In search of steady returns without large fluctuations
Introduction
Some investors assume that more risk means more return. However, investors seeking steady and stable long-term returns should avoid stocks that experience significant changes in value. When stocks are unstable, they can be detrimental to long-term returns, not to mention the emotional toll that large price fluctuations can have on the investor. Learn more about volatility and how to find stocks with low instability.
What is volatility?
All stocks have a level of volatility. High volatility indicates significant fluctuations in value, while low volatility suggests smaller fluctuations over time.
Examples of volatility
To help explain volatility and why it matters, let’s examine two stocks which are hypothetical and their annual returns over three years.
Defining volatility
It’s not always easy to determine how volatile a stock is. You can look at the stock price and see how it moves up and down, but this is of limited use when viewed out of context. To include more context in your examination of volatility, consider the volatility of other stocks in the same industry and the overall market movement.
Examples of low stability investments
If you’re looking for stocks with the lowest volatility, you can choose them by sector or review the volatility of individual stocks or invest in low-volatility mutual funds.
Sectors with low stability
Some sectors and industries are inherently less volatile than others. For example, technology stocks tend to be more volatile than utility stocks. Many financial advisors point to the consumer staples sector as one with low stability and strong returns. This sector includes companies that produce essential products we use daily, such as household items and food and beverages. Because these products are considered essential, sales tend to remain relatively stable, as do company profits and stock prices.
Popular low stability stocks
Over the years, a number of stocks have delivered positive and stable returns with little change in value. Many of these are well-known companies that have dominated their respective industries through decades of strong performance. These companies include:
- Procter & Gamble [NYSE: PG]: One of the giants in the consumer staples sector with a much lower volatility rate than average.
- Coca-Cola [NYSE: KO]: Coca-Cola is another low-volatility company that has been around for a long time and rarely disappoints. There’s a good reason Warren Buffett owns hundreds of millions of shares in this beverage giant.
- Lockheed Martin [NYSE: LMT]: The largest defense contractor in the world is considered a stable performer, and its stock price is not subject to extreme fluctuations.
- Kellogg Company [NYSE: K]: Kellogg is a leading producer of consumer staples known for products like Pop-Tarts and Rice Krispies. Its volatility is also much lower than average.
Low stability mutual funds
If you’re not interested in doing much work to find low stability investments, you can get good exposure to them through mutual funds and exchange-traded funds (ETFs) that exclusively invest in this type of stock.
Low volatility mutual funds invest in stocks that are less volatile than the market as a whole, and some funds specialize in dividend-paying stocks. Some of the most popular low volatility mutual funds as of April 2022 include:
- iShares MSCI Minimum Volatility ETF (USMV)
- Invesco S&P 500 Low Volatility ETF (SPLV)
- Legg
- Mason Low Volatility High Dividend ETF (LVHD)
- Fidelity Low Volatility Factor ETF (FDLO)
It is debatable whether these ETF funds consistently outperform the market as a whole. However, they can be a valuable part of a broader investment portfolio, especially during times of significant stock market volatility.
Conclusion
When looking to invest in stocks, investors should consider volatility and seek out stocks with lower stability. These stocks provide steady and stable returns over the long term and reduce the emotional fluctuations that can affect investors. By understanding the concept of volatility and how to measure it, investors can find stocks with lower stability and take advantage of them in their investment portfolios.
Source: https://www.thebalancemoney.com/how-to-find-low-volatility-stocks-4163622
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