With a presidential election looming, you may want to hedge your stock portfolio now

The S&P 500 is having one of its best-ever starts to a presidential election year. Congratulations to Disruption Investor members who beat the market so far in 2024. Our portfolio gained 23% through the first seven months, while the S&P 500 was up 15%.

The CEO of Goldman Sachs has said the key to a successful career is “stepping in the right elevators.” No matter how talented you are, the industry you choose to work in really matters. Same for investing. Which companies you own really matters.

That’s why we only invest in great businesses profiting from disruptive megatrends. It tips the odds of success heavily in our favor. Only stocks that hit the sweet spot in the middle of our Venn diagram can make it into the Disruption Investor portfolio.

Almost three decades’ worth of collective investing experience has taught me that if you pick great businesses profiting from disruptive megatrends the rest takes care of itself.

Our research suggests we’re in the middle of a long-term bull market. But no matter how bullish we are, we still invest like we might be wrong. Let me explain.

First, don’t lose sight of why we invest in the first place. We invest so we can live comfortably, give our kids the best possible opportunities, enjoy wonderful vacations and eventually live fulfilling retirements. We invest to build lasting wealth.

We’ve made a lot of profits in the stock market over the past 18 months. To make the most of the new wealth you’ve generated, you must avoid significant losses.

“Hedging is a strategy we can use to reduce the risk of losing money. It’s like buying insurance for your investments.” Stephen McBride

In my experience, this is the No. 1 thing that separates investors who grow rich from those who see mediocre results. There are a lot of “one-hit wonder” investors who strike it big during a stock market rally only to give it all back on the other side.

We must respect the market and remember: stocks fluctuate. That’s why now is a good time to put on a “hedge.” Hedging is a strategy we can use to reduce the risk of losing money. It’s like buying insurance for your investments.

There are various ways to hedge your portfolio: put options, shorting stocks, inverse ETFs, buying “volatility.” Some investors also consider assets like gold, bonds, and bitcoin to act as safeguards if the market takes a dive. We consider these assets important diversifiers, not hedges.

There’s a lot of misunderstanding about what a hedge is, what does (and doesn’t) make a good hedge and where it fits into your portfolio. We believe every good hedge is relatively cheap to implement and easy to manage. We’ll walk you through how to take advantage of our strategy below.

With stocks near record highs, insurance is cheap right now. And you want to buy insurance when you can, not when you’re forced to.

“I wouldn’t be surprised if stocks sell off heading into November’s political Super Bowl.” That’s what I wrote back in January. And with 60 days left to go, all eyes are on the U.S. presidential election. Remember, stocks typically go up in election years. Since 1928, U.S. stocks were positive 90% of the time. We can add 2024 to that list.

What gives us pause is that the biggest decline for the S&P 500 is 5.5% so far this year. This is historically low and suggests we’ll likely see a larger pullback at some point before November. The average election-year dip is 13%. Historically, these selloffs tend to happen in the weeks before election day as investors get antsy.

Buying stock market insurance also gives us peace of mind. Like home insurance, we hope it never pays off. But it’ll allow us to navigate potential volatility with confidence. It also means we can stay invested in great businesses through market turbulence.

That’s where our edge is: owning great, disruptive businesses in long-term megatrends. Over a multiyear period, the companies we own will continue to power ahead, no matter the political situation.

But in the short term, even great stocks can be tossed around in emotional waves, which we’re already starting to see.

Many of you told me you’re worried about a market correction. Disruption Investors don’t worry; we act. That’s exactly what we’re doing this month. Being prudent in times like these will let you come out on top no matter where the market’s headed next.

Read more: Interest rates and stocks — Mark your calendar for the Sept. 17 Fed meeting