Wednesday, March 20, 2013

don't fear the high

Until the Dow's record on March 5 this year, it had gone 1,973 days without hitting an all-time high. According to Bespoke Investment Group (BIG), that's the sixth-longest stretch the Dow has ever gone without closing at a new all-time high. It's also the second time in the past decade that the Dow has gone more than two years without closing at a new all-time high.

These periods of "drought" are very rare.

As you can see in the table below, going back to 1900, there have only been 10 periods when the Dow went two or more years without closing at a new all-time high. For each period, also shown is how the index performed over the following one, three, six and 12 months.

Looking at the average returns, there isn't much credence to the argument that you shouldn't be buying stocks when the Dow is trading at an all-time high. Over the following one, six and 12 months, the Dow saw better-than-average returns. Furthermore, while the average maximum drawdown (loss) was a decline of 8.5% over the following 12 months, the magnitude of the average maximum gain was more than twice that at over 20%.

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