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Don’t be a DIY investor

Don’t be a DIY investor

Are you a DIY investor? Do-it-yourself (DIY) investors are always on the lookout for stock tips and asking their financial advisor to make lots of moves into and out of the stock market. And even though they have a professional financial advisor, they likely have another account on the side that they use to make frequent personal trades. DIY investors are almost universally bad at investing. They often fall victim to the DALBAR effect, named for the market research firm that tracks how dramatically individual investors underperform the stock market over time. This happens because the DIY investor thinks they know what they’re doing, so they engage in lots of buying and selling. The extra effort rarely pays off. Over the 20 years from 1997 to 2017, the S&P 500 (a broad index of large U.S. stocks) returned an average of 7.2% a year. That return means that you would double your invested money every 10 years. DALBAR finds, however, that the average individual investor saw a return of just 2.6%. At that rate, it would take 30 years to double the balance in an investment account. DIY investors end up on the losing end because they make irrational and

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Active management shines in a time of indexing

Passive management, or buying stocks that track an index, has caught on over the last several years. But changes in the economy and markets have made it easier for active managers to now show their worth, too. Active managers, those who pick stocks with the intent to beat an index and not just match its performance, have enjoyed a comeback in recent months and say that they’re now enjoying a more fertile ground for picking stocks. Money managers say that there are more bargains to be had now, especially among stocks that aren’t included in the major indexes tracked by large passive funds. Last year, 63% of active small-cap growth funds and 54% of active small-cap value funds beat their benchmarks, up from 29% and 18%, respectively, in 2016, according to Morningstar. The money that goes into passive index-tracking funds tends to gravitate toward the companies that make up an index. The result is those stocks get bid up in price because of the massive flows into passive products, while other stocks often remain cheaper. In addition to those cheaper stocks, active managers can use stocks that aren’t typically included in a benchmark to amplify returns. Azzad small cap growth

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