The path to prosperity in 2012 is a narrow one to walk between risky and overly-cautious strategies.

Stray toward fluctuating equities, and investments could nose-dive in what analysts expect will be a volatile year on the stock exchanges. Veer toward the safety of traditional bonds, and returns are likely to barely keep ahead of inflation.

A trio of Cincinnati financial advisers instead offers their versions of the middle ground, a strategy for managing risk while plotting for moderate growth.

"I'd say there is a continued migration toward the management of risk," says Bret Parrish, principal and managing director of the private client group at Johnson Investment Counsel. "These last couple of stock downturns have really made people aware of the downside risk with equities."

Historic lows

But with traditional safe harbors like 10-year treasury bonds yielding near historic lows, investors who hope for at least moderate growth still need to look toward equities, according to the money managers interviewed, including:

Dividend bearing stocks: Matt McCormick, portfolio manager at Bahl & Gaynor, says that even retirees should look to stocks that pay high dividends with a history of dividend increases.

"You can get more income via dividend-paying stocks that have strong brands that people use and need every day," he says.

For retirees or those close to retirement who are seeking modest but relatively safe returns, he looks toward blue-chip companies like McDonald's, Procter & Gamble and Intel. Consumer staples and technology companies are in line for a good year.

"This is essentially betting on the tortoise rather than the hare, the bluest of blue chips. More importantly, they pay you an ever-increasing income (through periodic dividend rate increases)," McCormick says, adding, "It's important to look at the risk patterns of what you want to invest in. Stocks are our top recommendation."

Parrish is also a fan of high-dividend stocks for a broad range of investors.

"In terms of our equity portfolios, we continue to focus on high-quality, dividend-paying companies that look attractive on a valuation basis for us. They provide good downside protection," he says.

Companies that produce consumer staples are high on his list, including Coca- Cola, Nestle and Colgate.

Conversely, both advisers see financials as a lagging sector in the coming year, especially banks with the continuing tepid economic recovery and fears of recession in Europe.

Continuing recovery

Alternatives: Mark Caner, president of W&S Financial Group Distributors, a division of Western & Southern, points toward a product released in January 2011 as an attractive vehicle for investors who have left old jobs and have a retirement account to roll over into something new.

VAROOM (Variable Annuity for Roll Over Only Money) is the first variable annuity in the country to make available individual exchange-traded funds as sub account options.

Investors have access to 18 individual ETFs and a money market portfolio from iShares and Vanguard to create their own mix of funds.

Older vehicles used a fund-of-funds structure only, while VAROOM allows investors and their representatives to select individual ETF sub-accounts representing a spectrum of equity, fixed income, international and alternative asset classes, according to the company. Fees are about one-third of the average variable annuity on the market; the prospectus comes in at a relatively lean 62 pages; and it adds flexibility for investors who must make an unscheduled withdrawal, allowing them to earn back lost profit a year after the last withdrawal.

The product is designed for rollover-only money for the more risk-averse investors who want equities, but with guaranteed income.

Caner said the key to buying a variable annuity is choosing a company that has the financial stability and track record to deliver on its promises.

"If you're going to invest your money with a company that's going to give you this kind of guarantee, it's so important to invest with a company that is strong financially," he says.

Balancing portfolios

Parrish recommends a variety of alternatives to equities to balance investors' portfolios. While older investors in the past may have had a 60-40 ratio of stocks to bonds, those investors now typically have closer to 27 percent of their holdings in alternative bonds. He recommends investing in Master Limited Partnerships, focused on energy distribution and storage such as pipeline companies that pay dividends in the 6.5 percent range while providing stability through long-term construction contracts.

High-yield bonds that are rated below investment grade are also attractive vehicles with risks similar to equities, Parrish says.

High inflation, a great risk of investing in bonds, is not likely, he thinks, given high unemployment and the continuing housing slump. Investors wanting to hedge their bets against inflation, though, can invest in gold and other precious metals, he says.

Projecting modest growth

Parrish and McCormick both projected 2012 as a year of modest growth for the economy in general and did not expect it to fall back into a recession.

Parrish expects significant growth in energy and materials and is a fan of investing in globally dominant providers in those areas, including Chevron, Royal Dutch, BHP Billiton and Schlumberger. 

"I think we'll see slow growth in '12, but not a recession from an economic perspective. From a stock perspective, mid-to-high single-digit returns but with continued volatility."

"I like the technology sector, companies that have little debt," McCormick says. "It's easier for companies to buy a system than to hire more workers, and that means the potential for dividend increases."

He's sticking with staples rather than luxury item makers for investing. "I would probably bring it down to a very simple needs, not wants equation. People will wash their hair and brush their teeth. We all have enough big-screen TVs."

McCormick doesn't see the economy heating up. "Even if there's substantial changes in Europe or our political structure, I would not anticipate rapid economic growth any time soon. We're going to have a grind-it-out economy for many years, tepid but not rapid growth."


Q: What is one piece of advice you would give to people for growing and protecting their wealth?

Ellis D. Hummel, CFP®
Vice President/ Portfolio Manager
Bahl & Gaynor Investment Counsel

Q: How can a trust protect family assets from creditors, lawsuits or divorce?

Jarett T. Levitsky, CFP®
Principal/Portfolio Manager
Johnson Investment Counsel, Inc.
John D. Posey
Director of Wealth Management
Stock Yards Bank & Trust
Christopher M. Wright
Private Wealth Manager