Your Investments: Have your cake and eat it too

When sitting with prospective clients, I ask them about the level of risk that they would be comfortable with. Inevitably the answer that is given is that they want high returns and little risk.

By AARON KATSMAN
July 18, 2019 22:49
3 minute read.
Investment [Illustrative]

Investment [Illustrative]. (photo credit: PIXABAY)

Stock market goes up or down, and you can’t adjust your portfolio based on the whims of the market, so you have to have a strategy in a position and stay true to that strategy and not pay attention to noise that could surround any particular investment – John Paulson

When sitting with prospective clients, I ask them about the level of risk that they would be comfortable with. Inevitably the answer that is given is that they want high returns and little risk. Conventional wisdom among financial professionals is that you can either invest with a goal of high returns or the little risk, but there is no way you can have both. As someone who knows a thing a two about cake, just maybe you can have your cake and eat it to when it comes to investing. It seems most financial advisers may be wrong and the clients may be on to something. There has a growing amount of research that shows that low-risk stocks outperform high-risk ones. It seems intuitive that in years where the stock markets gets clobbered like 2001, 2008 or this past December that less volatile stocks would outperform but in good years that shouldn’t happen. Over both good and bad markets, that best way to accumulate wealth over the long-term was by investing in stocks with low volatility.

Keep the pace

As a runner, I find it funny that during races there are always those runners who start out really fast and then after 13 km. or 14 km., yours truly, the cake expert, passes them! This example maybe what actually happens in the stock market. A few years ago, Andrew Blackman wrote in the WSJOnline, “Multiple academic studies since the 1970s have shown that low-volatility stocks outperform the highfliers over long periods, though normally one might expect higher risk to give higher returns. This surprising result has become known as the low-volatility anomaly. Researchers have traditionally explained the anomaly in behavioral terms: Investors are drawn to fast-moving stocks which have potential for spectacular gains, which then become overpriced and struggle to sustain their high valuations. The slow and steady stocks tend to be overlooked, making them bargains that are more likely to rise in value.”

What’s not love?

For clients gun-shy about taking on added risk with certain markets at record levels, this could be a great solution. For most clients, if they can grow their portfolios over time, but don’t have to fret over that monthly statement which shows a huge short-term drop, then all is good. Low-volatility investing has become more popular. For investors considering the strategy, there are plenty of index-linked low-volatility products available.

Not all roses
There are many market pundits out there that say that this strategy has become so popular that the low volatility stocks themselves have become quite expensive. While they can’t argue with the long-term success of the strategy, they caution investors to wait for a pullback before buying into these funds. Whatever strategy you choose to invest in, stick to it. Investors who jump from strategy to strategy, or cherry-pick certain stocks from different strategies tend to lose money, even in bull markets.
Blackman quotes Andrew Schlossberg, head of US retail distribution and global ETFs at Invesco Ltd., as an answer to pundits: “The important thing on low-volatility investing is to look at it over a full market cycle. Research has shown that low-volatility investing can reduce risk in your portfolio and allow you to get adequate return.” Investors should speak with their financial professional to see whether low volatility investments have a place in their portfolio.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.


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