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Sound Advice: April 3, 2024

You can beat the market with high beta stocks, if . . .

. . . the market always goes up.  The problem is that stocks tend to go up two thirds of the time and down one third of the time.

What’s beta?  Beta is a measure of a stock’s volatility over time relative to that of the overall market.  By definition, the market (i.e., the Standard & Poor’s 500 Index) has a beta of 1.00.  A stock with a high beta (i.e., over 1.00) will generally have greater movement up and down than the market itself.  So if the market climbs 10%, a stock with a beta of 1.50 will climb 15%.  And vice-versa. Conversely, a stock with a low beta such as .80 will have smaller movements in both directions.

Stocks such as Nvidia, Advanced Micro Devices, and Etsy, are prime examples, typically with betas above 1.75.  These are high growth companies whose market performance typically is reflected in unusual investor enthusiasm and hefty valuations while their expansion continues.

Of course, the equation has a flip side, which is what happens when there’s disappointing news or the eventual moderation of forward progress.  And that, unfortunately, is when the benefit of high beta will do an about-face.

Yet, there have been a number of multiyear spans when the market has had extended linear upswings.  Those were the times when fund managers have tended to trumpet their ostensibly special skills.  Not surprisingly, though, those who had been the leaders invariably found themselves at the back of the pack when the indexes started slipping.

It might be comforting to think that there are professionals with extraordinary skills that enable them to maintain their investment positions during market advances while moving to cash when times are tough. But that’s a hypothetical talent called market timing, a talent that is elusive in the extreme.

One wonders why anybody even bothers.  The simple decision of holding nothing more than ultra low cost market index funds will almost always (if not always) give you results that are better than those of Wall Streeters who pretend to be all-knowing investment professionals.

The other key decision is asset allocation, which is largely determined by considering an investor’s time horizon, experience, risk tolerance and need for current income.  With those properly understood, creation of a worthwhile portfolio should be straightforward.

N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877

www.soundasset.blogspot.com

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