Why You Don't Have To Live With Market Volatility

Nathan Slaughter's picture

Wednesday, May 24, 2017 - 12:00am

by Nathan Slaughter

I knew it couldn't last forever. From April 24 through May 8, the S&P 500 went 10 straight trading sessions going no lower than 2,379 and no higher than 2,401. That’s an ultra-narrow band of just 22 points. 

So in two full weeks, the index didn’t fluctuate up or down by so much as 1%. According to Factset Research, this has only happened 10 times in the past four decades. 

But there are no guarantees in the investment world, and I knew volatility would return. Without a doubt, I knew we'd eventually see one of those crazy days where the Dow Jones Industrial Average swings up or down by a few hundred points. 

That day was this past Wednesday, May 17. Both the Dow and S&P 500 lost 1.8%, their worst losses since September 2016. The news had every investor checking the financial sites to see how high (or low) our portfolio holdings were trading. 

But we don't have to resign ourselves to living with this type of volatility.

Stay Out Of "Sensitive" Stocks
You’ve probably noticed that on "up" days when most stocks are in the green, some holdings always seem to ride a little bit higher than others. If most stocks in the group are up 1% to 2%, these outliers might gain 3%. The opposite is true on down days. When most stocks are in the red by 1% to 2%, these typically get hit harder and might drop 3%. 

I'm not talking about an isolated good (or bad) day triggered by company-specific news, but simply the stock's general sensitivity to market fluctuations over a period of months or years. 

There is a way to track this sensitivity. It's called beta, and it measures the degree to which a security rises and falls in relation to the broader market. 

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A stock with a beta of 1.0 tends to move in lockstep with the S&P 500. A higher beta of 2.0 indicates the stock will rise or fall twice as much as the crowd on a given session (wonderful on green days, not so much on red ones). Conversely, a lower beta of 0.5 suggests the stock tends to swing just half as much as the market. 

It's possible for a stock to have a negative beta. That means there is a negative correlation, so these stocks often rise when the market is falling and fall when the market is rising. 

Utilities are frequently used to illustrate the concept of low-beta stocks. They are slow and steady performers that march to the beat of their own drum and don't get bent out of shape when the market is in panic mode. That's because they are mostly immune to economic weakness. Consider my local power provider, American Electric Power (NYSE: AEP). 

The stock is currently trading at $68 per share and has a beta of 0.14. So if the market were to plunge 3% tomorrow, this stock could reasonably be expected to fall just 0.4%, or about $0.24. 

At the other end of the spectrum is an economically sensitive company like semiconductor maker AMD (NYSE: AMD), which has a stomach-churning beta of 3.0. On the same day that AEP loses 0.4%, AMD might freefall 9%.

Low-Beta Stocks You Can Count On
If you're a bit leery of the market's current nosebleed altitude and want to tone down your exposure to potential stomach-churning volatility -- yet still harvest decent income -- then I have a few ideas for you. 

Take a look at Physician's Realty Trust (NYSE: DOC), which owns and leases doctor's offices, surgical clinics and hospitals. Since its creation in 2013, the veteran management team has sunk $2.8 billion into 246 properties in 29 states -- which are 96% leased. 

The company has a sound, investment-grade balance sheet and ready access to capital to continue expanding its portfolio. The stock offers an attractive dividend yield of 4.7% and has delivered total returns that outpace the average healthcare REIT by 90% since it went public in 2013. 

And with a beta of 0.52, it’s just half as volatile as the broader market.

If the idea of owning an entire fund of low-beta, blue-chip stocks appeals to you, then take a look at the PowerShares S&P 500 Low Volatility ETF (NYSE: SPLV), which invests in 100 stocks with the least volatility over the past year. 

In the 10 worst market pullbacks since 2011, the fund experienced only 43% of the market's downside loss -- and actually rose in one of the declines.

These two picks are only a small sample of the diverse stocks that I recommend to my High-Yield Investing subscribers. If you'd like to gain access to future picks, as well as my entire portfolio -- consisting of some of the most unique (and safe) income instruments around -- then I invite you to consider joining us at High-Yield Investing. For more information, simply click here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.