Momentum investing, which involves buying assets that are rising in price and selling those that are falling, has become a prevalent factor in the current market environment. As of 18 August, the MSCI World Momentum Index has returned 21% so far this year, compared to 13% for the MSCI World Index.
The strategy's outperformance is so strong that it is forcing seasoned investors to change their approach. In July, Terry Smith, CEO and chief investment officer of Fundsmith, wrote to investors explaining that he would tweak the value-driven strategy for which he is known to account for the prevalence of momentum investing. He compared trying to buy undervalued stocks to "trying to catch the proverbial falling knife", adding: "All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect."
Rob Morgan, chief investment analyst at Charles Stanley Direct, said the strategy is "wonderfully simple to apply but also fraught with risks if you blindly follow what you see as a trend without understanding what you are actually buying and the risks involved".
Analysts note that momentum investing can lead to significant over-concentration, as it targets the most popular stocks at any given time. "Popular momentum trades can also become crowded, which amplifies the snapback when they unwind," said Angeline Ong, senior investment analyst at IG, citing silver prices in early 2026 as an example.
Ong also highlighted that momentum strategies can lead to higher costs, as they require frequent buying and selling, which racks up trading costs and, for taxable accounts, capital gains tax.