310 N. State Street, Ste. 206
Lake Oswego, OR 97034
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Why Momentum Investing? Tactical, Active Analysis.

Momentum-based investment strategies are not a buy and hold approach to portfolio construction. They involve technical, not just fundamental, analysis. They are tactical strategies, which actively buy and sell the securities in a portfolio to adjust to current markets.

Momentum-based investment strategies have been in use since the 1950s. These strategies focus on the forces of supply and demand in the marketplace and rely on the tendency of financial markets to emotionally overreact. Their objective is to identify and follow trends in financial markets that emotional overreaction creates. Trend identification is accomplished through price performance comparisons between securities, asset classes and market indices. These comparisons do not require interpretation and are undistorted by personal emotions or bias, which many times interfere with successful investing.

Momentum-based strategies tend to follow the 80/20 rule of investing. The 80/20 rule of investing generally holds that 80 percent of investment profits come from 20 percent of an investor’s trades. A momentum strategy follows the 80/20 rule by tactically shifting portfolio holdings to outperforming assets that allows the investor to keep winners and cut losses short. With this discipline, not all trades will be huge outperformers, but underperformers will be sold.

Despite their trend-following acumen, momentum-based investment strategies do not guarantee positive performance. These strategies participate on the upside and downside of financial markets with potential outperformance in relative, not absolute, terms. This means that when trends assert themselves, a momentum strategy may see outperformance. However, there are periods when trends do not assert themselves or when trends change and previously strong performing investments underperform while other investments gain strength. Under these circumstances, a momentum-based portfolio may underperform until the strategy tactically shifts to follow emerging trends.

With significant amounts of academic research and real world implementation, momentum is now recognized as an important investment factor. Investment strategies based on momentum measure the effect of supply and demand on prices. These strategies allow the investor to identify, follow and benefit from trends in today’s financial markets.

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