Stocks have to be the only entity in the world that become more attractive to investors as the price goes up. Imagine if prices at Macy's were at all-time highs this Christmas? It's safe to say there'd be no lines and unbelievable service.
But if you apply the same attribute to the Dow Jones Industrials (^DJI), for example, it's only then that people really start to get interested.
"Decades of research into behavioral analysis suggests that people chase returns," says Jeff Kleintop, chief market strategist at LPL Financial who just published a report on the subject. "They don't get ahead of them, they get behind them."
And right now, as he explains in the attached video, there's an even greater enticement out there than the seemingly endless string of new all-time highs that stocks have posted this year. Specifically, five-year average returns.
That's right. Kleintop's research shows that it's five-year average returns that influence investors the most, acknowledging that the one-year and three-year averages have been hugely positive for years already.
Of course it's no secret that the second half of 2008 was a disaster for the stock market, but Kleintop says for the first time in years, the one, three and five-year averages are all boasting double-digits returns. A number that not only makes 2% bond returns look all the more feeble, but one that is also about to get even great as the averages shoot north of 20%.
"It's the 5-year trailing return that individual investors have (historically) tended to follow with the (money)-flows into U.S. equity mutual funds," he says.
While many will argue that individual investors are deserving of their "dumb money" moniker, and are famous for buying high and selling low, Kleintop says that's actually only true at extremes.
"Investors are worried they're missing out and they're finally moving in en masse," he says. "The individual investors has trillions of dollars that they could move into this market and they're just starting to do it."
If he's right and the market continues to set new highs, then this bull run market is long from over. "It's only when we get out to maybe 2017 or so where we do need to worry about that stampede into the market."
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