Skip to main content

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

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more