Systematic Relative Strength

Lots of investors have avoided the stock market since 2009, only to miss out on a long run of good performance. Now, of course, they are concerned about buying because the market is near a 52-week high. Essentially, they are worried about buyer’s remorse—that bittersweet feeling when the market goes down right after you decided to join the party. In practice, this usually just means they will wait even longer to get in and will thus buy at an even higher price.

While it is impossible to know what the market will do next, buyer’s remorse might not be as significant as it seems. World Beta reprised a recent piece from Steve Sjuggerud on what happened when buying near new 52-week highs and lows:

We looked at nearly 100 years of weekly data on the S&P 500 Index, not counting dividends. You might be surprised at what we found…

After the stock market hits a 52-week high, the compound annual gain over the next year is 9.6%. That is a phenomenal outperformance over the long-term “buy and hold” return, which was 5.6% a year.

On the flip side, buying when the stock market is at or near new lows leads to terrible performance over the next 12 months… Specifically, buying anytime stocks are within 6% of their 52-week lows leads to compound annual gain of 0%. That’s correct, no gain at all 12 months later.

Using monthly data, our True Wealth Systems databases go back to 1791. The results are similar… Buying at a 12-month high and holding for 12 months beats the return of buy-and-hold. And buying at a 12-month low and holding for a year does worse than buy-and-hold. Take a look…

The same holds true for a more recent time period, this time starting in 1950…

History’s verdict is clear… You’re much better off buying at new highs than at new lows.