Wall Street is warning of a stormy start to 2023, but investors should be prepared to find pockets of opportunity and ensure their portfolios perform effectively. Just about every asset has had its share of bumps this year. The S&P 500 is down more than 17%. Bond prices fell alongside equities, so even the iShares Core Growth Allocation ETF – which is based on a 60/40 split between equities and fixed income – fell nearly 15%. “2022 has been hell,” said Callie Cox, investment analyst at eToro. “What about 2023? It’s hard to do much worse, but it might not get much better, and we’re also preparing customers for that.” But this is not a call to hide in cash. Rather, it is time to position your portfolio for optimal purchases and to seek yield wisely. “Investors may need to be more selective,” Cox said. “It could be the second part of a U-shaped recovery and not the V-shaped recovery that we’ve grown accustomed to.” “One of our themes for 2023 is playing offense and defense with dividend payers and dividend producers,” said Michael Arone, chief investment strategist for the US SPDR business at State Street Global. Advisors. He noted that dividend payers tend to outperform when the average 12-month consumer price index inflation is above 3.25%. “We expect inflation to start to ease, but it’s unlikely to drop below these levels,” he said. “It suggests to us that dividend payers and producers can perform well – that’s the defense.” The question is whether dividend-paying stocks will still meet these expectations in a recessionary environment. Wall Street is already pricing in lower earnings next year, including JPMorgan which recently cut its 2023 estimate for S&P 500 earnings per share to $205 from $225. However, JPMorgan also expects dividends to remain stable. See below for some high dividend ETFs. Higher Yields on Fixed Income The bright side of the Federal Reserve’s interest rate hike campaign is the higher yields investors can find on even the most boring fixed income offerings. Some banks offer high-yield savings accounts with annual percentage returns above 3%, according to personal finance site Bankrate.com. Meanwhile, Series I Savings Bonds issued from November 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. Additionally, you must hold your I Bond for at least 12 months before you can cash it out. If you redeem it in less than five years, you will lose the last three months of interest. “As long as 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 recommend it absolutely,” 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 treasury bills are another attractive option for your fixed income portfolio. “Three to 12 month Treasury bills are a good safe haven offering positive returns if markets are tougher,” Arone said. Three-month issues yield around 4.3%, while 1-year bonds offer rates of 4.7%. For investors willing to take a risk, dipping a toe into high-quality, short-dated corporate bonds might also be worth considering, according to Arone, who pointed to one- to three-year maturities. “Because you’re taking modest credit risk, you get a higher return, but you don’t increase duration or interest rate sensitivity too much,” he said. See some short-term corporate bond ETFs below. Review the Basics Market volatility is enough to keep any hidden investor on the sidelines. Instead, consider buying back stocks through cost averaging. In this way, you invest regularly in the market, regardless of its performance. Wealthstream Advisors’ McLoughlin said more of his clients are choosing to invest more money in the market each month, rather than quarterly. “It gives them more peace of mind and a sense of control,” she said. “It also spreads the downside risk somewhat while still acting. Being disciplined about the plan is the strategy, but we do it in smaller pieces.” It’s also a good time to watch your investment expenses to keep every penny of your return. This means not only monitoring your trading activity, but also being aware of your fund’s charges. “Investors are more active this year, and if you’re more active, you pay higher transaction costs,” eToro’s Cox said. “It’s so important to focus on fees; they reduce your returns.” — CNBC’s Michael Bloom contributed to this story.