Low Volatility Investing

In the world of investing you often hear the word “volatility”.  In finance the definition of “volatility” is:

“a measure for variation of price of a financial instrument over time”

So when we talk about volatility we are really discussing how much the price of the investment (e.g. stocks or mutual funds) varies over a time frame.

What is most surprising is how volatility and market conditions relate to each other.  The findings are surprising to most people.
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It would seem logical that in the strongest markets volatile stocks would perform best.  This is in fact true.  It would also seem logical that in the weakest markets that the most volatile stocks would perform the worst.  This too is in fact true.  So what happens the rest of the time…..in the so called “normal” markets?  In a recent study almost 70% of the people felt that volatile stocks would perform better than non-volatile stocks in “normal” markets.  This, however, is not true.  The fact is that in “normal” markets less volatile stocks perform better then highly volatile stocks.  Knowing this, the important question is…….how often do these different markets exist?  If the “strongest” markets happen the most then clearly high volatility would be the way to go.  Statistically however this is not the case.  The strongest markets (defined as equal to or greater then a 4% gain in a 30 day period) occur 24% of the time.  The weakest markets (defined as equal to or greater then a 4% loss in a 30 day period) occur 12% thus meaning the markets are “normal” 64% of the time.  If low volatile stocks “win” 76% of the time then low volatility would seem the way to go.

What you do give up by investing in low volatility investments is some of the upside.   By giving up some of the upside you can protect the downside much easier.   The low volatility funds we use at GBK seek to achieve 75-80% of the upside while only allowing for 30-40% of the downside.  An excellent trade off for an investor who does not want to see large swings in the value of the portfolio.

Slow and steady really does win the race!