Clocks fell back on the weekend. It marks the time when my neighbourhood becomes even creepier than normal because it’s now dark before dinner.
Falling back is just the sort of thing momentum investors try to avoid. They seek out stocks that have climbed in recent months in the hopes they’ll continue to move higher.
For instance, the Canadian 12-month momentum portfolio picks the 30 top-performing stocks over the prior 12 months from the largest 300 on the Toronto Stock Exchange. It gained an average of 18.4 per cent annually over the nearly 26 years from the end of 1999 through to the end of September, 2025. In comparison, the Canadian stock market, as represented by the S&P/TSX Composite Index, gained an average of 7.9 per cent annually over the same period. (The returns herein are based on backtests using data from Bloomberg. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly.)
Momentum is a force to be reckoned with in many markets and the Canadian stock market is no exception. But it isn’t obvious why investors should buy stocks based on their performance over the prior 12 months because other periods might yield similar or better results.
To explore the situation, 24 portfolios are created, with each one composed of 30 stocks chosen from the largest 300 on the TSX based on returns over the prior one month, two months, and so on up to the prior 24 months. The results are summarized in the accompanying graph, which shows the average annual growth rates of the 24 portfolios from the end of 1999 through to the end of September, 2025.
The returns of the portfolios peak with the one that used 11-month prior returns to pick stocks, which climbed by an average of 19.5 per cent annually. Those using returns over the prior six to 13 months provided strong results with average annual returns in excess of 17.6 per cent.
On the other hand, the portfolios that used returns over the prior 22 months, or more, didn’t do well with average annual gains of between 8.5 per cent and 8.9 per cent. The modest returns probably aren’t sufficient, compared with the market index’s 7.9-per-cent annual gain, to justify the extra cost and effort that the momentum portfolios require.
It’s useful to look more closely at the gains of the 12-month momentum portfolio. It surged higher in recent months with an 81-per-cent gain over the year through to the end of September, 2025, thanks to the stunning rise of mining stocks and gold miners in particular. Miners currently represent 21 of the portfolio’s 30 stocks, which means the portfolio is making a big bet on the industry. Mind you, that could change quickly should other stocks pull ahead in the return race.
Searching for the sweet return of momentum stocks
When discussing momentum-oriented portfolios, it’s important to keep in mind that they usually require a fair amount of trading. For instance, the 12-month portfolio swapped an average of about eight of its 30 stocks each month as it jumped from old to new winners. The trading generates commissions, triggers capital-gains taxes and requires, perhaps, an extraordinary amount of persistent attention and action.
The portfolio also suffered in the two biggest market downturns since the turn of the century. It fell 53 per cent from its prior high after the internet bubble burst in 2000 and dropped 51 per cent in the financial crisis of 2008-09. The declines in both periods were precipitous with a three-month plunge of 47 per cent in 2000 and a four-month collapse of 46 per cent in 2008. In comparison, the market index declined 43 per cent from its prior highs in both market downturns, based on monthly data.
The big worry with momentum strategies is that they tend to fall back abruptly and can be risky. But no one knows when the next big crash will occur and the profits have more than made up for the declines in recent times. Good luck out there.
Details on the stocks in the 12-month momentum portfolio and the others I follow for The Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.