Momentum Investing

Momentum investing is based on the observation that stocks which have performed well recently tend to continue outperforming in the near future, while recent losers often keep underperforming. This phenomenon has been documented across markets and time periods. Quantitatively, momentum is measured using price returns over specific lookback windows, commonly ranging from three to twelve months. Stocks are ranked by past performance, and portfolios are constructed by overweighting the strongest performers. Momentum is largely driven by behavioral factors such as investor herding, slow information diffusion, and trend-following behavior. It tends to work best in trending markets but can suffer sharp reversals during sudden regime changes. Because momentum strategies can be volatile, they are often paired with risk controls, volatility filters, or complementary factors like Quality or Low Volatility. This helps stabilize returns across cycles. Turnover is another important consideration. Momentum signals change frequently, leading to higher trading activity. Practical implementations therefore balance responsiveness with transaction cost management. Despite periodic drawdowns, momentum has historically been one of the strongest and most persistent equity factors. Its effectiveness depends on disciplined execution and patience during inevitable periods of underperformance. Momentum investing is less about predicting fundamentals and more about capturing market behavior as it unfolds in real time.