Momentum Investing

Momentum investors believe that prices tend to keep moving in the same direction in the short to medium term. Assets that have performed well over the past several months are expected to keep outperforming, and poor performers to keep underperforming.

For example, a momentum strategy might rank shares by their returns over the past twelve months, excluding the most recent month, then buy the top performers and avoid or short the weakest.

Academic research has found evidence of a momentum effect across many markets and asset classes over long periods. Explanations include investors underreacting to new information at first, then herding as trends become visible.

Momentum strategies can suffer sharp losses when trends reverse suddenly, often after market turning points, as happened in 2009 when previously beaten-down shares rebounded strongly. They can also involve frequent trading and higher costs. Momentum is one of the factors used in factor investing.