Goldman: Investors looking to beat the calmest market in 50 years are doing it wrong

Stock markets are as calm as they've been in five decades, causing investors to crowd into funds that aim to minimize volatility. Goldman Sachs is questioning whether that is the right goal in such a calm market.

"Fund managers should seek to maximize prospective risk-adjusted returns rather than minimize realized volatility," said Goldman Sachs' chief U.S. equity strategist, David Kostin.

Put simply, investors are focusing too much on finding stocks that offer just low volatility and not enough on stocks that offer both low volatility and high returns.

Kostin has updated the bank's list of stocks that can maximize returns in a low-volatility market, removing tech giants Facebook and Alphabet and adding stocks including Autozone, Discover Financial Services, Dollar Tree, HP Inc. and Intel.

A widely watched number called the VIX, which is an options-based measure of how much it would cost to protect a stock portfolio from a market decline in the near future, remains near record lows.

Investors looking to maximize returns should focus on stocks that have a high Sharpe ratio, a calculation that compares the performance of a stock to the return on a relatively risk-free investment such as a government bond. It helps an investor judge whether the return on the stock is greater than the additional risk taken to generate that return.

Goldman said the median stock on its new list had three times the expected risk-adjusted return of the median S&P 500 stock. The firm said consensus expects 21 percent upside for this group of stocks versus 6 percent for the median S&P 500 stock.

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

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