Monday, October 25, 2010

Buying Stocks After the Mid-Term Elections

On September 1, 2010, I mentioned that our plan was to significantly increase our investments in the stock market in anticipation of a continued recovery. While this continues to be our plan, I've decided hold off making any large equity purchases until after the November 2, 2010 midterm elections. I think there is a reasonable possibility that the market may correct after the elections results for the following reasons:

  • A Republican win is already priced into the market. The rally since July 2010 has been very strong reflecting a believe that the midterm elections will eliminate the current Democratic majority in at least the House of Representatives. Historically, the market results have been good with a Democratic President and a Republican controlled Congress.

  • The elections results may disappoint the market. The latest polls show many of the races are tightening meaning Republicans may take fewer seats than originally anticipated during the summer. If the Democrats maintain a majority in both houses of Congress, a market sell off may occur.
  • I've positioned our portfolios to take advantage of possible market decline or a continued market advance. First, I've sold parts of positions into this rally, taking some profits and holding the remaining shares in case the market rallies. Second, I've sold some covered calls against my company stock which will provide a cushion if the stock declines or allow profits to be taken if the stock advances. Finally, I've set aside 1/2 of the cash in our managed retirement accounts to be invested whether the market declines or advances.

    Psychologically, I feel better taking this hedging approach. While I may miss out on some gains, I will also mitigate any signficant decline that may happen after the elections results.

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    This is not financial or investing advice. Please consult a professional advisor.

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