While there tends to be a positive correlation between risk and reward over the long term, some investors prefer to err on the side of caution when it comes to stock selection. Better to saunter to significant wealth than shoot for the stars and risk running out of puff along the way, might be their philosophy. Enter low beta shares -- the sort of companies that experience less price volatility relative to the market, particularly during times of economic strife.
Although we won't get bogged down with calculations, the trick here is to look for shares with a beta of less than one. This essentially means that a stock is less susceptible to movement than the market (which always has a beta of one). So, a beta of 0.9 would suggest that a company is 10% less volatile. Anything greater than one and you have the opposite effect.
With this in mind, here are just three examples of stocks that low-risk equity investors may wish to consider.
Thanks to its virtual monopoly and our constant need for power, National Grid(LSE: NG) is the go-to utility for many investors. Despite a brief wobble back in November, shares in the FTSE 100 constituent have returned to form in 2017, rising almost 9% in the last three months. Although not as cheap as they once were, a valuation of 16 times earnings isn't completely unreasonable given the security that a company like National Grid offers (with a beta of 0.67). A 4.7% yield is also over four times that offered by the highest-paying instant access cash ISA currently available. Its shares won't rocket, but that's surely not the point.
Cruise operator, Carnival(LSE: CCL) is another pick for those with an aversion to volatility. With the popularity of voyages rising and boasting a beta of just 0.41, the Southampton-based business looks a sound selection. In addition to rising just over 23% over the last 12 months, Carnival's stock also still looks reasonably priced on 16 times earnings (reducing to just 13 in 2018, assuming earnings per share growth of 16% is achieved).
Thanks to legislation growing all the time, health and safety equipment supplier, Halma(LSE: HLMA) completes our trio of low beta beauties. Like National Grid, Halma's stock dipped towards the end of 2016. Since mid-January, however, a resurgence of interest has seen its price rise almost 13%.
Thanks to its stellar dividend history (37 years of consecutive growth), shares in Halma have rarely been cheap and currently trade on a price-to-earnings (P/E) ratio of 26 for 2017. Nevertheless, with a beta of 0.61, the FTSE 250 constituent takes some beating as a 'get rich slowly' option.
Don't forget to diversify
Of course, there are no guarantees when it comes to investing. Just look at how BT's share price plummeted following revelations of dodgy accounting within its Italian operations or how Tesco felt the wrath of investors back in 2014. And let's not even get started on the once utterly-dependable banks. To be clear, beta values can change over time and only give an indication of risk.
As a result, it's never a good idea to be over-invested in any one company, even if the majority of your portfolio is concentrated in what are perceived to be relatively stable businesses. A degree of diversification across different sectors and industries is still vital when aiming to grow your capital.
Make no mistake
Investing may be inherently simple but failing to pick investments that match your risk profile could prove a costly error.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.