Momentum Investing (Overview)
Educational only — not financial advice. Updated 2025-11-22.
Momentum investing tilts toward assets that have been winning recently, based on the idea that price trends can persist for a time. In practice, it’s usually implemented with rules-based screens—not gut feeling or chasing whatever is trending on social media.
This guide explains what momentum is, how rules-based implementations work, and why—if you use it at all—it often belongs as a small satellite around a diversified buy-and-hold indexing core.
- What momentum investing actually is
- Why momentum can work—and where it breaks
- Ways to implement momentum
- How to size momentum in a portfolio
- Common mistakes to avoid
- Quick FAQ
- Advanced tilt
- Rules-based
- Satellite strategy
What momentum investing actually is
In plain language, momentum investing is a discipline of owning assets that have been strong performers recently and avoiding those that have been weak. Instead of trying to predict fundamentals, the strategy leans on price behaviour.
Typical momentum screens look at performance over a recent window (for example, the last 6–12 months), then:
- Overweight or select securities with stronger recent returns, and
- Underweight or exclude those with weaker recent returns.
Momentum is not “buy whatever is hot this week.” It’s a systematic process applied to a broad universe with clear, pre-defined rules.
Why momentum can work — and where it breaks
Academic research has documented momentum effects across many markets and time periods. Possible reasons include:
- Slow information diffusion: markets may take time to fully reflect new information.
- Behavioural biases: investors underreact at first, then overreact, creating trends.
- Institutional frictions: mandates and constraints can force gradual adjustments.
However, momentum carries distinct risks:
- Sharp reversals: when trends break, momentum portfolios can underperform sharply.
- Higher turnover: more trading means higher costs and, in taxable accounts, potentially more realized gains.
- Tracking error: momentum portfolios can look very different from broad indexes for long stretches—emotionally tough to hold.
Momentum is not a free lunch. Any potential return premium comes with higher tracking error and the need for stronger conviction and discipline.
Ways to implement momentum
If you decide that a momentum tilt fits your plan, there are two broad implementation paths:
| Approach | Description | Considerations |
|---|---|---|
| Rules-based funds / ETFs | Use diversified funds that apply momentum screens to broad indexes. | Simpler and more diversified than DIY; still subject to momentum reversals and higher turnover. |
| DIY screens (advanced) | Manually select and trade securities based on your own momentum rules. | High effort, higher risk of errors and emotion-driven changes; generally not necessary for most investors. |
For most people, if momentum is used at all, a diversified, rules-based ETF is the more practical path than hand-picking momentum stocks.
Before adding momentum, make sure your core—your asset allocation, diversification, and buy-and-hold indexing—is already solid.
How to size momentum in a portfolio
Momentum is best thought of as a satellite tilting strategy, not a full replacement for a diversified core. One simple way to think about sizing:
| Component | Role | Illustrative share of equity allocation |
|---|---|---|
| Core index funds / ETFs | Broad, low-cost exposure to global stocks and bonds. | 80–95% |
| Momentum sleeve | Rules-based tilt toward recent winners. | 5–20% |
These ranges are illustrative, not prescriptions. The “right” size depends on:
- Your risk tolerance and time horizon.
- Your ability to stick with a strategy that can underperform for long stretches.
- Your comfort with complexity and tracking error vs a simple index-only approach.
You can experiment with different mixes using the CAGR Calculator or Retirement Savings Calculator, keeping in mind that past performance patterns may not repeat.
Common momentum investing pitfalls
A few traps are especially common when people approach momentum casually:
- Confusing momentum with hype: social-media-driven fads are not the same as systematic momentum.
- Changing rules midstream: adjusting your criteria after every streak of underperformance destroys the logic of the strategy.
- Oversizing the position: making momentum a large chunk of your net worth amplifies tracking error and stress.
- Ignoring costs and taxes: higher turnover can mean higher trading costs and tax drag in taxable accounts.
- Neglecting the core: focusing on momentum while neglecting asset allocation, diversification, and rebalancing.
A good filter: only use momentum if you are already happy with your core portfolio and you are prepared—emotionally and financially—for long stretches where it lags simple indexing.
Momentum investing: quick FAQ
What is momentum investing?
Momentum investing is a strategy that tilts toward assets with strong recent performance and away from those with weak recent performance, using systematic rules. It is usually implemented via diversified funds or ETFs rather than manual stock picking.
Is momentum investing suitable for beginners?
Momentum can be complex and emotionally challenging because it can diverge from the market for long periods. For that reason, it is typically more appropriate as a small satellite strategy for investors who already have a solid, diversified core portfolio.
Does momentum always outperform?
No. Momentum strategies can go through long stretches of underperformance and sharp reversals when trends break. Any potential long-term benefit comes with higher volatility and tracking error relative to simple index funds.
Where can I learn more?
Review Risk vs Return, Diversification, Asset Allocation, and Buy-and-Hold Indexing. Then explore other strategies in the Investing Strategies hub to see how momentum compares.