Portfolio Study Shows Low-Risk Stocks Outperform High-Risk

 The greater the risk, the higher the rewards, right?

Not so fast. A study of stock performance by the research firm Haugen Custom Financial Systems (HCFS) found that high-risk stocks consistently underperform low-risk stocks, both across time and across countries.  

High-volatility stocks can outperform lower-volatility stocks, but generally only for a year or two, said Bob Haugen, chief executive of HCFS, an economist and investment analyst. “I don’t know why anyone in the world wouldn’t want to use this information,” he told PLANADVISER. 

HCFS sorted stocks from 23 countries by risk, calculated the standard deviation of returns for each stock within a country using the last 24 months of returns. Stocks were sorted from lowest to highest risk. Ten groups or portfolios were formed by placing 10% of the risk-sorted stocks in each. For example, if there were 1,000 stocks in a country, they took the 100 lowest-risk stocks in the first group, the next 100 in the second, and so on, until the highest-risk stocks were in the 10^th decile portfolio.

(Cont'd)

They calculated the return of each of the portfolios over the next month and repeated the procedure for 264 months. The entire process was repeated for each of the developed countries as well as for a universe of the top 3,000 stocks in the world. Finally, they calculated return and risk of each portfolio and found that the low-risk groups remained low-risk over time. But the low-risk group outperformed the higher-risk group in every country.

The lowest-risk group won by an average of 17% per year over the high-risk portfolio. Although there was some variation in consistency across countries, the low-risk portfolio was the winner about 75% of the time.

High-volatility stocks can outperform lower-volatility stocks, but generally only for a year or two, Haugen said.

The procedure and results of the HCSF study can be seen here.