Can a Momentum Strategy Outperform the S&P 500 Index in a Retirement Plan?

Abstract

The objective of this article is to explore the selection and rebalancing of mutual funds in the portfolio of individual retirement investors to enable their portfolios to outperform market indexes. Three interesting facts emerged from this analysis: (1) momentum strategy is better when rebalancing is done in shorter intervals; (2) momentum strategy works better for longer investment horizons; and (3) momentum strategy is better when funds are more broadly diversified. Analysis of the results indicates that retirees using the momentum strategy over long horizons can earn significant excess returns compared to those of the Standard and Poor’s (S&P) 500 index. The results suggest that if crafted carefully, a momentum strategy can help retirees improve the performance of their retirement portfolio over a traditional diversification strategy.