Fear or Opportunity? How Momentum Strategies Have Responded to Market Drawdowns

I remember speaking to my friend, Aman, who had just started investing. He was fascinated by momentum stocks—those that he had bought earlier. But then, he panicked when his portfolio suddenly dropped by 15% in a market correction. He sold everything, only to watch the same stocks rebound and reach new highs just a few months later. Things would have been different if only he had known the below. 

Why does it make sense to buy during a drawdown? 

Momentum investing works on the simple principle that strong-performing stocks continue their upward trend. But sometimes, even the strongest trends face temporary declines. The key is to use these dips as opportunities rather than reasons to sell in fear. Our study of the NIFTY Momentum Index from 2005 to 2024 shows that investing during these drawdowns produces significantly higher returns compared to investing at random times. However, the aim should never be to wait for a drawdown to invest—momentum strategies are designed to deliver strong returns over time regardless of market conditions. But when a drawdown happens, it presents an opportunity to maximize gains by investing more. 

Median Returns Comparison

Looking at the numbers, one thing is clear: investing after a 15-20% drawdown produced much better returns than investing randomly. When Aman panicked and sold during that dip, he missed out on an opportunity, but if he had remained invested or added more funds during the dip, his gains would have been far higher.  

Momentum investing comes with sharp drops—but that’s a good thing 

It’s natural to be fearful when markets fall. But instead of seeing drawdowns as a threat, think of them as an opportunity. Our studies show the worst-case scenarios—what happens if you invest at the worst possible time v/s if you invest after a market drawdown? 

Imagine another investor, Raj, who entered the market randomly. In the worst case, his portfolio could have dropped by 16% over 3 years. But if he had waited for a 15% drawdown before entering, the worst return he would have faced was just -1%, and he would have had a stronger chance of making a positive return in the long run. However, the best approach would have been not to wait but to stay invested and use the dips as an advantage rather than fearing them. More importantly, adding to your investments during a drawdown allows you to compound returns at a much higher rate when the recovery begins. 

The best time to buy is when fear is high 

Many investors associate “buying the dip” with value investing—snapping up beaten-down stocks. But momentum investing also benefits from this strategy. Unlike value stocks that may stay cheap for long periods, momentum strategies tend to recover quickly after a dip. Once the trend resumes, they can rally fast, making it a great opportunity for those who invest during the fall. 

Right now, the NIFTY Momentum indices are experiencing a 15-20% drawdown. This means we are in one of those golden buying opportunities that history has repeatedly rewarded. According to the data, buying momentum stocks after a drawdown minimizes downside risk while maximizing long-term gains. However, waiting for a dip should not be the primary investment strategy—momentum is about catching trends early and staying invested. But when dips occur, they should be seized as opportunities to invest more aggressively and build a stronger position.