Investing during all-time highs can be good strategy
2 min read . Updated: 01 Jan 2021, 12:10 AM IST
PremiumExperts advocating momentum investing, say buying stocks near all-time highs can be a rewarding strategy as well
With markets at all-time highs, the general advice is to book profits. However, experts advocating momentum investing, say buying stocks near all-time highs can be a rewarding strategy as well. Mint analyses why buying stocks at their highs can be a legitimate trading strategy.
Is investing amid all time highs justified?
The idea of investing is to buy low and sell high. Buying high is thought of as a poor strategy. But as it turns out, those who bought index stocks during the dot com boom, ahead of global financial crisis, have all made good returns. The reason for this is simple. The market hits new all-time highs in a rally, and not all of these instances end up being the peak of the rally. In the rally that began in 2003, for instance, the markets reached new highs every few months until the peak of January 2008. The strategy of buying stocks at the end of each month, when all-time highs were reached, resulted in a fairly low acquisition price.
Has investing at highs paid off recently?
When the markets crashed in February and March 2020, investors were applauding those who had the foresight of booking profits just before the crash. But as it turns out, by the end of the year, a purchase of a Nifty index fund even at the peak of mid-February 2020 would have generated annualized returns of 17%. Of course, the sharp recovery in stocks this year has been unusual, and a repeat can’t be guaranteed. It just lends further support to the advocates of momentum style investing, which means that when market returns look good, it attracts more investors, which result in new all-time highs.
Has such a strategy paid off over a longer period?
Analysts at JPMorgan point out in a study: “If you invested in S&P 500 on any random day since the start of 1988 and reinvested all dividends, your one-year total return was 11.7%. Now, what do those figures look like if we only consider investments on days when the S&P 500 closed at an all-time high? They’re actually better! Your average total return was 14.6%."
Can investing at highs backfire any time?
Markets have their cycles, and a sharp reversal can hurt investors. The idea, then, to gain from a momentum style of investing, is to get in early and have an exit strategy. Just as putting all eggs in one basket is a recipe for disaster, investing large amounts at a given point is asking for trouble, more so when it comes to investing at all-time highs. Proponents of investing at peak suggest making a switch to bonds or debt when the markets correct beyond a certain threshold. This way, one can shift gains into other asset classes.
What all factors should investors keep in mind?
Investor returns depend on how long one is invested and the levels of markets in future. When one’s time horizon is decades, it doesn’t matter whether one is investing at highs. The fact also remains that investors waiting for the market to correct may not see it while the market continues to rise. So, the opposite is also true—that you might tend to miss out on making returns if you are not invested. An asset manager specializing in momentum investing is also key in avoiding missteps, and for help in booking profits at right intervals.
