Dual Momentum is a combination of Relative Strength Momentum and Absolute Momentum. Relative strength momentum compares the trend of one security with respect to another security. Platinum members are familiar with this concept as we are always comparing the strength (price performance) of one ETF with another ETF. Absolute momentum or absolute acceleration examines the trend of an asset (ETF or stock) with respect to its own past history.
Dual Momentum Investing is Gary Antonacci’s book (copyright @ 2015) that lays out a momentum plan to increase portfolio returns while at the same time seeking to reduce risk. The plan is described below and ITA readers will find few differences from the Rutherford Portfolio model.
On page 101 of the book is a diagram laying out the dual momentum strategy. Here is the model verbalized.
1. Select three broad based index instruments.
- U.S. Equities – VTI is my choice for this asset class.
- International Equities – VEU is my choice as it also includes emerging markets. In our list of assets we use VEA and VWO to cover both developed and emerging equity markets.
- Bonds or U.S. Treasury bills – BND is my choice, but one could use AGG.
2. At the beginning of each month run a screen to see if VTI performed better or worse than VEU (VTI > VEU). The look-back period recommended by Antonacci is 12 months. Here at ITA the default settings are 60- and 100-day combination. If VTI is performing better than VEU then run another relative strength momentum test, this time comparing VTI vs. TLT. If VTI > BND, invest all money in VTI.
3. If VTI < BND, buy and hold BND.
4. Going back to step #2, if VTI < VEU, then compare the relative strength momentum of VEU and BND. If VEU > BND, buy and hold VEU until the next review, but if VEU < BND, buy and hold BND until next month. In one month, repeat steps 2 through 4.
Antonacci does not mention what one does if all three ETFs are showing negative absolute momentum. At least I missed it on the first read if he does. One option would be to go to cash or SHY. With inflation on the horizon, consider investing in TIP or SCHP. These are inflation protection ETFs.
While the Dual Momentum model is simple to follow, the book contains much data as to how this method of investing worked over the past 40 or more years. There is still no rational explanation as to why it works.