Volatility in relation to the overall market is easy to gauge by looking at a stock’s beta - which you can find on investing sites such as Google Finance. Investors should commit to their low-volatility holdings at least through a complete bull- and bear-market cycle. The drawback to a low-volatility strategy is that it will lag in bull markets. Imagining lottery-like winnings, investors tend to overpay for such stocks, he says. Higher-risk, volatile stocks “are generally considered sexy,” says Harin de Silva, a portfolio manager with Analytic Investors, in Los Angeles. Investor psychology shows the benefits of a low-volatility strategy, too. Because of the way the math works, large losses cost investors more than big gains can make up. But the maximum decline for low-volatility stocks was 32%. Looking at monthly figures, the maximum peak-to-trough loss for the S&P 500 was 51%. Going back to 1968, says Bradley, a basket of the least-volatile stocks delivered annualized returns of 11.4% through 2011, compared with 9.5% for Standard & Poor’s 500-stock index. A paper coauthored by Brendan Bradley, director of managed volatility strategies at Boston’s Acadian Asset Management, and business professors at Harvard and New York universities, calls the winning record of low-volatility stocks “the greatest anomaly in finance.” That surprising conclusion, gleaned from recent research in academia and finance, turns an investing truism on its head: Taking on greater risk does not yield greater returns.
Wouldn’t it be nice to tuck some sleep-tight stocks into your portfolio? Stocks that deliver consistent returns over the long haul without all the drama? It turns out that a strategy of investing in low-volatility stocks will not only let you sleep better at night, it’ll beat the market over time.
“There is certainly concern over volatility.” (See Kiplinger's Stock Market Update.) “We’ve received calls from clients questioning the recent upswing’s sustainability,” says Cory Haith, an investment adviser at Syverson Strege & Co., in Des Moines. Other investors have become doubters precisely because the market is up so far so fast.