Stocks surged on Thursday in a delayed relief rally following Wednesday’s sharp rate cut from the Federal Reserve, but there may be tough times ahead – and investors need to prepare for such volatility. On Thursday, excitement over the central bank’s half-percent rate cut sent the S&P 500 above the 5,700 level for the first time. However, Goldman Sachs warned that investors should prepare for possible bumps in the market. Analyst Arun Prakash wrote: “On average over the past 30+ years, (CBOE Volatility Index) has increased 6% from September to October, and given seasonality and upcoming macro/micro catalysts, we believe There are currently upside risks to VIX levels. Prakash’s team said that key catalysts that may shake the market include the third-quarter earnings report to be released in October, the election on November 5, and the last two Federal Reserve meetings in 2024 ( November and December). “Election years, especially before the big vote in November, tend to be more volatile, and that’s not the case this year,” said Rafia Hasan, chief investment officer at San Francisco-based Perigon Wealth Management. exception. “Rebalancing to Risk Protecting your portfolio from large losses starts with understanding your tolerance for risk and ensuring your asset allocation reflects your long-term goals. Hold your ground during these times and let It is important that clients stay invested, but it is also important to structure portfolios in a way that recognizes that some clients may have lower risk tolerance. “She uses a combination of tax-loss harvesting and direct indexing (in which an investor’s portfolio holds individual stocks to reflect an index) to take advantage of periods of market instability. The benefit of direct indexing is that investors can trim their underlying stock holdings while Index exchange-traded funds then act as a basket of securities, allowing investors to harvest losses and use them to offset taxable capital gains elsewhere. If losses exceed capital gains, investors can use them to offset up to $3,000. of ordinary income and carry the losses forward for use in future years, Hassan said: “You saw this big drop on August 5, and the market recovered a few weeks later. “But during periods of market decline, stocks and individual stocks that experience sharp corrections have the opportunity to suffer losses. “Clients replace the positions they sold with stocks in the same industry and expected to perform similarly. The key is to avoid violating the wash rule: If you purchase a security that is “substantially similar” to the security being sold within 30 days before or after the sale, then The IRS will not allow you to take a loss. BIG BUYING Even as the Fed lowers interest rates, bonds still offer attractive yields — “higher than they have been over the past decade when interest rates were near zero,” Hassan said. They are a good choice for clients who are approaching retirement, seeking income, and appreciate bonds’ ability to offset stock volatility. For higher-income clients, she likes municipal bonds, which provide tax-free income at the federal level. Investors who reside in the issuing country may also receive income that is free of state or local taxes. In summary, she has been adding some duration exposure — bonds whose prices are more sensitive to interest rate changes — targeting five to seven years. Andrew Herzog, a certified financial planner with The Watchman Group in Plano, Texas, has also been increasing his bond investments with an eye on quality. “If we feel that high-yield investments are not safe enough, we are willing to ignore them,” he said. Herzog is targeting maturities of about two to five years, and he has been increasing his exposure to the iShares 1-3 Year Treasury Bond ETF (SHY). The fund has an expense ratio of 0.15% and a 30-day SEC yield of 3.74%. “Think about what a rate cut would do to fixed income,” in terms of capital gains, he said. “Move some of your wealth into something you can benefit from.” Options to Buffer Loss Options also play a role in investors’ portfolios as financial advisors try to mitigate volatility. Covered calls are one way to solve this problem. A call option gives an investor the right to purchase a stock at a specified strike price by a specific date. A covered call strategy requires selling a call when you already own the underlying security. Individuals who sell calls can benefit from premium income, but must be prepared to sell the stock—and potentially give up greater upside. A range of so-called buffer ETFs (also known as “definite outcome ETFs”) are also putting options into play. These products typically combine long-term deep-in-the-money call and long-term put spreads tied to a specific index to protect against losses up to a certain amount. Near-retirees concerned about market instability may be prime candidates for these instruments. “One of my most important jobs is managing risk in clients’ portfolios, and these are great tools to do that,” said Gregory Gunther, a retirement planner at GrantVest Financial Group in Mattawan, N.J. Guenther said. He noted that due diligence can be onerous for individual investors: Buffer ETFs need to be purchased on a specific date and then held until the underlying option expires to provide the full benefit. In addition to understanding the timing factors behind purchases, investors also need to be aware of fees, which can range from around 0.75% to 0.85%, according to Morningstar. “The most important thing is to do your research beforehand to make sure you’re getting the best product,” Guenther said. “Are you getting the highest cap and lowest internal fee?”
Strengthen your portfolio to withstand fall market shocks | Real Time Headlines
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