Low Volatility Stocks: A Smart Investment for Risk-Averse Investors

Have you ever wondered if there’s a way to invest in the stock market without enduring its roller-coaster-like swings? Welcome to the world of low volatility stocks. While it’s true that the stock market is inherently risky, some stocks experience much less volatility than others. For investors who are risk-averse or are simply looking for a way to balance out more aggressive portions of their portfolio, these low volatility stocks present an enticing option.

But before you make any investment decisions, you need to understand what low volatility stocks are and how they operate. In essence, low volatility stocks are shares of companies that experience smaller price swings compared to the overall market. These stocks tend to come from industries that are less impacted by economic cycles, such as utilities, consumer staples, or healthcare. When the market is booming, low volatility stocks may not see as significant gains as high-growth sectors. However, when the market is declining, these stocks tend to hold their value better than most.

Why Should You Consider Low Volatility Stocks?

The key selling point of low volatility stocks lies in their ability to reduce portfolio risk. While the trade-off is typically lower returns during bullish market runs, the minimized risk of substantial losses during bear markets can make them an essential component in a well-rounded investment strategy.

Chartink and Low Volatility Stock Identification
If you’re unfamiliar with Chartink, it’s a widely-used platform that allows investors to screen for stocks based on various technical and fundamental criteria. For investors looking specifically for low volatility stocks, Chartink’s stock screener can be a valuable tool. By applying filters such as historical volatility measures and market capitalization, you can compile a list of stocks that fit the low volatility profile.

A simple example:
Let’s assume you’re interested in a stock like Procter & Gamble (P&G). P&G is often considered a low volatility stock because it operates in the consumer staples sector—a field where demand tends to remain stable even during economic downturns. By screening for similar companies on Chartink, you can identify other low volatility options to diversify your portfolio.

Real-World Performance of Low Volatility Stocks

You might be wondering how low volatility stocks have performed in the real world. Several studies have shown that low volatility stocks, over time, often outperform their more volatile counterparts on a risk-adjusted basis. This is because, while the stocks may not shoot up in value during boom periods, they also don’t lose as much during market crashes.

For instance, during the 2008 financial crisis, low volatility stocks saw significantly smaller declines compared to high-risk stocks. Investors who had these stocks in their portfolio were able to weather the storm better and bounce back more quickly once the market started recovering.

How to Build a Portfolio with Low Volatility Stocks

So how do you get started with building a portfolio that includes low volatility stocks? It’s all about balance. You don’t want to put all your money into low volatility stocks because while they protect against downside risk, they also limit upside potential. Instead, you can use them as a stabilizing force alongside more volatile, high-growth investments.

For instance, you might allocate 50% of your portfolio to higher-risk sectors like technology or emerging markets, and 50% to low volatility sectors like utilities or healthcare. This way, when the high-risk stocks experience volatility, your portfolio won’t be as affected because the low volatility stocks will act as a buffer.

Factors to Consider When Selecting Low Volatility Stocks

Not all low volatility stocks are created equal. Here are a few things to consider:

1. Sector Exposure: Low volatility stocks are often concentrated in certain sectors like utilities, healthcare, and consumer staples. Make sure you're comfortable with the industries you're investing in.

2. Valuation: Some low volatility stocks can be overvalued, especially in times of market stress when investors flock to safer assets. Always consider the stock’s price relative to its earnings, growth prospects, and dividend yield.

3. Dividend Payouts: Many low volatility stocks tend to offer regular dividends, which can provide a steady income stream for investors, especially during times of market turmoil.

4. Correlation with Other Assets: Check how the low volatility stock correlates with other assets in your portfolio. Ideally, you want stocks that provide diversification and aren’t highly correlated with each other.

Risks of Low Volatility Stocks

While low volatility stocks are typically safer, they’re not without risks. One major risk is concentration. Because low volatility stocks are often concentrated in specific sectors, your portfolio may not be as diversified as you think. If those sectors experience downturns, your entire portfolio could be at risk.

Another risk is missing out on high returns. In bull markets, low volatility stocks usually underperform compared to high-risk, high-reward investments. If you’re too heavily invested in low volatility stocks, you could miss out on significant gains during these periods.

The Role of Low Volatility ETFs

For those who want exposure to low volatility stocks but don’t want to pick individual stocks, low volatility ETFs (exchange-traded funds) can be an excellent solution. ETFs like the iShares MSCI USA Minimum Volatility ETF (USMV) or the Invesco S&P 500 Low Volatility ETF (SPLV) allow investors to gain exposure to a broad range of low volatility stocks without the hassle of researching and buying individual shares.

These ETFs track indexes specifically designed to focus on low volatility stocks, making them a convenient option for investors looking to reduce risk in their portfolios.

Conclusion: Should You Add Low Volatility Stocks to Your Portfolio?

Low volatility stocks are an attractive option for investors looking to reduce risk, smooth out returns, and protect their portfolio during market downturns. While they may not deliver the sky-high returns that more volatile stocks offer, they provide a level of stability that can be invaluable in times of market uncertainty.

Using tools like Chartink to screen for these stocks, understanding how they fit into your overall portfolio, and considering their real-world performance and risks can help you make an informed decision.

If you’re someone who values a more stable approach to investing, low volatility stocks are definitely worth considering. They offer a way to invest in the stock market without the stress and uncertainty that comes with more volatile assets. By including them in your investment strategy, you can build a portfolio that not only has the potential for steady growth but also provides protection during periods of market turbulence.