This Investment Strategy Beats The Market: Boring Stocks Are Good

Can boring stocks really outperform?

Low-volatility investing is often seen as a “safe but slow” strategy. It focuses on stable, less risky stocks that don’t swing wildly in price.

But what if these “boring” stocks could beat the market, especially when combined with a bit of leverage? That’s precisely what a group of researchers set out to explore. Their findings reveal a powerful and underused way to boost long-term returns. This article is based on the research paper by van der Linden, Soehbag, and van Vliet and is called Leveraging the Low-Volatility Effect.

What Is Low-Volatility Investing?

Low-volatility investing means picking stocks that show smaller price swings over time. While it might sound dull, these stocks have a surprising advantage: they tend to deliver higher returns per unit of risk compared to the overall market.

This is called the low-volatility effect, and it has become a popular investment style over the past two decades.

Why Low-Volatility Stocks Sometimes Lag Behind

The biggest challenge with low-volatility investing is that it can underperform during long bull markets. Investors may feel like their calm stocks are being left behind when the market is soaring. That’s one reason why some give up on the strategy too soon. They are liable to recency bias and unable to think long-term (history shows these stocks have outperformed).

They may not jump as high during big bull markets, but they also don’t crash as hard when things go wrong.

The Solution: Add Smart Leverage to Low-Volatility Portfolios

The researchers found that this problem can be solved using a little leverage. Investors can scale up their exposure to low-volatility stocks by borrowing money or using futures without adding too much risk.

For example, they tested a portfolio that invested 140% in low-volatility stocks by borrowing 40%. This leveraged version achieved a strong annual return of 12.5%, well above the market’s 10.4%, offering better risk-adjusted returns.

How the Low Volatility Strategy Works

The study compared two main strategies:

The Lowvol portfolio picks the 100 calmest stocks from the 1,000 largest U.S. companies.

The Lowvol+ portfolio takes it further. First, it selects the 500 stocks with the lowest volatility. Then, it chooses the 100 best based on two factors:

• Price momentum (stocks that have been rising recently)
• Payout yield (dividends and share buybacks)

This combination of stability, upward trends, and shareholder returns leads to a high-quality portfolio that performs well both with and without leverage. The table below summarizes the results.

Accumulated the differences snowballs over time because of the compounding effect:

The authors have included borrowing costs.

Futures: A Simple Way to Add Leverage

Instead of borrowing money directly, investors can also use equity index futures to add leverage.

This approach requires less capital and is more liquid and cost-effective. Though returns were slightly lower than borrowing to buy individual stocks, the overall performance remained strong.

Risk vs. Reward: Sharpe Ratios Tell the Story

The study used the Sharpe Ratio to compare performance fairly, which measures return per unit of risk.

The market’s Sharpe ratio was 0.5. The leveraged Lowvol+ portfolio achieved 0.73, while the unleveraged version scored at 0.68. This shows that low-volatility strategies don’t just perform well – they do so efficiently.

Key Takeaways for Investors

Low-volatility investing isn’t just about playing it safe. It becomes a powerful tool for long-term wealth building when combined with careful stock selection and moderate leverage. To make the most of it:

• Focus on high-quality, low-volatility stocks—not just anything “calm.”
• Don’t avoid using a little leverage, but understand the risks.
• Futures can be a smart, simple alternative to borrowing.
• And remember: in investing, boring often beats flashy.

Conclusion: A Smarter Way to Beat the Market

This research shows that investors can unlock stronger and more consistent returns by adding a small amount of leverage to low-volatility strategies.

It reminds us that sometimes, the quietest strategies can speak the loudest over time.