With the markets hitting record highs following the recent presidential election, it makes sense why a lot of investors are concerned about the overall risk in the market at this time.
There are a couple reasons why the market has been so strong since President Trump’s unexpected victory in November, not the least of which is his pledged tax reform.
Trump made taxes a big talking point during the campaign, promising to lower taxes on corporations and individuals alike. Wall Street rallied on the promise of tax cuts, and if Trump is unable to follow through on his promises, the markets could easily give back the gains it has enjoyed since the election.
A lot of investors are scared of risk, but there are also plenty of investors that view risk as a good thing, since the higher the risk of an investment, the higher the reward potential.
Risk can be measured in terms of volatility. The higher a stock’s volatility, the riskier the stock becomes. Volatility is measured in beta. A beta that is greater than 1 means the stock is more volatile than the overall market, and a beta less than 1 means it is less volatile than the overall market.
To better understand this point, a stock with a beta of 1.2 is 20% more volatile than the overall market. This means that if the overall stock market rises, a stock with a beta of 1.2 should enjoy gains that are 20% greater than the broader market. This sounds great, but it comes with a cost. You have to accept that if the market moves lower, this same stock should, in theory, lose 20% more than the overall market.
Some trades are unwilling to assume this risk, and avoid stocks with high betas, but this is a mistake. You have to be willing to assume some level of risk, and part of your portfolio needs to be allocated to these type of stocks, otherwise you will simply track the overall market and fail to put up market-beat returns on a long-term basis.
You don’t want to assume blind risk, but there are plenty of volatile stocks out there you can put in your portfolio that are not as risky as you may believe.
Let’s take a loo at five such stocks.