I'm sure you've heard the phrase the best offense is a good defense, well given the offensive nature of the market over the past month -- the DJIA, S&P 500 and Nasdaq indices are down by 8.4%, 6.7% and 7.0%, respectively -- it might just be time to adopt a more defensive posture with your portfolio. How do we reduce risk, while maintaining exposure to the market? Simple, we lower our portfolio's beta.
As defined on the Investopedia web site, beta measures a stock's volatility in relation to the market. By definition, the market (the S&P 500) has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. When the market is racing to new highs, we want stocks with high betas that will outperform, but when the opposite is true -- as is the case now -- we want stocks that either move down slower than the overall market or, better yet, move in the opposite direction.
Read More...
