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Alka Seltzer For Your Portfolio – Understanding Volatility

17 January 2013 in Trading Ideas

Ten years ago the word volatility was one of those multi-syllabic words you peppered your thoughts with when you wanted them to sound slightly scientific or academic.

Now volatility seems to have worked its way into everyday parlance. The culprit: stock markets. They’re way up. They’re way down. It’s front page news in print (well, Internet really) and the lead story for broadcasters. You can also find a volatility measurement assigned to each motif.

But if you are an individual investor, all this volatility (simply vol if you are a trader) can turn your stomach. If you’ve got that queasy feeling, you might want to take a closer look at the Low Beta motif.

The concept of Beta is based on fairly sophisticated statistical analysis, but the underlying idea is easy to explain. Beta simply measures the degree to which a stock moves in relation to movements of the broader markets.

So, when the market has gone up 1% (or down 1%) on a given day and, historically, a certain stock has moved up 2% (or down 2%) on those same days, it would be considered a high beta stock. That is, it tends to magnify the changes in the broader market.

On the other hand the market has gone up 1% (or down 1%) on a given day and, historically, a certain stock has moved up just 0.50% (or down 0.50%) on those same days, it would be considered a low beta stock. That is, it tends to blunt the changes in the broader market.

As a result, the Low Beta motif is designed to include the stocks of companies that have had less volatility, that can help even out the risk/reward pendulum. As you might expect, the Low Beta motif currently has a low volatility measurement.

It’s true that big risks can lead to big rewards. But they can also lead to big losses. The Low Beta motif may help you avoid this “either/or” proposition. Even more importantly, low-beta investors focused on longer time frames may not be forgoing future returns. A 2011 study of stock performance over a 40-year period showed that low-beta stocks delivered better returns than their higher-beta counterparts.


Performance data and returns are based on past performance and are not representative of results an investor could expect to achieve. The 1-month and 9-month returns show how a particular benchmark motif could have performed over a stated period of time. Returns of individual motifs do not take into consideration certain fees and/or commissions, corporate actions, or other activity that can affect the return an investor could expect to incur. The performance results attempt to follow a standardized and consistent methodology for performance reporting. While we believe the performance data is gathered from reliable sources, the information that generates performance results uses historical data that we believe to be accurate but has not been validated and may contain errors in pricing or other conditions. Reference to return of index does not imply its performance is comparable to a motif, but rather serves to provide a reference point. For detailed information on how we calculate returns, please visit www.motifinvesting.com.

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