When comparing investment strategies, one of the key metrics investors look at is how these strategies perform over the long term. The Dual Momentum strategy has gained attention for its ability to outperform traditional approaches, particularly the buy-and-hold strategy, which has been a staple for many long-term investors. In this article, we’ll dive into the historical performance of Dual Momentum compared to buy-and-hold, illustrating how it stacks up in different market environments.
The Basics: Dual Momentum vs. Buy-and-Hold
Before we dive into performance data, let’s quickly define the two strategies.
- Buy-and-Hold: This is a passive investment strategy where an investor purchases a diversified portfolio of assets (e.g., stocks, bonds) and holds them for an extended period, regardless of market conditions. The strategy relies on the long-term upward trend of markets, assuming that despite short-term volatility, prices will rise over time.
- Dual Momentum: Dual Momentum, developed by Gary Antonacci, is an active strategy that combines relative momentum (choosing the best-performing asset classes) and absolute momentum (moving out of assets when they are underperforming compared to a risk-free benchmark like cash). By doing so, Dual Momentum aims to capture gains in bull markets and protect against large losses in bear markets.
Long-Term Historical Performance
When comparing Dual Momentum and buy-and-hold, historical data paints a clear picture: Dual Momentum tends to outperform buy-and-hold both in terms of higher returns and lower drawdowns.
1. Cumulative Returns
Research by Gary Antonacci and other quantitative analysts has shown that from 1971 to 2024, the Dual Momentum strategy has consistently delivered higher cumulative returns than a simple buy-and-hold approach in major asset classes like U.S. stocks and bonds. On average, Dual Momentum has provided an annualized return of over 16%, compared to approximately 10% for buy-and-hold portfolios like the S&P 500(
2. Managing Volatility and Risk
One of the standout features of Dual Momentum is its ability to limit drawdowns (the decline in an asset’s value from its peak) during market downturns. For instance, during the 2008 financial crisis, buy-and-hold investors in the S&P 500 experienced a drawdown of over 50%, while Dual Momentum limited losses to around 20% by shifting out of stocks and into bonds or cash as soon as momentum turned negative(
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Similarly, during the dot-com bubble burst of 2000-2002, buy-and-hold investors saw their portfolios plummet, while Dual Momentum preserved capital by exiting equities early in the decline and reinvesting in safer assets once the market began to recover.
3. Performance During Bull Markets
While Dual Momentum excels in protecting against bear markets, it also participates effectively in bull markets. For example, during the 2009-2020 bull market following the financial crisis, Dual Momentum captured significant gains by staying invested in U.S. and international equities as long as absolute momentum remained positive. In many cases, Dual Momentum slightly lagged behind buy-and-hold during extended bull markets, but the protection during downturns more than compensated for this during overall market cycles(
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Key Metrics: Risk-Adjusted Returns
When evaluating performance, it’s important to consider not just raw returns but also risk-adjusted returns. One of the best ways to measure risk-adjusted performance is by using the Sharpe ratio, which compares a strategy’s excess return (above the risk-free rate) to its volatility.
- Dual Momentum: Historical studies indicate that Dual Momentum typically has a Sharpe ratio of around 0.8 to 1.0, depending on the specific asset classes used and the lookback period. This reflects strong risk-adjusted returns, as the strategy minimizes losses while still capturing upside potential in favorable markets(CXO Advisory).
- Buy-and-Hold: In comparison, buy-and-hold strategies tend to have lower Sharpe ratios, particularly during volatile periods. For instance, the Sharpe ratio for a buy-and-hold S&P 500 portfolio has historically hovered around 0.4 to 0.6, reflecting higher volatility and larger drawdowns(QuantInvest).
Case Study: 2008 Financial Crisis
Let’s examine a concrete example of how Dual Momentum fared against buy-and-hold during one of the most severe market downturns in recent history.
- Buy-and-Hold (S&P 500): The global financial crisis of 2008 was a brutal period for buy-and-hold investors. The S&P 500 index lost over 50% of its value between October 2007 and March 2009, causing significant losses to portfolios that held stocks throughout the downturn. Recovery to pre-crisis levels took years, with some portfolios not recovering until 2012.
- Dual Momentum: In contrast, Dual Momentum’s absolute momentum indicator would have signaled to exit equities and move into bonds or cash as early as late 2007, well before the worst of the crisis hit. As a result, Dual Momentum investors would have avoided the majority of the drawdown and been positioned to re-enter the market as conditions improved in 2009. This ability to minimize losses and quickly participate in the recovery is one of the strategy’s biggest advantages.
Limitations of Dual Momentum
While Dual Momentum offers clear advantages in terms of risk-adjusted returns, it’s important to note some potential limitations:
- Lagging in Strong Bull Markets: During periods of extended market growth, Dual Momentum can sometimes underperform buy-and-hold because it requires periodic rebalancing and can miss out on some of the gains when switching between asset classes.
- Frequent Rebalancing: While Dual Momentum typically involves fewer trades than more aggressive tactical strategies, it still requires periodic rebalancing, which can result in higher transaction costs, particularly for small investors.
Conclusion: Why Dual Momentum Excels Over Time
When evaluating the long-term performance of Dual Momentum versus buy-and-hold, it becomes clear that Dual Momentum offers a compelling alternative for investors looking for both growth and protection. By dynamically shifting between asset classes based on market conditions, Dual Momentum delivers higher risk-adjusted returns, avoids catastrophic losses during downturns, and provides a smoother investment experience overall.
As markets continue to evolve, Dual Momentum remains a reliable strategy for investors seeking a more adaptive and risk-managed approach. In future articles, we will explore specific Dual Momentum models and how to apply them across various asset classes.