The foundation for what we now know as momentum investing is based on the theory that stocks that had gone up should tend to continue going up, while past losers should tend to keep falling.
Once you see it in charts, the theory behind momentum investing may become hard to discount. While all investing involves risk and may lose money, the long-term returns, the bouncebackability, and the persistence have kept this type of factor investing ticking for decades.
Source: Kenneth R. French Data Library, "10 Portfolios Formed on Prior (2–12) Returns," monthly value-weighted returns, January 1927–December 2024. Market return = CRSP value-weighted index (Rm) from the Fama/French 3 Factors file. Annualized returns calculated by compounding monthly figures over the full sample.
It’s a simple question that can have a simple answer, as long as we agree on how to measure momentum. Even though there’s no one way to measure it, academic research often uses the 2–12 momentum strategy, ranking stocks based on their returns over the previous 12 months while excluding the most recent two months.
Using that framework, we can compare the long-run annualized returns of high-momentum stocks, low-momentum stocks, and the broader market, drawing on the French Data Library’s momentum-sorted decile portfolios from 1927 to 2024.
It’s a spread that makes anyone sit up and take notice. Over the long run, the highest-momentum decile compounded far faster than the broad market, while the lowest-momentum decile struggled to keep pace.
One caveat is important. These decile figures are gross of trading costs, and real-world implementation trims the theoretical return. Still, the direction and size of the premium proved to be during the time period remarkably durable, which is exactly why practitioners often take momentum seriously.
Source: Panel A: Kenneth R. French Data Library, "Momentum Factor (Mom)," monthly return series. Drawdown figures represent approximate peak-to-trough declines in the cumulative UMD return series during identified stress periods, as documented in Daniel, K. and Moskowitz, T. (2016), "Momentum Crashes," Journal of Financial Economics, 122(2), 221–247.
Source: Panel B: Hurst, B., Ooi, Y.H., and Pedersen, L.H. (2017). "A Century of Evidence on Trend-Following Investing." AQR Capital Management (updated Fall 2017), Note: This exhibit shows the strategy's annualized excess returns (i.e., returns in excess of the risk-free interest rate), before and after transaction costs, and gross and net of 2-and-20 fees.
Like most everything in investing, there’s no such thing as a free lunch. And with momentum, the potential for higher highs can come with the risk of lower lows and loss of investment. Just look at the numbers from an academic analysis of "momentum crashes," a term coined by Kent Daniel and Tobias Moskowitz in their 2016 Journal of Financial Economics study.
This is a lesson that can’t be ignored. Momentum performs poorly at sharp market turning points. The good news is that this shouldn’t invalidate momentum investing. In fact, we believe it helps explain why the premium can persist. Investors demand compensation for enduring occasional, steep losses. In other words, to get the return premium in Chart 1, investors must tolerate the risk illustrated in Chart 2.
Source: Kenneth R. French Data Library, "Momentum Factor (Mom)," monthly return series, January 1927–December 2024. Rolling cumulative returns calculated independently for all non-overlapping and overlapping windows of each specified length. Percentage of windows with a positive cumulative return reported. Methodology is consistent with the analytical framework in Asness, C., Moskowitz, T., and Pedersen, L. (2013), "Value and Momentum Everywhere," Journal of Finance, 68(3), 929–985.
When we look at annualized averages, there’s always a chance that a few good years paint the whole picture. But with momentum investing, that’s not always the case. As the holding period increased from 1927 to 2024, momentum tended to beat the broader market at a higher clip.
This might be the most reassuring message of the three. Over rolling ten-year windows, momentum outperformed the broad market in roughly 83% of observations, reinforcing to us what we all know about the markets: investing rewards patience and may punish short-term reactivity.
So the simple answer to our initial question: Over long horizons, high-momentum stocks have historically delivered a substantial return premium over both the market and low-momentum stocks. But judging the strategy over any individual year may risk coming to the wrong conclusion. Instead, the numbers say to stick it out and resist the urge to abandon the strategy during its inevitable lean stretches.
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