Now is the time to invest like a coward

Investors navigating today’s volatile markets may find an unconventional strategy surprisingly effective: embracing caution. The conventional wisdom that greater risk yields greater reward isn’t always accurate, and a more measured approach may ultimately prove more successful.

The Allure of “Boring” Investments

For years, the narrative has favored bold investors. However, research suggests that consistently high returns are more often achieved by those who prioritize stability and incremental gains. This isn’t to say risk should be avoided entirely, but rather that deliberately seeking out extreme risk doesn’t necessarily translate to superior outcomes.

Did You Know? A 1972 study by Robert Haugen and James Heins found that low-risk U.S. Stocks outperformed high-risk stocks between 1927, and 1971.

To illustrate this point, a comparison was made between Vanguard Canada’s Balanced ETF Portfolio (VBAL) and Bitcoin. VBAL, designed for steady, dependable growth through a diversified mix of stocks and bonds, is described as a “snooze” – intentionally lacking the excitement often associated with investment.

Performance Comparison: VBAL vs. Bitcoin

Over a five-year period, VBAL has yielded a 46% return, assuming reinvested dividends. In contrast, Bitcoin’s cumulative gain over the same period was 31% in Canadian dollar terms. This demonstrates that, at least recently, the less flashy investment has outperformed its more volatile counterpart.

It’s important to note that these results are period-dependent. A different starting point could alter the outcome, particularly for Bitcoin. The core takeaway is that investors shouldn’t rely on the expectation of a guaranteed payoff from high-risk ventures.

Expert Insight: The tendency to overlook steady, incremental gains may stem from psychological factors, including a preference for lottery-like payoffs and an underappreciation for the compounding effect of consistent, lower-volatility returns.

Academic research supports this idea. Dutch investing giant Robeco stated that “the notion that greater risk pays off in the long run by generating higher returns has been proven incorrect.” This “low-risk anomaly” may be linked to investor attention spans and psychological biases.

The Long-Term Perspective

While low-risk strategies haven’t always outperformed in recent years – particularly during the rise of tech stocks – history suggests this trend could reverse. Low-volatility approaches tend to perform well during market downturns. If concerns about market turbulence and the impact of technologies like artificial intelligence are growing, a shift towards lower-risk investments may be prudent.

Several fund providers, including Vanguard Canada, iShares, and BMO Global Asset Management, offer low-volatility funds focused on stocks with reliable earnings and reduced market fluctuations. These funds prioritize stability over rapid growth.

Frequently Asked Questions

What is VBAL?

VBAL is Vanguard Canada’s Balanced ETF Portfolio, a diversified fund consisting of index funds that track stocks and bonds globally. It is designed to be a low-cost, balanced, and dependable investment.

How has Bitcoin performed compared to VBAL?

Over the past five years, VBAL has yielded a 46% return, while Bitcoin has gained 31% in Canadian dollar terms.

What is the “low-risk anomaly”?

The “low-risk anomaly” refers to the observed tendency of low-risk stocks to outperform high-risk stocks over the long term, contrary to traditional financial theory.

Considering the potential benefits of a more cautious approach, what role does risk tolerance play in your own investment strategy?