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As Volatility Rises, It May Be Time to Get Boring

11 October 2013 in Trading Ideas

It’s been a crazy October, with highly pressurized situations eliciting reversals of fortune on an almost daily basis.

And that’s just the baseball playoffs!

Whether it’s in lockstep with the government shutdown battle or part of its own separate universe, financial markets definitely have a different feel to them this month.

For starters, stocks have begun showing a little mortality. After hitting an all-time (noninflation-adjusted) high, the S&P 500 has slipped nearly 3%.

Elsewhere, the market’s volatility index has jumped over the last two weeks to match its highest level of the year, and even gold, the preferred metal of fearmongers, has shown an uptick in the past week as uncertainty seems to be locking horns with desperation that market momentum has hit a wall.

With another earnings season likely to push stocks wildly in one direction or the other, it would be perfectly understandable for investors to want a piece of their portfolio to be relatively calm.

stable earnings motifThat could make the Stable Earnings motif an attractive option. The motif is a portfolio of 19 stocks of companies that have been the pictures of earnings-growth consistency over the past five years. Specifically, every company has grown its profit by at least 3% in the past five years and has been shown to have a low earnings variability ratio, i.e., its standard deviation of annual earnings per share over the past five years divided by the mean annual earnings per share over the same period.

The motif has been flat over the past month, and has gained 17.1% in 2013. The S&P 500 has lost 0.7% in the past month, and is up 15.1% in 2013.

In addition, the stability of these companies generally coincides with their tendency to pay a steady dividend, and the motif’s components have averaged a 2.2% dividend yield over the past 12 months.

Of course, past stability is no guarantee of future performance, and it’s worth noting that the kind of stocks in this portfolio can often underperform a surging broader market.

But if you believe the last month is portending more of the same to come, the Stable Earnings motif could help you gain some peace of mind.

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