Momentum investing has moved centre stage in recent months, with many investors experiencing FOMO, says Ian Rees, Head of Multi Manager Funds at Premier Miton – who warns that chasing such trends can lead to risky behaviour.
Investing can be as much about the emotional and behavioural response of investors as well as a deeply analytical approach.
The current obsession with ‘momentum’ is a case in point. It appears more prevalent to us in recent months, when reading the financial press or speaking with equity fund managers, that momentum has become a more prominent consideration.
Now, momentum is no bad thing, especially if it is aiding positive returns, as it signals validation that you are ‘in with the crowd.’ It can be shown by performance being notably persistent, irrespective of events that have the potential to cause headwinds elsewhere.
It points to investments forming their own narrative to support ongoing returns, with topical areas currently being chip manufacturers and the space technology thematic, helped by the recent IPO of SpaceX.
Undoubtedly, jumping on the bandwagon of momentum can be instantly rewarding for investors who thirst for easy success.
It is what most investors welcome – positive returns from an investment story that remains credible and popular.
However, while these attributes are desirable and comforting, the pursuit of such momentum stories, with a goal of optimising short-term performance, often results in momentum factors dominating and concentrating return drivers within portfolios.
This can present real dangers to long term wealth creation, especially when it narrows investors’ perception to an investment’s quality or valuation considerations.
Consider a racing driver who finds that their team have developed the most powerful engine on the grid. The temptation for an amateur is to put the pedal to the floor and seek to generate the highest top-end speed in getting to the finish line the quickest.
However, any motorsport fan will tell you this has the potential to be an extremely fast road to ruin. The winner of any race must firstly make it to the end, with race finishers ranked by virtue of their fastest average speed, not the highest speed for a small section of the endurance.
While there is considerable joy in benefitting from positive investment momentum, all too often the dangers of pursuing this approach are overlooked by its advocates.
The first consideration is that momentum is never a one-way trade. Just like the adage that ‘trees do not grow to the moon,’ so momentum that sees widespread adoption, sows the seeds of its own destruction that can eventually see it falter as the marginal buyer is exhausted.
We typically see that when momentum becomes detached from normal valuation parameters, it results in greater volatility and more painful drawdowns.
A portfolio strategy that becomes increasingly concentrated with such drivers can therefore provide the allusion of short-term wealth gains but face a reduction in durability of returns.
Late-comers to the momentum trend can often encounter performance disappointment as the ‘top-of-the-cycle’ investment gains are never sufficient to offset losses as momentum declines.
Momentum advocates will point out that the returns generated by more cautious investors, not fully exposed to current market drivers, will lag and suffer an opportunity cost.
This makes it compelling to jump on the band wagon for so many investors. Indeed, it is this very psychology (the effect of FOMO – Fear of Missing Out), that perpetuates the phenomenon of momentum by attracting newer investors all the time, alongside embarrassing those investors who seek to control or diversify exposures as the ascent of momentum continues.
FOMO, or the pursuit of momentum for its own sake, often results in dangerous investor behaviour.
Not only is this evident through an absence of absolute risk considerations, but it also encourages increased demand for specific exposures, such as thematic or single sector ETF investments. These harness momentum in an ever more isolated manner.
More worryingly is the proliferation of leveraged strategies typically accessed with ETF’s that provide 2x or more gearing to the theme.
Typically tracking daily returns, these become dangerous investment vehicles with potential for significant investment losses, while encouraging speculative day-trading activity rather than supporting a long-term investment approach.
Recently we have seen growing availability of such instruments for the Philadelphia SE Semiconductor Index (SOX) given the strong returns generated by these stocks over recent months.
Even more dangerously, we have also seen the proliferation of leveraged notes on single stocks, particularly Asia semiconductor and memory chip names, such as Samsung, SK Hynix or TSMC, who have been leading the index returns in Korea and Taiwan this year.
Crowded momentum can present a real danger to index investors who elect for a truly passive approach to their investments.
Passive investors may discover that at the very peak of a momentum trade, they will have the greatest exposure to it, increasing losses when momentum switches into reverse.
Similar dangers also face active managers too. Professional managers, like amateur investors, have a similar motivation – they don’t wish to look stupid.
They couch this in terms of seeking returns that minimise underperformance so they can keep investors investing with them. This is a backdrop that has challenged most active managers in recent years.
Howard Marks of Oaktree terms this ‘career risk,’ resulting in a herding, even from professional investors, into momentum trades. This can result in an unhealthy focus on ‘relative’ exposures in stock selection, portfolio construction, and position sizing.
The unspoken view being that it is more difficult to be fired by ‘following the herd’ than having an independent or differentiated view.
In looking at investment concentrations within indices, and speaking to active managers across the market breadth, we think momentum remains a current and prescient risk for markets.
Seeking deliberate diversification is a cure for unhealthy concentration. While this comes with the opportunity cost of only being of benefit when market leadership changes, it helps in ensuring that not everything behaves in a similar fashion, so can reduce portfolio correlations.
It would also be wrong to categorise all attempts at diversification as dilutive to performance returns. As a team, we have worked hard to identify areas of opportunity that have delivered comparatively better returns, while simultaneously being in less crowded trades, than the large cap technology trends prevalent in the market. Biotech and US Value indices have both outperformed the Nasdaq over the last year to the end of May [1].
Controlling index exposures, being aware of performance drivers and concentration, deliberately seeking alternative thematic ideas and investment styles that offer good prospective returns, or even making use of good active managers for greater diversification, can all help in achieving the goal of diversification.
For financial planners, delivering good client outcomes to clients should extend beyond a pure performance focus. It should also encompass considerations of volatility, drawdown, and the durability of returns.
While investors may seek the thrill of generating strong returns in the shortest time possible, orientating their expectations to focus on compounding positive returns over time by minimising drawdowns, is a more lasting although less instantaneously gratifying strategy.
Investors and their financial planners should be careful to not be blinded by performance returns alone but recognise risk management is a necessary element of preserving and growing wealth.
[1] Source: FE Analytics, from 30.05.2025 – 29.05.2026.
Main image: momentum, nadir-syzygy-wc3jFFQxo8k-unsplash
