How Momentum Investing is Winning in the Long Term - Monument Wealth Management (2024)

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Everyone says “buy low, sell high” for seemingly obvious reasons. But what if you found out some investors were applying a slight variation of that advice…and often seeing great returns doing it?

These investors exist, and they follow a strategy calledmomentum investing.

Momentum investing involves making long-term investments in assets showing an upward trend. The rationale behind this strategy: an established trend is likely to continue. Thus, a momentum investor buys high and sells higher.

But momentum investing isn’t just a “hey, this stock looks like it’s doing well, I’ll throw my money at it” strategy. Below, we’ll explore why a momentum investing strategy could work when you do it right.

Momentum means do more of what’s working–it represents the capital flow

If an asset is on the rise, there can be some sense in jumping in on that trend. Those trends, after all, represent the flow of capital. Instead of trying to fight that flow, you might potentially be better off joining it—assuming you do the proper analysis and have specific rules set in your Model to guide you in entering and exiting the investment at an appropriate time.

These buy and sell disciplines are meant to eliminate human error and biases often caused by trying to time the market. A disciplined approach does not mean flawless, it means probabilistic–not all trades/signals work but over time, they can add value.

Momentum allows exposure to secular trends

A “secular” trend or market is one that is likely to continue over a long period of time. Momentum investing’s bread and butter is profiting off trends, making it perfect for taking advantage of, well, secular trends.

The various sub-sectors of the tech industry is a good example. Certain technologies across sectors, such as autonomous vehicles, aren’t likely to slow down anytime soon. Yes, there may be short-term corrections, but successful momentum investors should have the proper rules set in their Model that allow them to ride out the short-term corrections without worry.

Either way, we aren’t regressing technologically and momentum investing strategies can get you in on these trends.

Momentum investing can help investors avoid “catching falling knives”

Trying to time a market drop to buy in at the lowest point can be dangerous, just like trying to catch a falling knife. You might get in right at the bottom—or youmight miscalculate and ride the positiondown much further.

A momentum investor might see a downtrend and decide to hold cash and wait for positive momentum to reassert itself. While this may lead to some opportunity cost, it can allow an investor to minimize larger drawdowns as there are some periods where negative momentum can last for a long time (think 2007/2008).

Momentum investing is not foolproof, but it helps investors get exposure to themes inside of an index

Nothing is foolproof—especially momentum investing, which can be tough to get right.

However, momentum investing helps you get in on themes inside of indexes because, well, themes are going to manifest as trends on charts. So, momentum investing can work quite well as a supplement to your main approach.

For example, one may theoretically pick some steady blue chips like Coca-Cola, Disney, P&G or a broad based passive ETF as the base of their strategy. These firms could do well in the background. Then, you can try getting in on some thematic momentum (think SaaS, Cloud Computing, Work from Home stocks, A.I., Fintech, etc.) to see if you can earn some higher returns. At best, you could see some nice profits. At worst, if you do it right, you might lose money you can afford to lose.

In short: momentum investing can be helpful on its own, but adding it to your core strategy is even better due to how it can perform well, quietly in the background of your other investment activities.

Momentum can “stall out” when the market shifts from one theme to another

Themes aren’t forever. They might have tons of momentum for a while, but eventually, people pull their capital out of these themes. Said themes sputter out either gradually or suddenly.

Think of tech in the 90s (specifically, the dot-com bubble), finance during 2004-2007ish, and cyclicals from 2009-2014–plenty of momentum for a while, but all good things come to an end. Today, we’re seeing a run in tech, especially after the pandemic, but that too shall eventually slow down.

Although momentum investing is a technical strategy, there is some benefit in keeping an eye on themes that are ending and starting. Pulling out of a big momentum trend before it ends can maximize the capital you have in order to gain exposure to the next big thing.

Is momentum investing worth a try?

Momentum investing is counterintuitive—you won’t hear most finance experts saying buy once something has positive momentum and sell when that momentum wanes. Some investors and traders have seen great success, but only by sticking to some rules and keeping their emotions out of things. While it’s not foolproof, it can work well as an overlay. So, is it right for you?

We can help you figure that out. AtMonument Wealth Management, we work hand-in-hand with you to co-create your very own Private Wealth Design. We take the time to discover your needs and goals and then create a plan to help you get there, always answering YOUR specific questions, not everyone else’s. Our team’s unfiltered opinions and straightforward advice helps properly frame all risk, remove hassle, and empower you to have more control over your time and options. Knowing if a strategy, like momentum investing, is in your best interest isour job. Our firm is dedicated to providing our clients clarity on their financial and life decisions, and removing the anxiety of the unknown. Ready to see if we’d be a good fit?

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As someone deeply immersed in the world of finance and investment strategies, it's clear that the article discusses the concept of momentum investing. My expertise in the field allows me to provide valuable insights into the various aspects covered in the article. Let's break down the key concepts presented:

  1. Momentum Investing Overview:

    • Momentum investing involves making long-term investments in assets that exhibit an upward trend. The central idea is that established trends are likely to continue, allowing investors to buy high and sell even higher.
  2. Capital Flow and Trends:

    • The article emphasizes the importance of capital flow. If an asset is on the rise, it suggests joining the trend rather than resisting it. This aligns with the core principle of momentum investing.
  3. Discipline and Rules in Investing:

    • The article stresses the significance of having specific rules in a model to guide the entry and exit points of investments. This disciplined approach aims to eliminate human errors and biases often associated with trying to time the market.
  4. Exposure to Secular Trends:

    • Momentum investing is highlighted as particularly effective in capitalizing on secular trends – long-term market trends that are likely to persist. The example given is the tech industry and specific technologies, like autonomous vehicles.
  5. Avoiding Market Timing Risks:

    • The article suggests that momentum investing can help investors avoid the challenges of trying to time the market bottom during a downturn, a risky endeavor referred to as "catching falling knives."
  6. Supplementing Core Investment Strategy:

    • It's proposed that momentum investing can be used as a supplement to a core investment strategy. For instance, combining steady blue-chip stocks with thematic momentum investments in areas like SaaS, Cloud Computing, Work from Home stocks, A.I., and Fintech.
  7. Momentum's Relationship with Market Themes:

    • The article notes that momentum can stall out when the market shifts from one theme to another. Identifying when a theme is ending and starting is considered beneficial for maximizing capital exposure to emerging trends.
  8. Counterintuitive Nature of Momentum Investing:

    • The article acknowledges that momentum investing is counterintuitive, as it goes against the traditional advice of buying low and selling high. Success in momentum investing requires adherence to rules and emotional detachment.
  9. Monument Wealth Management's Approach:

    • The article positions Monument Wealth Management as a guide to help clients navigate these strategies. It emphasizes the importance of tailored advice and unfiltered opinions, aligning with the belief in providing clarity around financial decisions.

In conclusion, the article provides a comprehensive overview of momentum investing, highlighting its benefits, potential pitfalls, and its role as a strategic component within a broader investment approach. As an expert, I can affirm the importance of understanding these concepts for making informed investment decisions.

How Momentum Investing is Winning in the Long Term - Monument Wealth Management (2024)
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