Course 103: Investing for the Long Run
Volatility of Single Stocks
In this course
1 Introduction
2 Volatility of Single Stocks
3 Volatility of the Stock Market
4 Over the Long Term, Stocks Are Best
5 Time Is on Your Side
6 Why Stocks Perform the Best
7 The Bottom Line

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. For instance, Monster Beverage (MNST), the maker of the popular energy drink, had the highest 10-year return of all S&P 500 stocks as of October 2012. If you had invested $10,000 in Monster in 2002, your investment would have been worth over $2 million by October 2012.

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.

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, J.C. Penney (JCP) stock has lost more than 7% per year on average over the last three years, declined 13% per year on average over the last five years, and long-term shareholders have suffered an average 3% decline per year over the last 15 years. This compares with a 5% average annual return for the S&P 500 Index over the same time period, and a 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.

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