With the stock market surging wildly up and down, many investors have been scared away from equities. But for most investors, a complete retreat from stocks is not the best move. What might make more sense is to rebalance your portfolio toward low-volatility stocks.
As The Wall Street Journal recently reported, the Standard & Poor’s Low Volatility Index, a portfolio of the 100 least-volatile stocks in the S&P 500 stock index, lost just 1.1 percent, compared with a 9.8 percent drop for the S&P 500 overall over the last couple of months. But more significant is that over the past 10 years, the Low-Volatility Index has returned 80 percent, compared with the S&P 500′s 42.9 percent, assuming reinvested dividends.
How do you find low-volatility stocks?
Thanks to exchange-traded funds, it’s easier than ever to get your money into a simple low-volatility strategy. For instance, as MSNBC notes, the PowerShares S&P 500 Low Volatility ETF chooses the 100 S&P stocks with the lowest share price volatility over the past 12 months. Similar ETFs use slightly different selection criteria and track different indices but aim for largely the same results.
To find the right low-volatility investments for you, the Journal suggests:
1. Look for stocks with the lowest “beta” or “standard deviation.”
2. Consider fees and turnover when evaluating ETFs.
3. Remember to rebalance at least twice a year.
4. Avoid popular, high-risk stocks when possible.
That last point warrants a bit more discussion. One thing that often happens in the market is that glitzy, flavor-of-the-month stocks attract lots of investors. Often, such companies get overvalued, leading to impulsive decisions. Avoid such distractions. If you’re looking for stability, look where the bulk of the market isn’t.
As we’ve written before, part of a diversified portfolio is a variety of stocks—probably including utilities and staples, which tend to stay strong in a down economy—as well as bonds and other holdings. And don’t forget stocks that pay high dividends, including the aforementioned utilities.
Always remember that you’re in the market for the long haul. Don’t fall for the get-rich-quick pitch that so many investors adopt. When it comes to your financial security, a bit of boring can be beautiful.
Tags: beta, exchange traded funds, INVESTING, low volatility, S&P, STOCK MARKET, stocks