Momentum is one of the most powerful and persistent market anomalies. The evidence supporting this assertion is overwhelming. The idea that buying past winners and selling past losers (from 1-12 months) can lead to outperformance, though, is still bewildering to many. It’s not intuitive, especially for value investors, to believe that past performance in security prices can actually be indicative of future results.

But indeed it is. That is not to say that momentum investing is “easy” or that it “always works.” Far from it. It must be executed in a systematic fashion, with discipline and without emotion. And like value and other anomalies, momentum returns are inherently cyclical. That means there are periods of above-market performance and periods of underperformance.

Therein lies the problem for many investors when it comes to anomalies. They tend to chase performance, reducing or eliminating the benefits of the anomaly itself. The notion is particularly perplexing when it comes to momentum investing because while chasing security prices in a systematic fashion works over time, chasing the return stream from that chasing does not.

An example will make this point clearer.

An investment of $10,000 in 1980 would have grown to $1,176,223 by 2015 in Small Cap Momentum, far outpacing the $268,585 in the Russell 2000 Index (14.2% annualized vs. 9.6%). Meanwhile, a similar investment in Large Cap Momentum would have grown to $816,472 versus a gain of $504,466 in the S&P 500 (13.0% annualized vs. 11.0%).*

(*Note: there are many, many ways to define momentum. In this piece I use the AQR Momentum Index (Large-Cap and Mid-Cap U.S. Equities) and the AQR Small Cap Momentum Index (Small-Cap U.S. Equities). AQR ranks stocks based on their total return over the prior twelve months (excluding the last month) and includes the top 33% of stocks in their indices, weighted based on market cap and rebalanced quarterly. Click here for more detail.)

While momentum widely outperformed from 1980-2015, there were many periods in which momentum underperformed. In looking at rolling 1/3-year returns, Large Cap Momentum outperformed the S&P 500 62/63% of the time. This means that 37%-38% of the time it was deemed to be “not working.” Would you stick with it through such hard times, including the recent 30% underperformance from March 2009 through February 2012? Maybe, but most would not.

Momentum in Small Caps appears to have been more consistent, outperforming in roughly 75/82% of rolling 1/3-year periods. This is very high, even among anomalies, but still leaves investors with periods of underperformance.

Which brings us back to the title of the post. What if investors chased the anomaly, only investing in momentum after an outperforming year? How would their returns look?

As illustrated in the table below, all of the outperformance in Large Cap momentum and nearly all of the outperformance in Small Cap momentum disappears. (Note: this is before fees and expenses associated with a momentum strategy, after which the investor would surely be underperforming.)

The lesson here for investors: to reap the full benefits of an anomaly, you cannot chase the performance of the anomaly itself. In order to do so, you must be willing to accept the fact that there will inevitably be times when the anomaly is “not working.”

Emotionally, this is not an easy task. Which is why maintaining a diversified portfolio of asset classes with a tilt toward factors may in practice work better for many than a concentrated portfolio of value or momentum. This is probably true irrespective of whether the concentrated portfolio would have superior long-term returns.

Why? Because diversification will mitigate the negative emotional response from an underperforming year in any given factor. Which is another way of saying that the investor will be more likely to stick with value, momentum or other anomalies when they are underperforming if they are only one piece within a broader portfolio. And if we have learned nothing else from market history, sticking with a long-term investment plan is paramount to investment success.

Our own research has led us to a similar conclusion (click here to download the 2016 Dow Award winning paper on moving averages and leverage): your ability to stick to a strategy matters more than the strategy itself.