A recent article in InvestmentNews highlights how momentum investing—buying shares of whatever is rising the fastest and selling when these stocks “lose steam”–has been performing well of late. However, the article warns, that unless investors “have a long holding period and an appetite for risk, it might be better to wait until momentum cycles in and out of style once again.”
A type of growth investing, a momentum approach is not “inherently wrong,” the article says, adding that any index using market cap weighting falls under this category. However, it also argues that, like “the Great Circle of Life, everything comes back eventually,” and investors should be mindful that momentum investing requires risk appetite and the willingness to hold stocks for the long term. It supports the argument by comparing S&P 500 gains since the peak of the dot com bubble in 2000 (5.08%) with those of Morgan Stanley’s Institutional Growth fund over the same period (5.64%). “The odds are better for those with fortitude,” the article asserts.
Morningstar’s Tom Lauricella puts it this way: “Momentum works until it doesn’t.” While the approach is still working well, the article concludes by underscoring that these investors are “steadily accumulating some of the most expensive stocks in the market.”