Smart Investing Moves in a Mid-term Election Year

• Be sanguine about domestic energy. Even a more Republican House might not chant “Drill, baby, drill,” but it would be more inclined than Democrats to ease barriers to domestic production. This would help returns of investments like PowerShares S&P Energy Portfolio ETF (PSCE) and iShares U.S. Oil & Gas Exploration & Production ETF (IEO).

But without Republican seat gains, domestic energy is by no means doomed. Democrats have emphasized domestic production to reduce dependence on foreign oil, though with less enthusiasm for removing barriers.

• Surf the mid-term wave cycle on a beta board. Start by distinguishing exciting stocks from boring ones. By exciting, I mean stocks with high beta — a stock’s potential volatility, gauged by the tendency of its price to rise and fall with market swings. Often, you want to avoid this kind of excitement because volatility can punish returns. But if market volatility follows its normal mid-term election-year pattern, you can use this to your advantage.

A study by Richard Bernstein Advisors shows that since 1986, the current S&P 500 with the highest beta have historically low forward P/E ratios (anticipated price compared with earnings, a classic measure of future estimated value), so they are cheap. Those with low beta have historically high forward P/Es, indicating overvaluation. The PowerShares S&P 500 High Beta Portfolio fund (SPHB) holds 100 of the highest-beta stocks in this index. To exploit the typical market cycle of mid-term election years, consider buying a fund like this now before the spring spike, selling it at the end of April before the summer doldrums and then buying it again in early October.

• Expect things to get ugly. Given the level of nasty rhetoric between the two parties in recent years, this prospect is pretty likely. But as always, there’s the question of how much the nastiness—and the government gridlock it may bring before the election—might goose market volatility as measured by the Chicago Board Options Exchange Volatility Index (or VIX). Various ETFs, based on future contracts, go up with the VIX. So these investments can be helpful as tactical trading tools. To limit risk, be sure to keep these trading commitments extremely short-term — no longer than days or weeks.

These moves can make you a better dancer in a 2014 market ball that will be anything but a waltz fest — more like a break-dancing contest. You may see it this way when you’re spinning on your head with your feet in the air, but market returns this year will be good. If the market follows the historical mid-term election pattern, you can harness political winds and reduce their drag on your portfolio.

Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley/Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.

Any opinions expressed are solely those of the author and not of ABC News.

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