Dual momentum investing is a strategy that synergizes relative momentum and absolute momentum to create a robust investment approach. By focusing on both the directional trends of securities and their performance relative to a benchmark, investors can optimize their portfolio management techniques and enhance potential returns.
At its core, dual momentum investing operates on two key principles:
- Relative Momentum: This principle focuses on identifying assets that have performed better than their peers over a specific period. Investors can target these strong-performing assets, expecting their positive momentum to persist.
- Absolute Momentum: In contrast, absolute momentum assesses whether an asset is moving positively compared to its own historical performance. This criterion helps investors ensure that they are only participating in uptrends while avoiding downtrends.
Implementing dual momentum investing requires a systematic approach. Investors typically start with a predefined universe of securities, which can include stocks, bonds, or ETFs. From there, they measure both relative and absolute momentum over defined time frames, such as 3, 6, or 12 months.
This investing strategy offers numerous advantages. Firstly, it can help reduce drawdowns during market downturns by allowing investors to exit poorly performing assets. Secondly, by focusing on trends, dual momentum investing can enhance returns during bullish markets. The strategy’s systematic nature also minimizes emotional biases, making investment decisions more data-driven.
In summary, dual momentum investing effectively combines the strengths of both relative and absolute momentum. As investors continue to navigate complex market environments, this strategy can serve as a valuable tool for enhancing portfolio performance and achieving long-term financial success.