The Power of Many

This paper explores how portfolio breadth influences the performance, consistency, and risk profile of momentum strategies. Through empirical analysis across multiple equity universes, we investigate how expanding or contracting the number of holdings affects realized returns, risk-adjusted outcomes, and the stability of momentum as an investment approach.

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Background

Momentum investing has long been recognized as one of the most persistent and empirically validated return premia across global equity markets. Its appeal lies in a simple yet powerful observation: stocks that have demonstrated strong relative performance tend to continue outperforming, while laggards often persist in underperformance. This tendency for price trends to endure has been documented across regions, market cap segments, and time horizons, making momentum a foundational component in many systematic investment frameworks.

Despite its well-established strengths, including its historical robustness, intuitive economic rationale, and diversification benefits when combined with other factors, momentum investing still invites important practical questions about implementation. Among these, a central and universal portfolio construction question arises: how many securities should a momentum portfolio hold?

This paper explores how portfolio breadth influences the performance, consistency, and risk profile of momentum strategies. Through empirical analysis across multiple equity universes, we investigate how expanding or contracting the number of holdings affects realized returns, risk-adjusted outcomes, and the stability of momentum as an investment approach.

Literature Review

The intuition behind diversification is centuries old, reflected in the well known proverb: “don’t put all your eggs in one basket.” Miguel de Cervantes captured this wisdom in Don Quixote (1615), reminding readers that prudent risk management requires thoughtful allocation.

Harry Markowitz later formalized this key insight in Modern Portfolio Theory (1959), mathematically demonstrating how diversification reduces portfolio variance. Though he did not prescribe a specific number of holdings, Markowitz highlighted the diminishing marginal benefits as more securities are added.

Elton and Gruber (1977) extended this foundational work by showing that the most significant reduction in total risk occurs in the early stages of portfolio expansion. Their research suggested that a portfolio of 20–30 stocks captures the large majority of attainable diversification benefits within the US equity market.

While diversification theory is well established, its intersection with momentum investing—a strategy that often holds narrower subsets of the market—warrants a closer examination.

A Study on Momentum and Portfolio Breadth

In our study, we tested how the number of holdings influences the performance of momentum portfolios by constructing long-only, market-cap-weighted strategies based on stocks ranked by prior 12-month returns, excluding the most recent month (12–1m formation period) and rebalanced monthly.

Universes Analyzed:

US Large Cap (Russell 1000 proxy)

US Mid Cap (Russell Mid Cap proxy)

US Small Cap (Russell 2000 proxy)

US Micro Cap (Russell Microcap proxy)

MSCI ACWI ex USA

MSCI ACWI ex USA Small Cap

MSCI ACWI

MSCI ACWI Small Cap

MSCI Emerging Markets

MSCI Emerging Markets Small Cap

Our findings extend the insights of Markowitz (1959) and Elton & Gruber (1977) into the domain of momentum investing. While diversification remains central to risk management, momentum frameworks often emphasize stronger signals found in more concentrated subsets.

Yet concentration brings volatility. The evidence here suggests that breadth enhances both realized performance and reliability, particularly when momentum signals experience short‑term noise or reversals.

Importantly, while Elton & Gruber focused on capturing market variance, our study centers on maximizing risk‑adjusted returns for momentum strategies—a distinct, though related, objective.

Conclusion

Our findings reaffirm that diversification plays a central role in improving the stability and consistency of momentum portfolios. Broader portfolios generally deliver stronger risk-adjusted outcomes, with the largest gains occurring as portfolios expand from very concentrated structures to moderately diversified ones. Beyond that point, the benefits continue but at a diminishing pace.

At the same time, diversification is only one element of effective momentum design. Within IMC’s Informed Momentum framework, we incorporate both price momentum and measures of fundamental improvement. This intersection often elevates the quality of the opportunity set, allowing a portfolio to retain conviction without relying solely on price-based signals. As a result, a slightly more focused portfolio can remain disciplined without sacrificing robustness.

The balance between breadth and signal strength is therefore an important consideration. While broader portfolios improve consistency, thoughtful refinement of the underlying momentum signal can support maintaining a degree of concentration when the evidence warrants it. Our work continues to explore this balance, with the goal of enhancing the persistence and practicality of momentum-driven portfolio construction.

As Cervantes wrote in Don Quixote, “The road is always better than the inn.” Likewise, the optimal portfolio is not a destination but a pursuit. One that invites continual research and refinement to better understand how portfolio design choices shape the performance and persistence of momentum strategies.