After a volatile 2023 in the financial markets, one of the by- products has been that some investors feel inclined to take a more conservative investment stance. How can this be achieved? Selling all of your stocks and holding cash equivalents is one extreme alternative, though not practical for most investors. Capital gains tax considerations are one reason that makes this impractical. Another is the potential opportunity loss when equity markets reverse their course, which can often happen rapidly and unexpectedly. Nonetheless, there exist alternative strategies worth exploring for your portfolio for those concerned about uncertain times, and here are some suggestions:
Rebalance your portfolio — During more challenging times, there may be an opportunity to reassess and rebalance investment portfolios. For instance, if the value of one security has gone up so much that it dominates your overall holdings, this may be a good time to consider selling to restore balance. Reallocating assets based on long-term goals and risk tolerance can help ensure that portfolios remain aligned with your objectives.
Upgrade or switch investments — More established companies may offer greater stability and may be better able to withstand economic downturns. Companies with strong balance sheets, little debt and healthy cash flows can better fund operations during difficult times. Some quality companies have a history of continuing, and even increasing, dividend payments during downturns. Buying into companies/industries that will be least affected by adverse economic climates may be an option, such as consumer staples or healthcare (“defensive” sectors) that may continue to serve consumers’ basic needs throughout every market cycle.
Option writing — Engaging in a “covered call strategy,” or writing call options on your stocks, where available, may provide income and downside price protection without the need to sell your shares. The premium received — the price paid to the investor by the buyer of the options — provides immediate income and downside price protection. The potential risk is that you may be obligated to sell your shares at a predetermined price should the buyer of the options decide to exercise the options.
Look to different asset classes — For investors who are uncomfortable with current equity market volatility, and with interest rates expected to be higher for longer, there may be opportunities in fixed income. Shorter-term bonds may be one alternative to consider as they are less sensitive to changes in interest rates, given continuing bond market volatility. For investors with specific income needs, such as retirees, adjustments to a fixed-income strategy may help cover income needs, should the equity portion of a portfolio experience a downturn and require time to return to more stable levels.
Automate through a dividend reinvestment plan (DRIP) — This allows investors to reinvest dividends (or distributions) received back into the same investment, often in the form of additional shares, instead of receiving cash. Over time, this has the potential to meaningfully grow the number of shares owned, driven by the power of compounding. DRIPs are set up to operate automatically, which can be helpful to take the emotion out of investing; reinvestment is made at regular intervals, steadily building positions over time. Some DRIPs also allow reinvestment without additional transaction costs or commissions.
Instead of selling, consider buying — Down markets may be a great time for investors to put money to work for better-valued, longer-term opportunities. Regularly investing a fixed amount of money, regardless of market conditions, can help to separate emotions associated with market volatility from investing decisions. This is often done through a dollar-cost averaging program. During down markets, this strategy allows investors to purchase more shares when prices are lower, potentially lowering the average cost per share over time.
We continue to be focused on managing portfolios to navigate the challenges that come with the changing times. While adjustments to portfolios can be made in response to expected or prevailing economic conditions, it is worthwhile remembering that portfolios have been positioned for the longer term, with the expectation that markets will experience both ups and downs. Each element has been put in place taking into consideration diversification, strategic asset allocation, as well as your personal circumstances, including risk tolerance and stage of life. Even during more challenging times, have confidence that your plan continues to work for you.
