The Surprising Secret That Will Save Your Portfolio
Oct 4th 2011 9:33AM
Updated Oct 4th 2011 10:00AM
With the stock market having hit new lows for the year yesterday, investors fear a reprise of the 2008 market meltdown. European problems certainly aren't helping matters, and closer to home, a sluggish economy has market experts ranging from bond maven Bill Gross to the Economic Cycle Research Institute believing that a reversion to contracting GDP is nearly inevitable.
But recent research gives some hope to investors looking for a safe haven in times of uncertainty. Although stocks that don't rise and fall as dramatically as their peers may seem like the perfect place to hide from a bear market, it turns out that they also bring superior returns over the long haul. Below, we'll reveal the names of five of those stocks, but first, let's take a look at the researchers' broader findings.
Running from volatility
As The Wall Street Journal reported over the weekend, academicians looked at the performance of low-volatility stocks and compared them to the overall market. To no one's surprise, the researchers found that the 100 least volatile stocks in the S&P 500 suffered only a tiny fraction of the index's total loss -- just over 1% versus nearly 10%.
What was surprising, though, was that when you extend the period over the past 10 and even 20 years -- a period that includes one of the biggest bull markets in stock market history -- those same low-volatility stocks still produce outsized returns. When you include dividends, the total cumulative return of the low-volatility strategy nearly doubled the S&P 500's return over the past decade.
Sign me up!
With stocks in the doldrums and the future looking even darker, anything that preserves capital looks attractive to many investors. Thanks to exchange-traded funds, it's easier than ever to get your money into a simple low-volatility strategy. For instance, the PowerShares S&P 500 Low Volatility ETF (NYS: SPLV) chooses the 100 S&P stocks with the lowest share price volatility over the past 12 months. Similar ETFs use slightly different selection criteria and track different indexes but aim for largely the same results.
But the challenge in owning low-volatility investments doesn't come during the tough times. Rather, maintaining the discipline to hold onto them in good times taxes even the best investors. After all, less-volatile stocks don't just give you smaller losses during down markets; they also produce less dramatic gains during market booms than flashier, more high-profile stocks.
Boring but beautiful
But when you look at some of the stocks that make up this low-volatility index, their recent returns won't disappoint you. Here, for instance, are the top five stocks in the PowerShares ETF:
Return From October 2007 to October 2008
Return Since October 2008
|Southern Co. (NYS: SO)||5.4%||31.9%|
|Consolidated Edison (NYS: ED)||(3.3%)||53.5%|
|Duke Energy (NYS: DUK)||(5.2%)||35.0%|
|Progress Energy (NYS: PGN)||(0.8%)||36.6%|
|Procter & Gamble (NYS: PG)||3.1%||(3.0%)|
Sources: PowerShares and Yahoo! Finance.
From 2007 to 2008, most of these stocks held up quite well despite a big drop in the overall market. But in the past three years, even as stocks have gone on a roller-coaster ride, the returns from each stock except for P&G look quite attractive by comparison. Moreover, other non-utility stocks in the low-volatility index also show promising returns. For instance, Altria (NYS: MO) lost just over 1% from late 2007 to 2008, but it has posted better than 60% returns since, including dividends.
Don't go for the gold
Shooting for the moon with stock picks is a time-honored tradition, and with many investors always looking out for the next huge life-changing investment, the strategy won't die out anytime soon. But over the long haul, you'll do better accepting the solid returns that low-volatility stocks offer. They may not give you an exciting ride, but during tough times like these, excitement is the last thing you want to deal with in your portfolio.
The Motley Fool has found five stocks it found worthy of buying for its own portfolio, and we think they're good bets for you, too. Take a free look in this special report and get your investments off on the right foot.
At the time this article was published Fool contributor Dan Caplinger can keep a secret. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Altria Group. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't take you for a roller-coaster ride.
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