Understand the tradeoffs in low-volatility stocks so you’re not caught off guard
I’ll never forget my first foray into the world of low-volatility investing. Mostly because it was so gloriously underwhelming.
You see, I was expecting something dramatic. I’d read about how these mystical “low-vol” stocks could help you ride out market storms like a sailor in a bathtub during hurricane season. And since I’m a retiree whose risk tolerance hovers somewhere between “lukewarm tea” and “please just let me break even,” I was intrigued.
So, after reading half of an article (and ignoring the fine print), I dove in. Out went my racy tech ETFs that moved like caffeinated squirrels. In came the likes of consumer staples, utilities, and other companies that produce things like cereal, soap, and… apparently boredom.
At first, I thought I’d done something wrong. The market would soar 3% in a day, and my low-volatility holdings would inch up a majestic 0.2%, like they were recovering from a hip replacement. It was less like watching investments and more like watching grass grow — in slow motion — on a cloudy day.
Then came the correction. The market dropped like a bowling ball off a balcony, and for the first time ever, I was the smug one.
My portfolio lost… 1.5%.
Which, in stock-market language, is basically a polite shrug.
Suddenly, my boring portfolio wasn’t boring — it was predictably dull, like a reliable old friend who never shows up drunk or asks to borrow money. I began talking about it at dinner parties. (Okay, at early-bird specials.) I’d lean in and say things like, “Sure, I don’t beat the market — but I also don’t bleed out when it crashes.” Then I’d proudly flash a one-year chart of a dividend ETF that looked like a gently rising pancake.
But here’s the thing I wish I’d known back then: low volatility isn’t no volatility. It’s not a magic shield. Your portfolio still wiggles. Just… not as dramatically. And that’s what this post is really about — managing expectations.
What “Low Volatility” Really Means
Low-volatility stocks are shares of companies that tend to move less than the overall market. They’re the slow-and-steady turtles of investing — not flashy, but often more stable. Think utilities, healthcare, consumer staples, and dividend-paying giants with enough cash on hand to buy a small country.
These companies:
- Have stable earnings
- Often pay regular dividends
- Don’t spike (or drop) as sharply during market swings
So when the S&P 500 zigs and zags like a caffeinated rollercoaster, low-volatility stocks just kind of amble along, humming softly to themselves.
The Tradeoff: Missing Out on Market Highs
The first thing you’ll notice — and maybe grumble about — is that low-volatility portfolios usually underperform when the market is rising quickly.
Why?
Because these aren’t the high-flyers. You won’t find meme stocks, unprofitable tech darlings, or experimental moonshot companies here. When the market’s in euphoria mode, your boring holdings might feel like the only sober folks at a New Year’s party.
But that’s okay. The point of low-vol investing isn’t to chase the highs. It’s to limit the lows. Historically, this can result in better long-term returns — especially when you factor in reduced losses during market drops.
You’ll Still See Red – Just Less of It
A common misconception is that “low volatility” means you won’t lose money. Not true.
These stocks still fall during corrections and crashes. But instead of dropping 30%, they might drop 10% or 15%. That’s still unpleasant, but not devastating — and much easier to recover from emotionally and financially.
It’s like falling off a stepstool instead of a ladder.
Lower Risk, But Not Zero Risk
Here are a few expectations to keep in mind:
- You’ll have fewer sleepless nights, but there will still be the occasional tossing and turning.
- Some years, you’ll underperform the S&P 500. That’s normal. You’re trading a smoother ride for slightly slower speed.
- Diversification still matters. Don’t just load up on one sector. Even within low-volatility strategies, you need to spread your risk.
- It works best when you stick with it. Jumping in and out defeats the purpose. This is a buy and hold mindset — not buy and bail.
Tools to Help You Stay the Course
If you’re interested in trying low-volatility investing, here are some popular ETFs to explore:
- SPLV (Invesco S&P 500 Low Volatility ETF) – Focuses on the 100 least volatile stocks in the S&P 500.
- USMV (iShares MSCI USA Min Vol Factor ETF) – Offers more sector balance and screens for long-term risk.
- LVHD (Franklin U.S. Low Volatility High Dividend ETF) – Combines low volatility and high dividends for steady income.
- XMLV (Invesco S&P MidCap Low Volatility ETF) – Brings the strategy to the mid-cap space.
- EFAV (iShares MSCI EAFE Min Vol ETF) – Offers international exposure with a low-volatility tilt.
Each of these ETFs uses a different formula to reduce volatility, but they all share one goal: to give you a smoother ride than the overall market.
Why It Works for Retirees
Low-volatility stocks are especially appealing to retirees for several reasons:
- More stability in retirement income planning
- Less emotional stress during market downturns
- Reduced sequence-of-returns risk, which can ruin a retirement if you’re withdrawing during a bear market
- Better chance of sticking with your plan (no panicking during market crashes)
It’s not about eliminating risk entirely. It’s about taking the right risks and avoiding the kind that make you want to sell everything and move to a yurt in Montana.
The Bottom Line: It’s Still the Stock Market
Low-volatility investing won’t make you rich overnight. But it can help you stay rich quietly.
The key is to adjust your expectations:
- Don’t expect fireworks.
- Don’t expect total safety.
- Do expect fewer surprises, steadier returns, and a good chance of sticking with your retirement plan when markets get ugly.
In short: low volatility investing won’t thrill you — but that’s exactly the point.
This post is adapted from my book, Your Boring Portfolio: How to Get Off the Stock Market Roller-Coaster and Sleep Well at Night With Low Volatility Stocks, available at Amazon.com in paperback and eBook formats.
Disclaimer: This blog post is for informational purposes only and does not constitute financial, tax, or investment advice. Please consult a qualified financial advisor before making investment decisions, especially if you’re approaching or in retirement.