Why momentum investing works (and why most investors give up before it does)
Momentum is one of the most reliable anomalies in financial markets, yet most retail investors cannot stick with it. Here is the research, the math, and why discipline matters more than cleverness.
In 1993, two academics at UCLA published a paper that should have ended a lot of arguments. Narasimhan Jegadeesh and Sheridan Titman looked at US stocks from 1965 to 1989 and found that buying recent winners and selling recent losers produced significantly positive returns — around 1% per month over the next three to twelve months.
That paper, now cited thousands of times, sparked an entire field. Thirty years later, the momentum effect has been confirmed in:
- US equities across every decade since the 1920s
- International equities (Europe, Japan, emerging markets)
- Currencies, commodities, and bonds
- Even cryptocurrencies in their short history
If a pattern shows up that consistently across asset classes and time periods, it is probably real.
So why is not everyone rich from it?
This is the interesting question. If the effect is well-known and documented, why do not more investors capture it?
The answer comes down to three things.
1. Momentum is uncomfortable
Momentum strategies buy what has gone up and sell what has gone down. This is the opposite of how humans are psychologically wired. We see a stock at an all-time high and think "this is expensive, I should wait for a dip." We see a stock after a 40% drawdown and think "this is cheap, I should buy."
Both instincts, in the context of a momentum strategy, are wrong.
"The mother of all inefficiencies is that human beings under-react to information. They do not fully adjust their expectations, so prices drift in the direction of the news." — Cliff Asness, AQR
Following momentum means overriding a gut feeling that is probably older than agriculture. Most people cannot do it consistently.
2. Momentum periodically blows up
Momentum works on average. It does not work in every year. In 2009, during the recovery from the Global Financial Crisis, momentum strategies posted their worst year in history — down roughly 40% in some implementations. Why? Because the stocks with the worst recent returns (banks, financials, small caps) bounced the hardest in the recovery. Buying recent losers — the opposite of momentum — was the winning trade.
This happens periodically. Every decade or so, momentum goes through a bad stretch long enough to shake out every retail investor who did not understand the strategy in the first place.
3. Execution is tedious
A disciplined momentum strategy requires:
- Ranking a large universe of stocks on the same metric, every month
- Selling positions that no longer rank highly
- Buying new positions to replace them
- Tolerating transaction costs and tax drag
- Repeating this for years
Most retail investors try this for 3–4 months, get distracted, miss a rebalance, and their portfolio slowly drifts into a collection of whatever they happened to buy most recently. The strategy does not fail — the execution does.
What Numu changes
Numu does not solve the psychology. Nobody can do that for you. What it does solve is the execution.
Every month, on the first trading day, Numu publishes a ranked list of Shariah-compliant US stocks with the strongest momentum signal. The ranking uses:
- Cumulative 3-month return (a shorter-window momentum signal)
- SROC (Smoothed Rate of Change) at two lookback windows, to filter out noise
- Minimum history filter to prevent newly-IPO'd stocks with spike-like charts from dominating the top of the list
The output is the same every month: a clean list of 5–15 stocks depending on your chosen strategy. Your job is to follow it or not.
What the research actually says about expected returns
Published research on long-only momentum strategies in US equities typically shows:
| Metric | Typical range |
|---|---|
| Annualized excess return vs. S&P 500 | +3% to +8% |
| Sharpe ratio | 0.7 to 1.3 |
| Maximum drawdown | -25% to -50% |
| Worst year | -20% to -40% |
In Numu's own backtest of its four strategies (2020–2026, Shariah universe), the Balanced strategy posted a Sharpe of 1.23, CAGR of 35.7%, and max drawdown of -18%. These numbers are higher than the academic averages because the backtest window was favorable for momentum — we have been in a bull market for most of it. Future returns will almost certainly be lower.
The takeaway
Momentum is not a secret. It is not a hack. It is not going to make you rich in six months. It is a slow, mechanical, psychologically-uncomfortable strategy that has historically delivered 3–8% per year of excess return to investors who can stick with it.
The edge, if it exists at all, is not in finding momentum. The edge is in keeping momentum.
That is what Numu is for.
Want to see Numu's picks?
Numu recommends a fresh basket of Shariah-compliant momentum stocks every month. No sign-up required to see them.
View this month's picks