Is it really risky to invest at 52-Week Highs?
There's a common belief that investing in the market when it reaches a 52-week high is risky and often leads to disappointing returns. But is this theory true? Let's put it to the test.
Disclaimer: The information provided in this article is not investment advice and is intended solely for educational purposes. While I have made efforts to ensure accuracy, I cannot be held liable for any potential errors or omissions.
I analyzed Sensex data from January 2, 1986, to July 29, 2024, by calculating rolling 1-year returns. For those unfamiliar with this concept, here's how it works.
I looked at annual returns for every possible 12-month period within this timeframe. For example:
From January 2, 1986, to January 2, 1987
From January 3, 1986, to January 3, 1987
From January 4, 1986, to January 4, 1987
And so on, up until:
July 29, 2023, to July 29, 2024
This approach gives us a view of how the Sensex performed over every 12-month window between these dates. The median rolling 1-year return for the Sensex during this period was 12.8%.
Next, I focused on the dates when the Sensex hit a new 52-week high. For these specific dates, I calculated the forward 1-year return. The median forward return of all those dates came out to be 13.8%.
Remarkable, right? The median 1-year returns are marginally higher when investing during 52-week highs. However, this does not tell us the full story.
Let’s take a closer look at the return distributions.
A few things stand out.
As mentioned before, the median return for the Sensex after a 52-week high is slightly higher (13.8%) compared to the overall median return (12.8%).
The 25th percentile return for the Sensex after a 52-week high is positive (2%), whereas it is negative (-3%) overall. This indicates that the lower end of the return distribution is better when the market is at or near a 52-week high.
The average rolling 1-year return for the Sensex is considerably higher than the median. This disparity suggests the presence of more outlier positive returns, which are pulling the average up compared to the median. Such a difference indicates a positively skewed distribution.
The higher average return when the market is not at a 52-week high may suggest that the odds of experiencing extreme positive returns (outliers) are greater when the market is not near its peak. (Or at least that's what seems to be the case historically)
All that to say, historically, investing in the Sensex during a 52-week high has not been disastrous—far from it. The median returns from investing at these peaks have been comparable to, those from investing during regular periods.
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