Tom Gardner, CEO and co-founder, and Ayal Cusner, Investing AI & Automation lead at The Motley Fool, discuss the math behind stock volatility, owning growth-oriented companies, and the long-term rewards of stock investing. They explore the benefits of long-term investing, diversification, and understanding financial data for achieving financial independence.
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Quick takeaways
Understanding the math behind stock volatility is essential for weathering market storms.
Longer time horizons increase both volatility and potential gains in investments.
Deep dives
Understanding Volatility and its Relation to Growth in Stocks
Volatility in the stock market is driven by human emotion, uncertainty, and growth prospects. Stocks with higher volatility levels, around 30-40% per year, are more likely to experience significant price swings. Understanding the relationship between volatility and growth is crucial for investors in achieving desired returns despite the inevitable market fluctuations.
Effects of Time Horizon on Portfolio Performance
The longer an investor holds stocks, the greater the volatility experienced, but also the higher the probability of making significant returns. Holding the S&P 500 for a day yields 57% positive days historically, whereas holding it for 20 years results in a 96% likelihood of positive returns. Longer time horizons increase both volatility and potential gains in investments.
Significance of Portfolio Diversification and Allocation
Proper diversification in a portfolio plays a crucial role in reducing overall risk. Identifying and managing common sources of risk across different types of stocks contributes to a balanced risk-return profile. By understanding the unique characteristics and risks of individual stocks, investors can strategically allocate their portfolio to capitalize on growth opportunities while mitigating volatility.
Understanding the math can help you weather the storm as a stock investor. Ayal Cusner, Investing AI & Automation lead at The Motley Fool, joins CEO and co-founder Tom Gardner to talk about the data that can give you more peace of mind when the market goes sideways. In this episode they discuss: - The math behind stock volatility - The fundamentals of owning growth-oriented companies - The potential long-term rewards of going on stock investing’s wild ride To learn more: How to Calculate Volatility of a Stock - https://www.fool.com/investing/how-to-invest/stocks/how-to-calculate-stock-volatility/ Understanding Portfolio Diversification - https://www.fool.com/investing/how-to-invest/portfolio-diversification/ Host: Tom Gardner Guest: Ayal Cusner Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd