Momentum Investing: The Evidence, the Strategy, and How to Implement It in Your Portfolio

Introduction

In the ever-evolving landscape of investment strategies, momentum investing has emerged as a compelling approach for self-directed investors seeking to enhance portfolio performance. This strategy capitalizes on the tendency of assets that have performed well in the past to continue their upward trajectory, while those that have underperformed are likely to persist in their decline. Understanding the nuances of momentum investing is particularly pertinent in 2026, as market dynamics continue to shift and evolve.

This article delves into the academic foundations of momentum investing, explores the intricacies of absolute and relative momentum, and provides a comprehensive guide to implementing Gary Antonacci's Dual Momentum strategy. We will also examine the risks associated with momentum investing, discuss its application across various asset classes, and offer practical insights for integrating this strategy into your investment portfolio.

The Mechanics of Momentum Investing

Momentum investing is grounded in the observation that assets exhibiting strong performance trends are likely to continue their trajectory, while those with weak performance are expected to persist in underperformance. This phenomenon challenges the traditional "buy low, sell high" investment adage, suggesting that "buying high and selling higher" can be a more effective strategy.

Academic Foundations

The seminal work by Narasimhan Jegadeesh and Sheridan Titman in 1993 laid the groundwork for momentum investing. Their study demonstrated that portfolios of stocks with high returns over the past 3–12 months tend to continue to perform well over the subsequent 3–12 months, yielding an average return of approximately 1% per month above the market average. (nber.org)

Subsequent research has reinforced these findings across various markets and asset classes. For instance, studies have shown that momentum strategies yield positive returns in European countries, India, and emerging markets like the Nairobi Stock Exchange. (portfolioyoga.com)

Absolute vs. Relative Momentum

Momentum strategies can be broadly categorized into two types:

• Absolute Momentum (Trend Following): This approach involves investing in assets that have demonstrated positive returns over a specified period, regardless of the performance of other assets.

• Relative Momentum (Cross-Sectional Momentum): This strategy focuses on comparing the performance of multiple assets, investing in those that have outperformed others over a given timeframe.

Both strategies have been shown to be effective, but they operate on different principles and may be suitable under varying market conditions.

Gary Antonacci's Dual Momentum Strategy

Gary Antonacci's Dual Momentum strategy combines both absolute and relative momentum to enhance investment returns while mitigating risk. The strategy operates on the premise that by selecting assets with strong performance both in isolation (absolute momentum) and relative to other assets (relative momentum), investors can achieve superior risk-adjusted returns.

Strategy Overview

Antonacci's Dual Momentum strategy involves the following steps:

1. Asset Universe Selection: Choose a diversified set of assets, such as U.S. equities, international equities, and bonds.

2. Calculate Absolute Momentum: Determine the 12-month total return for each asset, excluding the most recent month to avoid short-term reversals.

3. Apply Absolute Momentum Filter: Identify assets with positive absolute momentum, indicating they have outperformed a risk-free benchmark (e.g., 3-month U.S. Treasury bills).

4. Calculate Relative Momentum: Among the assets with positive absolute momentum, identify the top performers based on their 12-month returns.

5. Asset Selection: Invest in the top-performing assets identified through the relative momentum filter.

6. Rebalancing: Regularly rebalance the portfolio, typically on a monthly basis, to maintain alignment with the strategy's criteria.

Implementation Example

Consider an investor applying the Dual Momentum strategy to a set of ETFs representing U.S. equities (e.g., SPDR S&P 500 ETF Trust - SPY), international equities (e.g., Vanguard FTSE All-World ex-US ETF - VEU), and U.S. aggregate bonds (e.g., iShares Core U.S. Aggregate Bond ETF - AGG). The investor would:

• Calculate 12-Month Returns: Determine the 12-month total returns for SPY, VEU, and AGG, excluding the most recent month.

• Apply Absolute Momentum Filter: Identify which of these ETFs have positive returns over the 12-month period.

• Apply Relative Momentum Filter: Among the ETFs with positive absolute momentum, select the one with the highest 12-month return.

• Asset Selection: Allocate the portfolio to the selected ETF.

• Rebalancing: Review and adjust the portfolio monthly to ensure it continues to meet the strategy's criteria.

Performance Considerations

Backtests of the Dual Momentum strategy have demonstrated its potential to outperform traditional buy-and-hold approaches. For example, during the 2007–2009 financial crisis, a Dual Momentum strategy experienced a maximum drawdown of approximately -15%, compared to a -55% drawdown for a buy-and-hold equity portfolio. (sourcetable.com)

Implementing Momentum Investing in Your Portfolio

Integrating momentum investing into your portfolio requires a systematic approach to asset selection, monitoring, and rebalancing. Below is a step-by-step guide to implementing the Dual Momentum strategy:

1. Define Your Investment Universe: Select a diversified set of assets, such as domestic and international equities, bonds, commodities, and currencies.

2. Determine Lookback Period: Choose a lookback period for calculating returns, typically 12 months, excluding the most recent month to avoid short-term reversals.

3. Calculate Absolute Momentum: For each asset, calculate the total return over the chosen lookback period.

4. Apply Absolute Momentum Filter: Identify assets with positive returns over the lookback period.

5. Calculate Relative Momentum: Among the assets with positive absolute momentum, rank them based on their total returns.

6. Asset Selection: Select the top-performing asset(s) based on relative momentum.

7. Portfolio Allocation: Allocate your portfolio to the selected asset(s).

8. Rebalancing: Regularly rebalance your portfolio, typically on a monthly basis, to ensure it aligns with the strategy's criteria.

Practical Considerations

• Diversification: Ensure that your investment universe is sufficiently diversified to mitigate risk.

• Transaction Costs: Be mindful of transaction costs associated with frequent rebalancing.

• Tax Implications: Consider the tax impact of buying and selling assets, especially in taxable accounts.

• Risk Management: Regularly assess the risk profile of your portfolio and make adjustments as necessary.

Risks and Pitfalls of Momentum Investing

While momentum investing can offer attractive returns, it is not without its risks and challenges:

• Market Reversals: Rapid market reversals can lead to significant losses, as momentum strategies may continue to hold assets that are declining sharply.

• Overfitting: Relying solely on historical data to design momentum strategies can lead to overfitting, where the strategy performs well in backtests but fails in live markets.

• Transaction Costs: High turnover associated with momentum strategies can result in increased transaction costs, which may erode returns.

• Behavioral Biases: Investors may be prone to chasing past performance, leading to suboptimal investment decisions.

The Bottom Line

Momentum investing offers a systematic approach to capitalizing on prevailing market trends, potentially enhancing portfolio returns. Key takeaways include:

• Academic Validation: Momentum strategies have been extensively validated across various markets and asset classes.

• Dual Momentum Strategy: Combining absolute and relative momentum can provide a robust framework for asset selection and risk management.

• Implementation Steps: A structured approach to defining the investment universe, calculating momentum metrics, and regular rebalancing is essential.

• Risk Awareness: Be cognizant of the risks, including market reversals and transaction costs, and implement appropriate risk management strategies.

• Continuous Monitoring: Regularly review and adjust your momentum strategy to align with evolving market conditions and personal investment goals.

By thoughtfully integrating momentum investing into your portfolio, you can position yourself to potentially benefit from sustained market trends while managing associated risks.

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