Three Ways to Temper Volatility In Your Portfolio

The volatility of recent months may be enough to send the average investor to the sidelines, but pros are quick to remind that it's the ups and downs, not the flat lines, that make money.

"They’re there to serve you," says Pat Dorsey, director of research and strategy at Chicago-based Sanibel Captiva Trust Company. “Don’t let it scare you or force you out of stocks at the wrong time."

No one's suggesting a day-trader approach, by playing the day-to-day swings, but investors can adjust their portfolios a number of ways to deal with the worst period of volatility since the height of the financial crisis in late 2008.

Tempering portfolios with big-cap stocks in recession-resistant businesses, inverse ETFs that rise when markets fall or even preferred stocks paying high dividends can add some ballast to your portfolio, says analysts say. On the risk barometer, they run the gamut from low to high, depending on your stomach.

Take ETFs, which are well tailored to volatile environments and generally have low fees.

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“There are inverse ETFs designed to go up when markets are down," says Michael Johnston, a research analyst at ETF Database in Chicago. Investors can also buy ETFs that go both long and short.

Even investing in Europe — the source of much market angst lately — can be less volatile with a sound strategy. Avoid pan-European investments while the Greek sovereign debt drama plays out, say analysts. Instead, opt for single-country ETFs to pinpoint strong economies around the world.

In Europe, Johnston likes the Germany ETF iShares MSCI Germany Index Fundand the Global X FTSE Nordic Region ETFthat targets northern Europe.

In Asia, where concerns about a slowdown in Chinese growth have hurt stock prices, he suggests investing in iShares MSCI Singapore Index Fund , since Singapore is growing quickly and is relatively stable.

The MSCI Indonesia Investable Marketalso offers a bright spot, fueled by Indonesia’s massive population, stable fiscal policies and growing middle class, says Johnston.

U.S.-centric investors can ride index ETFs too, adds Johnston, via inverse ETFs.

The Active Bear, which is 100 percent short and actively managed, is one favorite. For shorting indexes, there’s the ProShares Short S&P500 and the ProShares Short Dow30. Some other ETFs are hybrids, such as the Quant Shares US Market Neutral BetaETF that holds both short and long stock positions, he says.

Rimmy Malhotra, chief investment officer at GoalMine.com, prefers using put options or covered calls to shorts, though.

"Buying a put is an insurance policy on a stock," he says. "If it drops below a certain threshold, you make money, he adds. And covered calls trump shorts because you can also collect dividends.

Malhotra also likes contrarian plays that are already beaten down, such as financial stocks. “They’re super well capitalized but they’re trading at or below book value,” he says.

To temper portfolio volatility, he suggests opting for preferred versions ofCitigroup or Bank of America stocks.

“Preferred stocks are down a decent amount,” Malhotra adds, “and you can get dividends in the 7-to 9-percent range.”

Other analysts prefer big companies in growth businesses that buck recessions.

Pat Dorsey, director of research and strategy at Chicago-based Sanibel Captiva Trust Company, cites Anheuser-Busch InBevand Pepsico as good examples.

"Dividend-paying stocks, alone, aren’t bullet proof, adds. “Big cap stocks are now historically cheap versus small stocks,” he adds.