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Sell at market highs, or low? Steve Sjuggerud     | Should You Buy at New Lows? Or New Highs? Tuesday, April 2, 2013
When stocks hit a new 12-month high, people get scared... They sell. They get worried that the market must be about to fall. On the other hand, when stocks hit a new low, they might figure they're getting them "on sale."

So we tested which strategy works better: Buying near 52-week lows… or buying at 52-week highs. 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… 1791 to 2012 All periods 4.3% New Highs 5.5% New Lows 0.9% The same holds true for a more recent time period, this time starting in 1950… 1950 to 2012 All periods 7.2% New Highs 8.5% New Lows 6.0% History’s verdict is clear… You’re much better off buying at new highs than at new lows. You might not agree with it… but it’s true.

You might want to "catch a falling knife" and buy when stocks are at new lows. But if you do, realize you are fighting against more than 220 years of historical precedent. So, instead of fighting it ... embrace it... it can keep you from losing money by buying too early, and it can allow you to capture bigger gains by not selling too early.

Dr Steve Sjuggerud, Should You Buy at New Lows? Or New Highs?
 
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