Is the relationship between risk and return broken?
Mark and Shani run through Bob Haugenâs research that explores whether lower-volatility stocks outperform higher-volatility stocks over time.
Markets are often driven by excitement. Investors gravitate toward companies with big growth stories, dramatic price moves, and constant media attention. In this episode, we explore a counterintuitive idea: boring investments may actually deliver better long-term outcomes.
The discussion starts with a recent market shift. After more than a decade where US technology stocks dominated global markets, late 2025 and early 2026 saw signs of a rotation. Less glamorous sectors like industrials and consumer staples, companies often considered âboringâ began to outperform the high-flying tech names that had captured investorsâ attention for years.
To understand why this might happen, we revisit the work of Bob Haugen, a pioneering quantitative investor and academic who spent much of his career challenging a core assumption in finance: that higher risk should lead to higher returns. Haugen argued the opposite - that lower-volatility stocks often outperform higher-volatility stocks over time.
You can find the full article here.
You can find the transcript below:
Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.
Shani Jayamanne: So, Mark, before we started recording, you were telling me a story about something that happened to you last night and you described it as your greatest professional achievement or accomplishment in your life. So, do you want to tell us what it is?
LaMonica: No, I think thatâs true. I was walking back from squash and you know thereâs that Japanese izakaya in my building and I was walking by it â and I go there occasionally and I kind of know this waitress and she runs out of the izakaya and stops me on the street and she says to me that somebody came in â a guy came in and brought his daughter and they came in because they read about it in my article. So, I put this dumb thing at the bottom of my article that outlines a place where I go and get food and somebody actually acted on it and I didnât know anyone read it, except for one person. There was an official complaint where somebody was like, why are you putting this in the article?
Jayamanne: You get a lot of really nice things. Like some people say that they skip the article and they scroll down to the food section.
LaMonica: Thatâs a nice definition of nice that theyâre skipping everything else there.
Jayamanne: Halfway to being a food critic, Mark.
LaMonica: No, itâs exciting. And the waitress said that next time I come in, theyâll buy me a drink.
Jayamanne: Thatâs awesome.
LaMonica: I donât know, do you think I have to report that to compliance?
Jayamanne: I donât know. Youâll have to figure it out, Mark. This doesnât sound like itâs going to be the last time.
LaMonica: Wow.
Jayamanne: Yeah.
LaMonica: All right. Well, thatâs exciting.
Jayamanne: But weâve spent some time talking about what comes at the end of your column, but todayâs episode is going to focus on what comes before that.
LaMonica: The part that people skip.
Jayamanne: And specifically, weâre going to talk about a recent article that you wrote asking if boring was better when it comes to investments. So, give me a little bit of background to this.
LaMonica: Okay. Thereâs been a lot of talk, I guess kind of end of 2025, going into 2026, that thereâs a rotation happening in markets, and I guess kind of two different ways. So, for a long time, US tech shares have outperformed everything. So, everything else in the US, all the other global markets, and that has changed. So, itâs been a relatively short amount of time, but other sectors are outperforming. And also, then if you look outside of the US, the US has outperformed, because of those tech shares, has outperformed almost every other market for a long time. Well, now other markets are outperforming the US. And so, whatâs basically happened is all these â and weâll get into a definition â âexciting tech companiesâ have been replaced by boring companies. And I wanted to explore that trend. And thatâs what the article is on.
Jayamanne: All right. So, letâs talk a little bit about your definition of boring, because thatâs a little vague. And it could mean different things to different people. So how do you define boring?
LaMonica: Okay, well, thereâs going to be a main character in this podcast, and not you like it normally is. So, thereâs going to be this main character. Weâll introduce him in a second. But Iâm using his definition of boring. And basically, he said boring companies are less volatile. So, whatâs happened in the US, whatâs outperformed recently are two of the least volatile sectors in the US, consumer staples, and industrials. And theyâre outperforming everything else. Theyâre not volatile, they meet that definition of boring.
Jayamanne: All right. So, this is a good time to stop and define the two volatility measures weâll use during the rest of the podcast. So, the first is standard deviation. And that measures the dispersion of returns around the average return. And this is typically something you see for a market or a fund or for an ETF. And the next is beta, which is typically used for individual shares and measures the sensitivity of a share to market returns. And weâll come back to those. But first, itâs time to introduce the main character of your story, Mark, who is Bob Haugen.
LaMonica: So, he was a professor at several different universities in the US. And he started a quantitative investment manager back in the 1960s, which made him a pioneer in quantitative investing. So, heâs no longer with us. He passed away in 2013. And if you look at a picture of him, he looks kind of exactly what you would think a professor and guy who runs a quant shop looks like. So, heâs just an old white guy. He looks like a finance professor. But after he died, I read this tribute to him, and they called him a rebel economist with a cause.
Jayamanne: Well, not many economists are described in that way, Mark.
LaMonica: Thatâs true.
Jayamanne: But he did have a cause and he did pursue it relentlessly for his entire career. And that cause was that boring or low volatility shares offered the highest returns. Now, this may seem like a pretty tame argument. There are people that advocate all the time for certain investing styles. So, what was so different about this, Mark?
LaMonica: I mean, I think he wasnât just advocating for investment style. He was also attacking the cornerstone of modern finance theory. And he really attacked it. So, this wasnât just some kind of intellectual debate. He basically claimed â and youâll like this â there is a conspiracy between investment professionals and academics to peddle this theory that was wrong. And he wanted all finance textbooks to be rewritten. And heâs really passionate about this. So, you love conspiracies. How do you feel about sort of investing conspiracies?
Jayamanne: I want to know more.
LaMonica: Exactly. So, there we go.
Jayamanne: So, he was attacking the relationship between risk and reward. And risk is volatility and the reward is returns. We talk about this all the time on the podcast that there is a relationship between volatility and returns. The more volatility you take on, the more return you can expect to receive. And that is why shares have a higher return than bonds.
LaMonica: Now, what Haugen was doing is, he was going after the application of this logic within an asset class and that asset class was shares. So, thereâs something called the capital asset pricing model and itâs using that same principle and beta that we talked about before. Theyâre using beta as a measure of volatility. So, if a share has higher beta, the capital asset pricing model says that there should be a higher return over the long term. So thatâs really what he was going after.
Jayamanne: And he thought that this wasnât true and he used return data to show it. He did countless studies, but we can look at a paper published a year before his death in 2012 called the âLow Risk Stocks Outperform within All Observable Markets of the World.â
LaMonica: I liked the title because thereâs no ambiguity in that title.
Jayamanne: No. You know what youâre getting, front-up.
LaMonica: Exactly.
Jayamanne: So, the paper covered share markets and their returns between 1990 and 2011 in 21 developed countries and 12 emerging markets. Each month shares were ranked by volatility over the previous 24 months and placed into deciles. They examined the returns for each volatility decile.
LaMonica: And from the title of the paper, you can probably guess at the results. So, in every single country, the lowest volatility decile outperformed the highest volatility decile over a rolling three-year period, except for two instances â the height of the dot-com bubble and right before the GFC, so the Global Financial Crisis.
Jayamanne: Now itâs one thing to show some data, but you also need an explanation. And his explanation was pretty simple and he did have data to back this up, which Mark will go into. But the premise is that professional investors and individual investors are drawn to more volatile shares (ex-zoned) by the media attention that focuses on these shares that are more volatile.
LaMonica: And so, I think this passes the commonsense approach. The media does tend to focus on shares that have increased significantly or fallen significantly. But letâs look at some of the data that he used. So, I actually didnât go into this in my article because along with people not liking the food section, they also think theyâre too long.
Jayamanne: So, this is an Investing Compass exclusive.
LaMonica: Exactly.
Jayamanne: Okay.
LaMonica: So, get ready. All right. So, letâs start with the professional investors. Many professional investors are compensated with a base salary and then a bonus. And a lot of the bonuses are reliant on outperforming the market.
Jayamanne: And the base salary is pretty good generally. But if youâre also trying to maximize your bonus, it might make sense to try to build a more volatile portfolio. Because if the market goes up meaningfully, your portfolio is likely to outperform earning you a bonus. But if the market goes down, you will likely underperform, but you still have that ample base salary as long as you donât completely screw it up and lose your job.
LaMonica: And thatâs what we try to do every day here.
Jayamanne: Yes. Really hard.
LaMonica: Not completely screw this up and lose our jobs. So thatâs once again theory and explaining why this might happen. But he looked at a thousand shares in the US between 2000 and 2009. Once again, divided them into those deciles based on volatility. He then looked at institutional ownership of those shares across all of the deciles and sure enough, institutions own more of the more volatile shares. Then he looked at analyst coverage and the more volatile shares were covered at a higher rate by analysts. Then he looked at media coverage and sure enough, the media covered the more volatile shares more.
Jayamanne: And his hypothesis is that greater ownership leads to the shares becoming overpriced relative to their inherent value and overpriced shares tend to earn lower returns in the future.
LaMonica: So thatâs Haugen for you in a nutshell.
Jayamanne: So, the question for you, Mark, is does this argument resonate with you?
LaMonica: I mean, you can probably guess the answer. You call me a boring person frequently and I do like to invest in boring shares. So, a lot of that is part of being an income investor. So generally, shares that pay dividends are less volatile, kind of boring old school companies. But I think itâs really important to be careful here because all of us are drawn and seek out information that validates what we already think. So thatâs called confirmation bias.
Jayamanne: Now, when you apply Haugenâs theory to something like passive investing, it would mean that equal-weighted indexes would outperform market capitalization-weighted indexes. Larger shares are owned more because they are the largest parts of the index. And that makes them more overvalued by definition.
LaMonica: Now, since he published this paper, it is important to say that the exact opposite happened in the US. So, in the US, there are lots of different indexes. And over the last 10 years, the S&P 500 market capitalization-weighted index outperformed a low volatility index by over 7% a year. And the best-performing index was the high volatility S&P 500 index, which outperformed the market capitalization weighted index.
Jayamanne: So, whatâs your reaction to this, Mark?
LaMonica: All right. Well, I have two reactions. So one is that potentially the increasing popularity of passive investing in market capitalization weighted indexes has changed the market. So, we canât discount that as a possibility. But I would also say that all of us need to be prepared for certain strategies to underperform for periods of time and sometimes long periods of time. So, for example, during the lost decade, so thatâs the first decade or the 2000s, where the S&P 500 market capitalization weighted index had a negative annual return. Well, during that decade, the equal weighted index outperformed by nearly 6.5% a year. So, what that means is more shares went up than down, but that index was dragged down by the large shares that did so poorly after the dotcom bubble burst.
Jayamanne: And as a parting note, we want to remind you that the best thing to do is find a strategy that fits what youâre trying to achieve and one that youâre confident in. For Mark, that is buying more boring shares. For me, that is mostly using market cap indexes. Trying to change strategies constantly is a terrible way to invest. And weâve talked frequently about the consequences of chasing performance. The summary is that it just isnât good.
LaMonica: So, weâll have to wait and see if the first decade of the millennium and all of the data and research that Haugen did is indicative of what will happen with markets or if things have shifted. And weâll probably be sitting here. At least youâll be sitting here maybe 10 years from now with a new host and can go through that data. So, thank you all very much for joining. We really appreciate it.
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