Low risk the path to success

Study: Over time, slow and steady beat glitzy and volatile

Finance guru Bob Haugen pauses in the study of his home outside of Durango. Widely known in financial circles, Haugen recently published a study showing low-risk stocks have higher returns than high-risk equities, a finding that runs counter to much of conventional wisdom. Enlarge photo

SHAUN STANLEY/Durango Herald

Finance guru Bob Haugen pauses in the study of his home outside of Durango. Widely known in financial circles, Haugen recently published a study showing low-risk stocks have higher returns than high-risk equities, a finding that runs counter to much of conventional wisdom.

Local finance guru Robert Haugen says he has a controversial finding for the world’s stock market experts: Low-risk stocks actually have a higher return for investors than high-risk ones.

Haugen, president of Haugen Custom Financial Systems, just completed a 21-year study that examined the returns in 32 countries between 1990 and 2011.

“We find that risk has a negative payback in every country,” said Haugen, who completed the study with Nardin Baker, a chief strategist at Golden Alpha, Guggenheim Partners Asset Management.

This finding includes the United States. Haugen found that low-volatility stocks over time produce the highest returns in the United States.

Between 1990 and 2011, the study shows the least volatile decile of U.S. stocks made average returns of 12 percent, while the most volatile lost 7 percent, according the Financial Times.

There are few exceptions to this, such as during the tech bubble when investors were racing to put money into technology stocks, Haugen said.

“There was a three-year window where you fell behind high-volatility stocks for a very brief time because the market was roaring, and low-volatility stocks when the markets roars, don’t roar with them,” he said. “But when it falls, they (low-volatility stocks) don’t fall with the market, either.”

Haugen’s study was featured in a May article in the Financial Times. He was also featured in Money Magazine’s June issue as part of an in-depth report on how to make investments safer.

The study’s results could change how investors buy stock, but it hasn’t been an easy road for Haugen.

Haugen and his economics professor at the University of Illinois at Champagne-Urbana, Jim Heins, published a paper in 1975 that also showed high-risk stocks produce lower returns.

“It’s been a struggle for 40 years trying to get this done,” he said. “The first paper got shambled in the reviewing process, and it finally got published, but it was just a shadow of its former self.”

Investors should wait about three years before judging a return on stocks, Haugen said, and the safest stocks are generally uninteresting ones that poke along.

Money Magazine picked seven low-risk stocks that provide good returns, including Walmart and General Mills.

If you’re looking to buy small stocks, Dec. 31 is a good time to do so, according to Haugen.

It’s called the “January Effect” because it is the start of a new year, and investors are setting up stocks for the next year, which affects the price of stocks and small-stock investors can make money, Haugen said.

jdahl@durangoherald.com