Wall Street gospel says that investors seeking outsized investment returns need to take on more risk. Nearly all modern portfolio strategy is based on this simple, clean, intuitive idea. According to Larry Swedroe of Buckingham Asset Management the only problem with the accepted relationship between risk and reward is that it's just not true.
Using beta as a proxy for risk, Swedroe says lower beta stocks perform just as well and, over some time periods, much better than a basket of high-risk plays. Even better, they do so without exposing investors to as many of the terrifying highs and lows that have made investing in the new millennium such a harrowing prospect.
In this edition of Investing 101, Swedroe joined Breakout to share his beta insights and help us understand what they mean.
What is Beta?
Beta is kind of like volatility. It's simply a trailing measure of how a stock or portfolio moves in relation to stocks as a whole. "Beta is just a measure of the risk of a stock or your portfolio or a fund relative to the risk of the overall market."
For instance if the market gains 1%, a high-beta equity would be expected to rise more. The opposite is true for a down day, with high-beta stocks suffering more than their steady counterparts during down periods.
Don't Investors Willing to Endure Higher Beta Get Larger Gains?
Fortune may favor the brave, but Swedroe says brave investors don't increase their odds of making a fortune. "Data shows that stocks with low beta have actually had the same returns as stocks with a high beta."
Participants in equity markets may seek the thrills of wild fluctuations, but for those sane enough to invest for the purpose of building wealth, there's little to nothing in past data to suggest that emotional stress has any financial payoff.Read More »from Building a Low Beta Portfolio