Stock Returns Are Like Gaining Weight
The big gains happen over just a few days.
(You’ll find the text version below this embedded video)
Stock market returns are like gaining weight— the big gains happen over just a few days (credit to Phillip Pearlman for coming up with this analogy).
Research has shown that the average person gains 1 to 2 pounds per year (0.5 to 1 kg) from early adulthood through middle age.
But this weight gain isn’t distributed evenly throughout the year.
According to a study that tracked the weight of subjects in the U.S., Germany and Japan, people tend to lose a little bit of weight every day for most of the year.
But then once the holidays roll around, that reverses and people start to add weight—really fast.
Take a look at this chart from the New England Journal of Medicine. You can see that people go from losing weight on average to gaining weight on average around Christmas and New Year.
This makes sense. During the winter and especially the holidays— it’s cold, people stay inside, they move around less, and they eat more.
What Phillip argues is that you should be conscientious of this. It doesn’t mean you shouldn’t enjoy the holidays, but just be mindful that it’s around this time of the year that people tend to have unhealthier habits when it comes to food and exercise (if you’re mindful, you’re more likely to make good decisions).
So, how does this relate to investing?
Well, there’s a similar pattern in investing. Most of the big gains in the stock market tend to happen in just a handful of days.
Over the past four decades, if you missed just the five best days in the market, you’d have 38% less money than if you stayed fully invested. If you missed the 30 best days, you’d have 84% less money.
That’s why it’s so important to stay invested through thick and thin. If you miss just a few of the really big up days in the market, your returns will suffer enormously.
So this is a pretty interesting analogy: big gains in both the stock market and our waistlines happen over just a handful of days.
But of course, the takeaway is different. With stocks, you want to capture those big gains; when it comes to weight, you usually want to avoid the big gains.