Investment choices in a volatile market
Options to avoid the pain of a market correction
By DAVID N. GRENIER
Market corrections can be painful - and lately investors have had to endure their share of pain.
But there is an antidote. Any investment strategy has some risk, but a growth-and-income investment strategy has the potential to help your investments grow during good times, while protecting you from downside risk during bad times.
A growth-and-income strategy combines the two ways investors make money - growth, when the value of the security increases, and income, which investors receive regardless of market conditions.
The following investments offer both growth and income:
* Convertible securities
* Real estate investment trusts (REITs)
* Dividend-paying stocks
Introducing these securities to your portfolio can be a powerful antidote to volatility by providing diversification, income, growth and downside protection.
As with any investment, it is important to understand each of these securities before you invest.
Convertibles. Convertibles are corporate bonds or preferred stocks that can be converted to common stock. Convertibles typically decline, at most, to the level of their value as a fixed-income investment, which helps them outperform stocks during a down market. If the value of the common stock rises, the value of the convertible often does too, which helps the convertible outperform a traditional bond.
Income continues regardless of the changing value of the underlying stock. When convertibles grow in value, the investor is especially fortunate, as income will add to the total return. When convertibles drop in value, income reduces the downside risk.
When the income is reinvested, it compounds, adding significantly to long-term total returns.
REITs. REITs are trusts that enable investors to pool their capital to invest in commercial real estate. REIT managers manage real estate portfolios just as professional money managers manage investment portfolios.
REITs offer potential capital gains and income. The capital gains are created from an increase in rental income, an increase in real estate market value or an increase in investor demand. REITs earn income from rent and from interest on loans. REITs typically pass on at least 90 percent of their income as dividends to shareholders.
Because REITs are not strongly correlated with other asset classes, they can enhance a portfolio's diversification, reducing risk. REIT shares are traded daily on a national exchange, so they can be bought and sold easily.
Dividend-paying stocks. During the past 30 years, dividends have accounted for nearly a third of the total return of the S&P 500, according to Standard & Poor's. An added benefit is that income from dividends is taxed at a rate of 15 percent.
In today's world, financial markets are especially volatile. Events half way around the world led to a recent market correction, while the price of oil, war in the Middle East and other events beyond our control may affect tomorrow's markets.
By receiving income from investments that also provide growth, investors can be better prepared to make money, regardless of market conditions.
David N. Grenier is president of Cutler Capital Management of Worcester which operates the Cutler Investment Fund, a hedge fund. He can be reached at dgrenier@cutlercapital.com.
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