With risk a preoccupation in volatile 2010 investing, it shouldn't be surprising to hear a
"A good man always knows his limitations," the actor, in his role as detective "Dirty Harry" Callahan, said bluntly to a commander who claimed never to have drawn a gun.
That line from the film "Magnum Force" suits today's market perfectly, believes
"If you think you can cope with volatility in today's market, but you can't, you need to either ignore your portfolio or invest in less volatile stocks," Stovall explained. "Find out who you are and if you can handle all the turns."
The price volatility of five of the 10 sectors of the
"Companies carrying a lot of debt have interest-rate risk as their interest expenses go up with higher rates and impact their overall earnings," Stovall added. "Next, there is dividend payment risk in terms of the size of the financial cushion a company has to meet its dividend obligations."
It should be reassuring that 53 times since 1945 the market has dropped by 5 to 10 percent and on average it has subsequently taken just two months to break even. But rather than view a market decline as a time to buy, human emotion takes over and investors bail out, Stovall said.
"I find it interesting that people start to freak out when the market drops 5 percent," said Stovall. "In this day and age of instant information, people seem capable of experiencing fear and greed at the same time."
As far as risk is concerned, confidence in dividends is Stovall's current solution. There's less to worry about with companies that have consistently raised dividend payments in the past 10 years; have a stock yield of 3 percent or more; and have received favorable overall recommendations.
Those basic guidelines for low-risk investing apply to many stocks.
A recommendation in energy is oil and gas producer Chevron Corp. (CVX), he said.
In financials he likes the
On the other hand, some examples of stocks to which he'd give a wide berth due to lack of dividend growth and other uncertainties
are specialized chemicals firm
Lately, increased volatility has meant a stronger correlation in price movement of seemingly unrelated stocks than historically has
been the case, observed
That could be general overreaction to news events that moves everything at once, but whatever the cause it makes diversification tougher and requires investor homework.
"While we see no financial risks for information technology companies, we see high financial risk for financial institutions (such as banks) because of their extraordinary reliance on capital markets," said Cripps. "The greatest financial-risk sectors would be financials at the top, followed by consumer discretionary companies and then industrial companies."
The least amount of financial risk is in the stocks of IT companies because they don't carry much debt, electrical utilities because of their regulated environment, and consumer staple companies because they sell products that are constantly in demand, he said.
"In considering risk, you should always avoid company-specific risk in which you 'fly or die' by the performance of one stock,"
While some bigger companies can encounter problems, as a group they tend to be the least risky, Nolte believes. That's because they are usually global in nature with broad product lines, stable earnings, revenue growth, good rising dividends each year and reasonable stock prices, he said.
Some notable low-risk stock examples that Nolte pointed to are
International Business Machines Corp. (IBM),
Johnson & Johnson (JNJ),
PepsiCo Inc. (PEP),
Not all investors view investment risk the same way, even if they may seem as tough as
"I had a client who considered himself a risky guy because he drives race cars for a living, but when the portfolio dropped by 5 percent he was very concerned because he lost money," recalls Nolte. "He felt comfortable driving his car because he understood it, but was uncomfortable in the investment field because he didn't understand it."
A better knowledge of stocks and industries makes an investor's attitude toward risk much more reasonable, he concluded. Which is a good idea, since risk isn't about to vanish anytime soon.
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(c) 2010 Andrew Leckey