10.09.2024
Knowledge
Momentum: Myths, Facts, and Why It Matters for Your Portfolio
Momentum Investing: Myths, Facts, and Why It Matters for Your Portfolio
Momentum investing has been a topic of fascination for both academics and practitioners for decades. We've found momentum to be a powerful tool in our investment approach. In this post, we'll explore some common myths and facts about momentum investing, drawing from both practical experience and academic research.
What is Momentum Investing?
At its core, momentum investing is based on the premise that stocks which have performed well in the recent past are likely to continue outperforming in the near future, while those that have underperformed will likely continue to lag. This approach has been proven effective across various markets and asset classes.
Myth 1: Momentum returns are too low and sporadic.
Fact: Research has consistently shown that momentum effects are present and robust in various markets over long periods. For example, studies examining data from 1927 to 2013 have found persistent momentum returns, making it a reliable building block for investment strategies.
Myth 2: Momentum only works for small-cap stocks.
Fact: Contrary to popular belief, momentum effects are present in both small and large-cap stocks. The performance difference between small and large-caps is often negligible, debunking the notion that momentum is limited to only less liquid and smaller stocks.
Myth 3: Momentum is just a passing fad.
Fact: Momentum has been a steady phenomenon in financial markets, with empirical evidence dating back to at least 1927. Its persistence over nearly a century suggests that momentum is far from a fleeting trend.
Myth 4: Transaction costs make momentum strategies unattractive.
Fact: While it's true that momentum strategies can involve higher turnover, studies have shown that even after accounting for transaction costs, momentum strategies can deliver solid returns. Advances in trading technology and careful implementation have further improved the cost-effectiveness of momentum strategies.
Myth 5: Value investing is always better than momentum investing.
Fact: Both value and momentum strategies can achieve positive returns over the long term. However, in many markets, momentum strategies have achieved higher average returns than value strategies. Interestingly, combining momentum and value approaches often leads to even better risk-adjusted returns, highlighting the complementary nature of these approaches.
Why Momentum Matters for Your Portfolio
Diversification: Momentum strategies often have low correlations with traditional stock and bond portfolios, providing valuable diversification benefits.
Potential for Higher Returns: Over long periods, momentum strategies have demonstrated the ability to generate excess returns above market benchmarks.
Adaptability: Momentum naturally adapts to changing market conditions, potentially helping portfolios navigate different economic environments.
Complementary to Other Strategies: As mentioned earlier, combining momentum with other approaches like value investing can lead to improved risk-adjusted returns for the portfolio.
Implementing Momentum Strategies
While the concept of momentum investing is straightforward, successful implementation requires expertise, sophisticated data analysis, and careful risk management. As an asset management boutique specializing in data-driven and rule-based investment strategies, we have the tools and experience to effectively harness momentum in our clients' portfolios.
Conclusion
Momentum investing, far from being a myth or fad, has proven to be a robust and persistent phenomenon in financial markets. By debunking common misconceptions and highlighting the latest research, we hope to have shed light on why momentum strategies can be a valuable addition to diversified investment portfolios.
We're passionate about helping investors harness the power of momentum and other systematic approaches. If you're interested in learning more about how momentum strategies could fit into your investment approach, we'd be happy to discuss further.
Sources:
Asness, C. S. (2011, March 3). Momentum in Japan: The Exception that Proves the Rule. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1776123
Asness, C. S., Frazzini, A., Israel, R., & Moskowitz, T. J. (2014). Fact, fiction and momentum investing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2435323
Jegadeesh, N., & Titman, S. (2023). Momentum: Evidence and insights 30 years late. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4602426
Kolanovic, M., AC (Global), Zhen Wei, PhD (Asia), Kolanovic, M., Zhen Wei, CFA, Kolanovic, M., & Zhen Wei, CFA. (2015). Momentum strategies across asset classes. https://www.cmegroup.com/education/files/jpm-momentum-strategies-2015-04-15-1681565.pdf
Wiest, T. (2022). Momentum: what do we know 30 years after Jegadeesh and Titman’s seminal paper? Financial Markets and Portfolio Management, 37(1), 95–114. https://doi.org/10.1007/s11408-022-00417-8
Momentum Investing: Myths, Facts, and Why It Matters for Your Portfolio
Momentum investing has been a topic of fascination for both academics and practitioners for decades. We've found momentum to be a powerful tool in our investment approach. In this post, we'll explore some common myths and facts about momentum investing, drawing from both practical experience and academic research.
What is Momentum Investing?
At its core, momentum investing is based on the premise that stocks which have performed well in the recent past are likely to continue outperforming in the near future, while those that have underperformed will likely continue to lag. This approach has been proven effective across various markets and asset classes.
Myth 1: Momentum returns are too low and sporadic.
Fact: Research has consistently shown that momentum effects are present and robust in various markets over long periods. For example, studies examining data from 1927 to 2013 have found persistent momentum returns, making it a reliable building block for investment strategies.
Myth 2: Momentum only works for small-cap stocks.
Fact: Contrary to popular belief, momentum effects are present in both small and large-cap stocks. The performance difference between small and large-caps is often negligible, debunking the notion that momentum is limited to only less liquid and smaller stocks.
Myth 3: Momentum is just a passing fad.
Fact: Momentum has been a steady phenomenon in financial markets, with empirical evidence dating back to at least 1927. Its persistence over nearly a century suggests that momentum is far from a fleeting trend.
Myth 4: Transaction costs make momentum strategies unattractive.
Fact: While it's true that momentum strategies can involve higher turnover, studies have shown that even after accounting for transaction costs, momentum strategies can deliver solid returns. Advances in trading technology and careful implementation have further improved the cost-effectiveness of momentum strategies.
Myth 5: Value investing is always better than momentum investing.
Fact: Both value and momentum strategies can achieve positive returns over the long term. However, in many markets, momentum strategies have achieved higher average returns than value strategies. Interestingly, combining momentum and value approaches often leads to even better risk-adjusted returns, highlighting the complementary nature of these approaches.
Why Momentum Matters for Your Portfolio
Diversification: Momentum strategies often have low correlations with traditional stock and bond portfolios, providing valuable diversification benefits.
Potential for Higher Returns: Over long periods, momentum strategies have demonstrated the ability to generate excess returns above market benchmarks.
Adaptability: Momentum naturally adapts to changing market conditions, potentially helping portfolios navigate different economic environments.
Complementary to Other Strategies: As mentioned earlier, combining momentum with other approaches like value investing can lead to improved risk-adjusted returns for the portfolio.
Implementing Momentum Strategies
While the concept of momentum investing is straightforward, successful implementation requires expertise, sophisticated data analysis, and careful risk management. As an asset management boutique specializing in data-driven and rule-based investment strategies, we have the tools and experience to effectively harness momentum in our clients' portfolios.
Conclusion
Momentum investing, far from being a myth or fad, has proven to be a robust and persistent phenomenon in financial markets. By debunking common misconceptions and highlighting the latest research, we hope to have shed light on why momentum strategies can be a valuable addition to diversified investment portfolios.
We're passionate about helping investors harness the power of momentum and other systematic approaches. If you're interested in learning more about how momentum strategies could fit into your investment approach, we'd be happy to discuss further.
Sources:
Asness, C. S. (2011, March 3). Momentum in Japan: The Exception that Proves the Rule. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1776123
Asness, C. S., Frazzini, A., Israel, R., & Moskowitz, T. J. (2014). Fact, fiction and momentum investing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2435323
Jegadeesh, N., & Titman, S. (2023). Momentum: Evidence and insights 30 years late. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4602426
Kolanovic, M., AC (Global), Zhen Wei, PhD (Asia), Kolanovic, M., Zhen Wei, CFA, Kolanovic, M., & Zhen Wei, CFA. (2015). Momentum strategies across asset classes. https://www.cmegroup.com/education/files/jpm-momentum-strategies-2015-04-15-1681565.pdf
Wiest, T. (2022). Momentum: what do we know 30 years after Jegadeesh and Titman’s seminal paper? Financial Markets and Portfolio Management, 37(1), 95–114. https://doi.org/10.1007/s11408-022-00417-8