Subdue Your Stock Mix

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Subdue Your Stock Mix

Lessen your portfolio’s volatility by exploring the following options among U.S. stocks.

Very large companies

Some studies suggest that, over very long time periods, smaller-company stocks return more than larger-company stocks. That’s because smaller companies are usually growing faster than larger companies, and stock prices (and thereby returns) usually keep pace with growth. The faster the growth, says theory, the higher the return.

But the faster the growth and the smaller the company, the more volatile the stock, too. So if curtailing volatility is your goal, focus the U.S. stock portion of your portfolio on the very largest companies. They may not have the same growth potential as smaller companies, but they don’t have the same volatility, either.

Dividend-paying stocks

Dividend-paying stocks are often called "buffers." That’s because their dividends provide a cushion in a difficult market. Although a company’s stock price may fall, it will usually pay its dividend. And that dividend props up total return. (Please note: dividends are not guaranteed and are paid at the discretion of the stock-issuing company.)

Let’s take an example. Acme Cement Company’s stock price falls from $100 per share to $95 per share in one year. That’s a 5% loss. However, the company pays a $7.00 per-share dividend each year. At the end of the year, shareholders have a $95 share price and a $7 dividend. So they haven’t really endured a 5% loss. It’s really a gain, thanks to the dividend.

Dividends won’t always turn losses into gains. But they can curtail volatility.

Reasonably priced stocks

Companies whose stocks trade at high prices relative to their earnings, their sales, or their cash flows harbor what’s called "price risk." In such cases, investors have high expectations about the futures of these companies, and are therefore willing to pay a premium for the stock.

If the earnings, sales, or cash flows of these companies don’t live up to expectations, however, their stock prices can plummet.

To avoid such price dives, stick with companies whose stocks are trading at moderate prices relative to their earnings, sales, and/or cash flows.

For more information

Many online financial Websites, such as Morningstar.com, offer screening tools that are a good starting point for ideas about stocks. Additionally, analyst recommendations, or picks, are a great place to begin, too.