Pick stocks with low volatility if you want to avoid white knuckles. Most traders crave stock market volatility, while long-term investors seek to avoid it. If you're one of the latter, here's a solution: Buy low-volatility stocks, which "tend to fall a lot less in bear markets and rise almost as much in bull markets," says Harin De Silva, president of Analytic Investors. The Los Angeles firm found that a portfolio drawn from the 25% least volatile blue chips beat the market in the period from 1930 to 2004.
Using standard deviation data found on Morningstar.com, we put together a portfolio of stocks with low monthly stock-price volatility over the past three years. (In statistics, standard deviation is used to measure the amount of fluctuation in a given period.) We also use RiskGrades from Riskgrades.com, which measure fluctuations over the past five months relative to a global benchmark that has a grade of 100. In both cases, the lower the number, the less volatile the stock. While the three-year number is more important, an elevated RiskGrade could indicate a stock is becoming more volatile and should be carefully monitored.
Most important: Any of these stocks can be volatile on its own, so you need a portfolio of 15 or 20 different companies to capture their calming effect.
Copyright 2007, Bloomberg L.P.
