INVESTING EXPLAINED: What you need to know about momentum investing – buying stock whose prices are going up, but selling those going down
In this series, we bust the jargon and explain a popular investing term or theme. Here it’s momentum investing.
A LEFT-WING POLITICAL MOVEMENT?
Yes, but that’s not what we’re talking about here.
Momentum is an investment strategy in which you buy shares or bonds whose prices are moving upwards, while selling those that are going down.
The rationale is that once a trend has become established, then it is highly likely to continue.
Opposite directions: Momentum is an investment strategy in which you buy shares or bonds whose prices are moving upwards, while selling those that are going down
The approach, which is the diametric opposite of the adage ‘buy low, sell high’, requires considerable technical analysis of price movements to ensure that you observe any emerging patterns as early as possible.
Also required is emotional detachment from your investments. There can be no regrets, no tears goodbye when you sell.
WHO INVENTED IT?
The late Richard Driehaus, a fund manager and philanthropist, is called the father of momentum investing and he certainly popularised the strategy.
It is said that the approach enabled his Chicago-based business, Driehaus Capital Management, to produce returns of 30 per cent plus in the 1980s. In 2003 he founded the Driehaus Museum in Chicago whose collection of 19th century art focuses on America’s Gilded Age in the late nineteenth century when vast railroad, stock market and other fortunes were built.
WHAT ARE THE RISKS?
Plenty, including such obvious missteps as buying or selling too early or too late because you have lost the courage of your convictions. Nerves of steel are necessary. Driehaus said that momentum investing involved lengthy independent research, without which it is easy to miss key trends.
It is also hugely time-consuming since you dare not become distracted and so miss a key change in the direction of a price.
This is something of a challenge in an era of 24-hour global stock market trading and a round-the-clock news cycle.
SHOULD I TRY IT?
Momentum investing is only something to consider if you have plenty of money that you can afford to lose, lots of time on your hands and access to the sources of market data used by professional traders.
Hours have to be spent poring over charts of share prices, attempting to discern whether potential entry or exit points are moments of opportunity.
Momentum investing seems to produce better results when the mood of the market is bullish. At present, there are concerns that the profits expectations for some companies may not sufficiently reflect the threat of recession or of a sharp upward move in interest rates.
I DON’T HAVE TIME…
If you are attracted by the concept but don’t have the time or the knowledge to do it yourself, take a look at the range of momentum investment exchange traded funds available from iShares, a division of the US giant BlackRock.
These allow you to take a bet on US and world markets.