Another Excellent Momentum Strategy

Regular readers know I love to feature new investment strategies. I’ve come across a momentum strategy featured on CXOAG and developed by Malcolm Williams and maintained at www.copstrat.com. The strategy has outperformed buying & holding the S&P 500 over the past 19 years and at lower volatility. The strategy is detailed extensively on his site, but a summary is below. Mr. Williams welcomes emails, so visit his site, it’s free! CXOAG, an independent source, summarizes his strategy, “In summary, an asset class momentum trading strategy may favorably tilt the risk-reward playing field for investors who systematically apply it.”

An excerpt from copstrat.com below:

This strategy is to select an asset allocation from the top ten to fifteen asset classes that are performing now (last 12 months) from amongst about 80 asset classes (Appendix A lists the asset classes and will be explained later, however, look at it now to get a feel for the type of asset classes involved.) then to implement the allocation with the currently (again, last 12 months) top-performing funds. This is reviewed monthly and changed if necessary. It uses short-term performance which can be viewed as momentum or inertia. The reasons that this strategy works are provided and supported below. This is an outline of the strategy and the support discussion.

  1. Asset-class selection pays the most for your effort. Eighty, fund-investable, asset classes are used.
  2. Short-term performance, or momentum, of asset classes is used as the basis of selection of the top-performing funds for investment (e.g., 10 to 15 out of 80).
  3. Selection is based on “outperformance” of asset classes as opposed to absolute performance. The best performing asset classes, even in a down market, are not that bad, as will be shown below. The focus on short-term performance and monthly reviews will allow reacting much faster in the event of down markets. “Outperformance” is relative to the other asset classes, and the relative performance of asset classes is a much slower moving measurement than the absolute performance of a class. Furthermore, asset classes, and the funds that represent them, are less volatile than the individual stocks that make up the class.
  4. Funds (Mutual funds and Exchange Traded Funds (ETF)) are the preferred investment vehicle to implement a portfolio. Choose the best funds in the best classes.
  5. Monthly review and action. (My experience is that you will not trade excessively)
  6. Recognizing that this strategy does not solve sudden, serious market down-turns.
  7. Staying informed in a time/effort efficient manner.
More on this topic (What's this?)
Plenty of Momentum Left
The Reality Of Momentum
Read more on Momentum at Wikinvest