Beyond Diversification: What Every Investor Needs to Know About Asset Allocation

5

Momentum and Something About Horoscopes

The frictions that prevent efficient markets are numerous.

—JPP

WE’VE SEEN THAT VALUATION IS A KEY BUILDING BLOCK TO forecast returns, but that we must account for other factors. Macro factors give us a lot more context to interpret valuation signals, i.e., what’s priced into markets.

Sentiment also matters. One way to measure sentiment is to look at price momentum. There are many studies on asset price momentum. These studies and my own experience suggest momentum is a useful building block for return forecasting in an asset allocation context, especially when combined with valuation and other signals. However, there are many definitions of momentum. As for the other signals we’ve discussed thus far, ...