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Investing Specialists

3 Portfolio Moves to Consider Before the Election

For those who can't sit still, here are a few ideas to pursue that won't derail your long-term plan.

I like bringing order to chaos--or at least trying to. I make lists. I dig spreadsheets. I map out a week's worth of dinners in advance. And I can tell you exactly what I'll be wearing tomorrow, since I've already planned that out, too.

I know I'm not alone--many of us like to control what we can, particularly in the face of uncertainty. And we're facing plenty of uncertainty today, thanks to the pandemic, economic challenges--and a U.S. election just weeks away.

Indeed, elections typically lead control freaks to wonder what we should be doing before the first Tuesday in November--and not just with our ballots, but with our money, too.

My level-headed, thoughtful colleagues have urged us not to let the election derail our long-term financial plans. Morningstar columnist and researcher John Rekenthaler, for instance, argues that presidential elections in and of themselves have little impact on investment results. "Who is president is but a small determinant of how the market behaves," agrees Morningstar director of personal finance Christine Benz.

However, for those investors who feel like they just need to do something portfolio-related before Nov. 3, here are a few ideas to consider.

Make Sure You Have a Cash Cushion
We've experienced a good dose of market turmoil this year, and we're likely to experience more going forward, especially if there's a lot of uncertainty about the political outcome. It's therefore key to make sure your emergency fund is sufficiently stocked--you don't want to have to sell investments (especially during a market dip, which isn't out of the question) to raise cash for unexpected expenses. Also, be sure that you have any special near-term cash flow needs included here, too--such as paying for a wedding or a home down payment in the next six months.

Having sufficient cash on hand is especially important for those nearing or in retirement. When discussing her bucket portfolio strategy for retirement, Benz recommends parking money for living expenses covering the next two years in cash--that's Bucket 1 in her retirement portfolio system. She suggests that retirees maintain emergency funds, too. "Unplanned expenditures like a new roof, auto repairs, or big vet bills can crop up in retirement just as they do when you're working," reminds Benz. Retirees can either include a cash buffer for these costs in Bucket 1, or they can maintain separate emergency funds to cover them.

More on this topic:
10 Sources of Emergency Cash, Ranked from Best to Worst
Buckets Can Help You Stay Organized During Volatility

Double-Check Your Diversification--Including Inflation Protection
If you've created an investment policy statement outlining how you've positioned your portfolio and triggers for making changes, be sure that you bring your portfolio back in line with that plan if, in fact, it's out of whack. (And if you haven't worked up an investment policy statement, you can create one using Benz's guidelines.) Let your policy drive your portfolio.

Specifically, be sure your portfolio's asset allocation matches the target you've set. Although we experienced a significant stock market sell-off earlier this year, the subsequent rally may mean that your portfolio is heavier in equities that you intended--particularly if you've been a hands-off investor during the past several years. Given how well U.S. stocks have performed relative to other markets, you may also find that your once geographically diverse portfolio is more domestic than you had planned, too. And be sure to check your style preferences: The continued dominance of growth strategies versus their value counterparts may mean your growth/value split needs rebalancing.

Further, now may be a good time to consider whether your portfolio needs any additional inflation protection. Sure, the Consumer Price Index makes it seem like inflation is dead. But a change in the Federal Reserve's inflation policy and the reality that we're paying more during the pandemic for groceries and other essentials suggest that our personal inflation rates may be on the rise. Granted, younger investors with long time horizons who've assembled stock-heavy portfolios can shrug off inflation concerns, since stocks have historically outearned inflation. But for those nearing or in retirement who are relying on non-inflation-adjusted sources of income, a little inflation protection wouldn't hurt. Benz likes Treasury Inflation-Protected Securities as inflation hedges; in fact, she allocates around 10% of her bucket portfolio for retirees to TIPS.

More on this topic:
5 Ways Rebalancing Can Benefit Your Retirement Plan
Diversify, but Not Too Much
Should You Worry About Inflation and Your Portfolio?

Consider Converting to a Roth
Many tax experts say that 2020 is an ideal year to convert some traditional IRA assets to Roth IRA assets. In doing so, an investor will pay taxes now, in what most agree is a reasonably low tax rate environment, rather than pay taxes later in an as-yet-to-be-determined (but perhaps less friendly) tax climate.

What makes this year so special? For starters, some investors may find themselves in a temporarily lower tax bracket due to reduced income, or, in the case of retirees, because they don't have to take required minimum distributions in 2020; as a result, paying taxes on a conversion this year would be less onerous. Secondly, many think that the days of historically low tax rates may be numbered. "While the Tax Cuts and Jobs Act reduced taxes for many taxpayers, albeit with more limits around deductions like state and local taxes, the amount of stimulus needed to kick the economy back into gear could force tax rates back up in the future," suggests Benz.

Roth conversions are tricky, so consulting a tax professional for guidance should be step number one in your game plan. And while you may want to research whether a Roth conversion is right for you before the election, tax expert Ed Slott suggests waiting until early December to pull the trigger if you find a conversion is a good choice for you. Remember, Roth conversions are permanent and can't be undone; once you convert you're committed to pay the taxes on the conversion. As such, you want to make your final decision only after you have the most accurate projection of your 2020 tax liability, which should be reasonably clear by early December, says Slott.

More on this topic:
Seize The Opportunity to Convert to Roths
Ed Slott: Act Now on Historically Low Tax Rates