Applying Exercise Principles to Investing

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Those of us who work out regularly understand there is a huge difference between interval training and steady, consistent exercise. As its name implies, interval training focuses on raising and lowering your heart rate repeatedly over the course of a workout.  Even when your heart rate drops, your muscles are still exerting energy –just at a lower rate, until you turn up the energy again! In contrast, stable exercise elevates the heart rate to a plateau maintained over the course of the workout. Both methods are valuable, but for different reasons.

As I mounted my spin bike for an interval training session this morning, I was struck by how the financial markets can resemble interval training or a steady workout.  While individuals’ workout preferences vary, investors tend to favor consistent markets characterized by stable, steady growth (even realizing that’s not typical market behavior).

While the “ups and downs” in interval training keep me engaged and energized throughout the workout, a market that bounces up and down several percent a day doesn’t deliver the same positive energy. For investors, the key is to prepare for the coming workout, whether or not it’s the workout preferred.

The most popular questions I’m hearing this week are, “Joe, how can the S&P 500 really move by several percent in a single day?’ and ‘Can any single day’s event cause that much movement in the index?” The answers can be found by looking at some market basics.

First, the S&P 500 is an index of companies. The problem is investors and the media refer to the S&P 500 as an index of stocks. There is a huge difference between a company and its stock price especially over a short period of time. When looking at the market through the lens of book value, it would require extraordinary circumstances to make all the companies in the S&P 500 truly move several percentage points in a single day. Companies themselves – especially in mass – are more like plow horses moving steadily along with minor changes from quarter to quarter.

Stock prices are a very different discussion. Stocks tend to move based on data for the individual company, overall economic developments or headline stories and especially investor sentiment.  When headlines are uncertain and investor sentiment turns bullish (positive) or bearish (negative) markets may move wildly.

Monitoring activity over time provides perspective. It is good to record your exercise progress over weeks, months and even years. The information provides a valuable frame of reference as you move toward your fitness goals. When we examine the performance of the equity markets over time, we see there is more interval training (volatility) than we remember. On average, the S&P 500 contracts by 10% from its peak to its trough or bottom in a given year.  Looking at the last two years – up until August 24, 2015 – the markets steadily moved forward. Things have changed! Normal volatility and perhaps excess stored volatility from the last two years has arrived. Prepare for the workout ahead.

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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