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Hey, could you pass the Pepto-Bismol?
If you feel like your portfolio is taking you on a stomach-churning roller coaster, you're probably not alone. Taking a look at some of the most popular stocks visited by Fool readers, almost all of them move in hyperactive ups and downs well beyond an already overcaffeinated market.
Look at how the beta, a measure of volatility against the general market, of these popular stocks stacks up. A beta value of greater than one indicates above-average volatility:
|YRC Worldwide (Nasdaq: YRCW )||3.04|
|Sirius XM (Nasdaq: SIRI )||2.13|
|Keryx Biopharmaceuticals (Nasdaq: KERX )||3.94|
|Cell Therapeutics (Nasdaq: CTIC )||6.71|
|SandRidge Energy (NYSE: SD )||1.67|
|Taseko Mines (AMEX: TGB )||1.82|
Source: Yahoo! Finance.
That's a pretty incredible lineup of volatile stocks. Just think, on average YRC Worldwide has returns that move by three times as much as the overall market! That can cause some sharp upturns when the market shows strength, but can also test you resolve when the market is cratering, as it has done so often lately.
The important thing to remember is that like most tools used in investing, beta is no magic bullet; it has its limitations. Don't expect these companies to arbitrarily soar if the economy picks back up. The high betas seen in these stocks are often the result of business drivers that are completely different than the general market.
For example, both Keryx Biopharmaceuticals and Cell Therapeutics are reliant on the approval of drugs currently in development. News about Food and Drug Administration approval of their products will either send the stocks soaring or crashing. Taseko Mines has a solid balance sheet but faces a battle with regulators in Canada over a new gold mine.
However, every stock here has one of two key kinds of risk: the risk of permanent impairment of capital or uncertain revenue streams based on the whims of government agencies. Being able to stomach additional volatility doesn't matter if a company goes to zero, or has a stream of revenue permanently impaired by unforeseen government actions.
A mild suggestion
I'm not here to pass judgment on any of these companies. I hope investors in each company are aware of the unique opportunities, risks, and threats facing them. For example, Taseko Mines may not only survive but even thrive even if regulators don't approve its new mine. YRC Worldwide continues to face bankruptcy threats despite repeated union concessions.
Yet, I do have one simple suggestion. Buy downside protection. No, I'm not talking about costly options protecting investors from drastic drops. What I am talking about is diversifying with some defensive stocks that will show good traction in the event of a double-dip recession or a continued stagnant economic environment. Both those situations will play havoc with companies that have poor balance sheets or may need additional capital infusions in the future.
One stock worth considering is Annaly Capital (NYSE: NLY ) . The company thrives in environments with low interest rates by effectively borrowing at 0% and lending at higher rates. The spread between the two is pure profit that gets paid out to shareholders. To get a better handle on how Annaly functions and its risks, I suggest reading the recent buy recommendation in our Rising Stars series by Fool analyst Ilan Moscovitz.
However, the point here is that in an economy that's continuing to struggle, chances are Annaly will continue paying out its juicy 15% yield. The Fed's hands will simply be tied; it will be unable or unwilling to raise rates out of fear such an action would further prevent the economy from rebounding. If the economy does return to growth, Annaly might not perform as well, but at the same time riskier stocks should find better footing.
Singles and home runs
The important thing to remember is that investing isn't all about swinging for the fences. Yes, the thrill of a stock doubling, tripling, or even going up tenfold is exhilarating. All of the stocks above have tremendous potential to soar given certain advantageous situations going in their favor.
However, just like a baseball team doesn't have nine sluggers who always swing for the fences but strike out five times as much, your portfolio should also show balance. Think of dividend stocks as the consistent lead-off hitter who isn't flashy, but gets on base consistently and can give the team a spark when the heavy hitters are struggling.
Make no mistake, Annaly Capital still has plenty of risks and is just one possible component of a balanced portfolio. However, investors can look to a huge universe of more defensive dividend stocks out there.
For some dividend opportunities that may better fit your investing style, click here to get The Motley Fool's five-page free report: 13 High-Yielding Stocks to Buy Today. You won't find any biotechs with the possibility of fivefold increases in the next year, but you will find a number of companies to anchor your portfolio even if your roller-coaster stocks plunge down one last unexpected fall.