Momentum Investing

Momentum investing is a strategy that capitalizes on the continuance of existing market trends. Investors buy securities that have been rising and sell those that have been falling, based on evidence that trends tend to persist.

Core Premise:

• Winners tend to keep winning (short-term)
• Losers tend to keep losing (short-term)
• Trend persistence lasts 3-12 months typically

Academic Foundation: The momentum effect was documented by Jegadeesh and Titman (1993) and has been confirmed across markets and asset classes worldwide.

Momentum Metrics:

Timeframe	Measurement	Signal
3-month	Price return	Short-term
6-month	Price return	Medium-term
12-month	Price return	Long-term
52-week high	% from high	Relative strength

Implementation Approaches:

1. Relative Momentum: Buy strongest performers vs. peers
2. Absolute Momentum: Buy only if positive trend
3. Dual Momentum: Combine both approaches

Momentum Strategies:

• Buy top 10-20% performers
• Sell bottom 10-20% performers
• Hold 3-12 months
• Rebalance monthly or quarterly

Pros and Cons:

Pros	Cons
Backed by research	Can reverse sharply
Works across markets	High turnover, taxes
Complements value	Requires discipline
Quantitative, rules-based	May miss reversals

Momentum Crash Risk: Momentum strategies can experience severe drawdowns when trends reverse (March 2009, momentum crash).

Best Implementation:

• Combine with value (diversifies risk)
• Use in tax-advantaged accounts
• Consider momentum ETFs for simplicity