Portfolio Diversification Key To Navigating US Election Aftermath
November’s election ushered in a new president, a minor shift in the House of Representatives, and what may be the status quo in the Senate. With a divided congress and a new executive agenda, it’s difficult for investors to get a clear sense of what’s likely to happen next in terms of financial regulation and increased scrutiny (if any) of Wall Street.
In a normal year, investors might be better equipped to forecast how this election could impact markets. There are mitigating factors, primarily due to COVID-19 and the potential roll-out of one or several vaccines. The prospect of future lockdowns or economic disturbances due to public health measures, due in no small part to potential government policies, may complicate matters more than a conventional transition of power could.
Although Washington dysfunction and unprecedented political events may leave investors with few ways to future-proof their holdings, there are several things that can help—chiefly, portfolio diversification. Here’s what you need to know about the effects of political transition on your assets, and what kind of diversification might help safeguard you from an economic rollercoaster during unpredictable times.
How Elections Usually Affect Markets
Wall Street reacted positively to election outcomes in November, particularly because a divided congress signals that any new legislation or financial regulation will be unlikely. In fact, Washington gridlock does tend to be a boon to markets, since the passage of fewer bills means fewer reasons for investors to get jitters.
Historically markets have increased in value by nearly 20% under a divided Congress, usually because the president’s party is stymied when attempting to pass comprehensive reforms that prove unpopular with the other party that controls a part of the legislature. Talk of sweeping reforms—be it on Wall Street or the tax code—become unlikely to see the light of day when one party fails to win control of both chambers of congress and the White House.
Why This Election Cycle Might be Different
Normally, an election that foretells gridlock does not pose much cause for concern for most investors. This election is unlike any other we’ve had in the modern era, however. This is due in large part to two main factors: the end of the Trump presidency and the surge in COVID-19 cases nationwide.
President Trump so far has yet to concede the election, which in and of itself is an unprecedented step. The lack of a concession, combined with a series of lawsuits and recounts, stokes some amount of market uncertainty. The failure of these lawsuits and recounts to signify a change in the election outcome have dampened the potential fallout that could shake up markets, however. Don’t count out the possibility for the Trump administration to make markets jittery: Congress’ inability to pass a second round of COVID-19 stimulus may also lead to economic stagnation, low consumer confidence, and the closure of small businesses.
Add it all up, and we may see that there’s still a significant amount of turbulence on Wall Street—even if it’s not due to changes at the ballot box.
Key Tax Changes to Watch For
Although a divided congress may make substantive changes to current tax law less likely to pass, it’s worth taking a closer look at Biden’s proposed changes to current legislation. First, the highest federal income tax rate for individuals could rise from the Trump-era 37% to 39.6%—the rate in place before tax cuts enacted within the last four years. Individual filers that earn $400,000 or more yearly would be charged additional payroll tax, and the estate tax exemption would be roughly halved.
These changes may not affect every investor the same way, or to the same degree, but they may impact how you intend to manage your annual income, capital gains, and asset allocation. If you’re likely to be impacted by laws around estate taxes and want to find tax-advantaged solutions in your portfolio, for example, now might be an ideal time to consider your options.
How Diversification Can Help Keep You On Course
Keeping a portfolio that casts a wide net with a variety of holdings is sound advice during any kind of economic environment. Emphasizing diversification in the wake of an election is especially critical, particularly when one or more legislative bodies changes hands and a new party assumes control.
Now is an excellent time to revisit your holdings and seek opportunities to branch out. Even if gridlock ends up being the order of the day, that doesn’t mean investors can rest on their laurels and expect that no new legislation will pass at all for the next four years. The aforementioned changes might be easier to pass than major overhauls, but can still be impactful for how you’ve allocated assets.
Merely moving money from equity positions to other market products isn’t going to cut it. A lagging stock market is likely to create a drag on any assets traded on public exchanges, which means rebalancing should come from other sources. Alternative investments, for example, may be the ideal place to invest.
Gaining Real Diversification through Alternative Investments
Not all investment diversification efforts, or indeed financial products, are created equal. Moving positions in stocks to bonds or mutual funds may mitigate risk in a volatile market, but they’re not likely to generate much of a return. At best, they’re a hedge against losses or a sluggish economic recovery in the months (and potentially years) to come. True diversification means finding upside and opportunities in other investment classes entirely.
This is where alternative investments may be the right move. Alternatives come in several forms—each with a different level of exposure to the ebbs and flows of the markets alongside other external factors. Here are some of the best alternative investment options for diversifying your post-election portfolio.
Gold and Precious Metals
Gold is by far one of the most well-known and sought after alternative investment, especially when volatility pervades. Gold has a long history of retaining value in just about every economic scenario, and can increase in value when other investment types falter. For most investors, gold offers a “set it and forget it” method of incorporating diversification outside the stock market, but it’s far from the only option. Plus, gold can be an expensive proposition for newcomers, as the per-ounce price fetches for more than $1,800 at present.
Real Estate Investing
Real estate is another go-to alternative for many investors that want to withdraw some portion of their portfolio from the stock market. Real estate offers the chance to increase the overall value of your holdings without being dictated by Wall Street moves, and can mitigate many fears of increased financial regulation and tax code changes that loom whenever a new administration takes over. It’s important not to look at real estate on its own, however. Other factors, such as consumer spending and unemployment, can still put a damper on major real estate markets throughout the country. You might be able to eschew concerns about changes to Wall Street with real estate, but you’ll still have to consider their impact on Main Street.
Farmland investing can be an alluring proposition for many investors that want to further diversify their portfolio. This alternative asset class combines stable valuations with both real estate and grain commodity exposure. By investing in farmland, you take a stake in the real ownership of a farm. This means you’ll reap the benefits of land valuation increases as well as the profits made from the sale of crops. Farmland is historically stable as far as retaining value is concerned, and commodities tend to increase in value when markets falter.
You don’t need to be an expert on farmland valuation and investing strategy, either. FarmTogether offers a long sought-after solution for investors looking to enter the farmland investment sector. We match investors with our industry experts to determine the best investment option for their portfolio. Each of our investments offer different kinds of benefits—something that’s vital when looking to bolster your diversification efforts.
How to Diversify in Politically Uncertain Times
If you’re worried about dysfunction in Washington, you’re not alone. There is plenty to fret over now that the election has come to an end. As an investor, however, you may want to temper some of your greater fears about how a new administration and congress could impact your portfolio. Gridlock tends to benefit investments as legislators have an uphill climb to get meaningful changes passed, which usually makes the markets optimistic that things will remain the same for at least two years.
That said, investors shouldn’t let their guard down altogether. There is still a possibility that the new administration will be able to make incremental change a possibility. This may impact investors differently, and in ways that are less straightforward than sweeping change. Diversifying your portfolio now, before any prospective changes become law, can help stave off any major disruptions later on.
Pursuing a more robust portfolio, particularly with an alternative investment like farmland investing, is a great option whether or not real change is on the horizon as the White House gets a new occupant.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.