Go With the Flow?

Does momentum investing work?

Source: Callen Associates

Investors have a tendency to chase returns. That’s why mutual fund companies hype their most recent performance in big, bold letters, just above the fine-print disclaimer: “Past performance does not guarantee future results.” There’s a reason they advertise this way: everyone loves a winner.

It’s not just individuals who do this. A couple of business school professors analyzed 1000 pension fund target allocations over a 20-year period and found that the typical fund chases returns for several years, to the detriment of the plan. Momentum investing works for about a year, they found, and then the asset’s performance moves in the opposite direction.

Why does this happen? Investors are always looking for the next world-changing idea to lift their portfolios. Money floods into a promising concept until it’s priced for perfection. But nothing fails like success: when the world doesn’t change, those hefty valuations fall back to earth. That’s why tech stocks underperformed from ‘01 to ’04, and China’s market has lagged more recently.

Shakespeare once wrote, “There is a tide in the affairs of men which … leads on to fortune” (Julius Caesar IV.iii). Ironically, the character who said that had missed his tide and was headed for a fall. Often, the best way to profit from momentum is to go against the flow.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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By | 2017-07-17T12:23:17+00:00 October 10th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
Leave a comment if you have any questions—I read them all!
– And Follow me on Twitter @GlobalMarketUpd

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