Investing for steady growth

When interest rates are low, the stock market’s bumpy, and inflation is looming, it’s difficult to achieve consistent investment returns.

But there are investments that generate decent returns with less fluctuation.

Start by looking for bonds that act like stocks.

While most long-term bonds are generating uninspiring returns in the current low-interest-rate environment, less-traditional fixed-income investments provide a bond alternative with returns more common to stocks.

Among them, higher-yield corporate bonds can pay a considerable premium above government or investment-grade corporate bond offerings.

… or stocks that act like bonds.

You might think equities are too risky for your portfolio, and so you’re inclined to stick with bonds or other sure-return products. But don’t overlook the effects of inflation and taxes. They can eat away at fixed-income returns until you’re simply breaking even.

So, instead of avoiding equities, seek out those that act more like bonds and provide steady returns over time.

Tops on the list are dividend-paying stocks, which tend to be the most stable relative to inflation and can pay annual dividends as high as 4%. When coupled with rising stock prices for the underlying shares, they can generate good returns.

Preferred shares, which generally pay regular dividends, also can help raise returns. There are, however, two kinds: perpetual, which have stable dividend rates; and variable, where rates reset every five years. In a rising-interest-rate environment, variable preferred shares are generally a better option.

Another good option is lower-volatility stocks, which can be expected to perform well.

Manage volatility in an equity portfolio

Historically, equities have offered better long-term returns than fixed-income assets. Equity returns can be volatile, but consider these five strategies to reduce volatility in a portfolio.

• Asset allocation is the practice of dividing one’s cash among different investments, including stocks, bonds and mutual funds. Generally, when stocks rise, bonds often fall. But it’s devilishly difficult to time the market, and selling off – and being out of the market at the wrong time – can be costly. Asset allocation strategies alter the total mix of equities, bonds, and other instruments to better compensate for volatility.
• Using derivatives can reduce volatility by placing other assets that tend to increase in value when equities fall into the portfolio.
• Geographic diversification means you invest across various developed and emerging equity markets. The basic premise, which has produced results in practice, is that prices in one regional or national equity market will rise, even if they fall in another.
• Value strategies seek stocks of companies that managers believe the market has under-valued. They then hold onto these investments until the companies’ fortunes improve.
• Low-volatility equity strategies presume risky stocks tend to give inferior results. Low-volatility equity portfolios emphasize stable stocks and businesses, with a smaller weighting in more volatile/cyclical businesses such as resources.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.