Chasing Returns

November 11th Weekly Market Update

Decades of behavioral research suggest investors chase returns. In other words, they sell one investment to buy another that has performed better on the hope that it will continue to do so. Although this behavior is known to be very common, exactly which returns investors chase is less discussed. Do they chase returns over a month? A year? Three years? Five years?

For the U.S. stock market, it appears the rolling five-year has been the return that investors have most closely followed based upon their investing behavior in recent years. The five-year trailing annualized return for the S&P 500 has been weak, especially when compared with bonds, in recent years.

In fact, even as recently as the end of August 2013, the difference in the five-year annualized return between stocks and bonds was only about 2%, hardly enough to compensate investors for the volatility they experienced. Yet that difference has started to soar and may lead to investors chasing returns into the stock market.

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