A Free Tool for Identifying Low Risk, High Return Investments
History may not repeat itself, but it often rhymes
– Mark Twain
Once you have made the decision to own common stocks, the specific individual stocks or funds (mutual funds or ETFs) you select should have risk/return characteristics that match your investment goals and your temperament. While past history is not indicative of future returns, some companies are simply better run than others. If a company or fund has outperformed the S&P year after year without much more volatility than the broad market, you maybe onto something. It is also instructive to study the performance of stocks and funds during various economic climates. Do they do well in bull markets, but do much worse than the market in a downturn? If you find one that performs well in all market climates, you may have spotted a gem. You can do further research about their future prospects. Are they in a dying industry or a growing one? How are their profit margins? Do they have a lot of debt?
A great place to start is by identifying stocks and funds with risk/return attributes matching your investment goals and temperament. In this context, risk is represented by the volatility. If you can’t sleep at night when your investments are down 30%, then avoid high volatility stocks and funds. You may use the risk/return calculator on this site to see the risk and return attributes of stocks, mutual funds and ETFs for any period of time. In fact it would be quite instructive to study these characteristics during different market climates, such as bull markets, bear markets and sideways markets. You can also compare the performance of securities to benchmarks such as the S&P 500, Nasdaq and the DOW.
There are no silver bullets for making great investments. There are also no guarantees. There is risk associated with all investments. Risk is never zero. The best you can do is to try to minimize risk through due diligence. There is no substitute for doing your homework before you invest your hard-earned money. Peter Lynch said that investing without research is like playing stud poker without looking at your cards. In his book The Only Three Questions That Count, Ken Fisher argued that you make money by “knowing what others don’t.” I hope my little calculator will be a helpful tool to find investment gems by knowing what others don’t.
I wish you all the best in your investment journey. Please use the Feedback link to send your thoughts or suggestions.
Part 1 – Investment Risk
Part 2 - What is a Low Risk Investment?
Part 3 – Is Index Investing The Answer?