Low volatility strategies to help investors fend off uncertainty

Friday, Sep 28 2018 by
Low volatility strategies to help investors fend off uncertainty

Readers of the Stock Market Almanac may know that October is historically one of the most volatile months of the year for shares. The reason - if you believe in seasonal trends - is that many buyers return to the market in October (after selling up in May). And while that can send prices rising, the downside is that patches of weakness can be severe.

Opinions differ on these kinds of calendar effects. But what is certain is that UK markets have flattened out in 2018 after delivering two years of very solid gains.

For those who worry about rapidly rising valuations, this hiatus could be a welcome breather. But you could also interpret the drift in prices as as sign of creeping uncertainty about what lies in wait for equities. With Brexit looming large and President Trump’s trade war with China ratcheting up, you could argue that a lot could go wrong in the months ahead. UK markets could be in for some stormy weather.

Dealing with uncertainty

Predicting the outcome of these events is impossible of course. But one way of taking comfort and positioning a portfolio to deal with potential volatility is to look at how individual stocks tend to be buffeted by the market. Those that are less volatile could be a preferred option for investors who are worried about the impact of market uncertainty.

Over the past few years, growth and momentum have outpaced strategies like value and dividend investing. That’s because investors flock to fast moving stocks in up-markets. But it’s also true that speculative growth shares can suffer the most when market sentiment changes.

This means that in downturns, shares that are less sensitive to the market mood could be a safer, more predictable option. While low volatility shares don’t tend to outperform in bull markets, evidence shows they do much better in periods of uncertainty. In fact, over the long term, low volatility - which essentially means taking less risk - has been shown to be the superior approach.

This ‘low-vol anomaly’ was a finding of the late Professor Robert Haugen, who wrote in detail about low-volatility outperformance existed. He concluded that it was caused by investor behaviour and that there was a misconception that high risk equals high reward.

Haugen believed that investors were overconfident in their own stock selection abilities and naturally attracted…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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7 Comments on this Article show/hide all

Ritchie 25th Sep '18 1 of 7

negative as there are only UK Low Volatility stocks available

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PhilH 25th Sep '18 2 of 7

In reply to post #401874

Just fork the screen and change the index criteria to suitable alternatives for your market of choice

Professional Services: Sunflower Counselling
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Metatron 26th Sep '18 3 of 7

Would have thought `High Flyers` will risky.Would prefer for a portfolio to stick to `Superstocks` and if not enough UK candidates look abroad

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Frankyboy 26th Sep '18 4 of 7

Yes it's not just 'Canada Plus Pus' it's also 'Uncertainty Plus Plus'! :)

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JohnEustace 27th Sep '18 5 of 7

Unfortunately the UK just goes in the "too difficult" pile at the moment for many investors.

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HHShah 3rd Oct '18 6 of 7

Isn't it amazing that in the 3 days after the article was written RMG drops by 25%.This was a share considered a Superstock with a stock rank of 99!
Is it a case of "Do your own research" or "Investor Beware"?

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PhilH 3rd Oct '18 7 of 7

In reply to post #404259

Time and again Ed has been at pains to point out that ...

1) A individual stock with a high stock rank is not guaranteed to perform

2) That research evidences suggests that selecting a basket of stocks with a high stock rank outperforms

3) Despite point 2, there will be periods of under performance

Best of luck

Professional Services: Sunflower Counselling
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