Frequently Asked Questions

It seems that a lot can happen between the beginning of the month when your GEM model adjusts its positions and the beginning of the next month when new signals are given. Why not check for signals more than once a month?

Research has shown that stock prices are reactive rather than trending over short periods. Stocks are more likely to rebound from short-term fluctuations than to continue in the same direction. You will get whipsawed if you check for signals too frequently. Our proprietary models that use additional lookback periods adjust more frequently.

If dual momentum investing is so great why aren’t more people using it?

It takes a while for research to work its way into the investment marketplace. We saw that with indexing. Public awareness should grow when information about momentum and trend become more widely accepted.

There are other reasons momentum and other trend-following investing has not caught on.

First, it is not as psychologically appealing to buy what has gone up in price as it is to buy things that appear to be cheap. Momentum may also seem too simple for those who mistakenly think more complex approaches have more merit. There is still residual prejudice that originated in the academic world againt any kind of tactical approach.

Some investors are prejudiced against other investing styles or investing in indices rather than stocks. Interestingly, some of the same behavioral factors that explain why momentum works also explain why momentum has not caught on yet: anchoring, herding, conservatism, and the slow diffusion of information. A strong and universal home country bias keeps many from investing much outside their home country using dual momentum. Investors prefer to invest with the crowd doing what everyone else does.

Limits to arbitrage keep institutional investors from investing in new ideas because of career risk. Dual momentum, like all strategies, will have periods of underperformance. If you are wrong but doing what everyone else is, you have a better chance of keeping your job and your clients. But you are likely to lose clients or your job if you lose money at times when others do not.

After reading your book, how can I learn more about dual momentum?

My blog posts, written after my book was published, are a good place to start. Many of the posts have links to other sources of information.

Here are two especially relevant references. They contain long-term validation of both relative and absolute momentum.

Geckzy & Samonov (2017),

Greyserman & Kaminsky (2014).

You can click “Read Sample” to read the first chapter of this book.

You may also want to view some of my podcasts. You can request fact sheets on my proprietary models to go beyond basic dual momentum. They show more advanced ways to benefit from momentum and trend.

What are the biggest mistakes investors make?

The first is myopia. Many investors are unduly influenced by short-term performance. They go from one thing to something else every time performance lags. This is a serious mistake. Every approach will have periods of underperformance. Many of these periods will mean revert. Investors should do their homework so they have confidence in what they are doing and can ignore market noise.

The second is looking at investments in isolation rather than their whole portfolio. Diversification means you will always be temporarily wrong with something. This is related to the first problem above. Ray Dalio says the holy grail of investing is combining good return streams that have low correlations.

The third is not understanding and appreciating the value of trend following. Many investors only make minor allocations to it. They should read Greyserman & Kaminsky (2014) to see that simple trend following has outperformed buy-and-hold back to the beginning of all markets and has reduced downside risk exposure. My latest research shows how a channel breakout system like the one I use in my proprietary models has outperformed for the past 100 years.

What are the main risks associated with dual momentum investing?

One risk is that history is unreliable. The future may not be as good as the past, even though there are several hundred years of out-of-sample performance supporting both relative and absolute momentum. There are behavioral reasons momentum has a good chance to continue working, since behavioral biases are hard to change.

There is some risk that momentum will attract substantial capital and not work as well in the future because of too many participants. But the index ETFs we usually use are more scalable than individual stocks. Behavioral biases can keep investors away from dual momentum.

Much of the short-term volatility of the stock market still exists with dual momentum. There are re-entry lags when a new bull market begins after a bear market. You should expect this especially from our public dual momentum models. We designed our proprietary models to reduce this transitional lag.

If you invest with dual momentum after the stock market has gone up quickly, your risk is higher for a market pullback.

There is also the risk of tracking error. No strategy outperforms its benchmarks all the time. The biggest risk factor may be that one becomes inpatient or overly influenced by short-term performance thereby abandoning dual momentum at an inopportune time. We see this happen more often than it should with those who do not take the time and trouble to properly educate themselves about momentum investing. This is why we give plenty of research references in our book, blog posts, and our proprietary model factsheets.

Future drawdowns may also be larger than those in the past.

Please see our Disclaimer page for additional risk factors.

How many sectors does your Dual Momentum Sector Rotation (DMSR) model invest in?

The number of sectors depends on one’s attitude toward reward and risk. Fewer sectors mean higher expected returns, but also higher volatility. You can find parameters to create a sector rotation model suited to your risk preferences. Be aware, though, that data-mined parameters may not hold up well out-of-sample.

Since I published my book, the performance of DMSR using additional data no longer looks as attractive as broader-based dual momentum models. A recent study shows that only 26% of sectors have outperformed the S&P 500 ETF over their lifetime.

Using data from 1801, Geczy and Samonov (2015) show that momentum with geographically diversified stock indices outperforms momentum with sectors, individual stocks, currencies, bonds, and commodities. This may be because home country bias keeps investors from investing in more attractive geographic areas, thus creating abnormal profits for those who can do so.

More sophisticated approaches may still work with sectors or industry groups, as seen here.

What about using emerging markets as a separate asset within GEM?

EMs are already included in the MSCI ACWI ex-U.S. index that GEM uses. Based on market capitalization, they make up 17% of that index. Investors are more prone to overreact and sell more volatile assets, like EMs, during times of crisis. Those who want to add an extra allocation to EMs should proceed cautiously. We use EMs as a separate asset in one of our proprietary models, which has good risk controls and plenty of diversification.

What other investments can complement your dual momentum models?

Modest positions in non-correlated assets or additional strategies work well as diversifiers. Our low-to-moderate correlation proprietary models act as good diversifiers to our other proprietary models. See our Proprietary Models performance page or contact us for more information.

How much do you think should be allocated to non-correlated investments?

If correlations are very high, diversification has limited value. If correlations are very low, there can be substantial performance drag and tracking error. We found the sweet spot for monthly correlations to be 0.35 to 0.50. Correlations between our proprietary models are usually within those bounds.

What do you think is your best model?

Our Bitcoin and Digital Asset Synergistic System (BADASS) has the highest return, and our Stock Market Upside Reversal Factor (SMURF) model has the best reward-to-risk ratio. You can combine our proprietary models to reduce portfolio volatility further. All our single-asset models use the same superior trend following approach. See our Proprietary Models performance page or contact us for more information.

Is it better to use a combination of lookback periods rather than a single one?

Using multiple look-back periods intelligently and not indiscriminately may have some advantages. When you add complexity to a model, you introduce tradeoffs. We find adding other assets and more trend-following methods better than having too many look-back periods.

Why don’t you invest in long-term Treasury bonds when you are out of stocks since they are negatively correlated?

The negative correlation you have seen between stocks and bonds has not always existed. There have been long periods of positive correlation between stocks and bonds.

Source: Graham Capital Management Research Note, September 2017

Long-term bonds also have considerable duration risk. They are best suited for those who can hold them to maturity. During times of crisis, investors prefer safe harbor assets with little risk. Our Dual Momentum Fixed Income (DMFI) model has done well without incurring the risk of long-duration bonds.

The bond market has been unusually weak this year. Is there an alternative to aggregate bonds during times like this?

Using the simple logic in my book, you can apply dual momentum to the bond market. The model in my absolute momentum paper (included as an appendix in my book), moves to U.S. Treasury bills when bonds are weak. We do something similar in our proprietary models.

What about using leading economic indicators, such as the unemployment rate, to predict recessions and time stock market exposure?

There are 16 major leading economic indicators. With so many choices, it is easy to put together something that looks good in hindsight. The unemployment rate has been a useful stock market timing indicator since 1970, but it gave worse results than trend alone before then. No one knows what the future will be like.

The stock market itself is a leading economic indicator. Adding additional indicators or parameters can create potential data snooping and selection bias issues.

What are the differences between your published and proprietary models?

Our public model GEM was designed to protect smaller investors from extreme drawdowns while allowing them to earn better than buy-and-hold returns over the long run. We did not design it to be an optimal model.

Our proprietary models, which we license to advisors and family offices, use more assets than our public models. They also use multiple look-back periods and add improved trend-following methods to absolute momentum. In addition to an advanced version of GEM, we have proprietary models for diversified fixed income, municipal bonds, global balanced dual momentum, gold, and blockchain.

Most of our proprietary models use an exceptional trend algorithm to trade the leveraged NASDAQ index, gold, and blockchain technology. They use daily data and may include mean reversion and unique trend filters. See the Proprietary Models page or contact us for more information on our proprietary models.

How do you invest your own funds?

I think all investment professionals should be asked that question. I invest over 95% of my funds in a mix of my proprietary models. They provide exceptional expected returns and all the diversification I need. I am comfortable doing this because of the risk controls built into my models and portfolio diversification from low-to-moderate correlation models.

My 401K plan does not include an all-country world stock fund ex-US. What can I use instead?

Most 401K plans include a fund for non-U.S. stocks. You could use that. If your 401k has an emerging market fund, you could create a synthetic ex-U.S. all-country world fund by allocating 15-20% to the emerging market fund and 80-85% to a non-U.S. developed markets fund. As shown in my book, you can still derive signals using an ex-U.S. all-country world stock ETF.

What about adding value, quality, low volatility, equal weight, or small-cap ETFs to GEM?

Our research shows that these do not improve GEM’s results. Real-time results from factor-based funds have not been encouraging. See our blog post here.

What do you think of shorting the stock market instead of buying bonds when stocks are weak?

Bear markets rarely last as long as bull markets. There are lags with dual momentum entering and exiting the stock market, making it difficult to profit from short selling.

Bear markets are subject to sharp rallies that can fade quickly and create whipsaw losses for those who try to trade the short side. When stocks are trending down, we have better results in bonds or other assets than going short. Our proprietary models are agile enough to trade intermediate-term rallies in other assets, even in bear markets.

Are there any outside validations of your GEM model?

Several of them are mentioned in my book reviews on Amazon and elsewhere. Two of them are here and here. If you are still skeptical, you can backtest with ETFs or mutual funds using Portfolio Visualizer. You should use an S&P 500 mutual fund to determine “single absolute momentum.” Mutual funds have a longer history than ETFs. You could use VFINX, VWIGX, and VBMFX to get results back to 1987. These results differ somewhat from what you would get using ETFs or indices but are close.

I’ve seen dual momentum signals on the internet where they use an MSCI EAFE ETF rather than an MSCI ACWI ex-U.S. ETF. What do you think of that?

I use the All Country World ex-US Index along with the S&P 500 to be all-inclusive and avoid selection bias. Selection bias occurs when you select a subset of the data to make your results look better or, in this case, worse. EAFE omits Canada and emerging markets, which represent a meaningful 24% of the world’s equity market.

ACWI ex-US and EAFE performances may appear similar. But ACWI ex-US profits more in up markets and loses more in down markets than EAFE. We designed dual momentum to capture the upside while avoiding much of the downside. We want ACWI ex-US for that. Dual momentum can reduce the downside while capturing most of the upside.

There is a big difference in performance between the two indices when using dual momentum, which is not apparent from their non-filtered performance.

EAFE may also be slower than ACWI ex-U.S. in switching to non-U.S. stocks when they become strong versus U.S. stocks. This means EAFE can give different switching times.

It is misleading to say there is little difference in the performance of EAFE and ACWI ex-U.S. by looking at all the data since 1970 or earlier since MSCI didn’t track emerging markets before 1988. There was no difference in their performance before 1988 since ACWI ex-U.S. did not exist before then. But since 1988, dual momentum has captured the outperformance of ACWI ex-U.S. while reducing downside exposure.

Holding all else constant, GEM earned substantially more in annual return using MSCI ACWI ex-U.S. rather than MSCI EAFE from when the ACWI ex-U.S. index was created by MSCI in 1988. There can be no logical reason to invest in MSCI EAFE, which produces considerably lower returns than MSCI ACWI ex-U.S. in GEM once you apply dual momentum.

Why do you backtest on index data instead of ETF or mutual fund data?

One reason is that there is a lot more index data in history. Another is that non-U.S. stock ETFs and mutual funds withhold 30% of their dividend income for foreign taxes. This is recoverable by many investors as a tax credit. You should deduct 30% of the dividends from U.S. ETFs to get accurate relative strength signals.

Expense ratios can also distort the relative performance between assets. Momentum decisions should be based on asset performance. The markets do not care about taxes or other expenses.

Are there any websites that provide dual momentum signals?

The ones I have seen impose their ideas without good reasons for their changes. Using the information in Chapter 8 of my book, you can quickly determine the GEM signals using price charts. Alternatively, you can set up a free Morningstar, Portfolio Visualizer, or ETF Screen portfolio.

Which do you apply first, relative momentum or absolute momentum?

In my book, I show dual momentum both ways. It may be easier to apply relative momentum first if you are using a variety of assets. If you only use U.S. and non-U.S. stocks, then it is better to apply absolute momentum first. On page 98, I determine absolute momentum first using the S&P 500 index since the U.S. often leads world equity markets.

Have you looked at whether there is a best time of the month to rebalance your portfolios?

Studies here, here, and here show that stocks perform best early in the month. This is when institutional investors make changes to their portfolios. Prices, then, are most representative of their actual value. Rebalancing during that time frame shows the best results with fixed-duration models like GEM. Here are the Sharpe and Sortino ratios for GEM based on the trading day of the month.

GEM has had some close signals for switching in and out of stocks. What do you do then?

Our published results are based on month-end closing prices. I have tested an equal allocation to stocks and bonds when the switching signal is close. The results are about the same as following the signal precisely. You might use this approach to reduce feelings of regret no matter what happens. Another possibility is waiting a day or two to see if there is still a signal.

Why do you subtract Treasury bill returns from the S&P 500 returns to determine absolute momentum?

The idea behind absolute momentum is to look at the return of the S&P 500 above the risk-free return. There is no reason to bear the risk of stocks when you can earn a better return without downside risk.

I saw something called Accelerating Dual Momentum that evolved from your GEM model. What do you think of it?

Accelerating Dual Momentum is highly data mined using a limited amount of data. You can read more about this in my blog post, “Perils of Data Mining.”

It looks like the GEM model underperformed the S&P 500 after 2009. Is momentum still effective?

Dual momentum has a trend-following component that lags when a new bull market begins. That is the cost of avoiding the carnage of the preceding bear market. It is unfair to look only at a new bull market without considering the preceding bear market. You should consider at least a full market cycle to evaluate performance properly. GEM has outperformed its benchmark portfolio since 2008, which includes a full market cycle.

You should also understand how GEM has outperformed over the long run. First, there were profits from switching between U.S. and non-U.S. stocks. Since 2009, U.S. stocks have continuously outperformed non-U.S. stocks, so there has been little opportunity to profit from relative strength. Second, this recent secular bull market has been one of the longest in history. This means there was little opportunity for absolute momentum profits. It is difficult for any trend-following approach to keep up with the stock market when it is so strong.

GEM comforts investors who fear a 50% market decline. Don’t cancel your fire insurance because your house hasn’t burned down over the past ten years.

How tax-efficient is GEM?

Since 1971, 73% of GEM’s gains have been long-term, while nearly 100% of its losses have been short-term. Long-term capital gains are taxed at a historically low rate but might be higher when ETF investors realize their profit.

Many investors don’t know that almost 40% of the long-run return of the S&P 500 has come from dividends. These are taxed yearly, even if earned in an ETF. ETFs must also pass along taxable gains from futures, options, short positions, and stocks that settle in cash. Those who want to defer all income, including interest and dividends, can use dual momentum with retirement accounts or a low-cost variable annuity.

Why does a subscription site that tracks quantitative models show a lower return than you for GEM?

One reason is that they use net rather than gross returns for non-U.S. index data. Net returns have a 30% dividend reduction to account for foreign tax withholding. This puts GEM at a disadvantage to models that are not invested in foreign ETFs. If you account for taxes, you should adjust all indices and ETFs instead of penalizing only models that invest globally. There is no reason to penalize models using non-U.S. ETFs, especially since most U.S. investors can get the withholding back as a credit on their tax returns.

The main reason for the performance difference is their use of MSCI EAFE rather than MSCI ACWI ex-U.S. The latter includes Canada and emerging markets, while the former does not. The site says there is little difference between the two indices. That is true only if you look at both bull and bear markets. However, dual momentum tries to bypass bear markets while participating fully in bull markets.

Using MSCI EAFE instead of MSCI ACWI ex-U.S. decreases GEM’s diversification and lowers its return substantially since MSCI ACWI ex-U.S. became usable in 1989. This site does not penalize other models accordingly. They can use ETFs that have emerging market profits.

I read a paper where they use an ensemble mix of lookback periods from 1 to 18 months. What do you think of this?

Because you can use ensemble methods to use many things, it does not mean you should. Tobias Moskowitz, a top momentum researcher, said, ”Momentum is a phenomenon that exists at 6 to 12-month horizons. Beyond 12 months, momentum wanes…” Most academic papers on momentum use lookback periods of 6 or 12 months. The ensemble paper you mentioned shows a fall-off in results with lookback periods under three months and over twelve months.

We use different lookback periods in our proprietary models, but we select them based on their appropriateness, not randomly. Reducing specification risk by incorporating other factors or additional trading methods makes more sense than using many highly correlated lookback periods.

The paper’s statistical evidence is also suspect. You cannot correctly judge the probability of something happening after it has happened. You need to look at results out-of-sample. A 12-month lookback has more out-of-sample validation than any other look-back period. It was first introduced by Cowles & Jones in 1937 and validated by Jegadeesh & Titman in their seminal 1993 study. Other examples and additional information are in this blog post.

Stock valuations now look high, and bond yields are low. Will this adversely affect dual momentum returns?

High stock valuation levels can mean lower expected stock returns, and low bond yields usually point to lower future bond returns. However, stocks and bonds can still fluctuate and create trading opportunities. In 2000, there were also high stock market valuations and low bond yields. But our GEM model had a compound annual return of 11.6% over the next ten years, whereas a 60/40 stock/bond portfolio returned only 2.5%.

Will dual momentum lose its effectiveness if more people start using it?

An anomaly can lose profitability if it becomes too widely followed. However, the behavioral basis behind momentum is strong and persistent. Human nature does not readily change.

The same biases that make dual momentum work well also keep investors away. This is especially true of institutional investors, who often avoid tactical approaches.

Shleifer and Vishny (1997) show that asset managers are afraid of strategies that deviate from popular benchmarks because investors may leave following periods of underperformance. This can create career risk. Home country bias is also a strong disincentive to invest outside one’s country. It keeps investors from having much in non-U.S. stocks when they are stronger than U.S. stocks.

The performance of actively managed funds has been inferior to that of passively managed funds, in aggregate. People have known this since the 1960s, yet over 70% of all domestic equity funds are still actively managed. Dual momentum investing may very well show the same disconnect.

How do you determine the best lookback periods for your models? Won’t shorter lookback periods get you in and out of the market sooner?

Academic research shows that, over the long run, momentum works best for stocks with lookback periods of 3 to 12 months. Look-backs at the longer end of this range reduce transaction costs and increase the likelihood of long-term capital gains.

Cowles and Jones found a 12-month lookback period to work well in 1937, and it has held up well ever since. Staying with this lookback period reduces concerns about data mining and seasonality bias. See our blog post “Perils of Data Mining” for more on this.

Some investors skip the last month when applying momentum. Why don’t you do that?

It makes sense to skip the last month when applying momentum to individual stocks. This is because individual stocks can overreact to news and then mean-revert. You do not need to skip the last month if you use stock indices or other asset classes like we do.

Why do you use momentum with stock indices instead of individual stocks?

See here why we prefer using momentum with indices instead of stocks. According to this study, stock momentum profits have been insignificant since 1999. According to another study, momentum profits disappeared in the early 1990s. There is also the matter of transaction costs. See here for the most recent research on that. For more on stock momentum, see our review of the book Quantitative Momentum.

Why does the performance of GEM begin in 1950 on your website but in 1974 in your book?

The lack of non-U.S. stock index data constrained me when I wrote my book. Additional data I received since then validated GEM’s outperformance. In addition, Geczy & Samonov (2016) found that relative strength and absolute momentum outperformed buy and hold back to 1801. Absolute momentum showed superior returns and less downside risk back to the beginning of stock trading in the 1600s and to 1223 with other assets in Greyserman & Kaminski’s book.

Isn’t value investing the opposite of momentum investing? How can both be valid?

Value and momentum operate on different time frames. Value is based on longer-term mean reversion, while momentum relies on intermediate-term trends.

Why doesn't GEM just apply relative momentum instead of dual momentum to stocks and bonds?

Over the long run, dual momentum performs better. Historically, stocks provide the best return, so we want to be in them if their trend is positive. GEM uses absolute momentum to tell us that. Once we decide to invest in stocks, GEM uses relative momentum to tell us whether to be in U.S. or non-U.S. stocks.

Why do you use absolute momentum for trend following instead of moving averages?

Moving averages and other forms of trend following can also work. But Zakamulin showed that absolute momentum outperformed three different types of moving averages on 155 years of stock market index data. Absolute momentum and reverse exponential moving averages were the only two methods that outperformed buy-and-hold with statistical significance.

When I backtested GEM there were some months GEM was in foreign stocks, but you show it in aggregate bonds. Why is that?

On page 98 of my book, I first determine absolute momentum using the S&P 500 index since the U.S. leads world equity markets. I also cite a supporting reference. By doing so, you may occasionally be in aggregate bonds when the trend in U.S. stocks is down even when non-U.S. stocks are the strongest asset. On page 101 of my book, a flowchart applies relative momentum before absolute momentum for those who prefer doing momentum that way.

What about using stop-losses with dual momentum?

Investors once thought stop-losses reduce returns as they reduce risk exposure. However, more recent research shows that stops can enhance return if they are used with care.

We found dual momentum more effective than stops in reducing risk exposure and enhancing expected return. Stops add little or no value to dual momentum.

Since momentum works well geographically, why not use it with individual country ETFs?

Dual momentum works best when volatility is not too high. Individual countries can have extreme fluctuations. This can make it challenging to get in and out of positions quickly enough without giving up considerable profit. This is also why we do not use stock sectors with our proprietary models.

Country index funds have less liquidity and higher bid-ask spreads than broader-based index funds. That can create price impact and scalability issues, just as when you use momentum with individual stocks.

How do leveraged ETFs perform with dual momentum? And what about margin?

Most leveraged ETFs have daily resets, which makes them best suited for day trading. However, tracking errors can be considerable with highly leveraged (3X) ETFs held over longer periods.

Our QBAT proprietary model is adaptive enough to use a 2X leveraged ETF. There is still considerable short-term volatility with dual momentum. Intra-month drawdowns greater than 20% occasionally occur, and larger ones may happen. Investors should carefully consider that before using any leverage.

There are international stock index ETFs that hedge their currency exposure. What about using these?

International stocks usually outperform U.S. stocks when the U.S. dollar is weak and non-U.S. currencies are strong. This allows us them to profit from the strength in non-U.S. currencies.

When non-U.S. currencies are weak, we usually go out of international stocks and into U.S. ones. Thus, there is little reason to use hedged ETFs. Our models automatically deal with and potentially profit from exchange rate exposure.

Is international diversification still beneficial now that more companies are globalized?

Low correlation across global markets is not the main reason we earn relative momentum profits. Profits come from performance differences between the U.S. economy and the rest of the world. See the chart in the previous answer. Strong home country bias keeps investors from investing as much as they might otherwise in non-U.S. stocks. We do not have that bias.

What is the best way for non-U.S. based investors to use dual momentum?

Our blog post, “Dual Momentum for Non-U.S. Investors, ” discusses this. Several brokerage firms can accommodate non-U.S. investors and let them trade the U.S. markets. Contact us for more information.

Is it better to scale into dual momentum or to invest all at once?

If stocks have been up a lot recently, waiting a little in case of short-term pullbacks may make sense. Because everyone has different risk preferences, when you act is a highly individual decision. It may help if you consider minimizing regret no matter what happens.

What are momentum crashes, and do I need to worry about them?

Momentum crashes are caused by the short side of long/short momentum portfolios suffering significant losses when stocks rebound sharply off V-shaped bottoms. This happened in 1932 and 2009. Since we do not hold short positions, momentum crashes are irrelevant.

There is a dual momentum ETF using a large number of lookback periods and frequent rebalancing. What do you think of it?

I would never pay 94 bps per year to invest in a fund that is unlikely to do better than GEM. Since its inception in late 2019, this ETF has underperformed GEM. However, for some, the capital gains deferral from an ETF may make this a worthwhile investment.

Diversifying with other assets or different approaches is more effective than using many correlated lookback periods. My Proprietary Models diversify with additional assets and different trading approaches, such as a better trend indicator, mean reversion, and market structure. They use a modest number of lookback periods, which is all that is necessary. Contact us for more information.

Can dual momentum be used with markets other than stocks and bonds?

For more than 200 years, both absolute and relative momentum have worked well with different assets. Stock indices have historically given the best results. See Geczy & Samonov (2017). Our proprietary models use managed futures, commodities, and gold with dual momentum.

How has dual momentum done when applied to the bond market?

Dual momentum has done exceptionally well with bonds. We apply dual momentum to bonds in our Advanced Global Equities (A-GEM) and Dual Momentum Fixed Income (DMFI) models.

We use multiple bond sectors in these markets. We keep GEM simple by using only aggregate bonds.

With bonds being in a bull market over much of the past 30 years, does the use of aggregate bonds with GEM overstate future expected performance?

GEM has been in bonds less than 30% of the time. Bonds have been responsible for only 20% of GEM’s profits.

Aggregate bonds have an average duration of only around six years. They are not as sensitive to interest rate changes as longer-duration bonds. Over 60% of holdings are government debt. The remaining are investment-grade bonds spread out over 6800 holdings. This minimizes credit risk. The chart below shows that their returns have been relatively steady under varied market conditions.

We think it is reasonable to accept a little duration risk during most bear markets in stocks. But you can substitute shorter-term government bonds or Treasury bills for aggregate bonds with only a modest reduction in expected return. We apply dual momentum to a variety of bond sectors and cash equivalents in our Proprietary Models.

MOMENTUM

Momentum means persistence in performance. Additional periods of superior performance tend to follow initial periods of superior performance. But it is more than that. Momentum is also a systematic rules-based approach for entering and exiting the markets based on specific, proven criteria.

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MOMENTUM

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