Momentum Investing

🧭 Background & Context Momentum investing is based on the empirically proven anomaly that securities with strong relative price performance over a period of 3 to 12 months tend to continue this trend in the short term. The strategy therefore buys winners and sells losers, deliberately foregoing fundamental valuations and instead relying on the inertia of market participants and delayed information processing. Economically, momentum benefits from behavioral patterns such as herding and confirmation bias, which lead to underreactions to new information. Institutional investors amplify the effect through systematic buying on rising prices, creating a self-fulfilling prophecy. For retail investors, the strategy is attractive because it can be implemented rule-based and without deep balance sheet analysis – for example, via ETFs on momentum indices. Its significance lies in diversification: momentum has low correlation with value or dividend strategies, thus improving the risk-return profile of an overall portfolio. However, it requires strict discipline, as the strategy produces high losses in sideways markets and during abrupt trend reversals (momentum crashes). Retail investors should therefore only allocate a portion of their assets and clearly define the holding period. 🔍 How It Works in Detail Momentum investing relies on the idea that stocks that have risen strongly in the past will continue this movement in the short term. So you don’t buy cheap or undervalued stocks, but precisely those that are already on an upward trend and in high demand from investors. The idea behind this is that trends do not reverse immediately but often persist for a while because positive news and buying sentiment reinforce each other. Specifically, it works like this: you look at the price performance over the last three to twelve months and select the stocks with the best performance. These are then reviewed regularly – usually monthly or quarterly. As soon as a stock loses momentum or the trend reverses, it is sold and replaced by a st …