Momentum Investing

Momentum investing is, in essence, a fairly simple strategy: buy what is going up, sell what is going down.

It is a strategy that tends to work well at certain times. For example, a sustained bubble can make momentum investors a lot of money. It is also a strategy that can go badly wrong and momentum investors tend to take big losses when bubbles burst.

Investors often become momentum investors without really meaning to. There is comfort in buying what is already doing well. There is also pressure on professional investors, such as fund mangers, to pay attention to momentum.

If there is momentum in a share, sector or market and you stay out of it, you lose gains others (and the market) are making. Thus your comparative performance looks worse. During the dotcom bubble some fund managers who had the insight to realise that it was a bubble lost their jobs for underperforming. Going with the herd is a safe option - as long as your own money is not at stake.

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