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The Three Best Momentum Funds

These funds aim to buy high and sell higher.

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This article originally appeared in Kiplinger's.

Momentum funds had a great rebound in 2007, and now they're giving it all back in 2008 as fast-growing companies' shares are getting smacked. That's instructive because you have to be able to stand a lot of pain in order to be around for the good times at momentum funds.

Academic Support
Momentum investors buy stocks that have already gone up, betting that they'll go up even more. As a strategy, this seems like mindlessly chasing the hottest thing. But there actually are sound academic underpinnings to the practice. Behavioral-finance studies show that investors tend to underestimate the magnitude of change. So investors often don't anticipate that more good news (or more bad news) is on the way because they fail to recognize how much has changed.

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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.