The Case for Momentum Investing
The Case for Momentum Investing
Though known to financial academics for many years, momentum is for most investors the "undiscovered style,” a valuable tool in building diversified portfolios with above- average returns.
Definition. Momentum is the tendency of investments to exhibit persistence in their relative performance. Investments that have performed relatively well, continue to perform relatively well; those that have performed relatively poorly, continue to perform relatively poorly. Momentum is about much more than buying a handful of hot stocks – it is a disciplined, systematic investing style that applies across asset classes.
Intuition. Momentum is a phenomenon driven by investor behavior: slow reaction to new information; asymmetric responses to winning and losing investments; and the "bandwagon” effect. Numerous academic and practitioner studies have confirmed momentum’s existence.
Implications. Virtually all investors can expect higher risk-adjusted returns by adding momentum to their portfolios. Growth investors will see that momentum delivers much better performance. Value investors will find momentum to be an effective complement. Value-growth investors will want to consider momentum as an alternative to their growth allocation.
This paper introduces a family of investable momentum indices, and in so doing, opens this powerful strategy to a broad range of investors.
Source: http://www.aqrindex.com/resources/docs/PDF/News/News_Case_for_Momentum.pdf
(click title to link to full paper on authors website)
