Money Momentum: Building Speed Towards Your Goals

Momentum isn’t just a physics concept—it’s a powerful financial principle that can transform how you invest and pursue personal aspirations. By learning to identify and harness upward trends, you can accelerate both wealth-building and life goals.

Understanding Financial Momentum

In the markets, momentum describes the tendency of winning assets to keep rising and losing assets to continue falling. This phenomenon mirrors a famous physics law: objects in motion stay in motion unless acted upon by an external force. In finance, the force is investor behavior rather than pure market efficiency.

There are two primary types of momentum:

• Absolute Momentum: Compares a security’s current price to its own historical price. Buy when returns over a set period (e.g., 12 months) exceed zero, and sell or short when they fall below.
• Relative Momentum: Ranks securities against each other. Invest in top performers—those with the highest recent returns—and rotate away from laggards.

Evidence and Historical Performance

Contrary to the Efficient Market Hypothesis, momentum has consistently outperformed over long horizons. Academic studies dating back to Jegadeesh and Titman (1993) highlight a 3–12 month persistence of winners and losers.

Key findings include:

Momentum strategies targeting 6–12 month winners delivered a 10% higher risk-adjusted return than global equities over 10 years and a 28% edge over 20 years. It remains the fourth factor in the Fama–French model, explaining up to 99% of diversified portfolio returns when included.

Implementing Momentum Strategies

Whether you’re trading short-term or investing for decades, momentum can be applied in versatile ways:

• Trading Approach: buy high, sell higher approach by entering positions once momentum confirms and exiting before anticipated reversals using technical indicators.
• Long-Term Investing: Identify secular trends—AI, cloud computing, autonomous vehicles—and overlay momentum on core holdings or diversified ETFs.
• Tools and Access: Use specialized ETFs like iShares MSCI World ex Australia Momentum ETF to gain broad exposure without sector concentration risks.

Managing Risks and Pitfalls

Momentum isn’t foolproof. Sharp reversals and market shocks can erode gains if you’re unprepared. Major drawdowns occurred in 2001, 2009, and 2023, reminding investors that past trends don’t guarantee future results.

• Avoid catching falling knives by establishing clear cash buffers and stop‐loss rules before downturns deepen.
• Maintain diversification to prevent single-stock or sector overexposure, ensuring broad market participation.
• Stay disciplined against emotional biases; momentum can feel counterintuitive to “buy low, sell high” instincts.

Applying Money Momentum to Personal Goals

Beyond financial markets, the momentum concept can guide personal growth. Just as assets follow persistent trends, habits and efforts can compound when you build consistent progress.

Consider these parallels:

• Saving Streaks: Automate contributions and let each deposit reinforce positive behavior.
• Skill Development: Focus on one discipline, track incremental improvements, and ride your own growth wave.
• Career Advancement: Leverage small wins—completed projects, networking successes—to generate further opportunities.

By setting simple rules—like monthly goal reviews and automatic savings increases—you create cash buffers for setbacks and preserve momentum through challenges.

Conclusion

Momentum investing challenges traditional wisdom by showing that recent winners often stay ahead and losers lag further. Its robust historical performance, though punctuated by downturns, rewards disciplined application.

Similarly, in life and finance, consistent effort and trend-following can accelerate your journey toward goals. Embrace the principle, establish clear rules, and shape your financial destiny over time through intentional momentum-building.

Now is the time to act. Identify your trends, set your rules, and let Money Momentum propel you toward greater success.