I love roller coasters—the thrill of the drops as well as the excitement of the peaks. And I don’t mind a little volatility in the stock market, as it brings some fabulous opportunities to “buy low” on some great companies whose stocks have been taken down for no reason other than being dragged down by the broader market. But I wouldn’t mind at least a brief respite from the market ups and downs of the last few months. Low-beta stocks can provide such a respite. More on those in a bit.
Back to the market. As you can see—and have lived—in 2018, the Dow Jones Industrial Average has been incredibly volatile, with a net loss so far this year of 5.6%, or 1,392.56 points.
I’m a big believer in protecting your portfolio—especially during volatile periods—and have often written about several of my favorite ways to do so, including using stop losses, setting price targets, diversifying your portfolio, and stocking up on dividend-paying stocks.
With so much political and global uncertainty, it doesn’t look like this volatility is going to cease anytime soon. And since the stock market is the best place to build a retirement portfolio over time, it’s important to keep safety—as well as growth—in mind.
Unless you majored in finance or are a stock broker yourself, you may not feel confident enough to invest on your own. This free report aims to give you the confidence to dive right into the stock market. Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory!
Unless you majored in finance or are a stock broker yourself, you may not feel confident enough to invest on your own.
This free report aims to give you the confidence to dive right into the stock market.
Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory!
With that thought, I’m focused on finding pockets of the market that hold good opportunities for each of these investment goals. And one strategy that may be worth a look is adding some low-beta stocks to your portfolio.
The definition of beta is simple—it compares the volatility, or systemic risk, of a stock to the volatility of the market. In other words, it measures a stock’s response to market swings.
If a stock has a beta of 1, that means the price of that stock generally moves with the market. Less than 1 means the stock is less volatile than the market. And more than 1 means it’s more volatile than the market.
Here are a couple examples:
- A beta of 1.3: the stock is deemed to be 30% more volatile than the market. If the market goes up 10%, the stock should, theoretically, rise by 30%. And if the market declines 10%, the stock should decline by 30%.
- A beta of 0.5: the stock is expected to be half as volatile as the market. If the market rises by 10%, this stock should go up by 5%. And a market decline of 10% should result in a decline of just 5% for the stock.
And there are potentially some stocks with a negative beta—a beta less than 0. They demonstrate an inverse relationship with the market. So, if the market falls, a negative beta stock is expected to rise. One thing about negative betas—they are rare and usually short term in nature, and will often reflect industry conditions more than market volatility.
The average beta for large-cap stocks is less than 4. Cash has a beta of 0, and low-beta investments include utility stocks and Treasury Bills.
You can find a security’s beta on many of the available financial websites, including Yahoo! Finance. Just type in the symbol of your stock and it comes up on the first screen. Keep in mind that the beta quoted is a “historical” average and doesn’t mean the stock’s volatility measure will remain the same in the future. In fact, empirical studies have shown that higher betas tend to decline back toward 1 and lower betas tend to rise toward 1, over time.
And it’s important to know that beta is a measure of systematic or market risk, and doesn’t tell us anything about the specific risk of the company itself. That’s why it’s essential to use the measure as just one parameter in your overall stock analysis.
With that in mind, I ran a list of low-beta stocks, then put them through my analytic process to see which ones also exhibited the other important characteristics of a good long-term stock: growing earnings, good cash flow, reasonable debt, and investor and analyst interest.
Five Low-Beta Stocks
Here are the five best low-beta stocks I came up with:
These stocks are in industries whose betas range from 1.13, Technology; 0.89, Medical Devices; 0.42, REITs; and utilities, 0.13. Just one more consideration, when deciding if any of these ideas are suitable for your portfolio.
Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.Learn More