What is momentum investing? | MoneyWeek
Investing ‘factors’ refer to a number of styles or strategies that dictate how investors choose their stocks. Some of the best-known are value and growth.
Momentum investing is one of the simplest investing factors, but paradoxically one of the most difficult to successfully adopt.
In essence, it means you buy stocks, funds or other assets that are rising in price, and sell the ones that are falling.
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It is an especially prevalent factor in the current market environment. As of 18 August, the MSCI World Momentum Index has returned 21% so far this year, compared to 13% for the MSCI World Index (the former index is based on the latter, but has a heavier weighting towards stocks that have positive momentum traits).
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In July, the respected fund manager Terry Smith, CEO and chief investment officer of investment management company Fundsmith, wrote to investors in the Fundsmith Equity Fund explaining that he would tweak the value-driven strategy for which he is known to account for the prevalence of momentum investing.
He compared trying to buy undervalued stocks to “trying to catch the proverbial falling knife”. “All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect,” he said.
Momentum investing’s current outperformance is so strong, that it is forcing seasoned investors to change their approach.
It’s particularly important to understand the concept as it’s not an easy strategy to replicate.
“It’s 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,” said Rob Morgan, chief investment analyst at Charles Stanley Direct.
What is momentum investing?
Momentum investing effectively means buying stocks or other assets that are increasing in price.
“Momentum investing is simple in principle,” said Angeline Ong, senior investment analyst at IG. “Buy what’s already going up or sell (short) what’s already going down. It’s built on the idea that any asset that has performed well over the recent past tends to keep performing well in the near term, and vice versa.”
A basic approach might be to rank stocks or funds by their returns over a given time period (three, six or 12 months) and buy whichever has generated the greatest returns.
“Some investors are probably doing it without even thinking about it, by buying a share or fund they notice is performing well,” said Charles Stanley Direct’s Morgan.
More advanced momentum investors might make use of technical analysis tools which measure patterns in how an asset is trading.
For example, the relative strength index measures the speed and change of an asset’s price and quantifies this as a number between 0 and 100; a reading of 50 or above indicates positive momentum (though a reading above 70 is usually interpreted as a sign that a stock is overbought and that its price might soon fall back), while a reading below 30 indicates it might be oversold and due a rebound.
Some also use long-term moving averages to look for signs of momentum. A stock’s 50-day moving average price rising above its 200-day moving average can be interpreted as a ‘buy’ signal; (and vice versa: if it falls below, this can signal a ‘sell’).
Ong added that momentum investing is often considered a natural opposite to value investing.
“Value investors buy cheap stocks that the market has undervalued, and wait for them to re-rate,” she said. “Momentum investors and traders buy stocks the market already likes, and ride the trend.”
What are the drawbacks of momentum investing?
For most non-professional investors, momentum investing is a challenging strategy to execute over the long term.
One obvious reason for this is that the stocks or sectors that have momentum behind them are constantly changing. A stock can go from having positive momentum to being overbought – and then, oversold – very quickly, so if you’re not spending most of your waking hours looking at live market data, you could easily miss the switch and be left out of pocket.
It can also lead to significant over-concentration. Momentum investing by definition targets the most popular stocks at any given time. If a majority of the world’s investors are deliberately targeting momentum stocks, the effect can become circular; investors keep putting more and more money into a given stock or sector, simply because everyone else is.
That can generate excellent returns when the stock market is gaining, but it can unravel quickly when it falls.
“If $200 billion market valuation stocks are moving 33% a day in a bull market, you can reasonably speculate about what’s going to happen if or when things reverse,” Terry Smith wrote in his July letter. “In 2007–08, the S&P fell 57% in five months. Next time round, it would not surprise me if it accomplished this in five days.”
“Popular momentum trades can also become crowded, which amplifies the snapback when they unwind,” said Ong – as happened with silver prices in early 2026.
Momentum is arguably better-suited towards shorter term approaches.
“In momentum investing’s purest, fastest-moving form, which involves chasing days-to-weeks price action, it is seen as more of a trading strategy, not an investing one, and needs discipline and speed most retail investors may not have time for,” said Ong.
As well as it being a difficult strategy to consistently get right, Ong highlighted that it can lead to higher costs; momentum strategies require frequent buying and selling, which racks up trading costs and, for taxable accounts, capital gains tax.
How can you adopt a momentum investing strategy?
If you do want to try momentum investing for yourself, you have two basic options.
The first is to attempt to identify momentum stocks yourself. This will take a lot of technical analysis, and given the potential of the market to change in a flash, it will be time-consuming to ensure you’re on top of all your picks.
The simpler approach would be to buy a momentum-focused fund. This leaves the hard work of deciding what to buy and sell to the fund manager or index provider.
There are plenty of passive funds, most of which are focused on the MSCI World Momentum Index or similar indices. Some examples include the iShares Edge MSCI World Momentum Factor UCITS ETF (LON:IWFM), the Xtrackers MSCI World Momentum UCITS ETF (LON:XDEM) or the L&G Developed World Momentum Factor Index Fund.
Active funds following a momentum strategy are less common. Active fund managers, in theory, earn their living by picking out opportunities the market has overlooked, rather than simply following what everyone else is doing.
But Smith is not the only active manager to acknowledge that momentum can (and, debatably, should) play a role in their investment decisions. So momentum does factor into the strategies behind some active funds and investment trusts.
Morgan, for example, highlights Artemis US Extended Alpha Fund as an active strategy that incorporates elements of momentum investing (its stated objective is to profit from both rising and falling share prices). Notably, though, the fund describes its approach as contrarian, which is in some respects antithetical to momentum investing.
“It’s not pure quantitative momentum but represents partial exposure to the factor,” said Morgan.
Investment trusts where momentum is one of the characteristics assessed include JPMorgan European Growth & Income (LON:JEGI), which targets companies exhibiting value, quality and momentum characteristics, and Aberdeen UK Smaller Companies Growth Trust (LON:AUSC) which assesses companies based on quality, growth and momentum criteria.
