How to Find and Invest in Low-Volatility Stocks

Look for stocks with steady returns and few wild price swings

Stock Market

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Investors looking for solid, steady returns over a long period of time should generally avoid stocks that have wild changes in value. When a stock goes up and down in extreme fashion, it can be harmful to overall long-term returns, not to mention the emotional toll that wild price swings can have on an investor.

Stocks with high volatility are especially risky for investors close to retirement age—the possibility of losing money quickly is combined with a lack of time to recover any losses. While it’s possible to make money on volatile stocks, and some volatility is OK if overall returns justify it, most investors would be better off searching for stocks with relatively low volatility and a track record of steady, positive returns.

Stocks with low volatility aren’t always easy to spot, but they can be found as long as you have a good understanding of what volatility is and how it can be measured.

The Basics of Volatility

To help explain volatility and why it matters, let’s examine two imaginary stocks and their five-year annual returns.

Company A (high volatility):

Year 1: +12%

Year 2: -5%

Year 3: +18%

Year 4: -11%

Year 5: +21%

This company has an average annual return of 7%, but as you can see, returns are not consistent from year to year.

Company B (low volatility):

Year 1: 7%

Year 2: 9%

Year 3: 5%

Year 4: 6%

Year 5: 8%

The annual returns of this second company look very different than Company A's, but the annual average return is the same. Both of these stocks have an average annual return of 7%, despite the first company's higher rate of volatility.

So, why does this matter if the returns average out the same? It has to do with the compounding value of an investment, and how big changes in annual returns can have an abnormal impact on the money.

To better grasp this concept, let’s examine these imaginary companies again, assuming that you make a one-time investment of $1,000. Watch how volatility affects the total amount of money you'll have at the end of each year, based on the returns above.

Company A (high volatility):

Year 1: $1,120

Year 2: $1,064

Year 3: $1,255

Year 4: $1,086

Year 5: $1,314

Company B (low volatility):

Year 1: $1,070

Year 2: $1,166

Year 3: $1,224

Year 4: $1,297

Year 5: $1,400

As you can see, investors in Company B have more money at the end of the five years than those who invested in Company A. That’s because, when a company loses money in one year, it has to earn much more the next year to make up for the loss. Investors in Company B not only ended up with more money in the end, but they also didn’t have to deal with the emotional swings of watching the stock shoot up and down.

Determining Volatility

It’s not always easy to determine how volatile a stock is. You can examine a stock price and see how it moves up and down, but that’s only modestly useful when viewing it out of context. To include more context in your examination of volatility, it’s important to consider the volatility of other stocks in the same industry, as well as the movement of the overall stock market.

Fortunately, there are specific measurements that help investors get an objective sense of a company's volatility. One is called “beta.” This is a commonly used metric, so you should easily find it when researching a stock online. In most cases, a beta figure simply compares a company’s volatility to the volatility of the S&P 500, which tracks the largest companies in the stock market. A measure of “1” means the stock price moves almost perfectly in line with the S&P 500. A measure of “1.25” suggests it is 25% more volatile than the index.

When listing stocks, most online brokerage firms will show the beta for a company, but you should also look for the beta for that industry. In many cases, online brokers and financial sites will include this figure, as well. This is important because it provides more context for the company's beta. For example, in April 2018, Apple showed a beta of 1.03, making it slightly more volatile than the S&P 500. However, the average beta for the information technology industry as a whole at this time was 1.27. While Apple was slightly more volatile than the stock market in general, it was substantially less volatile than most other tech stocks.

It’s also worth noting that larger companies tend to have less volatile stock prices than smaller ones.

Low-Volatility Sectors

As the Apple example above shows, some sectors and industries are, by nature, less volatile than others. Tech stocks, for example, tend to be more volatile than utilities. Many financial advisors point to the consumer staples sector as one with low volatility and strong returns. This sector includes companies that produce essential products that we use every day, such as household items, food, and beverages. Since the products are considered essential, sales stay fairly consistent, as do the companies' earnings and stock prices.

Popular Low-Volatility Stocks

Over the years, there have been a handful of stocks that have garnered consistent, positive returns without wild changes in value. Many of them are well-known companies that have come to dominate their respective industries through decades of strong performance. They include:

Procter and Gamble [NYSE: PG]: One of the titans in the consumer staples sector with a beta far below average.

Coca-Cola [NYSE: KO]: Coke is another low-beta company that’s been around forever and rarely disappoints. There’s a reason Warren Buffet owns hundreds of millions of shares in this beverage giant.

Lockheed Martin [NYSE: LMCO]: The world’s largest defense contractor has long been a stable performer and its stock price is not prone to extreme swings.

Rockwell Collins [NYSE: COL]: Rockwell Collins is another defense and industrial firm with steady earnings and one of the lowest beta numbers among big companies.

Easy Ways to Invest in Low Volatility Stocks

If you’re not keen on doing a lot of legwork to find low-volatility investments, you can get good exposure to them through mutual funds and exchange-traded funds (ETFs) that invest exclusively in these types of stocks.

One of the most popular low-volatility funds, as of December 2019, is the iShares MSCI Minimum Volatility ETF [NYSE: USMV], which looks to invest in stocks that are less volatile than the market as a whole. Similar funds include the Invesco S&P 500 Low Volatility ETF [NYSE: SPLV] and the Vanguard Global Minumum Volatility Fund [NYSE: VMVFX].

It’s up for debate as to whether these ETFs consistently perform any better than the market as a whole, but they could be a useful part of a broad investment portfolio, especially during times when the stock market is fluctuating wildly.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.