Zero-Beta Portfolio

When you have a portfolio of all kinds of fun security-goodies, you can calculate the “beta,” which is the overall risk your portfolio has (in comparison to the market, or to a set benchmark).

You can tinker with individual eggs in your basket to make your beta more or less risky. As people get closer to retirement, usually you want your beta to get less risky, which means closer to zero. When you’re at a beta of one, your risk is equal to the market, or your benchmark. Above one means you’re living on the edge, taking on more risk for the hope of higher returns.

A zero-beta portfolio is when there’s zero systematic risk, which is when your beta is zero. If you had a portfolio with a beta of zero, you could watch everyone rejoice at bull markets and weep in the corner during bear markets while your portfolio is completely unaffected by any of those market changes. This is good if you’re close to retirement, since that’s not the time to be playing with the potential to lose a lot of money, which you’ll need as your income.

So how is the zero-beta portfolio achieved? You can balance things out by pairing together a mutual fund or ETF with a bond fund that has a negative beta. Don’t forget: a portfolio could include “alternative” securities like real estate and land, which are safe from stock market fluctuations, and futures contracts, which can help an investor hedge bets on the market. Living the zero-beta-portfolio life may be a boring ride, but it’s a green pasture if the rest of the economy turns into a desert.