The dual momentum system is a style of investing that is often understood by the vast majority of people.
When broken down into its components, the dual momentum system isnt as complicated as some people may believe. In fact, it’s relatively simple.
In this article, we will be describing exactly what the dual momentum system is and whether or not it is a good way to invest for both beginners and veterans of the industry alike.
What Exactly is the Dual Momentum System?
The dual momentum system is a strategy of investing that aims at being able to better predict the outcome of how a stock may perform.
It does this by using a combination of both absolute momentum and relative momentum, which are both ways of analyzing stocks past performance.
In turn, this allows investors that make more informed decisions and pick stocks that will perform better.
The dual momentum system employs some tactics that are extremely different from the usual investment strategies, such as the standard 60/40 asset allocation model that sees 60% of an investors portfolio being made out of stocks and 40% being bonds, and the “buy-low, sell-high" model.
In contrast, the dual momentum system revolves around allocating 20% of ones portfolio into 5 different asset categories: U.S. equities, Treasury bonds, REITs, corporate bonds, and gold. In addition, the dual momentum system takes a different approach by using a buy-high sell-low model, which ensures that an investors portfolio only contains well-performing stocks.
Why the Dual Momentum System Works
The dual momentum system works because of the fact that it is able to reduce the volatilely of an investors portfolio. This is because instead of taking a slight gamble which is done with traditional investing where you buy a stock while it is low, hoping for it to increase in price, the dual momentum system does not rely on such hope.
Of course, investors still want the stock to rise in price when using the dual momentum system, but the growth is more likely to be more consistent and reliable rather than sporadic and unpredictable.
Although, it is worth mentioning that the dual momentum has not shown to be superior to the traditional investing method in terms of returns on investment. They are both equal, with dual momentum beating it in investment security.
Things You Need to Look Out for With Dual Momentum Investing
For the plethora of advantages the dual momentum system brings, it also has its fair share of drawbacks.
For one, it can take experience to know exactly which stocks will be a good choice to invest in when using the dual momentum system, so it may not be the best choice for beginners.
Furthermore, there is substantially more time and effort that goes into choosing stocks based around the dual momentum system, which can be a big issue for people who don’t want to spend a lot of their time looking at charts.
All in all, the dual momentum system can be an extremely lucrative and safe way to invest. Although, that’s not to say that its risk-free.
Sure, the past performance of a stock can give us a better idea to predict the future performance of said stock, but its no sure-fire method.
That being said, for those of you who already have a good understanding of how stocks work and have a few years of experience under your belt trading stocks, then the dual momentum system may be able to help you improve your overall success.
For you beginners out there, don’t be afraid to give the dual momentum system a shot. Just make sure you accept the risks that come with it.