Low-volatility investing for Long-term Success

Low-volatility investing is a strategy that focuses on reducing the risk of significant losses by investing in assets that have historically been less volatile.

By doing so, investors can aim for more stable returns over the long-term, rather than trying to time the market or chase high returns.

Historically, low-volatility stocks have outperformed the market in the long term, with research showing that they have a 93% success rate in beating the S&P 500 over a 10-year period.

Low-volatility stocks tend to have lower price-to-book ratios, which means they are often cheaper than their higher-volatility counterparts.

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Low-volatility investing is a strategy that focuses on stocks with relatively stable prices and less price fluctuation than the overall market. This approach aims to minimize portfolio volatility while still achieving returns.

To implement a low-volatility strategy, you can invest in low-volatility ETFs or mutual funds, which can provide exposure to a variety of low-volatility stocks. These funds are diversified and can help reduce risk.

One way to identify low-volatility stocks is to look for companies with stable earnings and consistent dividends, as these tend to have a track record of steady financial performance and lower likelihood of experiencing large price fluctuations.

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Low volatility investing is a strategy that can help reduce risk by focusing on stocks with less price fluctuation. This means they are less likely to experience large declines in value.

History shows that we make more behavioral mistakes when investing in volatile assets. This is why low volatility stocks can be a good choice for investors who want to avoid large losses.

Investing in low volatility stocks requires a focus on fundamentals, such as earnings and dividends. This can help you identify strong companies in good financial health.

Low volatility stocks tend to have more predictable business models, making it easier to understand their potential for growth.

Here are some benefits of low volatility investing:

We take a disciplined and research-driven approach to investment, focusing on strategies that have been proven to be effective over time. We examine the research around various investment approaches, including low volatility factor investing, to determine the best course of action for our clients.

Our approach is centered around minimizing risk while still achieving returns, which is why we focus on low volatility stocks. These stocks have a track record of steady financial performance and are less likely to experience large price fluctuations.

We believe that low volatility investing can be a good fit for conservative investors with a low risk tolerance. However, it's not suitable for everyone, particularly aggressive investors who are comfortable with higher risk.

To implement a low volatility strategy, we can invest in low volatility ETFs or mutual funds, identify low volatility stocks, or diversify our portfolio by investing in a variety of low volatility stocks across different sectors.

Some key metrics we consider when evaluating a minimum volatility portfolio include stock volatility and correlations. We look at how volatile an individual stock has been based on standard deviation and understand how stocks move relative to each other based on several factors.

Here are some key benefits of low volatility investing:

Ultimately, our goal is to help our clients achieve their financial goals while minimizing risk. By taking a disciplined and research-driven approach to investment, we can help our clients navigate even the most turbulent markets.

Low-volatility investing has been shown to outperform high-volatility stocks in the long run, with research spanning over 90 years.

The data suggests that low-volatility stocks tend to lag during bull markets but reduce losses in bear markets. A full business cycle is needed to assess performance.

Some critics argue that low-volatility investing's popularity could lead to its advantage being arbitraged away, but David Blitz's research shows that hedge funds are actually at the other side of the low-volatility trade.

The relationship between market value and volatility is also worth noting. Research has shown that low-volatility stocks tend to have higher market values, with the lowest volatility decile having a market value return of 16.73% since 1963.

Here's a summary of the returns for the 10% most volatile stocks compared to the S&P 500:

This highlights the poor returns from the most volatile stocks, especially during bear markets.

Low-volatility investing has been gaining acceptance due to its consistent real-life performance over more than 15 years, encompassing both bull and bear markets.

Professor Kenneth French's research from 1964 to 2015 found that the 10% most volatile stocks had poor returns, with a 17.1% return when the S&P 500 went up and a -35.35% return when it went down.

The statistics show that the most volatile stocks hold up when the market goes up, but when the market falls, they perform poorly. They actually lost more value than the overall market during the three worst years for the S&P 500: 1974 (-44.4%), 2002 (-52.3%), and 2008 (-60.3%).

Long-term data indicates it’s best to avoid the 10% most volatile stocks, as rolling 10-year returns show that high volatility has consistently produced lower returns than low volatility.

Research by "Plotous" on SeekingAlpha found a relationship between market value and volatility for US stocks from 1963 to 2018, showing that stocks with lower market value tend to have higher volatility.

Here's a summary of the relationship between market value and volatility:

This shows that stocks with lower market value tend to have higher volatility, which is consistent with the idea that low-volatility stocks tend to outperform high-volatility stocks in the long run.

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Low-volatility investing can lose effectiveness over time if its popularity causes its advantage to be arbitraged away. This is what happened in the late 2010s when low-volatility stocks became highly valued.

Hedge funds are often on the other side of the low-volatility trade, despite their ability to use leverage, as shown by David Blitz's research.

Low-volatility stocks tend to have more interest rate risk compared to other stocks, which can be a concern for investors.

Value investing is another style that's often related to low-volatility investing, as seen after the dotcom bubble when value stocks offered protection similar to low-volatility stocks.

US low-volatility stocks had a challenging year in 2020, significantly lagging behind the broader market by wide margins.

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Valuation can be a tricky thing to pin down, especially when it comes to companies like Tesla. In January 2020, Tesla breached the $100 billion market capitalization, becoming the most valuable car manufacturer globally.

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This massive valuation was a result of the company's rapid growth and innovation in the electric vehicle space. Tesla's valuation was a whopping $100 billion, making it a significant player in the industry.

But does valuation really matter for future returns? The answer is not a simple yes or no. Tesla's valuation has fluctuated over time, with some periods of extreme growth and others of significant decline.

The company's valuation has been impacted by various factors, including its market capitalization. In January 2020, Tesla's market capitalization was a staggering $100 billion, making it the most valuable car manufacturer globally.

This massive valuation was a result of the company's rapid growth and innovation in the electric vehicle space.

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Low-volatility stocks have only justified investing when they were in the value regime, after periods of strong market performance, and when they excluded high-volatility stocks with low short interest.

To improve the performance of low-volatility strategies, it's essential to focus on companies with stable earnings and consistent dividends. These companies tend to have a track record of steady financial performance and a lower likelihood of experiencing large price fluctuations.

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One key principle of the low-volatility strategy is to minimize portfolio volatility while still achieving returns. This is achieved by investing in stocks with lower volatility or price fluctuation than the overall market.

By excluding high-volatility stocks with low short interest, investors can potentially improve the performance of their low-volatility portfolios.

To backtest a low-volatility strategy, you can use a stock screener to select stocks that meet specific criteria, such as low volatility. You can also gather historical data and use a backtesting platform to simulate trades using the historical market data.

Here are some key steps for optimizing a low-volatility portfolio: