Strategie
Momentum Investing for the Retail Investor
Key takeaways
- The momentum effect is academically documented — assets with recent strong returns tend to outperform the market in the short to medium term.
- The strategy works at the level of individual stocks, sectors, and markets, but requires disciplined rotation.
- Momentum's weakness is a rapid reversal — losses come fast at market turning points.
- Retail investors can implement momentum through specialised ETFs.
- Trading costs and taxes can significantly reduce real returns.
Momentum investing rests on a simple idea: assets that have grown more than others over the past six to twelve months tend to continue that trend.
Why momentum works
The effect is well documented — academically described by Jegadeesh and Titman in 1993 and confirmed by dozens of studies since. The reason? A combination of behavioural biases: investors underreact to good news, then overreact, and the trend reinforces itself. Institutional managers under benchmark pressure also buy what is rising — and sell what is falling.
How to implement momentum
There are three basic approaches for the retail investor:
- Stock-level momentum: buy the top-decile stocks by 12-month return (minus the last month) and rotate the portfolio quarterly or monthly. Requires time and activity.
- Sector rotation: track the relative strength of ETFs across different sectors and allocate to the strongest. Simpler, but still active.
- Momentum ETFs: funds such as iShares MSCI World Momentum Factor (IWMO) or Invesco S&P 500 Momentum (SPMO) handle the rotation for you according to a defined methodology.
Costs and tax reality
Active portfolio rotation generates transaction costs and — depending on the holding period — taxable gains. In the Czech context, you lose entitlement to the three-year tax exemption if you sell shares or ETFs early. This substantially reduces net returns compared with a passive strategy.
Who is momentum suitable for
Momentum makes sense as a smaller portion of a portfolio (satellite) for investors who understand the risks, have the discipline for mechanical rotation, and accept higher taxation. As the sole strategy, it is too costly and emotionally demanding for most retail investors. A comparison with the passive approach can be found in the article on active vs. passive investing.
FAQ
What is momentum investing?
A strategy that buys assets with a recently above-average return and sells those with weak returns. It is based on an academically documented effect that trends tend to continue over the short to medium term.
What are the main risks of a momentum strategy?
The so-called momentum crash — a sharp reversal at the start of a new market cycle, when the previous winners lose fastest. Also high transaction costs from frequent rotation and the loss of tax exemption with short holding periods.
How can a retail investor use momentum?
The simplest route is specialised momentum ETFs (e.g. iShares MSCI World Momentum Factor), which automatically rotate according to index rules. Direct stock selection requires the activity and discipline that most retail investors struggle with.
Does momentum work in the Czech market?
Data for the Czech Republic are limited and the market is small. Momentum effects are better documented in the US and global equity market. On the Prague Stock Exchange liquidity and transaction costs would be a problem.