Momentum Investing
A strategy that buys recent outperformers and sells recent underperformers.
What is Momentum Investing?
Momentum investing is a strategy based on the empirical observation that assets with strong recent performance tend to continue outperforming in the near term, while recent underperformers tend to continue lagging. Academic research by Jegadeesh and Titman (1993) documented a robust 12-month momentum anomaly in equity markets. Momentum strategies typically rank securities on past 3–12 month returns and go long the top performers while shorting the bottom. The strategy works until it reverses sharply: momentum crashes occur in rapid market reversals when recent winners sell off violently and losers bounce. Systematic factor-investing frameworks include momentum as one of several documented return premia alongside value, quality, and low volatility.
Example
A momentum strategy at the start of 2023 would have screened for stocks with the highest 12-month trailing returns and bought the top decile. Technology and AI-related stocks would have ranked highly, having led the prior year's recovery. An investor holding these high-momentum stocks for the next 3–6 months would have benefited as institutional momentum followers piled into the same names — until sentiment shifted.
Source: CFA Institute — Factor Investing