It's basically about
how low volatility stock give you some piece of mind since you don't have to deal with wild price swings.
In the Part 1 of this series we discussed the evidence that has come to light over the past 40 years that shows us that
low volatility stocks out - perform high volatility stocks.
By adjusting the stock allocation to include 30 % holdings
in low volatility stocks, investors can improve the potential return and risk of their asset allocations.
In this post, the focus is
on low volatility stocks but now adding profit target stops to see how they can improve the results.
In the absence of access to leverage, investors may overpay for high volatility stocks in an attempt to increase risk in their portfolios, potentially
leading lower volatility stocks to become more attractively valued and outperform in the future.
The top quintile of
low volatility stocks delivered average monthly excess returns of.52, whereas the top quintile of high volatility stocks delivered excess returns of.17, a 300 % difference.
Frazzini and Pedersen (2014) showed that leverage - constrained investors have a predilection for riskier assets even though
leveraging low volatility stocks would produce better results.
An analysis of volatility portfolio performance of common stock on the major US exchanges from 1968 to 2015
shows low volatility stocks deliver significantly higher excess returns.
A compelling argument is that institutional portfolio managers are discouraged from
overweighting low volatility stocks by an implicit mandate or explicit contractual requirement to maximize the information ratio relative to a cap - weighted benchmark.
On the other hand, just as I reccomended throughout 2014, I believe it makes sense to remain committed to longer - term bonds in funds like iShares 10 - 20 Year Treasury (TLH) as well
as lower volatility stocks across the sector spectrum.
Proctor & Gamble (PG), known to be a very
stable low volatility stock, fell hard during the 2010 flash crash as stock loss orders were triggered and became market orders.
Long - Term Outlook There will most likely be periods when investors» demand
for low volatility stocks will drive prices up and reduce the return premium to a level that makes the strategy unattractive.
Research in finance has aggregated together cross-listed and non-cross-listed stocks and finds that, on average, value stocks outperform growth stocks, small cap stocks outperform large cap stocks, low liquidity stocks outperform large liquidity stocks and
low volatility stocks outperform high volatility stocks.
Therefore, in periods when the S&P 500 performs poorly, we could typically expect both the S&P 500 Low Volatility Index and the S&P 500 Dividend Aristocrats to outperform, as both indices are made up
of low volatility stocks.
Low volatility stocks tend to trade at a discount to the broad market and, of course, to high volatility stocks; the magnitude of the discount is highly variable, 2 but the low volatility effect has nonetheless been durable (see Table 1).
However, a fund that invests
in low volatility stocks may not produce investment exposure that has lower variability to changes in such stocks» price levels.
By putting 20 % each in the three just mentioned asset classes, then 20 % in high dividend stocks and 20 % in
low volatility stocks, I got to a portfolio with 5.2 % income at 4.8 % vol.
In general,
lower volatility stocks have low bid - ask spreads.
Using monthly returns for
the low volatility stock ETFs and their benchmark ETFs as available through September 2017, we find that: Keep Reading
Low volatility stocks» excess returns may be rationally explained by leverage constraints.
Over 5 or 10 year periods,
low volatility stocks will likely outperform their higher volatility counterparts.
For everyday investors, some of the more popular types of stock portfolio strategies focus on either
low volatility stocks, dividends, cash flow and value.
See
the Low Volatility Stocks and Profit Targets post for the tables.
In general,
lower volatility stocks have low bid - ask spreads.
So it's a good idea if you can develop a portfolio that contains a mix of high volatility and
low volatility stocks.
In my last post, Should one trade high or
low volatility stocks?
-LSB-...] on from our previous posts and research, Should one trade high or
low volatility stocks?