How to keep your portfolio steady in volatile times as the election approaches
The election is just a week away – and markets may be about to enter a rocky period – but investors can take a few steps to ensure their portfolios are ready to handle potential shocks. The S & P 500 is toting a 1.3% gain in October, but it’s up more than 22% in 2024. “Expect elevated volatility due to the election and earnings uncertainty,” said Craig Johnson, chief market technician at Piper Sandler, in a Tuesday note, suggesting that investors use pullbacks to add to their positions. He said his team expects the CBOE Volatility Index (VIX) , a measure of expected volatility, to remain elevated around 20 until after Election Day. Individual investors are already expressing some worries about how the markets might behave in the run-up to Nov. 5 – and the days that follow. “Clients often start wondering if the markets are going to dive off a cliff or surge to new heights depending on who wins,” said Logan Queck, certified financial planner and founder of Total Wealth in West Des Moines, Iowa. “It’s easy to get caught up in the noise, but the real challenge is keeping a long-term perspective.” Gut checks and opportunities Investors who are losing sleep over the prospect of volatile markets would benefit from reviewing their goals and time horizons – and understanding that short-term shocks to the upside or downside are to be expected. “I’m worried about people trying to outsmart the election cycle, or their fear forces them to do something that’s counter to their interest,” said Malcolm Ethridge, CFP and managing partner, Capital Area Planning Group in Washington, D.C. A sudden dip in stocks could open an opportunity for patient investors, however. “Where you might have some fear-based trading the week of the result, it’s a good time to rebalance and reset your allocation,” he added. It could be prime time to pick up some names on the cheap. Meanwhile, a relief rally could give investors a window to trim some of their winners and get their asset allocation back to their targets, Ethridge said. Tax-loss harvesting – that is, pruning losing positions in taxable accounts and using them to offset capital gains in other areas of the portfolio – could also be a smart move for investors seeking a silver lining in rocky times, said Queck. When losses exceed capital gains, investors can use them to offset up to $3,000 in ordinary income and then carry forward losses over that amount for future years. Investors can replace the positions they’ve sold with stocks that are expected to perform similarly and are in the same sector, so as to maintain the asset allocation. However, they should be wary of the wash sale rule. The IRS will block the loss if you buy a stock that’s “substantially similar” to the one you sold within 30 days before or after the sale. Assessing options There is more than $6.5 trillion in money market fund assets as of Oct. 23, according to the Investment Company Institute. “There are more people sitting in cash than in past presidential elections, which could have to do with rates being higher,” said Ashton Lawrence, CFP and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina. “But once your fears have passed, you have this cash position, so what to do next?” Cash-secured puts can offer investors an opportunity to put cash to work and generate some income, he said. Put options give investors the right to sell a stock at a “strike” price by a specified date. In a cash-secured put strategy, you would write the put option and then keep enough cash to buy the stock in case the put is exercised. “It’s a strategy for the patient investor: You generate income now and the market dips, you can buy your stocks at a discount,” Lawrence said. There is risk on the upside, however, where the stock falls but then powers above the strike price – and then the investor misses the sharp appreciation. Covered call strategies have also come into play as a potential way for investors to contend with concentrated positions, he added. This would entail selling an investor a call option – the right to buy a stock at a certain strike price before an expiration date – on a position you already own. Options strategies can invite additional complexity, including tax ramifications, Lawrence said, so investors may want to work with a financial advisor to get a sense of how these tactics might work in concert with a diversified portfolio. “We want to be mindful of how much we do this, the underlying shares you have and how much income is likely to be generated,” Lawrence said.
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