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Monday, December 6, 2010

How Dumb Money Could Get Smarter

I have noted many times how retail investors chase hot asset classes and wind up buying high and selling low. WSJ reports on some research that supports that observation and recommends a remedy:

Over the years, the funds research company Morningstar Inc. has found that investors can profit if they invest in the most-unloved stock-fund categories and hold on for the next three to five years. Sometimes, the least-popular categories can be narrow ones on which you might not want to place a big bet.
But this year, through October, the biggest redemptions by investors have been in three bread-and-butter categories focused on large stocks in the U.S. and abroad: Morningstar's large-growth, large-value and world-stock groupings.
If your gut reaction is, "Thanks, but I don't do charity cases," think again. It's an old story: Ugly-duckling mutual fund transforms into profitable swan.
Chicago-based Morningstar found that buying what other investors sell generated a 3.7% annualized gain over the decade through July, while the most-loved fund categories lost an average 1.2% a year and the Standard & Poor's 500-stock index shed 0.8%. (The most-loved categories this year through October: diversified emerging markets, commodities and foreign large blend.)

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