If you think momentum strategies aren’t suitable for taxable accounts, think again.
The 2014 paper, Fact, Fiction and Momentum Investing, by a group from AQR Capital and the University of Chicago, addresses some of the common myths about momentum strategies like NoLoad FundX’s Upgrading approach and offers some often-overlooked facts about momentum:
1. Momentum isn’t new.
NoLoad FundX has been investing in leading funds since 1976, but the study noted that evidence of momentum has been around for hundreds of years.
“The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years (yes, this is not a typo, two hundred and twelve years of data from 1801 to 2012) of U.S. equity data…Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets since their very existence, well before researchers studied them as a science.”
2. Momentum is tax efficient.
“Momentum actually has turnover that is biased to be tax advantageous—it tends to hold on to winners and sell losers—thus avoiding realizing short-term capital gains in favor of long-term capital gains and realizing short-term capital losses. From a tax perspective this is efficient and effectively lowers the tax burden of momentum strategies.”
3. Momentum doesn’t always outperform.
No investment approach succeeds in every market environment, and momentum strategies are no different.
“We make no claim that momentum works all the time. In fact, of late (this year and the last few years), momentum as a strategy has had a more difficult time. Still, the fact is momentum is a risky variable factor (as they all are) with an impressive long-term average return that survives all the attacks (myths) hurled against it.”