What is Momentum Investing?

Momentum Growth in Investing

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.”

Contrarian Wisdom

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!

  1. Sharon

    My results with the fund upgrading from SMI have been a mixed bag so far. But then I am just getting started and it hasn’t been the best year to invest so far. SMI has a great website and I appreciate the wise counsel from their staff. It is a great way to begin to develop a strategy for how to invest and I have found their site helpful toward building my confidence. The strategy makes a lot of sense to me.

    • Matt Bell

      Sharon – I understand about the results you’ve experienced so far. As we regularly counsel, stick with it. Over time, I’m confident you will be pleased with the results. I appreciate the comments about the site as well. I’ve worked at SMI since April and the more I get the know the content on the site, the more impressed I am with the depth and breadth of the advice and resources. I believe that Austin Pryor and Mark Biller are two of the wisest investment pros I’ve met, and I know them to be fully committed in their faith. It’s a very powerful combination.

  2. K @ Get Worth

    For people that have the interest and desire to learn to invest in individual stocks, I think momentum investing or other types of investing like swing trading can be a fun and rewarding hobby. I recently switched from an actively managed mutual fund that made basically nothing over the past four years, to picking individual stocks with a swing-trading/momentum strategy. Although most of my portfolio is in low expense ratio index funds, it has been enjoyable trying my own hand at investing.

  3. Jim

    In my 50 years of investing I’ve purchased land, 6 different annuities, CDs among other things. I’ve had several different investment advisers and CPAs. All after doing research. Some made money, some did not. But I never saw momentum in any of them.

    2 of my CPAs went belly up. The third did well by owning a quick oil change franchise. The investment advisers, by looking at their homes, did not do any better than I did.

    It would seem the only ones that consistently did well were the sellers of products and the insiders like those in Congress.

    I now invest in NOTHING but CDs. I won’t get rich. I won’t keep ahead of inflation. But, I won’t lose principal.

  4. JR

    I’m confused – after looking at SMI performance on the website, it appears to have done worth in the short and long term than the S&P 500 for example. Why would that make me want to purchase SMI, rather than an S&P 500 index fund, or some other index fund?

  5. JR

    SMI appears to have done ‘worse’, I should say, then others in comparison.

    • Matt Bell

      JR – In the short-term, the market has not been kind to upgrading. The trends have simply been too short, and upgrading is a trend following strategy. Plus, since we are fully committed to the principle of diversification, the foreign category has hurt. However, in the long-term, here’s a look at the results:


  6. Good article! The trick with momentum investing is identifying the momentum early enough to get a meaningful upside. By the time “everyone” realizes there is momentum in a stock, that unfortunately is when it seems those stocks are close to their peak.

    Another thing to look at is how much of the momentum is due to earnings, and how much comes from increases in the PE multiplier of those earnings. I’m always leery of collapses in the PE. I may be wrong, but I think Apple, for instance, might be close to a PE readjustment as the market for their products reaches saturation/maturity and the high growth slows. The earnings may still be there, but the price I will get from selling the stock might stumble.

    On the other hand, if earnings are on a roll, and the fundamental reasons for earnings growth are solid, it’s hard to lose. Those are the momentum stocks worth looking for. I must confess I missed out on Amazon, Priceline, Microsoft, Walmart and others. But I found gold in stocks which were undervalued and eventually got caught up. So I guess at heart value investing is a better fit for me.

    There are many ways to make money. From what I’ve seen, you’re best off picking a strategy that resonates within you enough to make you want to do the work necessary to succeed. And at the end of the day I believe it’s the time you put in that causes more success than simply following a formula. The golf great Gary Player once said: the harder I practice, the luckier I get.

  7. Momentum investing works great in bull markets when stock are rising. It is not a good strategy in flat or down markets, therefore it is a sound investment strategy for most investors.

  8. Jeff Diercks

    We find you can get even better results when you combine momentum investing with trend following. The downside of momentum investing is that in bear markets this strategy works against you for even larger downside losses. You need triggers to get you out of the market or trading a reduced exposure. For us, trend following provides this.

    • Matt Bell

      Jeff – Our experience during bear markets has been mixed. During the 2008 financial crisis, our Upgrading strategy was about a point and a half behind the market. The market went down so fast, very few strategies held up. However, in the slower, more prolonged bear market that we had from 2000 to 2002, upgrading helped a lot. In 2000, the market lost a little less than 11 percent. Upgrading lost a little less than 3 percent. In 2001, the market was down another 11 percent. Upgrading actually gained almost 5 percent. And then in 2002, the market was down 22 percent and Upgrading was down about 14 percent. Again, it’s designed to be a long-term strategy, and over the long-term, Upgrading has a really good record vs. the market.