New investors should seek to manage volatility such that they’re not inclined to sell shares after a particularly bad market-losing streak. Indeed, market sell-offs happen. Yet, most near-term investors have their guard down. Even if a long-term growth thesis is still on the table, the markets can still get rocked.
For those with extended investing horizons, such plunges tend to be pretty good buying opportunities. However, patience and discipline are key to doing well in stocks over time. At the end of the day, it’s long-term investors who expect to take a hit to the chin immediately after they’ve bought who may stand to get the best results.
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Hello, market volatility!
As May volatility stands to wobble the TSX Index a bit, perhaps new investors should consider battening down the hatches with some lower-beta stocks. Indeed, volatility does not necessarily equal risk. However, new investors who found recent fluctuations in their portfolio to be excessive may need to rotate slightly into some of the less choppy names in the market waters.
Many of such names trade at reasonable valuations, with betas (which entail a lower degree of correlation to the broader market averages) that can help smoothen out the swoons in your portfolio during market corrections.
Though low beta does not mean zero volatility (saying goodbye to volatility is just not possible in the choppy world of stocks, even with the stablest bond proxies out there!), I do think that the following plays can help you manage volatility to a level that you’re more comfortable with.
Don’t try to eliminate volatility: Seek to manage it to a level you’re comfortable with!
As a new investor, you must get used to dealing with swings in the markets rather than seeking to eliminate them as much as possible. Indeed, some of the market’s best growth opportunities are the most volatile. In any case, inching a toe into stock markets (with a lower volatility play) can help you become more comfortable with those day-to-day fluctuations.
Eventually, you’ll be a bit more numb to 2% down days or even 5% ones! And perhaps when you’re a seasoned enough investor, a 10% single-day drop won’t rattle you in the slightest. In fact, you may grow increasingly bullish on such a decline and buy while most other scared investors sell.
At writing, I find Hydro One (TSX:H) to be one of the best volatility fighters on the market. The stock boasts a 0.29 beta, meaning it’s far less likely to follow the TSX Index on any given trading day. The lower correlation may entail H stock rising on a big down day for the TSX and vice-versa. With a nice 3.1% dividend yield, though, H stock’s payout can help you stay the course as you deal with the market swings.
At 21.4 times trailing price-to-earnings, H stock also looks relatively cheap, given the stable cash flows you’re exposing yourself to. And though the beta is incredibly low, there’s been no shortage of steep downward moves of late. H stock has fallen by double-digit percentages on many occasions over the last several years. But at the very least, H stock is less likely to amplify the down days markets will inevitably throw your way.
Bottom line
It’s impossible to say goodbye to volatility for good if you’re a stock investor. Instead, try to manage volatility and insist on solid dividends and modest valuations to minimize the risks you’ll bear. Arguably, that’s the best a stock investor can do in the face of choppy market waters.
