Stock Volatility: Get off the Roller Coaster

Pick stocks with low volatility if you want to avoid white knuckles. Most traders crave stock market volatility, while long-term investors seek to avoid it. If you're one of the latter, here's a solution: Buy low-volatility stocks, which "tend to fall a lot less in bear markets and rise almost as much in bull markets," says Harin De Silva, president of Analytic Investors. The Los Angeles firm found that a portfolio drawn from the 25% least volatile blue chips beat the market in the period from 1930 to 2004.

Using standard deviation data found on Morningstar.com, we put together a portfolio of stocks with low monthly stock-price volatility over the past three years. (In statistics, standard deviation is used to measure the amount of fluctuation in a given period.) We also use RiskGrades from Riskgrades.com, which measure fluctuations over the past five months relative to a global benchmark that has a grade of 100. In both cases, the lower the number, the less volatile the stock. While the three-year number is more important, an elevated RiskGrade could indicate a stock is becoming more volatile and should be carefully monitored.

Most important: Any of these stocks can be volatile on its own, so you need a portfolio of 15 or 20 different companies to capture their calming effect.

Stock (Symbol) Industry Price* Dividend yield Risk Grade Standard Deviation (%)**
Kellogg K Food $55.00 2.3% 60 8.80
Pitney Bowes PBI Office equipment 45.74 2.9 64 9.35
Torchmark TMK Life insurance 63.39 0.8 55 9.99
General Dynamics GD Defense 85.90 1.2 82 10.21
PepsiCo PEP Beverages 73.91 2.0 58 10.22
Southern Co. SO Electric utility 36.33 4.4 72 10.23
Diageo DEO Beverages 89.48 3.7 63 10.24
Progress Energy PGN Electric utility 47.02 5.1 83 10.32
Johnson & Johnson JNJ Drugs 66.02 2.5 59 10.49
Colgate-Palmolive CL Household products 72.00 2.0 50 10.53
General Electric GE Diversified 41.53 2.7 63 10.77
Coca-Cola KO Beverages 57.80 2.4 61 11.13
Northrop Grumman NOC Defense 78.79 1.9 72 11.23
Consolidated Edison ED Electric utility 47.20 4.9 77 11.34
Kimberly-Clark KMB Household products 69.88 3.0 59 11.53
Anheuser-Busch BUD Beverages 52.03 2.6 84 11.70
United Technologies UTX Diversified 80.36 1.6 64 11.78
General Mills GIS Food 57.36 2.7 68 11.86
Washington Post WPO Media 804.95 1.0 42 12.03
Novartis NVS Drugs 53.92 1.7 74 12.08

Data: Morningstar, RiskMetrics Group, Yahoo! Finance

*Oct. 8, 2007; **Based on the three-year monthly average

By Lewis Braham

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