CAN YOU HAVE YOUR CAKE AND EAT IT TOO?

As originally appeared in The Jerusalem Post on November 29th, 2019.

You know you’re getting old when you get that one candle on the cake. It’s like, ‘See if you can blow this out.’ Jerry Seinfeld 

When sitting with prospective clients I ask them about the level of risk there are comfortable taking in their portfolio. The most common answer I receive is that they want high returns and no risk. In fact, when I speak to my 3 oldest children about investing spare money they always say, “I won’t lose anything, right? I only want to make money.” One of the most important rules in investing is that a stock’s return will be directly related to its risk. Meaning that if you want high returns you need to take a fair amount of risk, and with that risk, when things go against you, you can lose a significant part of your savings. Either you can go for high returns or low risk, but there is no way you can have both. 

Or is there? Maybe you really can have your cake and eat it too. I have a bit of a sweet tooth so when I hear anything related to cake and investing I naturally become excited! Maybe just maybe clients may be on to something. There was an article in the “Financial Analysts Journal” that showed something that flew in the face of conventional financial planning: Over the 41 years ended in 2008, low-risk stocks outperformed high-risk ones. Keep in mind that if you took a few years, especially years like 2001 or 2008 when the stock market crashed, you could easily make the case that less volatile stocks would outperform but in good years that shouldn’t happen. That’s what is so surprising about the research. You may ask what has happened since the market crashed in ’08? Well, low volatility stocks have held their own against the broader market. That in fact over both good and bad markets, that best way to accumulate wealth over the long-term was by investing in stocks with low volatility.

Slow and steady

As I have quoted previously, 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 the 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.”

Scared?

With the economy slowing, geo-political dustups all over the world and the US-China trade war, jittery investors are looking for some protection with the potential to get solid gains. And they are running to low-volatility funds. According to a Wall Street Journal report “the 57 ETFs and mutual funds following the low-volatility strategy have witnessed an inflow of around $31.53 billion over the past year.” This is a huge amount of money.  For most clients, if they can grow their portfolios over time, but don’t have to worry over that monthly statement which shows a huge short-term drop, then all is good.  

Drawbacks

As is usually the case there are many voices 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.

As I have written here numerous times, whatever strategy you choose to invest in, stick to it. Investors that jump from strategy to strategy, or try and cherry-pick certain stocks from one strategy and stocks from another tend to end up losing money, even in bull markets.

Andrew Schlossberg, head of U.S. retail distribution and global ETFs at Invesco Ltd.,  answers the pundits: “The important thing on low-volatility investing is to look at it over a full market cycle. The research has shown that low-volatility investing can reduce risk in your portfolio and allow you to get an adequate return, which is what everyone is trying to do.”

Investors should speak with their financial professional to see whether low volatility investments have a place in their portfolio.   

 

 

The information contained in this article reflects the opinion of the author and not 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. 

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com  or email aaron@lighthousecapital.co.il.