worst performer, down 52% from the start of 2008, for a loss of up to $182,000. The Obamas also had between $100,000 and $250,000 in the Vanguard Wellesley Income Fund (VWINX). Because this fund consists of 60% bonds, which are less volatile than stocks, the Obama's losses were limited. The fund has fallen almost 18% in the past 15 months, possibly taking a bite of $17,900 to $44,750 out of the Obama portfolio.
The S&P 500 is down 9% since Jan. 20, when Obama took office. The broad index fell 40% in the eight years that George W. Bush was President.
Trusts Provide Privacy
Now that Obama has taken over the White House, he may choose to follow Bush's example by setting up a trust to handle his investments. By keeping a politician's investments secret, a trust can shield them from charges of conflicts of interest.
But, by hiding investments from the public as well as the politician, so-called "blind trusts" can also frustrate watchdogs who want more disclosure and transparency, says Bill Allison, a senior fellow at the Washington, (D.C.)-based Sunlight Foundation, which advocates for more government transparency. "The fear is that they're not truly blind," Allison says.
The advantage of the Obama's strategy—of diversification among mutual funds that hold thousands of stocks—is that it's harder to claim any individual company has a undue influence because the President is an investor, Allison says.
Portfolio "for an Old Lady"
A conservative investing approach—with lots of cash and Treasuries—may have benefited Obama in the past couple years. However, it wouldn't be the long-term strategy suggested by most financial advisers. Cathy Pareto, of Cathy Pareto & Associates in Coral Gables, Fla., warns the Obama's approach would be "hammered by inflation."
"This is the portfolio, frankly, for an old lady. This is not a normal portfolio for someone their age," like gold or commodity funds, she said.
Ironically, it's this threat of inflation that has been a frequent topic of Obama's critics. They say federal spending and liquidity from the Federal Reserve—designed to end the current economic crisis—are increasing the chances of runaway price increases. Like many other investors, the President will have to hope that efforts to jolt the U.S. economy back to life don't bring some nasty unintended consequences.
Steverman is a reporter for BusinessWeek's Investing channel.