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Weighing up investment strategies: Value investing vs momentum investing

by , 21 May 2015

When you decide to invest in shares, most investors find it easier to find a strategy that yields results and stick with it.

Two popular investment strategies are value investing and momentum investing.

So how do these investment strategies work? And which one is better?

Read on to find out…


Two completely different investment strategies


Value investing
Value investing involves looking for undervalued shares on the stock market. It’s the strategy that’s helped Warren Buffett amass his riches over the decades.

Momentum investing
Momentum investing involves investing with trends. You find a trend in the market that’s going well and invest in companies that should benefit from it.

So which of these investment strategies is the better option? Or should you try to combine them?


The merits of value and momentum investment strategies


Patrick O’Shaughnessy is a portfolio manager. He recently investigated the performance of these two investment strategies to see which one gave the best results. His study looked at performance over five decades.

His results showed that both value investing and momentum investing performed better than a buy and hold strategy over the long-term.

Interestingly, his study also revealed that these two investment strategies both showed periods of underperformance.

From his study, Mr O’Shaughnessy believes that combining both value investing and momentum investing is the best strategy. This minimised portfolio underperformance during market bad times.

By opting for a 50/50 approach of the two strategies, your portfolio will perform better during times of underperformance.

Mr O’Shaughnessy says the best stocks to invest in are ones with cheap valuations and in an upward trend. In other words, buy cheap stocks that are in an uptrend, Dr Steve Sjuggerud in Investment U explains.

So there you have it. Weighing up value and momentum investment strategies.

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Weighing up investment strategies: Value investing vs momentum investing
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