How to avoid the next stock market crash creates historically back-tested strategies that have been shown to limit risk from stock market corrections and  improve portfolio returns by investing in the strongest areas of the stock market using broad-based diversified index funds.  

Our strategies are based on momentum effects found in US stock markets and described by Jegadeesh and Titman’s 1993 study in the Journal of Finance.  The momentum effect is the tendency for rising stocks to continue to rise, and for falling stocks to continue falling further when looking back over the past three to twelve months.  Further evidence for momentum across global stock markets over the past 200 years has also been identified (Geczy and Samonov).

What causes stock market momentum?

The exact cause of momentum in stock markets remains under debate.  It is generally thought to be driven by human behavior. Here are a few investor behaviors that aren’t necessarily rational.

Common investor behaviors contributing to market momentum

  1. Investors tend to sell their winning positions too early in order to lock in gains, and when their investments are losing money, they tend to hold on to the investment too long hoping to make back the money they lost, thus incurring even more losses.  
  2. Investors hold on to investments based on past data, and when times change, they are hesitant to change their view.  This is known as anchoring.
  3. People tend to give more credibility to information that reflects their own views and disregard information that does not support their view.  In addition to seeing this behavior in politics, it has also been observed in investor behavior.
  4. Investors tend to follow the lead of other investors in much the same way that animals travel in herds and fish swim in schools.  For instance, in order to preserve their jobs, professional investment managers do not want to take risks that would make them stand out from other managers and lose money when other managers are winning or just breaking even.

These irrational behaviors help us understand why we have experienced extended periods of overpriced stocks, followed by rapid declines.

“The premier market anomaly is momentum”
-Eugene Fama, the father of the efficient-market hypothesis.

How can following a momentum strategy affect an investment portfolio?

Below is a chart of our FREE Dynamic US Market Strategy compared to holding a static portfolio of 60% stocks and 40% bonds over the past 20 plus years.  The chart and data does not consider trading fees and taxes.

MetricFree Dynamic US Market StrategyBalanced portfolio of 60% Stocks / 40% Bonds (VBINX)
Annual Return (20 years)10.5%6.7%
Sharpe Ratio (20 years)0.940.68
Max Drawdown-16.8%-32.6%
Drawdown Start / End datesNovember 2014 to January 2016October 2007 to December 2010
Max Drawdown length14 months38 months
  • The overall annualized return of the strategy was higher than holding  Vanguard Balanced Fund (VBINX) which holds 60% stocks and 40% bonds.
  •  The momentum strategy had a higher Sharpe Ratio meaning it had a higher risk-adjusted performance, compared to a static 60% stocks / 40% bonds portfolio over 20 years.
  •  The maximum drawdown, or percentage loss from peak to trough, of the porfolio was lower than the static portfolio.

The power of a momentum-based investment strategy is the performance gains experienced over a full market cycle of both bull and bear markets.  

Features of all our strategies

  • Research-based – Our models use concepts and techniques documented in publicly available white-papers.
  • Rules-based – they are driven by quantitative models that evaluate index fund performance on a monthly basis using mathematical rules, taking the emotional component out of the investment decisions.
  • Systematic – Our pre-built investment models repeat their decision-making calculations on a regular monthly basis.
  • Minimize fees – Use low-cost index funds to limit expenses and provide diversification that holding individual stocks does not provide.
  • Automated – Make the strategies easy for individual investors to follow by processing stock market data and notifying members regular monthly email notifications.

Join for Free!

Benefits of free membership

  • US Market Strategy recommendations updated monthly.
  • Monthly email notifications of upcoming model updates.
  • We will respect your privacy and won’t spam your mailbox, only one email per month.
  • Learn more about momentum strategies over time.
  • Once again..  It’s Free!

Looking for more advanced strategies?  Consider our Premium membership.

Benefits of Premium membership

  • Additional strategies that have been shown to outperform a typical buy-and-hold portfolio over time.
  • See the advantages of a premium plan, including Higher returns