Dawn Bennett does not think the sky is falling; she just sees it as seriously askew. She says she is skeptical of the year-end surge in stock prices, and not at all convinced America is in for the much-ballyhooed soft landing.

Ms. Bennett heads up the Bennett Financial Group, which she founded earlier this year after leaving Legg Mason, and which currently has about $700 million under management. Her concerns are summarized thus: “There’s no way we’re not going to feel the effects from 17 interest rate hikes. There’s usually a seven-month lag. I can see the Fed having to lower rates in the first six months of 2007.”

This is not your normal jolly Christmas conversation. Ms. Bennett’s concerns include an expectation that the housing sector is going to get still worse before it gets better, and that the sizeable mortgage credit bubble will cause the consumer to pull in more aggressively. The amount of lending done in the past few years to those with questionable (and unquestioned) credit, stimulated by an expectation of evergrowing home prices, makes Ms. Bennett jittery.

Although others certainly have voiced these concerns, Ms. Bennett’s outlook includes a more profound and enduring slowdown in the American economic expansion. Consequently, she is aggressively looking for investment opportunities overseas, as well as trying to plump up domestic returns through purchases of convertible preferreds and other high-yield asset classes.

No doubt she derives her comfort with international securities in part from having grown up with a father in “the agency,” as she calls it, which took her family all over the globe. This early direction inspired her to learn Chinese during her college years, and probably also explains her ordering a breakfast of pickles and fish when we met the other day.

By aggressively diversifying her clients’ portfolios, Ms. Bennett is attempting to prevent losses and simultaneously to reduce the volatility of her accounts. She recommends that clients invest in multiple asset classes, including fixed-income and preferred securities, or really any that might enhance returns as profit growth slows. Most of her clients’ funds are invested in open-end or closed-end mutual funds, or with independent money managers.

Ms. Bennett’s recommendations are colored by her career of helping real people plan for retirement, finance their children’s educations, and deal with the often messy and confusing details of life. In 1985, she went to work for Wheat First Butcher Singer, where she learned the investment trade for nearly a decade.

In 1996, she joined the brokerage arm of Legg Mason Wood Walker as a senior vice president and investment officer. When Legg Mason sold its brokerage operations to Citigroup, Ms. Bennett decided it was time to move on. She had built a loyal client following over the years, and when she left in February of this year, she took with her a team of five, as well as a significant amount of money under management.

Although not a trained economist, Ms. Bennett has studied under the toughest of all tutors — the individual investor. She espouses defensive investing, which includes pretty much anything that does not lay her clients open to the risks of another terrorist attack or a worse-than-expected market pullback. One of the more interesting of Ms. Bennett’s suggestions was that clients boost returns by writing covered calls.

This practice involves selling calls on stocks you own in your portfolio. The upside is that in a flattish market environment, it is a way of boosting returns by capturing the option premium on a stock you hold. In other words, you can sell to another investor the option to buy a stock you own at a predetermined price.

The downside is that the stock may rise suddenly in value, and the shares will be called away from you. That is, you may have to hand them over to the person who bought the call. This limits your participation in the stock’s rise, and is therefore not appealing to those expecting to benefit from a stock’s strong advance.

There are some simple ways to make sure this approach is a sensible one. First, it is not appropriate for highly volatile issues. It is perfect for a stock such as Time Warner, which has traded within a fairly narrow range in recent years. True, you won’t earn as high an options premium on a stock that is fairly stable. But, you will boost your returns on the shares. Medium volatility should be the standard here.

Also, it is worth noting that you do not necessarily have to hand over the shares in your portfolio should the stock get called away from you. It is possible (if for instance you don’t want to pay a large capital gains tax) to go into the marketplace and buy equivalent shares to meet your obligation. Also, if the stock goes south unexpectedly, you can always repurchase the option in the market, and sell the stock.

This year, such measures and a broadly balanced portfolio have resulted in gains for Ms. Bennett’s clients (through November) of 17%. Over the past five years her accounts have reportedly grown at nearly 12% per year. Since when did defensive investing become so profitable?

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