Conventional investment wisdom says there is a direct relationship between risk and return. In other words, you must be willing to accept more risk to receive a greater reward. But is that true?
Not necessarily. Academic research demonstrates that low-risk stocks have historically delivered higher returns than high-risk stocks. This observation is known as the “low-volatility anomaly.”1
How the Low-Volatility Anomaly Defies Conventional Wisdom
Historical data indicates low-risk stocks have outperformed high-risk stocks on a risk-adjusted basis over time.2 Risk-adjusted simply refers to an investment’s gain or loss relative to its risk. So, if two stocks perform the same during a given period, the one with lower risk has a better risk-adjusted return.
This isn’t a new concept. In 1972, economists Robert Haugen and James Heins provided evidence of the low-volatility anomaly. Based on data from 1926 to 1971, they concluded that “over the long run stock portfolios with lesser variance [volatility] in monthly returns have experienced greater average returns than their ‘riskier’ counterparts.”3
Numerous other studies of U.S. and international stock markets have come to similar conclusions.