Insulate Your Portfolio from Election Anxiety

As the 2024 U.S. election quickly approaches, American investors find themselves navigating a landscape fraught with uncertainty and anxiety. According to Nationwide's Advisor Authority survey, 45% of investors believe the election results will significantly impact their retirement plans and portfolios more than market performance. This sentiment reflects a growing concern about the potential fallout from the election results, no matter which party prevails.

As anxiety mounts, regardless of party affiliation, one thing is clear: election anxiety translates to market volatility that can upend an investment portfolio. To navigate these uncertain waters, it’s crucial to understand how to shield your investments from market volatility.

Election Anxiety and Market Volatility

The lead-up to national elections often brings heightened market volatility, driven by uncertainty about policy changes, economic impacts, and potential shifts in governance. Nearly one-third of investors fear that if the political party they oppose gains power, it could lead to a recession or adversely affect their financial future.

This apprehension is exacerbated by broader economic concerns, including high interest rates and geopolitical tensions, which contribute to investor unease.

Recent indicators, such as the CNN Fear & Greed Index, reflect a prevailing investor sentiment rooted in fear territory.

Investor fear is undoubtedly due to a myriad of factors, including election anxiety, concerns about the economy, and geopolitical unrest. Amid this market anxiety, many investors are opting to park their cash in traditional fixed-income assets such as CDs and high-yield savings accounts, but it’s not how the ultra-wealthy choose to insulate their portfolios from volatility.

The Wealthy’s Approach: Investing in Stability

While many investors retreat to CD’s, low-yield bonds, or other fixed-income products, the wealthy employ a different strategy—a strategy that’s always prepared for volatility or any other unexpected event that might turn up. Their strategy focuses on assets that are less susceptible to market volatility and economic downturns—assets non-correlated to the broader markets. And their two preferred assets that consistently top their asset allocations include investments in real estate and investments in private companies (i.e., private equity).

The typical asset allocation of the ultra-high-net-worth members of the exclusive peer-to-peer investing community Tiger-21 ($50M minimum of investable assets to join) is representative of how the ultra-wealthy invest in general. Here is the latest asset allocation report of the members of Tiger-21.

Notice that private equity and real estate come in #1 and #2 among the preferred assets of the ultra-wealthy, combining to represent 55% of the typical member portfolio. This is typical of all ultra-wealthy individual investors as well as sophisticated institutional investors and college endowments who typically allocate more than 50% of their portfolios to these two assets.

Where do real estate and private equity fall within your own investment portfolio? Do they fall within your top 2? Or are they more near the bottom at #6 or #7? Or do they appear at all?

Here's why you should consider including real estate and private equity in your top 2:

(1) Real Estate: A Tangible Hedge Against Volatility

Real estate has long been favored by sophisticated investors seeking stability. Unlike stocks, which can be highly sensitive to political and economic changes, real estate often provides a tangible asset with intrinsic value. Institutional investors are even getting into the residential real estate game, snapping up a significant portion of U.S. homes. For instance, the median price of American homes has surged by 28% over the past two years, driven by increased demand and demographic shifts. Institutional investors, including corporate entities, focus on purchasing single-family homes in growing metro areas with strong job markets to generate recession-insulated rental income.

(2) Private Investments: Diversification and Stability

Private equity offers another avenue for insulation from market volatility. Unlike public markets, private investments are less influenced by daily market fluctuations and can provide steady returns through long-term value creation. By focusing on businesses with strong fundamentals and growth prospects, investors can achieve returns that are less correlated with broader market movements.

The wealthy often diversify their portfolios with private investments, seeking opportunities that are not readily available to the average investor. This approach allows them to capitalize on emerging trends and sectors poised for growth, further insulating their portfolios from market instability.

Preparing for Recession - A Strategic Approach

As recession fears loom, it’s essential to reassess and potentially rebalance your investment portfolio. A well-prepared portfolio will include assets that are less vulnerable to economic downturns and market volatility. This involves moving away from traditional stocks and bonds, which can be highly susceptible to market swings, and toward assets with inherent stability and growth potential like private equity and real estate.

Investors should focus on:

• Income-Generating Assets: Prioritize investments that provide passive income streams, such as rental properties or income-producing private businesses. These assets can help offset potential income losses during economic downturns.
• Uncorrelated Assets: Seek investments that are not closely tied to broader market movements. These investments are less likely to be impacted by market volatility.
• Demand and Growth: Invest in sectors and regions with strong demand and growth prospects. By following the lead of sophisticated investors, you can position your portfolio to benefit from emerging trends and avoid areas likely to suffer during economic slowdowns.

As the 2024 elections approach and market volatility escalates, it’s crucial for investors to adopt a strategic approach to safeguard their portfolios. By focusing on assets that are insulated from market fluctuations, such as real estate and private investments, you can better position yourself to weather economic uncertainties and achieve long-term financial stability.

In the end, ask yourself who you would rather model your investments after: the average investor who is heavily invested in stocks and bonds and susceptible to market anxiety or the ultra-wealthy who can weather any storm?