Every now and then the markets make a severe move one way or the other (usually lower) that causes long term investors to take a close look at their holdings and possibly make a switch. Now, there are many ways to invest for the long term and one of those ways is to simply close your eyes and wait it out. Another way is to buy on the way down, and build a big portfolio as prices get cheaper, then, wait it out. These are all fine ways to manage your portfolio and we are not here to bash one style or the other.
Today we want to assist the investor who says "This worries me and I want to be invested in the market, but I don't want to see that much volatility in my holdings."
The first thing you will want to do is look at the holdings in your portfolio and let's try to close out the high beta names and switch them over to low beta. What does this mean? Well we want to close out of the positions that historically move more than the market, and start new positions that historically move less than the market. To give an example we will use Tesla
We all know Tesla, and are familiar with the fancy cars they make. We choose Tesla because it has been mostly favored by analysts as a good long term hold. Well, if we look at the beta for Tesla we would find a 1.39. Now this means that it moves 1.39 times whatever the market does. A beta of 1 would indicate that it moves pretty much in lockstep with the markets so 1.39 shows that Tesla is more volatile than the overall market. Now, were not saying that Tesla is a bad investment but its probably not something you want to invest in if your concern is that there will be more market volatility, or a correction.
Conversely we have Clorox
Now this is just a quick example of moving into low beta names. Imagine if your whole portfolio was in low beta names during a crisis?
