Unless you live under a rock, I’m sure you’ve heard a variation of this investing maxim:
“To earn high returns… you must assume high risk.”
There’s an ounce of truth to this saying… but it mostly leads investors astray.
Today, I want to show you how three specific low-risk investments helped my subscribers turn $20,000 into $40,010 – between January 19 and March 22 of this year.
Before I do that, though, let me explain where the “high risk = high returns” idea comes from. And then I’ll show you why, in some market environments, the relationship is exactly the opposite.
It all starts with the finance industry’s most-prized theory: the Capital Asset Pricing Model (CAPM).
Introduced in the 1960s, the Capital Asset Pricing Model was the first major theory to explain the relationship between investment risk and return.
The idea is simple…
If Stock “A” is twice as volatile as Stock “B”… then Stock “A” should provide investors twice the return as Stock “B.”
After all, why else would an investor suffer through twice the volatility… if they aren’t fairly compensated for the excess emotional torture?
The theory is surprisingly simple and intuitive – so much so that financial professionals and investors alike have “bought it” for the last several decades.
And even though a slew of research has since discredited the simplistic “low risk = low returns” relationship, most investors still think you can’t make big money in low-risk investments.
I’m here to tell you: YOU CAN!
Earlier this year, I recommended three low-risk stocks in my trading services. And even though these stocks were definitely “low risk,” they generated much bigger gains than the overall stock market – eventually turning a $20,000 investment into $40,010 in just two months.
By “low-risk,” I mean stocks that are less volatile than the overall stock market (i.e. the S&P 500), since, according to CAPM, volatility is synonymous with risk. Some stocks, such as Tiffany & Co. (NYSE: TIF), are almost twice as volatile as the S&P 500… while others, like Wal-Mart (NYSE: WMT), are only 23% as volatile.
So, according to the Capital Asset Pricing Model, Tiffany & Co. should return more than the S&P 500 (because it’s more volatile), and Wal-Mart should return less.
But that’s only in theory.
In reality, there are times when low-volatility stocks trounce the market.
Specifically, when investors are fearful… low-volatility stocks are a much better bet than the overall market.
And by my own proprietary measures, we’ve been in this fearful market environment since early January.
I’ve written about this before… so I won’t go into detail here. But essentially, when the stock market’s various sectors are producing similar returns, investors feel safe. But when there’s a large spread in the performance of sectors (i.e. some doing very well, some doing very poorly)… investors get fearful and skittish.
And during those environments – when the spread is high, and investors are fearful – low-volatility, “defensive” sectors tend to beat the overall market. Basically, investors put a premium on “safe” stocks during these times.
To be specific, two low-risk sectors have historically beaten the market during these environments: the utilities sector and the consumer staples sector.
And those are precisely the low-risk sectors that made my subscribers huge gains earlier this year.
Here’s exactly what we did…
Low-Risk Trade #1: Go Long the SPDR Utilities Sector ETF (NYSE: XLU)
On January 19, I recommended a specific bullish position on the SPDR Utilities Sector ETF (NYSE: XLU).
We stayed in that position until March 22, when we closed it out for a net gain of 86.3%.
Mind you, utilities stocks are much less volatile than the market – about 22% as volatile on average.
But even though this utilities sector ETF was “low-risk,” it easily beat the market while investors were fearful.
Low-Risk Trade #2: Go Long Kroger Co. (NYSE: KR)
On January 21, I recommended a specific bullish play on Kroger Co. (NYSE: KR), a consumer staples stock.
Kroger’s stock is only 78% as volatile as the broad market, but since investors were so fearful in January… they piled in and bid up the price.
Kroger returned twice what the S&P 500 did during our holding period. And that was enough to hand us a profit of 75% on this low-risk position. Lastly…
Low-Risk Trade #3: Go Long Duke Energy Corp. (NYSE: DUK)
On February 25, I recommended a specific bullish play on Duke Energy Corp. (NYSE: DUK), a low-risk utilities stock.
Get this… Duke’s stock is just 6% as volatile as the market, but it managed to beat the market’s return while we were in it.
All told, we were in this position for just 10 days… and we walked away with a 38.8% gain.
Putting it all together…
Investors have been especially fearful in 2016… and I’ve shown my subscribers how to take advantage of this environment, by making low-risk investments in ultra-safe stocks.
And even though the Capital Asset Pricing Model says my subscribers should have earned low or even measly returns from those low-risk investments… they actually have huge profits to show for them.
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research
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