Tension in the Middle East, hot inflation rattle stocks. Take these steps to shore up your portfolio

Published Mon, Apr 15 20243:27 PM EDTUpdated Mon, Apr 15 20243:47 PM EDT

The major averages sold off with renewed fervor on Monday, but investors should resist the urge to join in. Fresh off its worst week since last October, the S & P 500 dropped more than 1% on Monday afternoon. The CBOE Volatility Index , known as the market's fear gauge, leapt more than 10% to 19.17. Conflict in the Middle East escalated over the weekend as Iran launched drones and missiles at Israel, and traders braced for a response. Investors have already been on edge as of late amid climbing oil prices and recent economic data that shows inflation is remaining sticky. Rockier times could be ahead, too, noted Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. "Our view is that this latest escalation poses greater risks for potential future capital-market volatility," Christopher wrote in a Monday report, noting that his team is reiterating its preference for "quality in portfolio allocation." Here are a few rational steps you can take with your portfolio as markets remain volatile. Rebalance your portfolio Last year's sharp run-up in stocks, along with this year's strength, may mean that your asset allocation is too heavily skewed toward equities. In turn, that results in greater portfolio risk than you may want. That's where rebalancing comes in: This move involves tweaking your portfolio's weightings and ensuring that they are still reflective of your time horizon and risk appetite. It's a step that financial advisors recommend taking every quarter or at least once a year. "A good place to start trimming is in the Information Technology and Communications Services sectors, which look expensive from a price-to-earnings perspective," said Christopher. He noted that investors could consider rebalancing into the industrials, materials, energy and health-care sectors. Sell selectively There is an art to selling your losing positions. Tax-loss harvesting involves selling losers in your taxable account and using these losses to offset realized gains within your portfolio. If those losses exceed gains, you can offset up to $3,000 a year in ordinary income. Be mindful of your asset allocation as you decide what positions you're selling. You can use the proceeds to buy an asset that will keep you similarly exposed to the market and help you meet your goals. Keep the wash-sale rules in mind as you shop for a substitution. If you sell a losing position and then buy securities that are substantially like it within 30 days before or after the sale, you incur a wash sale — and the IRS can block you from deducting the tax loss. Search for income opportunities Bond yields move opposite to their prices — and that means that as yields pop, you may still find some solid opportunities to shore up your fixed income at an attractive price. Recent hot inflation reports have spurred traders to tame their expectations for rate cuts in 2024. Fed funds futures trading data are pricing in a 71% likelihood that the Fed will ease in September, according to the CME Group's FedWatch Tool . If you haven't taken the opportunity to start moving out of cash to lock in some of these higher yields , now might be the time. Indeed, Gargi Pal Chaudhuri, chief investment and portfolio strategist, Americas at BlackRock, noted that "the recent back up in rates is probably the last best opportunity to extend duration ." Extending duration involves adding exposure to bonds with greater price sensitivity to changes in rates. Longer-dated bonds tend to have the greatest duration. Chaudhuri's team likes fixed income with duration of three to seven years, and she recently called out the iShares 3-7 Treasury Bond ETF (IEI) and the BlackRock Flexible Income ETF (BINC) for investors who are ready to step out of cash.