By Paul Vigna

A contested election. No clear victor. A disruption to mail-in voting.

The potential doomsday outcomes of an already-caustic presidential election campaign are spurring anxiety among investors who are trying to position themselves for any wild surprises.

Some are using sophisticated derivatives tied to the Cboe Volatility Index to bet on dramatic swings in markets through the end of the year. But for those who don't want to get involved in exotic and risky gambits, there are other strategies investors can take to protect their portfolios.

"I would expect volatility," said Jason Brady, president of Thornburg Investment Management in Santa Fe, N.M. "The election itself may be reasonably priced in. The aftermath? I'm not sure that is."

The S&P 500 has surged 50% since bottoming in late March and is up 3.6% this year. Stocks, however, have been under pressure since early September as investors wonder about the contentious election season, the prospect of further stimulus to support the economy and a rise in coronavirus cases, among other things.

For investors who are trying to make portfolio changes in anticipation of volatility, Brian Rose, senior economist at UBS Global Wealth Management, recommends focusing on sectors that are likely to be less affected by either candidate's victory. His list for stocks includes housing, consumer staples and consumer discretionary.

"We're not trying to change the clothes people wear or the food they eat, " he said.

Lowe's Cos., Target Corp. and Domino's Pizza Inc. are among the retail stocks that have benefited from demand during the pandemic, logging double-digit share-price increases this year. The home builders Lennar Corp. and D.R. Horton Inc. are both up more than 45%.

Mr. Rose cautioned investors against becoming too attached to the fate of a particular candidate and making an emotional decision to buy or sell shares.

A mistake to avoid this year, Mr. Rose said, is assuming a Joe Biden administration would hurt markets because of his tax policies. The effects of extra government spending to rebuild infrastructure and limit climate change would benefit the economy generally and, in turn, buoy the stock market.

"In our view, these roughly offset," he said.

Mr. Brady of Thornburg said he is advising his clients to hold higher-than-normal levels of cash. The firm's own fixed-income portfolios have about 10% of their assets in cash, he said, adding that there is little downside to money-market funds when government-bond yields are hovering near record lows.

Plus, in a tightly correlated market, investors holding cash would be better positioned to take advantage of buying opportunities in the event of another selloff, he said. As stocks declined in September, so did Treasurys and gold, leaving investors limited places to hide during the downturn.

"What I've said, and it's very informed by March, you can turn cash into anything, but you can't turn anything into cash," Mr. Brady said.

He pointed to money-center banks and mortgage providers as potentially attractive investments with low valuations. Buying mortgage providers could be viewed as another take on the work-from-home trend, he added.

Big bank stocks have tumbled this year, partly because lower interest rates have dimmed their profit prospects. Citigroup Inc., Bank of America Corp. and PNC Financial Services Group Inc. have declined more than 25%.

Trying to play volatility is risky, though, especially for individual investors, said Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Mass.

He and other strategists suggest investors take a simpler approach: sit tight.

"So we get a decline in November," Mr. McMillan wrote in a research note. "So what? We see declines all the time. Over time, they don't matter."

UBS's Mr. Rose echoed that sentiment. The election and its aftermath may be chaotic, or the outcome could be clear on election night. Regardless, the firm doesn't forecast any changes to the long-term investment outlook. For that reason, investors shouldn't feel compelled to make any moves.

"Doing nothing is a perfectly fine option," he said.

Write to Paul Vigna at paul.vigna@wsj.com

Corrections & Amplifications

This article was corrected Oct. 4, 2020 because the original version gave an incorrect spelling for the city of Santa Fe, N.M.

(END) Dow Jones Newswires

10-03-20 0814ET