Momentum Investing — momentum strategy

What is momentum investing?

Momentum investing is an investment strategy based on the observation that assets that have been rising recently tend to continue rising — and those that have been falling often continue to fall. You buy "winners" and avoid "losers."

Where does the momentum effect come from?

Momentum is one of the best-documented factors in academic finance. Research by Jegadeesh and Titman (1993) showed that a strategy of buying companies with the highest returns over the past 3-12 months and selling the worst performers generates above-average returns.

Causes:

• Crowd psychology — investors react with delay to new information
• Herding effect — rising assets attract more buyers
• Fundamental confirmation — rising price often reflects improving company performance

How does momentum strategy work?

Simple version

1. Every month (or quarter) check which assets gave the highest returns in the last 6-12 months
2. Buy those from the top of the ranking
3. Sell those that dropped out of the top
4. Repeat

Momentum indicators

• Relative Strength (RS) — return over the last 12 months (excluding the last month)
• Moving Average — price above moving average (e.g., 200-day) → positive signal
• Rate of Change (ROC) — percentage price change over a given period

Advantages of momentum

• Historically higher returns than simple buy-and-hold (documented across many markets and asset classes)
• Works globally — not only in the US, but also in Europe, Asia, commodity markets
• Can protect against deep bear markets (exit signal when momentum reverses)

Disadvantages and risks

• Momentum crash — at the moment of trend reversal (e.g., V-recovery after a crash) the strategy can suffer large losses
• High turnover — frequent transactions generate commissions and taxes
• Psychological difficulty — buying at peaks and selling falling assets goes against human intuition
• Delayed signals — momentum reacts with delay to sudden changes

Momentum vs other strategies

Momentum perfectly complements value investing. Historically, the correlation between these strategies is low or negative — when one doesn't work, the other often compensates. A portfolio combining both factors (value + momentum) gives more stable results.

Momentum ETFs

• iShares Edge MSCI World Momentum Factor — global companies with strong momentum
• iShares MSCI USA Momentum Factor — US momentum companies
• Xtrackers MSCI World Momentum — European alternative

How Freenance can help

Freenance analyzes your portfolio dynamics and shows which positions have strong momentum and which are losing steam. This helps make informed decisions about rebalancing and allocating new funds.

👉 Monitor portfolio momentum with Freenance — freenance.io