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Low Risk, High Returns

NEW YORK ( TheStreet) -- In today's bull market, few investors may be thinking about risk.

That is the nature of a bull market for any asset class, especially one up more than 20% such as stocks in 2013. It is during a run-up, however, that investors should prepare for the inevitable downturn. For long-term investors looking for defensive holdings, the stocks with the lowest risk have been proven to have the highest rewards.

Russell Investments, a global asset manager that is a subsidiary of Northwest Mutual, conducted two studies on the returns of equities as related to the beta, or the measure of the volatility of an asset in relation to its market. It was determined that stocks with the highest betas, the most volatile ones, had lower returns than stocks that fluctuated less in price. In other words, investors can have it all: a low-risk asset with a high return when buying equities.

That means that what was learned about the risk/reward ratio is wrong. Investors don't have to accept a high level of risk in order to have a higher level of return. Greater total returns will come from stocks that are lower in risk.

After all, if a stock is performing well and rewarding its investors, why would they sell? It makes no sense to sell an asset that continually does well, not to mention taking the capital-gains tax hit on the profits. If the shareholders don't sell, then the price won't bob up and down like a high-beta asset. As a result, equities with the lowest betas probably do have the highest returns.

Let's take a look at a holding of Warren Buffett in the portfolio of Berkshire Hathaway (BRKA, BRKB). Buffett prefers companies that have wide economic moats, those features that will protect the business enterprise against the forces of time and competition.

Tops among his holdings as a performer has been Coca-Cola (KO), listed as one of Buffett's best investments of all times. He started to buy shares of Coca-Cola for Berkshire Hathaway back in 1988.

The return since has been more than 700%, far exceeding that of the Standard & Poor's 500 Index for the same period. While the beta for the S&P 500 is 1, the beta for Coca-Cola is 0.48. The dividend yield for Coca-Cola is 2.79%, above the 1.9% average dividend for a member of the S&P 500.
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