In an Increasingly Volatile Stock Market, it Makes Sense to Take on Less Risk in Your Investing. Low-Beta Stocks are a Good Place to Start.
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 as of late. Low-beta stocks can provide such a respite. More on those in a bit.
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 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.
The current stock market is creating huge opportunities to invest - even during a pandemic. And unless you majored in finance or are a stock broker yourself, you may not feel confident enough to start investing on your own. This free report aims to give you the confidence - and the right know-how - to dive right into the stock market. We'll show you how. Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory! Don't be left out!
The current stock market is creating huge opportunities to invest - even during a pandemic. And unless you majored in finance or are a stock broker yourself, you may not feel confident enough to start investing on your own.
This free report aims to give you the confidence - and the right know-how - to dive right into the stock market. We'll show you how.
Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory!
Don't be left out!
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.
Low-Beta Stocks 101
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 stocks and 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.
What else would you like to know about finding low-beta stocks in a high risk market? Leave a comment below.
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