One of the most compelling reasons to adopt the Dual Momentum investing strategy is its proven historical performance. By combining both relative momentum and absolute momentum, this strategy has not only outperformed traditional investment approaches like buy-and-hold, but it has also managed to reduce the risk during major market downturns. In this article, we will explore the historical performance of dual momentum, review key periods of success, and compare it with other common investment strategies.
The Origins of Dual Momentum
Dual momentum was developed by Gary Antonacci, who sought to combine the benefits of two well-researched concepts: relative momentum, which compares the performance of assets to one another, and absolute momentum, which checks whether an asset is trending upwards compared to a risk-free asset like cash or short-term Treasury bills.
Antonacci’s backtests of dual momentum in his groundbreaking book Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk show the strategy’s effectiveness across various market conditions, dating as far back as the 1970s.
Historical Performance vs. Traditional Strategies
Over the past several decades, dual momentum has consistently shown strong performance, particularly in periods of market turbulence. Here’s how it stacks up against other common strategies:
- Buy-and-Hold Strategy:
- The classic buy-and-hold approach involves purchasing stocks and holding them for the long term, regardless of market fluctuations. While this strategy can generate substantial returns in bullish markets, it exposes investors to significant drawdowns during recessions or market crashes.
- Dual Momentum outperforms buy-and-hold by shifting out of equities and into safer assets like bonds during bearish periods. This approach not only captures upside potential but also limits the damage during downturns.
- Tactical Asset Allocation:
- Tactical asset allocation involves adjusting the proportion of different asset classes in a portfolio based on market conditions. While similar to dual momentum in concept, most tactical strategies do not combine both relative and absolute momentum.
- Dual momentum’s edge comes from its dual-layered decision-making process, which allows for more precise timing when moving in and out of assets.
Key Historical Periods of Success
1. The Dot-Com Bubble (2000-2002)
During the early 2000s, the burst of the tech bubble led to a steep decline in U.S. equities. The NASDAQ lost nearly 80% of its value, while the S&P 500 fell by about 50%. Investors who followed a buy-and-hold approach suffered heavy losses.
- Dual Momentum Performance: Those who employed dual momentum avoided much of the carnage by moving out of stocks and into bonds or other safer asset classes as soon as absolute momentum signaled a negative trend. This helped dual momentum investors significantly reduce drawdowns.
2. The 2008 Global Financial Crisis
The 2008 financial crisis is another perfect example of dual momentum’s resilience. The S&P 500 lost over 50% of its value during the crisis, causing widespread panic in the markets. Buy-and-hold investors had to wait years for the market to recover.
- Dual Momentum Performance: Thanks to its ability to identify both relative and absolute momentum, dual momentum investors would have shifted to safer assets like bonds or cash before the major crash, protecting their portfolios from the worst of the losses.
3. The COVID-19 Pandemic (2020)
The global pandemic caused a sudden and sharp decline in stock markets worldwide. Although the market quickly recovered, the initial shock saw dramatic losses in equity markets, especially in March 2020.
- Dual Momentum Performance: As markets began to crash in early 2020, dual momentum strategies would have shifted into safer assets based on absolute momentum signals, limiting drawdowns before reentering the markets during the recovery.
Long-Term Performance Metrics
Over the long term, dual momentum has delivered higher risk-adjusted returns compared to traditional strategies. Key metrics include:
- CAGR (Compound Annual Growth Rate):
- Studies have shown that dual momentum portfolios have consistently outpaced market indices like the S&P 500 in terms of annualized returns.
- Lower Drawdowns:
- One of the primary benefits of dual momentum is its ability to reduce drawdowns by exiting risky markets before major downturns. Historical data demonstrates that this strategy has consistently minimized losses during market crashes.
- Improved Sharpe Ratio:
- By focusing on both return and risk management, dual momentum typically results in a higher Sharpe ratio, which measures risk-adjusted returns. This makes it an attractive option for investors seeking to maximize returns while minimizing volatility.
Conclusion: Why Dual Momentum Continues to Outperform
The historical performance of dual momentum speaks for itself. In nearly every major market event of the last few decades, dual momentum has shown its ability to protect investors during downturns while still capturing gains during bull markets. By combining relative momentum with absolute momentum, the strategy offers a robust, data-driven approach to investing that balances both risk and reward.
As markets continue to evolve, dual momentum remains a powerful tool for those seeking long-term growth with lower risk. In future articles, we will further explore specific historical case studies and provide in-depth analyses of how this strategy can be applied to various market environments.
Stay tuned for more insights into the performance of dual momentum and how you can incorporate it into your investment strategy.