What is Momentum Investing?
Momentum investing capitalizes on the empirical observation that assets which have performed well over the past 3 to 12 months tend to continue performing well in the near future, and vice versa. Academic research by Jegadeesh and Titman documented that a strategy buying past winners and selling past losers generated average annual excess returns of 8-10% over their study period.
Implementing Momentum Strategies
Typical momentum strategies rank securities by their trailing 6-12 month returns, then buy the top decile and sell or avoid the bottom decile. Portfolios are rebalanced monthly or quarterly. Momentum ETFs and factor funds have made this approach accessible to retail investors, with expense ratios typically ranging from 0.15% to 0.50%.
Key Considerations
Momentum strategies are vulnerable to sharp reversals, particularly during market regime changes. The strategy experienced severe drawdowns in 2009 when markets suddenly reversed from bear to bull conditions. Transaction costs from frequent rebalancing can erode returns, and tax efficiency is lower compared to buy-and-hold approaches.