The currency exposure built into the WisdomTree Emerging Markets Debt fund can also help investors ride out a declining dollar, as central banks in developing countries raise their interest rates, boosting their currencies. For example, the Brazilian real is up almost 6 percent against the dollar this year, while the Russian ruble appreciated almost 9 percent compared with the dollar. For U.S. investors, foreign currency appreciation increases the value of assets once they are repatriated in the United States.
High-quality equities. While fixed-income investments have traditionally been used to offset volatility in the stock market, experts say dependable blue-chip stocks can also help anchor a portfolio while still creating a stream of income. "It's a very bullish situation for equities for this environment," Lutts says. "Everyone is ignoring what could be the best asset class today."
It's best to focus on a handful of stable, high-quality stocks—think Verizon, Bristol-Myers, Exelon—with average dividend yields of more than 5 percent, says Oliver Pursche, president of New York-based Gary Goldberg Financial Services. More sophisticated investors can go a step further with options and write covered calls for those stocks, and buy puts to generate more income from the asset. (Buying a put essentially means an investor bets that a stock will decline in value.) Using this strategy, investors can obtain the income component they're looking for while hypothetically generating extra income to further protect on the downside.
Regardless, it all comes back to playing the middle of the road in today's economic climate. With little hope of a big run-up in economic growth in the near future, investors have to be more creative—and in some cases take on a bit more risk—to achieve the desired balance between adequate portfolio protection and adequate growth.