Wild market swings are becoming so common that my standard response is now a shrug of resignation. August was the sixth-wildest month of the past 30 years, and things haven't calmed down much since. The past quarter's worth of trading has seen the Dow Jones Industrial Index
Don't get swept up
When I touch on the importance of beta, it's for a simple reason -- it offers an easy way to assess how wildly your stock will swing in relation to the rest of the market. In turbulent markets, high betas can make stock ownership simply nauseating. Ameriprise Financial, for example, is one of the most volatile stocks in the S&P 500
Over the past year, beta has been a reasonably good predictor of success, especially measured against broader market performance:
Performance (Past Year)
|Dow Jones Industrial Average||(7.08%)||3.50%|
|Entire S&P 500||(8.18%)||2.91%|
|S&P 500 stocks with beta < 0.5||0.85%||13.61%|
|S&P 500 stocks with beta < 1.0||(6.05%)||8.29%|
|S&P 500 stocks with beta > 1.0||(16.65%)||1.19%|
|S&P 500 stocks with beta > 1.5||(21.47%)||(4.57%)|
Sources: Finviz.com, Google Finance, and author's calculations.
The solution seems pretty simple, doesn't it? If you stick with low-beta stocks, you'll do better. If only it were that easy. There's no such thing as a foolproof method, but looking for a low beta can serve as the starting point in your search for the right stocks.
No ETFs track the under-0.5 group, as only 40 companies from the S&P 500 make the grade. There is an ETF, the PowerShares S&P 500 Low Volatility Portfolio
Classic defensive positions
Some of our favorite companies have classically low betas, like McDonald's
Riders on the storm
One less visible member of the low-beta club is AutoZone
The flip side of fast growth is steady dividends, and you can't get much steadier than a utility, and there are two in the low-beta club. Southern Company
Beta isn't everything, but it can provide you with a good starting point when searching for safety. No stock is a sure thing, but doing the research can help you minimize risks and position your portfolio to explode when the next bull market inevitably charges in.
If you're thinking about giving one or more of these companies a place in your portfolio, you can stay on top of new information and fascinating facts by adding them to your Watchlist.
Editor's note: A previous version of this article incorrectly stated that the PowerShares S&P 500 Low Volatility Portfolio ETF paid no dividends. The Fool regrets the error.
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Fool contributor Alex Planes holds no financial stake in any company mentioned here. The Motley Fool has a disclosure policy.