The origins of momentum investing can be traced back to the 19th century when economist David Ricardo famously advised, “Cut short your losses; let your profits run on.” This advice is the fundamental principle of momentum investing. However, it was only in the 1990s when the strategy gained popularity, following a groundbreaking study by finance professors Narasimhan Jegadeesh and Sheridan Titman. They found that stocks showing strong past performance tended to perform well in the future, providing empirical evidence supporting momentum investing.

In recent years, momentum investing has continued to evolve and adapt to market changes. Many modern momentum investors incorporate factors like market volatility, liquidity, and risk-adjusted returns into their strategies. The strategy has also been applied to various asset classes, including bonds, commodities, and even real estate.

Momentum investing can offer significant returns. A study by AQR Capital Management found that a global equity momentum strategy outperformed the market by 8.6% per year from 1985 to 2019. However, like all investment strategies, momentum investing is not without risks. The strategy can underperform during market reversals and requires frequent trading, which can lead to higher transaction costs.

Practical applications of momentum investing are vast. Many mutual funds and exchange-traded funds (ETFs) follow momentum strategies, offering individual investors an easy way to gain exposure to this investment style. High-frequency trading firms also use momentum strategies to profit from short-term price movements.

Savvy Strategies for Momentum Investing

• Stay disciplined: The key to successful momentum investing is discipline. Stick to your investment plan and avoid chasing hot stocks that may not have lasting momentum.

• Diversify: Don’t put all your eggs in one basket. Diversifying your portfolio can help reduce risk.

• Stay informed: Keep a close eye on market trends and economic indicators. Understanding the market’s direction can help you make smarter investment decisions.

• Consider transaction costs: Remember, momentum investing involves frequent trading, which can lead to higher transaction costs. Make sure the potential returns outweigh the costs.

In conclusion, momentum investing offers a unique and potentially profitable approach to investing. By purchasing assets that are on an upward trajectory and selling those that are declining, investors can capture significant gains. However, it’s crucial to stay disciplined, diversify your portfolio, and keep a close eye on market trends. With the right approach and a deep understanding of the strategy, momentum investing can be a powerful tool in your investment arsenal.