By Peter Mastrantuono
The stock market’s fall from a record high into a bear market was the quickest since 1931. History teaches us that recovery periods can range from a few months to multiple years. It’s difficult to know when the market regains its footing, but volatility is likely to continue over the short term.
Given the damage to investors’ portfolios, now may be the time to begin discussing with your financial advisor a portfolio recovery strategy and how to position your portfolio to protect against future downturns in the market.
To aid that conversation we begin a two-part series on portfolio recovery steps that investors may want to review with their financial advisor. Part One will focus on strategies to enhance portfolio returns that can potentially help accelerate recovery, while next week we will discuss portfolio protection strategies to hedge against potential future market downturns.
5 Strategies to Enhance Portfolio Recovery
- Enhance yield potential by writing (i.e., selling) covered calls. If you expect stocks to trade in a range or move lower, you may want to write covered calls to produce additional income in your portfolio. By writing covered calls you receive premium income, an amount that will vary by the strike price, time to expiration and market conditions. In exchange for this premium income, you agree to sell your stock at a predetermined price (the strike price). If the stock price remains below the strike price until the call option’s expiration date, you maintain your ownership in the stock. (When the call option expires, you can elect to write another call to receive additional income.) If the stock price rises above the strike price, you may be required to sell the stock and lose out on gains above the strike price. In either case, you keep the premium income from writing the covered call.
- Implement tactical investments. Buy-and-hold is a sound investment approach, but there may be ways to pick up return through tactical investments. Work with your advisor to identify individual companies or industry sectors that may have suffered disproportionately in this market retreat. There may be opportunities to rebalance equity investments to take advantage of some short- to intermediate-term tactical opportunities created by this sell-off.
- Consider long-dated LEAPS (Long-term Equity Anticipation Securities). LEAPS are a type of option with terms that extend out years, rather than the more typical weeks or months. LEAPS may be one way to maintain upside exposure to a stock at less capital risk.
- Amplify portfolio return potential with a cash-secured put strategy. Rather than playing the waiting game of placing a limit order to buy a stock once it falls to a certain price, you can sell a put and place the funds for buying the stock into short-term Treasuries. The benefit of this approach is that you receive premium income for selling the put, which does not happen with waiting for limit order instructions to activate a purchase.
- Magnify exposure through leverage securities. If you have a short-term view on the market, one way to enhance returns is through leveraged ETFs, which use derivatives to magnify the returns of the underlying index.
These strategies may not be appropriate for every investor. A financial advisor can help you better understand the risks and opportunities with each of the above ideas. He or she may also have additional ideas for you to consider.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.