Better investment performance with less risk
IndexfundTrends.com 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.
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
- 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.
- 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.
- 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.
- 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.
“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.
|Metric||Free Dynamic US Market Strategy||Balanced portfolio of 60% Stocks / 40% Bonds (VBINX)|
|Annual Return (20 years)||8.9%||6.7%|
|Sharpe Ratio (20 years)||0.80||0.38|
|Drawdown Start / End dates||December 2019 to February 2020||October 2007 to February 2009|
|Max Drawdown length||2 months||16 months|
- The overall annualized return of the indexfundTrends.com 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 indexfundtrends.com 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.
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
The information provided here is for informational purposes only. Past performance is not necessarily indicative of future results, and all investments involve risk. The investment models and strategies discussed on this site are not appropriate for all investors, and all investors should carefully consider the potential risks of a strategy and their own investment objectives before investing in any strategy. Strategy returns do not reflect any management fees, transaction costs, expenses, or taxes. No representation is being made that any account will or is likely to achieve results similar to those shown. Nothing on indexfundtrends.com should be interpreted as personalized investment advice. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security. None of the content on this site is guaranteed to be correct, and anything shown here should be subject to independent verification. You, and you alone, are solely responsible for any investment decisions that you make.