Warren Buffett once said, “After all, you only find out who is swimming naked when the tide goes out.”

The rough start to 2022 was a wake-up call for investors who had gotten used to nearly two years of an explosive bull market. Thanks to relatively high stock valuations, an 8.5% inflation rate and the Federal Reserve tightening money policy, you’ll continue to face a more precarious environment. To help you dial down risk and safeguard your portfolio while continuing to grow your nest egg, Bottom Line Personal assembled a panel of five top investment experts known for their cautious approaches. Their general takeaways and what to do now…

Higher interest rates will not crush the economy and cause a recession or trigger a bear market. But stocks could see more volatile and frequent pullbacks, and both economic and corporate earnings growth could slow dramatically.

Inflation should moderate but will remain stubbornly higher than in the past.

There will be negative returns from both ends of the investment spectrumspeculative growth stocks as well as traditional ports in the storm such as long- and intermediate-term bonds.

How to Proceed

Invest in boring, high-quality companies with growth potential. The most attractive prospects are in an overlooked area of health care—medical-equipment makers. Their steady revenues were ignored last year as investors chased sexier investments. Even if the economy slows, interest rates rise and prices stay high, these companies can continue to deliver strong growth and maintain their profit margins. Two life-sciences equipment manufacturers to consider now…

PerkinElmer (PKI) is a diagnostics and life-science tool company serving the pharmaceutical, industrial, healthcare and academic end-markets. Recent share price: $160.38.

Thermo Fisher Scientific (TMO) is also a life-science tools-and-diagnostics company serving the pharmaceutical, industrial, health-care and academic end-markets. Recent share price: $572.13.


Bolster your portfolio with alternative assets that offer inflation protection. Even if inflation calms down later this year, it still will play havoc with older investors who live off fixed incomes and have large bond portfolios. About 8% of my model portfolio is in four asset classes, each of which tends to benefit from higher inflation including Treasury inflation-­protected securities (TIPS) …real estate (­infrastructure stocks and real estate investment trusts)…commodities…and gold. My favorite inflation-protection mutual fund now…

DWS RREEF Real Assets (AAASX) invests in the four asset classes above, changing allocation levels based on where we are in the investment cycle. The fund, which has about 125 holdings and two-thirds of assets currently in real estate, has a long history of making successful tactical changes. Recent yield: 2.36%. Performance: 6.4%.


Don’t abandon all traditional fixed income. Many investors are dumping bonds because bond prices have an inverse relationship with interest rates. With higher interest rates a near-certainty this year, it’s wise to avoid longer-maturity bonds, but short-term investment-grade corporate bonds remain a foundation of my clients’ portfolios. Reason: The yields you can get are better than what you get in deposit accounts. And even in a rising-rate environment, the risk of losing money is minimal. Plus, a diversified, short-term bond fund makes back losses by reinvesting in new bonds at higher yields as older ones mature. Most important, short-term bonds have proven to be effective shock absorbers when stocks tank. My favorite short-term ­investment-grade corporate bond fund now…

Vanguard Short-Term Corporate Bond ETF (VCSH) tracks the Bloomberg US 1-5 Year Corporate Bond Index, which holds more than 2,100 bonds from major corporations. The annual expense ratio is just 0.04%. Recent yield: 1.6%. Performance: 2%.


Look overseas for bargains. Reducing risk by investing in undervalued companies outside the US may seem ­counterintuitive. While the war in Ukraine is now a headwind—and Europe is still in an earlier stage of its economic rebound due to longer pandemic lockdowns—valuations haven’t been this cheap since the financial crisis and, as it did back then, economic growth will eventually rebound. Two of my favorite European value stocks now…

BASF (BASFY), the world’s largest chemical company, manufactures a vast array of products used in everything from skin-care lotions to crop protectants to lithium-ion batteries. The German firm, with annual revenues of more than $60 billion, is more attractive than smaller American competitors such as Dow and DuPont. Recent net yield: 5%. Recent share price: $13.93.

Volkswagen (VWAGY) has emerged as a major player in electronic vehicles (EVs). It recently released the Porsche Taycan, an all-electric roadster to challenge Tesla. Volkswagen plans to launch around 70 other EV models and build several battery factories across Europe, as well as sell three million EVs annually by 2025. Recent net yield: 2.5%. Recent share price: $22.16.


Re-examine your risk capacity. Small investors often are warned to figure out their “risk tolerance”—how much volatility they can handle in their portfolios and still sleep well at night. But it can be difficult to estimate how you’ll feel about a future event based on how you felt during past events, then use that information to make stock and bond allocations. Better: Think of your tolerance for risk and volatility in real-life consequences. Risk capacity captures how much your portfolio would have to lose in actual dollar value before you would be forced to make changes in your lifestyle. Example: Say we had another bear market, like the one in 2007–2009, when stocks dropped about 50%. If you are 30 years old and have decades until you need the money, your risk capacity is almost unlimited, so you may want to keep 100% of your holdings in stocks. But what if you are 68, have an $800,000 portfolio split evenly between stocks and bonds, and draw down 4% ($32,000) a year? A 50% drop in your stock holdings leaves you with a $600,000 portfolio or an annual 4% drawdown of $24,000. Could you handle an $8,000 cutback and still pay your bills until your stock portfolio recovered? If not, you need to rethink how much stock you own in your portfolio. Using risk capacity to make allocation decisions isn’t fool-proof. You still could wind up panicking and selling in a bear market. But it gives you a baseline of how much volatility you can realistically withstand.

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