The truth bomb you need to know about stocks and how you'll get through these stocks swings happening.
The stock market is CRAZY! Between headlines, market crashes and scandals; it’s enough to make you just want to keep your cash under the mattress! But are stocks really that risky or is it just what you’re made to believe?
In this video, I’ll show you why stocks are not nearly as risky as you might think. How investing has become an entertainment industry to distort your view of risk and how to find the right stocks to buy for low-risk and high-return. We’re talking stock market risk, today on Let’s Talk Money!
Nation, the stock market can be intimidating. Putting your hard-earned money on the faith that some faceless corporate managers will use those assets to create a return…and watching the news or investment analysis only makes it worse.
Happy investors do not make for good front-page headlines. Instead you see news of scandals, impending crashes and even the not-so occasional sensational tweet.
The tragedy, is the invented chaos causes you to stay out of stocks and miss the best opportunity to have your money working for you…to create that financial future you deserve!
Are Stocks Risky? Here's the Truth
And the truth is, stocks are not a fraction as risky as you might think.
The problem is where we get our stock market information. You see; the media, the websites, even here on YouTube, it’s all built on an advertising model. The more dramatic, the more chaotic they can make investing seem…the more you’ll come back for more and the more advertising dollars they can sell.
Investing has become an entertainment industry!
The truth is, as the first American to win the Nobel in economics put it, REAL investing is like watching paint dry…except more boring, like watching paint dry in slow motion!
2 Reasons Why Stocks are Not Risky
In this video, I’ll first show you two reasons why stocks are not as risky as you think. Then, we’ll look at how to find stocks that will produce a great return on the lowest of risk. Stick around because as a bonus, towards the end of the video, I’ll reveal how to make even the riskiest stocks a stress-free investment so you can sleep at night while your money grows!
And the first reason stocks aren’t as risky as you might think is because; while the news might focus every day on those most sensational stories, the riskiest stocks, there are thousands of stocks that are a fraction of that risk. In fact, there are whole groups of stocks that are less risky than others.
There are 11 sectors of the economy, broad groups of companies that provide a common service or product, and while some of these like Technology and Communication Services are home to those high-risk, disruptive stocks…some of these sectors have the kind of stable cash flows that all but guarantee a smooth return over time.
What is Standard Deviation?
Here I’ve listed the funds that hold stocks in each sector along with the standard deviation for each group. Now without getting all math nerd on you, standard deviation is just a measure of volatility, of risk. It shows how much that investment tends to rise or fall in any given year.
And you can see that some of these stock sectors do tend to rise or fall quite a bit. The XLF, the fund that holds stocks of financial companies in the S&P 500, has a standard deviation of almost 25%…a quarter of its value. Industrials, Materials, Energy…all stocks in those sectors with the potential to fall more than 20% on a bad year. But some of these other sectors, the safety sectors like Utilities, Real Estate and Health Care. The companies in these sectors have stable cash flows even in a recession and the stocks are much less volatile.
Now you’re still saying, but I saw shares of Tesla plunge 10% the other day…how can you say stocks are not risky?
But nobody holds just one stock…or I hope you don’t! Holding more than one stock, holding a group of stocks like in the bonus strategy I’ll show you later is going to significantly lower the risk in your money but still help you make those higher returns.
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How to Find Low-Risk Stocks with High Returns
Next I’ll show you a quick way to find stocks with low-risk and high-returns but first, I want to get your opinion on this to see where the community is at on risk. Would you rather have a 10% chance of making $1000 on an investment or an 80% chance of making $125 on a different investment. And in both of these cases, it’s all or nothing, So scroll down and let me know in the comments below, the small chance of a big return or the almost definite smaller return?
Here before I reveal that bonus investing strategy, I want to show you a simple way to find stocks with lower risk but still high returns.
We’ll use Yahoo Finance here because it’s free but you can find this on any investing app. And first you’re going to look for the beta, shown here on a stock’s profile page. Beta is another measure of a stock’s volatility. It shows how much the stock tends to rise or fall relative to the market. For example we see here that shares of General Electric have a beta of 1.07 which means they’re only a little more risky than the general market. Now this doesn’t happen every day but this says GE tends to rise or fall by 1.07 times what the market does, so if the market falls by 0.54% as it did this day, we would expect GE to fall about 1.07-times that or about 0.58%…which it did a little more than that today.
So using this beta, you can look through a few stocks to see which are lower risk. Here you see Tesla is about twice as volatile as the market with a beta of 2.0; here we see that AT&T has a beta of just 0.74 which means it’s less risky than the market. This means we would expect shares of AT&T to rise or fall 0.74-times what the market does. So if the market falls 1% then we’d expect AT&T to only fall by 0.74% on the day. And last here, we see Coca-Cola with a beta of just 0.61, the least risky of all. Of course, it’s proving me a fool today because it fell more than the market but this beta is calculated on five-years of data so again, remember this idea of risk is going to be on average over months or years, not necessarily one day to the next.
For an idea of potential return on these, you can look at this average analyst price target on the stocks. Taking that number divided by the current price gives you forecast for return over the next year, so for example the average target of $59.62 per share for Coca-Cola gives us an expected return of 9% from the current price. Here we can go back to GE and see the average target of $14.97 gives us an expected return of 11%.
Now, these analyst price targets aren’t gospel. I know some analysts that would have a hard time finding their ass if it had a neon sign on it, let alone forecasting stock prices, but using the average here can give you a rough idea of return expected on a stock. Using that, along with the stocks with low betas, is a quick way to find those low-risk, high return investments.
So you see, you can find stocks that produce a solid return on lower risk but the fact is, there is a very clear relationship between risk and return. Those stocks with the most risk of falling by ten or twenty percent are also those that can make you thirty or forty-percent on your money.
Ways to Invest in Low-Risk with High Returns Stocks
So now I want to reveal an investing strategy to get the best of both worlds, a strategy to invest in the most volatile stocks but without all the risk.
This strategy is going to focus on two ways to invest in those high-risk stocks that will reduce the overall risk to your money and the first is to invest in exchange traded funds, ETFs, that hold risky stocks.
ETFs are groups of stocks held in a fund and then you buy shares of the group just like you would any individual stock. And here, you can find ETFs that invest in themes like tech-stocks, high-growth companies, stocks that individually would be considered very risky.
But by investing in this group of stocks, you get an investment that is much less risky than the individual companies. As an example, let’s compare shares of the ARK Invest Innovation Fund, ticker ARKK, a fund of 51 companies in disruptive technologies.
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Now individually, these are some of the riskiest stocks in the market but also some of the best returns you can find. If we go back to that idea of beta and look up some of the stocks in the fund, here we see Seres Therapeutics, ticker MCRB, a stock I recommended December 2019 at $3.45 a share, but you can see how volatile it’s been over the last year and the beta here is nearly four-times the market. Here’s CRISPR Therapeutics, ticker CRSP, another stock I like but with a beta of 2.25, remember that means it’s more than twice as risky as the market on that measure. Even shares of Tesla which are also in the fund, have a beta of two-times the market.
But holding them together in the fund, the overall volatility in the group is a fraction of that. The beta on the fund itself is just 1.5-times, still riskier than the market but much less so than the individual stocks within it.
This way, investing in these funds, you still get those higher returns but with lower risk. Some other examples of these high-return types of funds are the ARK Next Generation Internet ETF, ticker ARKW, producing a 616% return over the last year. The Amplify Online Retail Fund, ticker IBUY, with its 416% return, and the Invesco Solar ETF, ticker TAN, with a 324% return over five years.
Another way to invest in riskier stocks, still benefit from those higher-returns, but without the risk is by holding other funds and stocks from different sectors. This is a core concept of investing called diversification. A way of spreading your money across different types of investments and lowering your risk. Having more investments from different sectors means some will rise while others fall, smoothing out the overall risk in your money.
Again, here we see the riskiness or volatility in a few individual stocks. Tesla, twice as risky as the market, Seres Therapeutics, four-times as risky on that beta measure. Even a fund here, the Amplify Online Retail is more than 1.5-times riskier than the overall market. But look what happens to the overall risk if we adds some ETFs or just a few other stocks. The overall portfolio with a beta of 1.12 is only a little more risky than the overall market, you still get the upside in all these stocks but lower your risk.
Stocks are NOT risky if you know where to look. The problem is, most of us get our stock market advice from the wrong places, the investing news and websites that want to make stocks look risky. With these information laid out for you, what steps are you taking?