Beta: A Proven Tool to Estimate Risk

One of the most frequent qualifiers I offer when discussing investments wit...

Little-Known System Delivers $3,287 Extra Per Month Ordinary Americans are collecting $1,178, then $2,587, and then even $3,287 in "transfer" payments every month. Now this little-known loophole is set to deliver even larger payments... up to a staggering $294,600! All because local "Patriot Millionaires" have just released more tax stimulus cash. Click here to see how to collect your first payment.

Beta: A Proven Tool to Estimate Risk By Robert Rapier One of the most frequent qualifiers I offer when discussing investments with people is "depending on your risk tolerance." That's sound and easy advice to dispense, but for many people it may be nebulous. Today I want to put more definition around that advice. The beta of a stock is a measure of that stock's daily movements compared to a broader market index, typically the S&P 500. A stock with a beta of less than 1.0 means that its daily moves are on average less than the market index. A stock with a beta higher than 1.0 historically moves more than the market index. A stock with a negative beta moves in the opposite direction from the market index. Let's consider companies in each category. For conservative investors, utilities are one of the safest equity investments available. They are considered low volatility investments. NextEra (NYSE: NEE) is among the largest electric utilities in the U.S. According to the S&P Global Market Intelligence database, NextEra has a five-year beta of 0.26. That means that over the past five years, NextEra has only been 26% as volatile on a daily basis as the S&P 500. This measure of course works in both directions. The low beta suggests that NextEra won't rise as much as the S&P 500 on up days, and won't decline as much on down days. However, that doesn't mean that over a long time frame NextEra only delivers 26% of the S&P 500's returns. To the contrary, NextEra has actually outperformed the S&P 500 over the past five years, with a return of 96% versus the S&P 500's 47% return. But a low beta means that NextEra's downside moves are on average less than the S&P 500's. As a recent case in point, last year between December 3 and December 24, the S&P 500 declined by 15.7%. NextEra, on the other hand, declined by 7.9% over that period. Now consider a more volatile stock. Streaming video giant Netflix (NSDQ: NFLX) has a five-year beta of 1.39. That means its daily moves have been 39% more volatile than the S&P 500. This is a situation in which a person needs a higher risk tolerance, because Netflix can move quickly with respect to the market. Over the past five years, Netflix has returned 460%, nearly 10 times the performance of the S&P 500. But between mid-June and mid-December of last year, Netflix shares fell by 44%. During the same time period, the S&P 500 declined by only 11%. Had you bought Netflix at the top last July, it may take a long time to recover your money, presuming you didn't sell your shares in a panic. My colleague Jim Fink, chief investment strategist of Options for Income and Velocity Trader, also notes that high beta stocks are often overvalued, writing: "Investors are greedy and bid up the price of high-beta stocks above their fair value, so high-beta stocks suffer downside volatility from BOTH their high betas and reversion to fair value."

Sponsored Content Stop Picking Losers! (This is the Simplest Way I've Ever Seen) There's a reason so few investors are ever able to beat the market: they've been lied to. They have no idea what really drives stock prices. When you discover exactly why stocks rise or fall, it's easy to avoid losers and find more, bigger winners. Check out this "open secret" to wealth.

This is the main takeaway from beta: It gives some relative measure of how quickly shares can drop in a down market. If you have a low risk tolerance, for example if you are retiree counting on income from your shares, then stick with low beta stocks. The Case of PG&E Let's look at one final case to highlight how beta can be misleading. PG&E Corporation (NYSE: PCG) has a five-year beta of -0.45. That would imply that its daily moves on average are in the opposite direction of the S&P 500's moves. But if you look at its performance over the past five years, up until October 2017, PCG's five-year performance was ahead of the S&P 500. A calculation of the five-year beta at that point would have looked similar to that of NextEra's. It would have been low, but positive. What happened was a series of sharp drops in the share price, beginning in October 2017, at a time when the S&P 500 was rising. These drops were a result of a series of unfortunate events for PCG, including a dividend cut, massive liability from the Camp Fire in California, and the subsequent declaration of bankruptcy. The resulting drops caused the beta to turn negative, which might imply to some investors that PCG generally falls when the S&P 500 is rising. Knowing the beta in October 2017 would have implied that PCG was a safe stock, but that didn't prevent the company from imploding. That's because beta is a backward-looking measure, and can't anticipate future events that can cause a company to crash to the ground. Beta is like many other measures. It is a tool that informs us of relative historical volatility, but past performance isn't always a perfect indicator of future performance. However, generally speaking, a basket of low beta stocks is preferable for conservative investors over a basket of high beta stocks. But what if I told you there's an investment play poised to reap huge gains, regardless of market volatility? It has to do with the president of the United States. Yes, him. Donald Trump is opening a money-making opportunity for individual investors… worth $287,000. Amid the scandals, allegations of Russian collusion, and the looming possibility of yet another government shutdown, there lies a chance for investors to pocket a market-crushing gain. We're calling it the "Trump Impeachment Trade" and it's your opportunity to make 28x your cash in the next few weeks if Trump gets impeached. The best part is, this trade can still make you a fortune, even if impeachment goes nowhere. Click here for the details.

The Smart Thing to Do If Trump Is Impeached… If Donald Trump is impeached, history shows stocks could plunge 48%... and millions of investors are facing that risk head-on. That's crazy — and it could cost them big. The good news is that you can take out insurance for just $167. And if you buy a $10,000 policy, you could walk away with $287,000. Details here.

You are receiving this email at indra21poetra@gmail.com as part of your subscription to Investing Daily's Stocks To Watch, published by Investing Daily. To ensure delivery directly to your inbox, please add postoffice@investingdaily.com to your address book today. Preferences | About Us | Contact Us | Privacy Policy Copyright 2019 Investing Daily. All rights reserved. Investing Daily, a division of Capitol Information Group, Inc. 7600A Leesburg Pike West Building, Suite 300 Falls Church, VA 22043-2004 U.S.A.