For beginning investors, the word “volatility” can be scary. We are trained to think of volatile things as inherently dangerous, but in investing you want to see a little volatility if you want to put yourself in a position to outpace the overall market.
Ultra-cautious investors may opt to put all their money to work in exchange-traded funds (ETFs) that track the overall market, as a way to ensure that their portfolios are consistently able to produce the same returns as the market. There is nothing wrong with this approach, but the ultimate goal of investing is to do better than the market, and in order to do that, you must look at volatility as a positive thing.
Having said that, you don’t want to look for stocks with a lot of volatility that tend to consistently underperform. You want to find stocks in solid companies that have good performance histories that have additional volatility to the overall market so that when the market is up your positions will enjoy greater downside. You will assume a slightly higher risk of dealing with larger losses when the overall market turns lower, but that is the nature of the game, and if you are not willing to assuming some risk, then you are better off keeping your money in a savings account of some form of fixed-income asset where you know exactly what return you will make each year. Unfortunately these investments do not offer the types of returns that most investors are after.
To find volatility you simply need to look at a stock’s beta. If a stock has a beta of 1, that means the stock will trade pretty much in tandem with the overall market. Anything above 1 means greater volatility, and likewise anything lower than 1 means lower volatility.
The way it works is like this. Assume you find a stock that has a beta of 1.2. You can use that number to assume that the stock is 20% more volatile than the overall market. Likewise, a stock with a beta of 0.8 is 20% less volatile than the market, and will most that much less when the stock makes strong moves in either direction.
Let’s look at five stocks with betas above 1 that appear to be solid buy candidates at this point.