Volatility of Single Stocks

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Volatility of Single Stocks

Individual stocks tend to have highly volatile prices, and the returns you might receive on any single stock may vary wildly. If you invest in the right stock, you could make bundles of money.

Things To Know

  • Individual returns can vary wildly.
  • Most stocks won’t double in the coming year, nor will many go to zero.

Here is an example

For instance, Monster Beverage (MNST), the maker of the popular energy drink, had the highest 15-year return of all S&P 500 stocks as of February 2017. If you had invested $10,000 in Monster in the late 1980s, your investment would have been worth over $5 million by February 2017.

But you could also lose wildly

On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment. In the early 2000s, there were hundreds of examples of dot-com investments that went bankrupt, and during the 2008 financial crisis, once-storied Lehman Brothers collapsed entirely and Wall Street cornerstone Merrill Lynch was acquired by Bank of America (BAC) at a fraction of its pre-crisis value.

But most stocks aren’t like this

Between these two extremes is the daily, weekly, monthly, and yearly fluctuation of any given company’s stock price. Most stocks won’t double in the coming year, nor will many go to zero. But do consider that the average difference between the yearly high and low stock prices of the typical stock on the New York Stock Exchange is nearly 40%.

In addition to being volatile, there is the risk that a single company’s stock price may not increase significantly over time. For instance, by late 2017, J.C. Penney (JCP) stock had lost more than 21% per year on average over the previous three years, declined 31% per year on average over the previous five years, and long-term shareholders had suffered an average 5.8% decline per year over the previous 15 years. This compared with a 7% average annual return for the S&P 500 Index over the same time period, and a nearly 6% return for the bond market.

Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs. Other times, that basket will hold the equivalent of a winning lottery ticket.