Investing in international stocks can be a rewarding venture, offering diversification and access to global opportunities. However, the decision to buy stocks when they are at all-time highs can be met with skepticism. But a question arises: Is it profitable to buy stocks at an all-time high? Does it work?
In this article, we’ll explore a strategy for buying international stocks at their peaks, understanding the rationale behind it, and conducting a backtest to evaluate their historical performance.
Related reading: International stock markets trading strategies
Why You Should Buy At All-Time Highs?
Contrary to the conventional wisdom of buying low and selling high, investing at all-time highs capitalizes on momentum investing, involving the exploitation of existing trends. The underlying principle is that stocks in an uptrend tend to continue upward for a certain period. There exists a rationale behind buying stocks at all-time highs:
- Strength of Trend: Stocks reaching all-time highs often signify a robust underlying trend. This strength can be driven by factors such as robust fundamentals, positive market sentiment, or exceptional company performance. After all, stocks tend to go up because of inflation and productivity gains.
- Market Recognition: All-time highs attract attention from institutional and retail investors alike, reflecting the market’s acknowledgment of a company’s success. Buying at these levels means riding the wave of investor confidence, positioning oneself alongside those who recognize and respond to the positive trajectory of the stock.
- Potential for Further Upside: Momentum investing assumes that stocks in a strong uptrend may continue to climb. Buying at all-time highs anticipates the possibility of further gains as positive momentum persists. This approach acknowledges the potential for an extended period of upward movement, aligning with the momentum theory that suggests winning stocks tend to keep winning. Momentum has proven to work for a century.
By understanding and implementing this strategy, investors can navigate the challenges of buying at all-time highs, leveraging momentum to potentially capture additional gains in the ever-changing landscape of international stocks.
All-Time High Trading Strategy For International Stocks – Backtest
To assess the viability of buying international stocks at all-time highs, let’s conduct a backtest using historical data.
The strategy we are going to backtest is pretty simple:THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get A Trial Access Click Here To Get Access To Trading Rules
The data is adjusted for dividends. Here is the equity curve:
The returns look decent considering the low time invested. Here are some performance metrics and statistics about the strategy:
- CAGR was 3.35% (buy and hold 4.59%)
- Time spent in the market was 28.43%
- Risk-adjusted return was 11.78%(CAGR divided by time spent in the market)
- Maximum drawdown was -25.11% (-56.78%)
As you can see, the strategy looks more appealing than buy and hold. The CAGR is slightly lower (although higher when adjusted for time spent in the market) and the maximum drawdown is less than half.
But what if we extend the backtest and start in 1926 rather than 1996? Meb Faber did it and found even better results. The only slight difference with our strategy is that he, instead of gaining 3% interest on his cash, invested it in bonds. Here is his backtest:
As you can see, the returns of the ‘Buy at Highs System’ and buy-and-hold strategies look very similar. Here are some metrics and statistics:
The biggest differences are in volatility and maximum drawdown. The world stocks’ volatility (otherwise known as standard deviation) is 14.33%, while the strategy’s is 8.18%. More impressively, the maximum drawdown is just -17.03% vs. -71.33% for buy and hold.
All-Time High Trading Strategy For International Stocks – Conclusion
Buying international stocks at all-time highs may seem counterintuitive, but a momentum-based approach can offer a strategic perspective.
Today, we showed you a strategy that involved buying international stocks at all-time highs, which works very well. In both the timeframes we backtested, the strategy had a similar CAGR while exhibiting much lower volatility and maximum drawdown. As with any investment strategy, it’s essential to consider risk tolerance, so please make sure you backtest yourself.