You’ve probably heard the old adage that when it comes to investing, past performance does not guarantee future performance. Momentum investing takes a somewhat different point of view.
While it’s true that long-term past performance has no correlation to long-term future performance, short-term past performance does correlate to short-term future performance.
That’s the essence of momentum investing; find the investments that have been doing well in the recent past and put your money there. Then have a process in place to tell you when those investments are losing steam and need to be replaced with others that are doing well.
A Solid Track Record
While momentum investing may not be well known, it is well regarded.
The Economist magazine noted in a January 2011 article entitled Why Newton Was Wrong: “Since the 1980s academic studies have repeatedly shown that, on average, shares that have performed well in the recent past continue to do so for some time.”
And Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the performance of investment advisory newsletters, said in a MarketWatch.com article entitled Inertia vs. Momentum, “the majority of the newsletters at the top of the Hulbert Financial Digest’s rankings for long-term performance, are those that, in one way or another, employ momentum strategies.”
To be sure, momentum investing challenges some strongly-held aspects of conventional investing wisdom.
For example, some investing experts recommend finding a good mutual fund manager and sticking with him or her through thick or thin. It’s akin to running a marathon.
However, stock market marathon runners don’t have the best records. As has been widely reported, every year the majority of actively managed mutual funds fail to beat their benchmarks.
Momentum investing is more of a relay race. When one fund is doing well, it carries the baton. When it runs out of steam, the baton is handed off to another stronger runner.
Momentum investing isn’t a silver bullet that always generates market-beating results. However, over the long haul, it has proven to be a very effective investing strategy.
Note from Bob: I have been investing in the SMI fund for the last year and have been happy with my results thus far. The momentum investment strategy offered by Sound Mind Investing, called Fund Upgrading, has beaten the market in 11 of the past 13 years, growing nearly 170% in that time vs. about 42% for U.S. stocks. While an SMI web membership usually costs $9.95 per month, for a limited time readers can access all that SMI has to offer with a 30-Day free-trial membership.
What are your thoughts on momentum investing? Leave a comment below!