Wall Street is warning of a stormy start to 2023 , but investors should prepare to find pockets of opportunity and ensure their portfolio is running efficiently. Just about every asset took its share of bumps this year. The S & P 500 is down more than 17%. Bond prices have tumbled alongside stocks, such that even the iShares Core Growth Allocation ETF – which is based on a 60/40 split between equities and fixed income – has dropped nearly 15%. “2022 was hell,” said Callie Cox, investment analyst at eToro. “And 2023? It’s hard to get much worse, but it may not get much better, and we are preparing clients for that as well.” But this isn’t a call to hide out in cash. Rather, it’s time to position your portfolio for optimal purchases and sensibly hunt down yield. “Investors may have to be more selective,” said Cox. “This could be the second part of a U-shaped recovery and not the V-shaped recovery we’ve become accustomed to.” Dividend plays in the spotlight “One of our themes for 2023 is to play offense and defense with dividend payers and dividend growers,” said Michael Arone, chief investment strategist for the U.S. SPDR Business at State Street Global Advisors. He noted that dividend payers tend to outperform when the 12-month average consumer price index inflation is above 3.25%. “We anticipate that inflation will begin to slow, but it probably won’t get below those levels,” he said. “This suggests to us that dividend payers and growers can perform – that’s the defense.” The question is whether dividend-paying stocks will still live up to those expectations in a recessionary environment. Wall Street is already anticipating a decline in earnings next year, including JPMorgan recently slashing its 2023 estimate for S & P 500 earnings per share to $205 from $225. However, JPMorgan also predicts dividends will remain stable. See below for a few high dividend ETFs. Higher yields on fixed income The silver lining of the Federal Reserve’s interest rate hiking campaign is the rising yield investors can find on even the most boring fixed income offerings. Select banks are offering high-yield savings accounts with annual percentage yields in excess of 3%, according to personal finance site Bankrate.com . Meanwhile, Series I savings bonds that are issued from Nov. 1 to April 30, 2023 have a current interest rate of 6.89%. Just be aware that a single individual can purchase up to $10,000 per calendar year through TreasuryDirect . Further, you must hold your I bond for at least 12 months before you can cash it. If you redeem it in less than five years, you’ll lose the last three months of interest. “To the extent that you have $10,000 that you don’t need for a year, that’s still an attractive interest rate and it’s state tax exempt interest, so I absolutely recommend it,” said Brenna McLoughlin, certified financial planner and senior advisor at Wealthstream Advisors. While I bonds are exempt from state and local levies, federal income taxes still apply. Short-term Treasurys are another attractive option for your fixed income sleeve. “Three- to 12-month T-bills are a nice safe haven providing some positive returns should the markets be more of a challenge,” Arone said. Three-month issues are yielding about 4.3%, while 1-year notes offer rates of 4.7%. For investors willing to take some risk, dipping a toe into short-maturity investment grade corporate bonds might also be worth considering, according to Arone, who highlighted maturities of one to three years. “Because you’re taking a modest amount of credit risk, you get a higher yield, but you’re not increasing the duration or interest rate sensitivity too much,” he said. See below for a few short-term corporate bond ETFs. Brush up on basics Market volatility is enough to keep any investor hiding on the sidelines. Instead, consider buying back into stocks through dollar-cost averaging. This way, you’re steadily investing in the market regardless of how it’s performing. McLoughlin of Wealthstream Advisors said that more of her clients are choosing to invest more money into the market each month, rather than doing so quarterly. “It gives them more peace of mind and a feeling of control,” she said. “It also spreads out the downside risk somewhat while still taking action. Being disciplined about the plan is the strategy, but we’re doing it in more bite-sized pieces.” It’s also a good time as any to monitor your investment expenses so that you’re holding onto every cent of your return. That means not only watching your trading activity but also being aware of your fund fees. “Investors are more active this year, and if you’re more active, you are paying higher transaction costs,” said Cox of eToro. “It’s so important to focus on fees; they eat into your returns.” — CNBC’s Michael Bloom contributed to this story.
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