Dissecting The Irrational Enthusiasm For Stocks

buyers and sellersDavid Fabian: The market is designed as a mechanism to humble even the most confident investor. At one point or another, we have all been caught up in the rapid groundswell of enthusiasm that supports any bull market. The fever, the euphoria, and the hype are all designed to get you on the same side as the rest of the crowd.

The SPDR Gold Shares ETF (NYSEARCA:GLD) had an amazing run from 2008-2011. I remember the advertisements on TV for gold IRA’s and merchants hawking “cash for gold” on every corner. It seemed for a while there that gold would never lose value. Everyone who was in it was sure to make money. Every expert touted its inflationary attributes and long-term track record. Those that got in early surely made a lot of money and are patting themselves on the back for their prescient timing and intuitive foresight.

But what about those that weren’t so lucky? What about the investors who held out for so long and then capitulated near the highs?

They are more than likely sitting on hefty losses and cursing themselves for not heeding the warning bells that were flashing in the back of their minds. It happens to the best of us and can be a frustrating cycle of greed and fear that continues to erode investor confidence and trading discipline.

In that same vein, I was not surprised to see a recent story about US equity fund flows seeing record volume in July. Stock ETFs and mutual funds pulled in a staggering $40.3 billion in a single month while the SPDR S&P 500 ETF (NYSEARCA:SPY) was hitting new highs. Performance chasing investors were likely lured out of bond funds near their lows and into stocks near their highs as they try to assuage their performance anxiety. The story did note that an even greater amount of money went into cash and money market funds as well.

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