As an investor, you’ve likely heard the phrase, “Buy low, sell high.” But what about, “Buy high, sell higher?” That’s the basic premise of momentum investing. It's a data-driven investment strategy for traders seeking to capitalize on improperly valued equities. The goal is to buy high, sell at peak profit, and rid your portfolio of unwieldy money. Sappers as soon as possible.
Momentum investing is one of the more technical trading strategies. It involves seeking out securities that under- or overperform against the broader market. The goal is to determine a security or fund’s price momentum and capitalize on continuing trends with certain indicators:
As a rule, momentum investors seek to rack up profits in short-term increments, rather than in the long haul. For instance, an investor may hold a stock for anywhere from 2 months to 3 years before selling. That's compared to a long-term investor who may hold the same security for 2-3 decades or more.
Ideally, an investor will see long-term profits with a momentum strategy by augmenting their portfolio with high-performing securities as they rise, then selling them off when they start to lose value.
This approach assumes that investors over- or undervalue certain stocks, leaving room for investors to profit off price discrepancies. Instead of selling your highest-performing securities, you buy more of them, while selling off any assets that drop in price.
Momentum investing rejects the efficient-market hypothesis (EMH), which states that assets are accurately priced according to all available information. Instead, investors believe that growth stocks will continue to grow, while consistently losing stocks will continue to lose.
If you want to adopt a momentum investing strategy – or just a few momentum securities into your portfolio – getting started with your current portfolio is fairly simple:
Note that there is a significant difference in time cost (and real cost) between investing in momentum stocks and momentum ETFs. Maximizing your stock investment returns requires more research, more trades, and a constant finger on the market’s pulse.
But for more casual momentum investors, a generalized momentum philosophy can still generate returns that match (or exceed) standard indices. A less granular approach – such as investing in momentum ETFs or throwing money in when the overall market is performing well – allows you to benefit from positive volatility without sacrificing your weekends to watching the stock market.
Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.