Investing in momentum: what is it?

While some investors may adopt a momentum investing strategy without giving it much thought, doing so consistently can be dangerous and time-consuming

A variety of approaches or tactics that influence how investors select their stocks are referred to as investing factors. Among the most well-known are growth and value.

Despite being one of the most straightforward investing strategies, momentum investing is paradoxically one of the hardest to successfully implement.

It basically means that you purchase rising-priced stocks, funds, or other assets and sell declining ones.

In the current market environment, it is a particularly common factor. The MSCI World Momentum Index, which is based on the MSCI World Index but has a heavier weighting toward stocks with positive momentum traits, has returned 21% so far this year as of August 18, while the MSCI World Index has returned 13%.

Watch the entire video here: In July, investors in the Fundsmith Equity Fund received a letter from renowned fund manager Terry Smith, CEO and chief investment officer of the investment management firm Fundsmith, stating that he would modify the value-driven approach that he is known for using to explain the popularity of momentum investing.

Purchasing cheap stocks was likened to "trying to catch the proverbial falling knife" by him. "All we are getting is cut fingers as the index momentum enhancement effect exacerbates their downward share price spiral," he stated.

The current outperformance of momentum investments is so great that seasoned investors are being forced to alter their strategy.

It's especially crucial to grasp the idea because it's a difficult strategy to duplicate.

Rob Morgan, chief investment analyst at Charles Stanley Direct, stated that it is "wonderfully simple to apply but also fraught with risks if you blindly follow what you see as a trend without understanding what you are actually buying and the risks involved."

Momentum investing: what is it?

Purchasing stocks or other assets that are rising in value is an effective method of momentum investing.

"In theory, momentum investing is straightforward," stated Angeline Ong, a senior investment analyst at IG. "Sell (short) what is already declining or purchase what is already rising. It is based on the notion that any asset that has done well recently will probably continue to do well in the near future and vise versa."

Ranking stocks or funds according to their returns over a specified time frame (three, six, or twelve months) and purchasing the one that has produced the highest returns could be a simple strategy.

"Some investors are probably doing it without even thinking about it, by buying a share or fund they notice is performing well," stated Charles Stanley Directs Morgan.

Technical analysis tools, which track trends in an asset's trading, may be used by more sophisticated momentum investors.

For instance, a reading of 50 or higher indicates positive momentum (although a reading above 70 is typically interpreted as a sign that a stock is overbought and that its price may soon fall back), while a reading below 30 indicates it may be oversold and due to a rebound. The relative strength index, for instance, quantifies the speed and change of an asset's price as a number between 0 and 100.

To search for indications of momentum, some also employ long-term moving averages. When a stock's 50-day moving average price rises above its 200-day moving average, it may indicate a buy; if it falls below, it may indicate a sell.

Momentum investing is frequently seen as the natural antithesis of value investing, Ong continued.

According to her, "value investors purchase inexpensive stocks that the market has undervalued and wait for them to re-rate." "Momentum traders and investors purchase stocks that the market already finds appealing and follow the trend."

What disadvantages does momentum investing have?

Momentum investing is a difficult long-term strategy for the majority of novice investors.

The fact that the stocks or industries with momentum behind them are always shifting is one clear explanation for this. If you don't spend the majority of your waking hours watching real-time market data, you could easily miss the switch and end up out of pocket because a stock can quickly go from having positive momentum to being overbought and then oversold.

Significant over-concentration is another possible consequence. By definition, momentum investing focuses on the most popular stocks at any particular moment. Investors may start investing more money in a particular stock or industry just because everyone else is, creating a vicious cycle if the majority of global investors are purposefully focusing on momentum stocks.

When the stock market is rising, that can produce fantastic returns, but when it is falling, it can quickly fall apart.

Terry Smith wrote in his July letter, "If £200 billion market valuation stocks are moving 33 percent a day in a bull market, you can reasonably speculate about what's going to happen if or when things reverse." The SandP dropped 57% in just five months in 2007-2008. If it could do this in five days the next time, I wouldn't be shocked."

As was the case with silver prices in early 2026, "popular momentum trades can also become crowded, which amplifies the snapback when they unwind," according to Ong.

Perhaps momentum is more appropriate for shorter-term strategies.

"Momentum investing is viewed as more of a trading strategy, not an investing one, and requires discipline and speed that most retail investors may not have time for in its purest, fastest-moving form, which involves chasing days-to-weeks price action," Ong stated.

In addition to being a challenging strategy to consistently execute, Ong pointed out that momentum strategies can result in increased expenses because they necessitate frequent buying and selling, which raises trading costs and capital gains tax for taxable accounts.

How can a momentum investing approach be implemented?

You have two main choices if you decide to give momentum investing a try.

Making an effort to recognize momentum stocks yourself is the first step. This will require a great deal of technical analysis, and it will take time to make sure you are keeping up with all of your selections because the market can change quickly.

Purchasing a momentum-focused fund would be the easier course of action. This gives the fund manager or index provider the difficult task of selecting what to buy and sell.

The MSCI World Momentum Index or comparable indices are the focus of the majority of passive funds, which are widely available. The iShares Edge MSCI World Momentum Factor UCITS ETF (LON:IWFM), the L&G Developed World Momentum Factor Index Fund, and the Xtrackers MSCI World Momentum UCITS ETF (LON:XDEM) are a few examples.

Momentum-based active funds are less prevalent. Theoretically, active fund managers make their money by spotting opportunities that the market has missed rather than just doing what everyone else is doing.

However, Smith is not the only active manager who recognizes that momentum canand, arguably, ought tohave an impact on their investment choices. Thus, some active funds and investment trusts do incorporate momentum into their strategies.

For instance, Artemis US Extended Alpha Fund, which aims to profit from both rising and falling share prices, is highlighted by Morgan as an active strategy that combines aspects of momentum investing. Interestingly, though, the fund characterizes its strategy as contrarian, which is somewhat at odds with momentum investing.

Morgan explained, "It's not pure quantitative momentum but represents partial exposure to the factor."

Investment trusts that evaluate momentum include Aberdeen UK Smaller Companies Growth Trust (LON:AUSC), which evaluates companies based on quality, growth, and momentum criteria, and JPMorgan European Growth & Income (LON:JEGI), which targets companies exhibiting value, quality, and momentum characteristics.