Momentum investing is a topic that can seem a little complex to people who are beginner investors. All of the technical jargon that is often thrown around by tech-savvy financial gurus can make momentum investing seem much more convoluted than it really is.
In reality, momentum investing is a simple to understand concept that can help people be more successful in their venture within the stock market and potentially negate some of the disadvantages that come with doing so.
In this article, we will be giving a beginner’s introduction to the topic of momentum investing, as well as telling you some essential information surrounding the subject.
Momentum Investing in a Nutshell
Momentum investing flips the usual investment strategy of buy-low sell-high on its head. In fact, momentum investing is the exact opposite.
Momentum investing works by taking into consideration the previous performance of a stock, and using that to predict how well said stock is going to perform in the future.
For example, by applying the momentum investment strategy a stock that has always performed well will be a good choice even though it will be more expensive compared to its underperforming counterparts.
Turing Trader explains Dual Momentum system as having roughly the same performance as the usual 60/40 method which sees people have around 60% of their portfolio made up of stocks and 40% being made up of bonds, but with one major advantage.
The usual strategy of buy-low sell-high works upon the hope that whichever stock you may have purchased goes up in value. Although, it can be a bit of a gamble.
Whereas, momentum investing works by only purchasing stocks that have consistently performed well, and if said stock seems to dip in price, one would then sell that stock.
Furthermore, momentum investing revolves around a certain asset allocation of 20% in U.S. equities, Treasury bonds, REITs, corporate bonds, and gold, providing the assets return is higher than that of a T-bill, otherwise, said capital would go on to be invested in an aggregate bond market.
Why Momentum Investing is a Good Strategy
Momentum investing offers less volatility than the usual 60/40 method, so even though the returns will be roughly equal, momentum investing can oftentimes provide a safer alternative to the standard method.
This means that momentum investing is a great strategy for would-be investors who are looking to see less volatility within their investment’s portfolio, without sacrificing any of the returns.
Is Momentum Investing High-risk?
In short, there are a plethora of pros and cons for momentum investing.
Sure, momentum investing can potentially make investors portfolio’s less volatile and add an element of safety.
Although, the simple fact that momentum investing takes a somewhat aggressive all-in all-out approach is enough to scare off the vast majority of investors.
So, the risk with momentum investing is directly correlated to the expertise of said investor, which is going to be a good thing to some but a bad thing to others.
Overall, momentum investing can be a great way for people to increase the odds that they choose better investments to delve into and increase their success overall in the stock market.
For beginners to investing and the stock market, momentum investing may not be the best choice if you have absolutely no experience, and you may be better off opting to go with index funds or other relatively low-risk investments.
Although, if you’re willing to accept the risk that comes with momentum investing, feel free to give it a shot.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.