One of the common terms in investing is beta. It is used both in portfolios and stocks to help investors under risk. The downside is that Beta is a backward-looking indicator that does not incorporate other information. Personally, I always look at the beta of a stock before investing.
So what beta? Beta is the volatility of a stock in proportion to the market. The S&P 500 Index, for example, has a beta of 1.0 by definition, and individual companies are graded according to how much they depart from the market. A stock with a beta above 1.0 fluctuates more than the market over time.
What is a good beta for a stock? If you want less risk, then you want stocks that will be less than 1 beta. If you can accept more risk, then you may want to look at stocks with a beta higher than 1. The general concept is that the more risk, the greater the potential return.
Beta should never be the sole factor that drives your investment decisions. Which one is best for you? Read on to discover the best stocks to buy for your portfolio.
Low beta
If you’re thinking about retirement, low beta stocks are a great way to invest without having to worry about market volatility. Because these stocks tend to move more slowly than their higher beta counterparts, you can invest a larger percentage of your portfolio in them and see similar results. In fact, investing in low beta stocks can make it easier to retire comfortably while enjoying a lower risk of losing money. The low beta formula makes investing easier than ever and gives investors a straightforward way to pick stocks with low beta.
Low beta stocks are among the most popular investments today. The reason is simple: they offer lower volatility and less risk. Because they are associated with low-risk businesses, they are generally more stable and offer consistent earnings. The low beta characteristics of these stocks also allow them to make excellent choices for diversified portfolios. While high beta stocks are often more volatile, they can provide excellent long-term performance if you are willing to withstand market volatility.
While low beta stocks are often the best picks during downtrends, they can still be risky when markets reach certain levels. Although low beta stocks can match the movement of the market, their volatility is largely relative to the S&P 500. Therefore, they offer lower returns than their high beta counterparts. So, if you’re looking to retire soon and want to make your money last a long time, you should focus on low beta stocks.
Although the low beta phenomenon was first documented almost 50 years ago, it continues to persist globally and across asset classes. But newer research shows that returns attributed to low beta are well explained by other factors. These factors include the value or growth regime of the portfolio, the size premium performance, and past returns. As a result, the low beta strategy has lost its alpha regime. So, is it a good idea to invest in low beta stocks?
Low beta stocks are a better choice if you can’t handle large price swings. The beta factor is useful in predicting the overall volatility of stocks. However, beta does not indicate that a stock is risky or safe, and it’s impossible to predict the future of stocks with a high beta. You can’t predict market volatility in a single stock, so low beta stocks are a smart choice if you aren’t confident with risk.
When markets are volatile, investors often turn to low beta stocks to maximize their returns. This is particularly true of low beta strategies that have outperformed the markets in the past. For example, USMV returned -19.5% during the 2020 pandemic drawdown, but below the historical norms for significant outperformance. However, this surprise drawdown did change the composition of low beta stocks. Consumer staples and tech stocks did better than CSRs.
To understand how beta affects a stock’s volatility, look at how each stock’s beta rate compares to its benchmark. A high beta value suggests a stock is more volatile than its benchmark. A low beta means that it is less risky than its benchmark. A low beta means a low beta is better for the average investor. In other words, a high beta is riskier and produces higher returns, but it means that you’ll have higher losses if the market falls.
In other words, a stock with a low beta has less volatility than the market as a whole. A low beta indicates that the stock has a low correlation with the S&P 500. In addition, it’s also better for small-cap stocks and technology companies. Low beta stocks are better for small-caps than large ones. However, adding high beta stocks to your portfolio will increase the risk associated with your investment. The upside is that it may also increase the expected return.
If you want to take the low beta route, try picking a combination of high and low-beta stocks. A combination of both will average out to a portfolio with beta somewhere in the middle. This will help you pick stable stocks while also maximizing potential. You’ll likely have a more profitable portfolio than one with a high beta. That’s why low-beta stocks are better than high-beta ones.
High beta
You might be wondering if the high beta is good for stocks. Beta measures the volatility of stocks in relation to the overall market. Stocks with lower betas tend to be less volatile than those with high betas. The opposite is also true. If the S&P 500 gains 1%, high-beta stocks will jump 3%. If the index falls 1%, high-beta stocks will fall by 10%. The higher the beta, the more volatile the stock. However, there may be a higher return.
While adding extra beta may seem like a smart idea during bull markets, it can be a dead weight in storms. Closing the Gap Gang talks about the benefits of low and high beta strategies in volatile markets. This is not an exhaustive list of high beta stocks and why they are so popular. There are a few general rules to follow. You may want to follow the advice of a professional. To find out which one is best for you, read this article.
For instance, the oil and gas sector has many high-beta stocks. These stocks often suffer from supply-side constraints, which can increase the price of oil. This, in turn, leads to higher volatility in share prices. However, if you are an experienced investor, high-beta stocks are a good place to start. Just remember to do your research and keep your eye on multiple variables. There are many other reasons why high-beta stocks are good for your portfolio.
To understand why high-beta stocks are good for investing, you should know what your benchmark is. Beta is a measure of the risk factor in stocks. A stock with a high beta can be twice as volatile as the benchmark. Similarly, a stock with a low beta will likely have a lower beta. And vice versa – a low beta stock may have negative betas.
Although the beta is helpful when used in conjunction with other tools, it is not an accurate predictor of future price action. It only measures past volatility compared to an index and isn’t a reliable indicator of safety. The best way to use beta is to learn about the entire business and look for sustainable advantages. Never use beta alone to make investment decisions. But if you don’t know what beta means, it can be beneficial for you.
In addition to the return of a stock, beta also measures how volatile it is. A stock with a high beta will typically rise more during a market rally and drop more during a market correction. That means that high-beta stocks are more volatile and riskier than low-beta stocks. High beta isn’t necessarily good for stocks, but you shouldn’t ignore it if you’re unsure about what to do.
Beta is a backward-looking measure and doesn’t take into account new information. Therefore, you’d be better off looking at future prospects and potential market disruptions. The downside of a high beta is that you’ll be left with a stock that’s more volatile than the market overall. If you’re considering investing in a high beta stock, consider these companies. They may be a good way to make money.
While high-beta stocks are more volatile than their corresponding index, they are also more illiquid than other types. This means that high-beta stocks are prone to rally higher than the index, but they also experience steeper corrections than their peers. Investing in a portfolio of stocks with a high beta will require a higher risk appetite, but you can potentially make great returns. You need to understand the risks and rewards associated with high beta stocks and determine which stocks are right for you.
