Low Volatility Investing

Low Volatility investing focuses on stocks that exhibit smaller price fluctuations compared to the broader market. Contrary to traditional finance theory, lower-risk stocks have historically delivered competitive, and sometimes superior, risk-adjusted returns. Quant strategies identify low-volatility stocks using measures like historical price variance or beta. Portfolios are then constructed to emphasize these smoother-return securities. The appeal of Low Volatility lies in drawdown reduction. During market corrections, low-volatility portfolios typically fall less, preserving capital and improving long-term compounding. Behavioral explanations suggest that investors overpay for high-risk stocks in pursuit of lottery-like gains, leaving low-risk stocks undervalued. Structural constraints on institutional leverage also contribute to this anomaly. Low Volatility strategies often tilt toward defensive sectors, so diversification and sector controls are important. Without constraints, portfolios may become overly concentrated. While Low Volatility can lag during strong bull markets, its downside protection makes it valuable as part of a diversified factor allocation.