Is Low Volatility Investing the Way To Go?

low volatility investing

low volatility investingBrenda Jubin reminds me a lot of myself. Actually, it probably the other way around. She is someone that I would like to resemble one day.

Her blog, Reading the Markets, is an interesting site where she discusses different insights she has gained from financial literature. In a recent post, she discussed a few excepts from Peter Sanders’ book All About Low Volatility Investing. As I have been gravitating towards approaches that are less time intensive but still include some quantitative analysis, I was very interested in what Brenda had to say.

She began by quoting a financial study and illustrating the power of low-volatility returns:

Over the 41 years between January 1968 and December 2008 a dollar invested in the lowest-volatility portfolio, assuming no transaction costs, increased to $59.55 whereas a dollar invested in the highest-volatility portfolio was worth a mere 58 cents by the end. In real terms, the former produced a gain of $10.12, the latter a loss of more than 90 cents (or 90%).

Brenda continues by discussing the views Sanders expresses in his book:

Sander begins at the level of portfolio construction. He suggests building a three-tiered portfolio comprised of foundational, rotational, and opportunistic investments. Low-volatility investments belong to the foundational portion of the portfolio, along with such long-term investments as real estate, trusts, and collectibles.

That makes a lot of sense from a wealth management standpoint. I’m not convinced that it will help me grow 10 grand into 10 million, but I’m not convinced anything else will either.

Rotational investments are those that take advantage of business cycles such as sector-specific ETFs. Opportunistic investments/trades include high beta stocks and options. The weightings of these categories of investments will depend on how conservative or aggressive the investor is.

The rotational park reminds me of Mebane Faber’s Ivy Portfolio. I am obviously very interested at this point. I also like the idea of adjusting the weightings based on the desire to be more or less aggressive.

A sample tiered portfolio would consist of classic low volatility stocks (30%), low volatility funds (30%), real estate income (10%), inflation hedge (10%), sector funds (5%), inverse/low correlated (5%), strategy funds (5%), and “hot stuff” (5%).

I would really like to see how this portfolio has performed. I assume that if Sanders is writing a book, and Brenda found it good enough to write about, that there is some serious return data to back up this portfolio. If that’s the case, this could be a great alternative to wasting my time hassling with trend following systems.