For growth investors, volatility comes with the territory. In fact, for those who dedicate themselves to buying low and selling high, it’s often the best possible news.

Volatility, however, can bring quite a different reaction for income investors, who aren’t used to seeing their holdings fluctuate wildly from day to day. The fact that income investments have often been leading the way on particularly violent days has been extremely disconcerting to many. More than a few stocks, bonds, preferred stocks and mutual funds with steady reputations and stable businesses have been up or down as much as 5 percent in a single day.

This is the kind of trading that typically accompanies some kind of major swing in a company’s fundamentals, like a dividend cut. As a result, many conservative investors have become increasingly nervous, and more than a few have been throwing in the towel, placing their full faith in money market funds that now yield 3 to 4 percent on average.

Even that much cash, however, is far too much for the typical investor who wants to get at least some long-term growth. And an all-cash account is little better than stuffing all your money into a mattress and hoping your house never catches on fire.

The worth of any income investment is determined by the health of the underlying business paying the dividends and/or interest. As long as that business is growing and financials are getting stronger, it’s going to be capable of maintaining and increasing its distributions over time.

Of course, this is very difficult to keep in mind when the price of something you own is moving all over the map. Like most investors, when a stock I own or recommend makes a dramatic move down, I always first assume something horrible has gone wrong with the fundamentals.

My next task is to try to track down what happened using a wide range of sources.

Sometimes, the explanation is obvious. This month, for example, otherwise solid Telecom New Zealand was beaten up when New Zealand’s Communications Minister announced sweeping reforms of that country’s telecom system. The proposal would force the company to open its wireline network to competitors, presumably at a utility rate of return, for the purpose of sparking broadband growth.

The 33 percent drop in the share value since the proposal is because of the uncertainty about how this plan will be carried out, the impact on the company’s profits and, ultimately, if it will force a dividend cut. All three are big risks, so it’s easy to see why the shares have dropped, though they look cheap now.

More often than not lately, though, stocks have been getting smacked for reasons that have nothing to do with their fundamentals. Rather, the action has been due to rampant fears about interest rates and inflation.

Back in the Greenspan era, the Federal Reserve had built up a mystique that it was always thinking several moves ahead, like a chess grandmaster. Wall Street became comfortable that it knew where the economy and markets were headed and had a clear idea of what the Fed was going to do to influence events in the best possible way.

And rightly or wrongly, this belief in the omniscient, omnipotent Fed was a major underpinning of stability in the investment markets.

The Bernanke Fed, however, has been something of a different story.

The biggest issue since its ascendancy this year has been when the central bank would stop raising interest rates to control inflation.

The Greenspan Fed had given no definitive indication when it would do so; rather it just indicated that progress was being made reigning in inflation, that the American economy remained strong, that deficits remained a long-term threat and so forth.

In contrast, the Bernanke Fed has more or less given the impression that it’s looking for signals from the economy before deciding whether to raise or lower rates. That’s obviously what the Greenspan Fed was doing as well. The difference is by telling Wall Street that it’s on the fence about what to do, the Fed has lost that veneer of being one step ahead of the game. Consequently, traders are now reacting violently to every manner of indicator that might give an impression of which way Bernanke and company will bend.

The Greenspan Fed, of course, had its share of low points during its first year. The decision to jack up interest rates in early 1987, for example, was probably the right one when it came to controlling then-accelerating inflation and the crash in the US dollar. But it did arguably result in the colossal crash of Oct. 19, 1987, when Greenspan was forced to dramatically reverse course and flood the system with money to avoid a corresponding economic crash.

It’s also easy to forget that Greenspan was following another legendary Fed Chairman, Paul Volcker, who many credit with taming the inflation of the 1970s. He survived the comparison and is more highly regarded today for his ability to keep the American economy on the road, despite a variety of potentially disastrous shocks that occurred during his tenure.

SOUND AND FURY

The key thing to remember, however, is that the market action we’re seeing now in response to concerns about interest rates and inflation has little or nothing to do with whether or not you should keep holding your yield-paying investments. For one thing, the down and up days are now basically canceling each other out.

There are some stocks that are down dramatically from their highs.

In the utility area, for example, water stocks across the board have taken big hits. Natural gas and other energy producing stocks have been weak, as investors worry about energy prices. And any company cutting its distribution has been taken out and shot.

What’s particularly remarkable is that this time around the yield has hit and remains above 5 percent. And while I continue to expect more selling and lower prices, more than a few of my favored stocks remain stubbornly above my buy targets. At least so far, the fear factor has moved well past what we’re actually seeing.

The main reason volatility shouldn’t knock you off your game: With few exceptions, the underlying businesses of the stocks we own are going strong. The evidence is in strong first quarter earnings, which also indicate strength ahead.

Roger Conrad is Editor of UTILITY & INCOME