The federal government shutdown, combined with looming discussions on whether Congress will raise the debt ceiling and anticipated tapering by the Federal Reserve, means that uncertainty is here to stay for the foreseeable future. But that does not mean that you cannot insulate your portfolio from market volatility. Here, professional financial advisers share their tips for how you can successfully position your portfolio.
Park in cash
“Sometimes, cash is the best place to be,” said Chris McIntire, an investment adviser representative and founder of McIntire Retirement Services. “With the stock market having a strong performance for the year, it's not a bad timing to take some profits off the table.” The S&P 500 has risen more than 18% since the beginning of the year. Mr. McIntire said that historically, October has been a volatile month for equities, but considering that volatility typically tends to come down in November and especially in December, investors can take advantage of the end-of-the-year rally to reinvest their cash.
Diversify
“The basic principles still apply,” said Chris Cook, portfolio manager and president of Zero Commission Portfolios. “Have a diversified portfolio across all sectors and diversify within equities, too, because sectors react differently to the environment.” If existing diversification hasn't been working, investors should adopt an active approach and reallocate selectively to undervalued sectors.
Dip into high yield
“We like high-yield bond funds,” said Mr. McIntire, who added that a rising-interest-rate environment isn't as devastating to high-yield bonds as it is to 10-year Treasuries. This is because interest rates typically start to rise when the economy is doing well, which takes away some of the default risk. The upper ranks of high yield, such as BB-rated bonds, tend to be the most attractive because they have adopted a conservative approach and are paying down debt, which could prompt them to be upgraded to the investment-grade category.
Shorten durations
Investors should also reduce maturities of their government bonds to less than two years to avoid the impact of rising interest rates. “You really can't take too much risk there,” said Mark McCarron, chief investment strategist at Drexel Morgan Capital Advisers. “However, that has a very little yield.” The two-year
Treasury yield was 0.36% as of Sept. 25. In addition, Mr. McCarron recommends focusing on shorter maturities in the high-yield sector where investors can get a little more yield while still being shielded from rising interest rates.
Look overseas
“International investments in general, but especially developed and emerging markets, can be and should be a part of a portfolio, even in retirement,” Mr. McCarron said. Investments can be riskier but they can also bring higher yields, which retirees or those nearing retirement still need. “You need to grow your assets because retirement is lasting much longer,” he said.
