Momentum Investing Explained

Introduction

Most investing advice says to buy low and sell high. Momentum investors take a different approach. They buy stocks that are already rising, betting that strong performance will continue for a while.

How Momentum Investing Works

Momentum investors look for stocks that have outperformed the market over recent months. The idea is that trends tend to persist in the short to medium term, often because investors react slowly to new information. Momentum investors usually sell stocks once their performance starts to weaken.

The Evidence

Research has found that momentum has been a persistent pattern in stock markets around the world over long periods. Some ETFs are built specifically to hold stocks with strong momentum. Professional investors often combine momentum with other factors, like value or quality.

The Risks

Momentum strategies can suffer sudden, sharp reversals, called momentum crashes, when market trends change direction. They also involve frequent trading, which can lead to higher costs and taxes. Chasing hot stocks without a plan can lead to buying near the top. For most beginners, a long-term, diversified approach is easier to stick with.

Conclusion

Momentum investing shows that markets do not always move randomly. It is a fascinating strategy, but one that requires discipline and an understanding of the risks!