How to Brace Yourself

Bolster Your Portfolio for Rising Risks, but Gird Your Stocks and Bonds the Right Way. 

- Carolyn Bigda

CHANCES OF A RATE HIKE are rising. A new administration is heading to Washington, promising a few curveballs, no doubt. And not only is the second-longest bull market in history getting even older—only the 1990's rally lasted longer—but both U.S. stocks and bonds are expensive by historical standards, limiting the number of potential safe harbors. “If there’s anything to expect from here until the end of the year, it’s rising volatility,” says Omar Aguilar, chief investment officer of equities and multi-asset strategies at Schwab.

Still, the odds of a downturn are slim, according to the Blue Chip Economic Indicators survey of leading forecasts. And a well-diversified portfolio can help you ride out bumps along the way.

But diversification means more than owning enough fixed income to weather a market storm. You must also assemble the right variety of stocks and bonds to address specific types of volatility. Sometimes that means thinking counter intuitively.

YOUR EQUITIES

Conventional wisdom says to add a dose of income-producing shares to your core stock holdings because dividends serve as a cushion in rocky times. In 2008, when the S&P 500 lost 37%, an index of dividend growers fell just 22%.