Low-volatility strategies for a less stressful ride
After an unusually steady 2017, the U.S. stock market took a more volatile turn in the first half of 2018.1 A number of factors contributed to this year’s volatility, but trade tensions between the United States and its largest trading partners were a frequent trigger. A series of announced tariffs raised the possibility of a broader trade war and repeatedly spurred market jitters.2
Volatility refers to stock market ups and downs, but few investors worry about the ups. It’s the downs that may cause investors to lose sleep at night.
If you don’t need the money in your portfolio for a long time, you may be better off tuning out day-to-day movements in the market and sticking with your investment approach. However, if you are nearing retirement or just have a more conservative risk tolerance, holding stocks and stock funds that tend to be less volatile may help you manage risk while maintaining a robust equity portfolio.
Stocks and Funds
All stocks are volatile to some degree, but investors who are pursuing higher returns have to accept higher risk and price swings. Even so, some stocks have historically been less volatile than others.
For example, stocks of larger, well-established companies tend to be less volatile than the stocks of smaller companies, and certain market sectors tend to fluctuate more than others. A portfolio invested too heavily in a particular company, industry, or market sector could also carry higher risk and volatility.
Some mutual funds and exchange-traded funds (ETFs) — typically labeled “minimum volatility” or “low volatility” — focus on managing volatility and may help stabilize the equity portion of your portfolio. These funds vary widely in their objectives and strategies, and there is no guarantee that they will maintain a more conservative level of risk, especially during extreme market conditions.
Keep an Eye on Beta
One commonly used measure of a stock or stock fund’s volatility is its beta, which is typically published with other information about an investment. The stock market as a whole (represented by the S&P 500 index) is generally considered to have a beta of 1.0. A beta higher than 1.0 means the investment has been more volatile than the broader market, whereas a beta below 1.0 indicates it has been less volatile.
For example, a beta of 0.8 means that the investment has been about 80% as volatile as the market. In theory, such an investment might experience only 80% of market gains during an upswing and only 80% of losses during a downswing — and thus would have less ground to regain when the market turns upward again.
Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The principal value of all stocks, mutual funds, and ETFs will fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) Yahoo! Finance, 2018
2) The Wall Street Journal, July 5, 2018
This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.
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