Charles Rotblut leads a class in AAII’s new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

• How capital gains stacking works and why investment income is taxed based on how it layers on top of ordinary income

• Why crossing tax thresholds can raise effective marginal tax rates on both income and investments

• Tax-planning strategies to manage taxes and improve aftertax returns

The discounted tax rates on your long-term capital gains and qualified dividends are applied in a progressive manner. In simple terms, long-term capital gains and qualified dividends stack on top of your ordinary income—a concept known as capital gains stacking. It is not apparent when you look at your Internal Revenue Service (IRS) Form 1040, but it can impact any investor with taxable investments.

Here is the core principle: When the IRS calculates your tax bill, your ordinary income goes first. Then, your capital gains and qualified dividends are layered on top. The larger your amount of ordinary income, the more of your long-term and qualified dividends will be pushed into either the 15% or 20% tax tiers.

Understanding the dynamics at play can help you better manage your taxes and avoid unwanted surprises.

How Capital Gains Stacking Works

To help you understand how capital gains stacking works, let’s start with the basics.

Long-term capital gains and qualified dividends are taxed differently from ordinary income. They are taxed at 0%, 15% or 20% depending on your taxable income.

Taxable income includes—but is not limited to—your salary, interest income, Social Security benefits, withdrawals from traditional individual retirement accounts (IRAs) and Roth IRA conversions. Taxable income also factors in your standard deduction or itemized deductions, enhanced senior deduction (2026–2028) and other deductions you qualify for.

Let’s call this ordinary taxable income to simplify the explanation.

The second component of taxable income consists of qualified dividends and long-term capital gains (or losses). This qualified investment income sits on top of ordinary taxable income when determining your effective marginal tax rate. The effective marginal rate that applies to each additional dollar of income (taxable or qualified investment) depends on where your qualified investment income lands in the overall income stack, not on the investment gains themselves in isolation.

This is where we get the term capital gains stacking. Your capital gains stack on top of your ordinary taxable income to determine your effective marginal tax rate.

An Example of Stacking

Consider Frank and Paula, a retired couple who are making tax projections based on what they expect to earn this year (2026). The couple will receive $80,000 of ordinary taxable income from Social Security, pension benefits and required minimum distributions (RMDs). Thanks to the Tax Cuts and Jobs Act (TCJA) of 2017 and the One Big Beautiful Bill Act (OBBBA) of 2025, no taxes are levied on capital gains and qualified income for taxable income of up to $98,900.

Based on this, it may seem logical that the couple will qualify for the 0% tax rate on qualified investment income. This will be the case as long as their qualified investment income does not exceed $18,900 ($80,000 + $18,900 = $98,900).

If the couple earn $1 more of ordinary taxable income, it will be taxed at an effective rate of 27%. How is this possible? The couple pay a marginal tax rate of 12% on their ordinary income. In addition, since capital gains and qualified dividends stack on top of ordinary taxable income, $1 of their qualified investment income will now be taxed at 15%. Put another way, the couple’s income would be $1 above the $98,900 threshold (Table 1).

TABLE 1

The Cost of Going $1 Over the Threshold

Frank and Paula are married and retired. They forecast their 2026 ordinary taxable income from Social Security, pension benefits and required minimum distributions (RMDs)—adjusted for the standard deduction, additional senior deduction and new enhanced senior deduction—to total $80,000.

The couple also anticipate realizing $18,900 of qualified investment income (long-term capital gains and qualified dividends). This amount will exactly fill the remaining room in the 0% capital gains bracket ($80,000 + $18,900 = $98,900). Should Frank and Paula’s forecast prove to be right, every dollar of their qualified investment income will be tax-free at the federal level.

Now suppose that the couple’s forecast underestimates their ordinary taxable income by $1. That single dollar incurs a effective marginal tax rate of 27% due to capital gains stacking, as shown in the table below.

Key Takeaway: Frank and Paula are in the 12% ordinary income bracket. That $1 of additional ordinary income is technically taxed at 12%, but because it pushes $1 of their qualified investment income over the $98,900 threshold, it also triggers a 15% tax on that $1 of gains. The combined cost of that single dollar is $0.27, an effective marginal rate of 27%. This is the capital gains bump zone in its simplest form.

The progressive nature of the tax code is at work here. Income, regardless of whether it is taxed at ordinary or long-term tax rates, always fills up the lowest tax rate bucket first. Any excess then fills up the next tax rate bucket and so on. Because ordinary taxable income determines how full the 0% capital gains and dividend bucket is, capital gains stacking can lead to qualified investment income flowing into either the 15% or 20% bucket, or just the 20% bucket.

The Capital Gains Bump Zone

As you can tell from the last example, capital gains stacking becomes especially important when you are near one of the capital gains rate thresholds. In that situation, adding ordinary income does not just increase the tax you owe on that income at its own rate—it also pushes a portion of your capital gains into a higher bracket. The result is a higher effective marginal rate on that ordinary income than your tax bracket alone would suggest.

Financial planner Michael Kitces describes this as a “capital gains bump zone.” When an extra dollar of ordinary income crosses one of the tax rate thresholds, it is taxed at a higher effective marginal rate than its bracket alone would suggest—because it simultaneously pushes capital gains stacked above it into a higher tier (Table 2).

Frank and Paula were in the 12% income tax bracket and got pushed into the 15% capital gains bracket because of one extra dollar of income. High-income earners also face a capital gains bump zone.

Harold and Stacey expect to have $613,700 of combined ordinary taxable income and qualified investment income. Should the couple earn just one extra dollar of income this year, they will be bumped into the 20% capital gains bracket. That extra $1 will come with an additional 5% tax on top of the 35% income tax, 3.8% net investment income (NII) surtax and 15% capital gains tax rates they were already paying before crossing into the bump zone—bringing the effective marginal tax rate of that dollar to 40%.

The Net Investment Income Tax

As shown in the previous paragraph, the 3.8% NII surtax adds a third layer to the stack for investors above certain income thresholds. It applies to the lesser of your NII or your modified adjusted gross income (MAGI) above $250,000 for married couples filing jointly and $200,000 for single filers. Unlike most other thresholds, these are not adjusted for inflation.

MAGI for most taxpayers is the adjusted gross income (AGI) amount listed on your Form 1040. It is calculated as all taxable income minus specific adjustments to income [e.g., contributions to health savings accounts (HSAs), contributions to self-employed retirement accounts, etc.]. Foreign earned income is generally added back too.

NII subject to the surtax includes short- and long-term capital gains, qualified dividends, taxable interest, rental income and nonqualified annuity income.

The NII surtax can combine with the capital gains bump zone to create even higher effective marginal rates. A married couple in the 24% ordinary income bracket with capital gains straddling the $250,000 MAGI threshold may face a higher marginal rate on even one additional dollar of ordinary income.

Let’s break down the math. One dollar of MAGI crossing the $250,000 threshold will be taxed at a 24% income tax rate. It will also cause $1 of qualified investment income already taxed at 15% to incur an additional 3.8% (NII surtax). The combined effective marginal rate on that extra $1 is 27.8%, compared to the 24% bracket rate alone.

The effect of the NII surtax is that it creates four long-term capital gains rates rather than three: 0%, 15%, 18.8% (15% + the surtax) and 23.8% (20% + the surtax).

Capital Gains Stacking and the OBBBA

While the focus has so far been on how one extra dollar of income impacts how your qualified investment income is taxed, the reverse is also true. One extra dollar of investment income—regardless of whether it is long-term capital gains, qualified dividends, short-term capital gains, interest, etc.—can increase your MAGI above key thresholds.

This is because capital gains and dividends not only stack on top of your ordinary income, but they are also included in all forms of MAGI. The higher your investment income is, the higher your MAGI will be.

MAGI is a very important component of tax planning because it not only determines the Medicare premiums you will pay (if age 65 or older two years from now) but also your current eligibility for the following new deductions included in the OBBBA.

• Enhanced senior deduction: The additional deduction of $12,000 for married joint filers (both age 65 or older) and $6,000 for single filers age 65 or older begins phasing out at MAGI above $150,000 and $75,000, respectively. The deduction completely phases out at MAGI of $250,000 and $175,000, respectively.

• Auto Loan Interest Deduction: The ability to deduct up to $10,000 of interest on qualifying vehicles begins phasing out at MAGI of $200,000 (married joint) and $100,000 (single). The deduction completely phases out at MAGI of $250,000 and $150,000, respectively.

• State and Local Tax (SALT) Deduction: Up to $40,400 of state and local taxes (income or sales plus property) can be deducted by those married joint and single filers with MAGI of up to $505,000 in 2026. The deduction phases down to a floor of $10,000 for MAGI above those levels.

Neither the enhanced senior deduction nor the auto loan interest deduction are indexed to inflation. The current phaseouts will remain static through 2028, after which both deductions will expire. The SALT deduction and its phaseouts will increase 1% each year through 2029. The SALT deduction will revert to a maximum of $10,000 with no phaseout in 2030.

For all three deductions, every extra dollar of qualified income pushes you closer to or above their respective MAGI thresholds. Proper tax planning must take into account this aspect of capital gains stacking too.

Planning Strategies for Capital Gains Stacking

Tax planning involves understanding what levers can be pulled and how pulling one lever might impact your overall tax bill. Here are strategies you can use to your advantage.

Capital Gains Harvesting in Low-Income Years

Capital gains harvesting involves purposely selling an investment at a profit. Often, investors who engage in this practice will immediately repurchase the investment, thereby resetting its cost basis at a higher level.

Capital gains harvesting is very effective when you expect to temporarily be in the 0% capital gains tax bracket. This can be the period when a person retires but has not filed for Social Security benefits or started taking RMDs. Years with large deductions can also create an opportunity for capital gains harvesting (Table 3).

TABLE 3

Harvesting Gains Around RMDs

Robert and Karen are married and retired. Their 2026 ordinary taxable income from Social Security and a pension totals $78,000. Robert turns age 73 this year and must take his first required minimum distribution (RMD) of $18,000, bringing the couple’s total ordinary taxable income to $96,000. This leaves $2,900 of room below the $98,900 threshold for the 0% capital gains bracket.

The couple hold two stock positions with unrealized gains. Position A has a gain of $2,800, which is small enough to fit entirely within the 0% bracket. Position B has a gain of $3,800, big enough to push $900 of the gain into the 15% bracket.

Key Takeaway: By harvesting Position A, Robert and Karen reset their cost basis by $2,800 at no federal tax cost. Harvesting Position B produces a $135 tax bill on the $900 that spills into the 15% bracket. When room in the 0% bracket is limited, fitting in just enough capital gains not to overflow optimizes the tax-free basis reset.

The critical step is calculating your projected taxable income before realizing any gains to confirm how much room remains below the 0% threshold. High-income investors could also target the 15% threshold if they would otherwise be subject to the NII surtax and/or the 20% capital gains bracket.

Combining Expenses in a Single Year

Bunching charitable donations into a single year rather than spreading them out over several years is an effective way of lowering your tax bill. Realizing elective medical costs in years when you expect to exceed the 7.5% AGI floor for deducting such expenses is also effective.

Coordinating Roth Conversions With Capital Gains and Dividends

Roth IRA conversions are taxable as ordinary income in the year they are made. The larger the size of the Roth conversion, the less room there is to stack qualified investment income on top of your AGI. In years when significant gains are unavoidable, it may be worth reducing the size of a planned Roth conversion or deferring it to a year with fewer gains.

Qualified Charitable Distributions

Qualified charitable distributions (QCDs) are an even better way of using your charitable intentions to avoid the adverse impact of capital gains stacking. QCDs reduce your AGI dollar-for-dollar, thereby giving you more room to realize long-term capital gains and qualified dividends without crossing key thresholds.

Withdrawal Sequencing

Retirees drawing from multiple account types—traditional IRA, taxable and Roth—have an opportunity to sequence withdrawals in a way that manages the stack. The math starts with how much room you have between your RMDs and the top of the next tax or Medicare bracket.

Married joint filers reach the 15% tax bracket for long-term capital gains and qualified dividends once taxable income exceeds $98,900. Their income tax rate rises to 24% for taxable income above $211,400. Higher Medicare premiums go into effect for MAGI above $218,000 in 2026.

Factoring in the interplay of your withdrawals and the capital gains and income realized from taxable accounts can help you better assess how close you are to crossing one of these three thresholds.

Capital Gains Stacking Can Be Managed

While it is important not to let the tax tail wag the portfolio dog, there are ways you can effectively boost your aftertax returns. Strategically planning around the impact of capital gains stacking is one of those ways.

Sell investments that meet your sell rules while also identifying opportunities to minimize their tax impact including those outside of your portfolio. As this article explains, looking at all the income sources and deductions that drive your tax bill can help you do so.

Neutral sentiment among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.5 percentage points to 33.6%. Bullish sentiment is below its historical average of 37.5% for the seventh consecutive week.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 3.1 percentage points to 15.0%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 89th time in 91 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 1.6 percentage points to 51.4%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the eighth consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 0.2 percentage points to –17.9%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the eighth consecutive week.

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This week’s special question asked AAII members how oil prices are affecting their perception of the economy.

Here is how they responded:

• They will have a significant negative impact: 34.3%

• It depends on how long oil prices remain at current levels: 24.2%

• They will slow economic growth somewhat: 23.7%

• I do not expect them to have a lasting impact: 16.5%

• Not sure/no opinion: 0.9%

This week’s Sentiment Survey results:

Bullish: 33.6%, up 1.5 points
Neutral: 15.0%, down 3.1 points
Bearish: 51.4%, up 1.6 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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The number is your adjusted gross income (AGI). It is located on line 11a at the bottom of the first page of your 2025 Internal Revenue Service (IRS) Form 1040.

AGI is your wage income and other income you received—such as Social Security benefits, individual retirement account (IRA) distributions, capital gains, interest income, etc. These amounts are adjusted for contributions to IRAs and health savings accounts (HSAs), alimony paid, student loan interest deductions and other adjustments listed on Schedule 1 of Form 1040.

AGI matters because it either directly determines or is a major component in determining what and how much you can deduct. It also influences how much of your Social Security benefits are taxed for a given tax year and what you will pay in Medicare premiums two years out. Both combined income and modified adjusted gross income (MAGI) are based on AGI.

Below are some of the big things that AGI influences.

• Charitable Deduction for Itemizers: AGI is typically the contribution base for individual taxpayers. Effective this year, charitable donations below 0.5% of your contribution base can no longer be deducted. If your AGI is $100,000, the first $500 of the donations made this year ($100,000 × 0.5%) are not deductible. The amount subject to the 0.5% floor can be carried forward for up to five years.

• Combined Income: This is a variant of MAGI that is used to determine the percentage of your Social Security benefits that are taxed. It starts with your AGI, excluding any Social Security benefits received, and adds tax-exempt interest income and one-half of your annual Social Security benefits to that number.

• Enhanced Deduction for Seniors: Married joint filers who are both at least 65 years old can claim an additional $12,000 deduction on their taxes between 2025 and 2028. Single filers who are at least age 65 can deduct $6,000. This deduction begins to phase out at MAGI of $150,000 for married joint filers and $75,000 for single filers. MAGI for most filers claiming this One Big Beautiful Bill Act (OBBBA) deduction will be AGI, except for those taxpayers with earned foreign interest or earned income from certain U.S. territories.

• MAGI for IRMAA: Medicare’s income-related monthly adjustment amount (IRMAA) is based on a different definition of MAGI. Like other versions, MAGI for IRMAA starts with AGI from your Form 1040. It then adds back tax-exempt interest. Unlike other uses of MAGI, Medicare uses your current MAGI to determine your premiums for two years in the future. So, the IRMAA-based MAGI you earned in 2025 will determine what your Medicare premiums will be in 2027.

• State and Local Tax (SALT) Deduction: MAGI for determining the start of the SALT deduction phaseout is $505,000 for tax-year 2026. Like the enhanced senior deduction, MAGI equals AGI for most taxpayers, except for those with earned foreign interest or earned income from certain U.S. territories. (The deduction for those with MAGI above $505,000 phases down gradually to $10,100 for 2026.)

• Other OBBBA Tax Breaks: The MAGI limits for OBBBA deductions for tips, overtime and auto interest also use the same definition of MAGI as the enhanced senior and SALT deductions. For most taxpayers, this means that AGI will determine their eligibility for these tax breaks.

• Traditional and Roth IRA Contributions: The income limits for deductible IRA contributions and Roth IRA contributions start with AGI and add back certain items, including the IRA deduction itself, the student loan interest deduction and the foreign income exclusion. Those receiving Social Security benefits should read Appendix B in IRS Publication 590-A for specific instructions.

Because AGI is mostly determined by income, the only way you can reduce it is to have less taxable income. Qualified charitable distributions (QCDs) satisfy required minimum distributions (RMDs) without the amount counting as taxable income. This reduces AGI dollar for dollar relative to taking the RMD. Roth IRA conversions increase AGI in the year they are made but reduce future AGI by shrinking the size of or eliminating RMDs. Realizing more tax-free interest, avoiding short-term capital gains and holding tax-inefficient investments in retirement accounts (e.g., IRAs, Roth IRAs, etc.) also help to reduce AGI.

To learn additional tax saving’s strategies, access the recordings and resources for the AAII Tax Seminar.

AAII Stock Bracket Challenge: Round 1 Results Are In

The first week of the AAII Stock Bracket Challenge is in the books, and it delivered the kind of upsets that make a bracket competition worth watching. Four of the eight first-round matchups went to the lower seed—including Coca-Cola Co. (KO) outlasting Microsoft Corp. (MSFT) and AT&T Inc. (T) edging out Chevron Corp. (CVX).

Advancing to the Quarterfinals: AbbVie Inc. (ABBV), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), AT&T, Coca-Cola, JPMorgan Chase & Co. (JPM) and Pfizer Inc. (PFE).

MrZiggyD is the only player to have a perfect bracket after the first round. AZ Hot List and Blue Ants—as well as 10 other players—are tied for second place, each correctly picking seven of the eight first-round matchups.

The tournament is far from over.

The Quarterfinal round is running from April 1–7, closing at market close on Tuesday, April 7. Check your bracket, track live results and follow the leaderboard here.

Join us for our Week 2 live stream on Wednesday, April 8, at 1:00 p.m. Central Time for a full breakdown of the Quarterfinal results.

Reminder

The U.S. market and the AAII office will be closed on Friday, April 3, in observance of Good Friday. Wishing a happy Easter and a happy Pesach to those of you observing the respective holidays.

More on AAII.com

• AAII 2025–2026 Tax Guide: What’s New for 2025–2026 Taxes
  Learn how your taxes are affected by changes due to the OBBBA and the IRS inflation adjustments for 2026.

• For Qualified Charitable Distributions, Timing Is Everything
  With careful planning, a QCD can be a smart tax-planning strategy for an IRA holder taking distributions.

• New Shadow Stock Addition and January Barometer Insights
  The newly posted April 2026 AAII Journal reports one deletion and one addition for the Model Shadow Stock Portfolio after its quarterly review.

  
  AAII Sentiment Survey

Neutral sentiment among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.5 percentage points to 33.6%. Bullish sentiment is below its historical average of 37.5% for the seventh consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 3.1 percentage points to 15.0%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 89th time in 91 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 1.6 percentage points to 51.4%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the eighth consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 0.2 percentage points to –17.9%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the eighth consecutive week.

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This week’s special question asked AAII members how oil prices are affecting their perception of the economy.

Here is how they responded:

• They will have a significant negative impact: 34.3%

• It depends on how long oil prices remain at current levels: 24.2%

• They will slow economic growth somewhat: 23.7%

• I do not expect them to have a lasting impact: 16.5%

• Not sure/no opinion: 0.9%

This week’s Sentiment Survey results:

Bullish: 33.6%, up 1.5 points
Neutral: 15.0%, down 3.1 points
Bearish: 51.4%, up 1.6 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

AAII Asset Allocation Survey

Individual investors’ allocations to cash increased while stock and bond allocations decreased in the March AAII Asset Allocation Survey.

Stock and stock fund allocations decreased 0.2 percentage points to 69.2%. Stock and stock fund allocations are above their historical average of 61.5% for the 70th consecutive month.

Bond and bond fund allocations decreased 0.6 percentage points to 15.8%. Bond and bond fund allocations are below their historical average of 16.0% for the fifth time in six months.

Cash allocations increased 0.8 percentage points to 15.0%. Cash allocations are below their historical average of 22.5% for the 40th consecutive month.

March AAII Asset Allocation Survey results:

• Stocks and Stock Funds: 69.2%, down 0.3 percentage points

• Bonds and Bond Funds: 15.8%, down 0.6 percentage points

• Cash: 15.0%, up 0.8 percentage points

March AAII Asset Allocation Details:

• Stocks: 29.5%, down 1.3 percentage points

• Stocks Funds: 39.7%, up 1.0 percentage points

• Bonds: 5.1%, down 0.1 percentage points

• Bond Funds: 10.7%, down 0.5 percentage points

Historical averages:

• Stocks/Stock Funds: 61.5%

• Bonds/Bond Funds: 16.0%

• Cash: 22.5%

Take the Asset Allocation Survey.

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Last year, we spent considerable time discussing investor and market sentiment when we launched AAII Sentiment Investing, which tracks more than 10 indicators measuring market breadth, valuation, trends, volatility and sentiment. We’ve been showing how individual investors can use these indicators as a behavioral lens to add to, not replace, a fundamental approach.

This focus on sentiment is not new for AAII. In fact, AAII has conducted the AAII Investor Sentiment Survey for nearly 40 years, polling members each week on where they believe the market is headed over the next six months. The survey has been featured in prominent national newsletters and cited in numerous multiyear academic and practitioner studies on investor behavior.

AAII Sentiment Investing tracks 13 indicators. Even for fundamentally driven investors, market sentiment matters as a filter and sizing tool, helping validate your thesis, calibrate exposure and avoid being early, late or emotionally misaligned with the market.

This month, I encourage you to talk with your fellow investors about one key debate: the Fed Model versus the yield curve.

Go to the AAII Investor Sentiment Community today to participate in the discussion.

Join Our Community Today

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Related

AAII Sentiment Investing

Identifying Future Economic Changes With the Yield Curve

Trading Strategies

Analyzing the AAII Sentiment Survey Without Hindsight

The Markets

Market Valuation Measures: Does the Fed Model Really Work?

• How donor-advised funds work and key considerations before contributing assets

• Changes under the OBBBA affecting deductions and giving strategies

• How strategies like bunching can maximize charitable impact and tax efficiency

The One Big Beautiful Bill Act (OBBBA) of 2025 enacted important changes for charitably minded and tax-averse households. Donor-advised funds (DAFs) continue to be a compelling philanthropic tool for high-net-worth households. Here we examine how donor-advised funds are structured, who might find them attractive and why, and what changes were introduced by the OBBBA.

Donor-advised funds allow households to generate immediate tax deductions by donating money or assets to the fund. The charitable organizations that sponsor donor-advised funds administer funds that are divided into individual subaccounts. Those accounts accept donations and disburse gifts on a donor’s behalf. Unlike many other giving options, donor-advised funds allow donors to make anonymous grants to avoid being put on solicitation lists.

Funds frequently offer donor-directed investment options that can help your gift grow or earn tax-free income. Advances in financial technology over the years have made donor-advised funds even more convenient and flexible.

The three largest sponsors of donor-advised funds are Fidelity Charitable, National Philanthropic Trust and DAFgiving360 (which was spun off from Charles Schwab in 2024). Vanguard Charitable is also included in our discussion here, given Vanguard’s popularity as an investment manager. Although the sponsors may be charitable entities, donor-advised funds are often related to large financial services firms because they can invest assets in funds that generate management fees for the investment adviser.

Donations to donor-advised funds now outpace donations to individual charities. For example, according to 2023 data from the Institute for Policy Studies, Fidelity Charitable received approximately two-and-one-half times the donations reported by the largest individual charity, Feeding America.

What You Need to Know Before Funding

Donations to a donor-advised fund are irrevocable. Once you deposit money, it becomes an asset owned by the fund until it is granted to your approved charities. Depending on the fund sponsor’s requirements, donations may be in the form of stock, cash, cryptocurrency and/or illiquid assets such as appreciated real estate and private business interests.

Such donations are beneficial from a tax standpoint. Capital gains taxes on an appreciated asset are avoided when that asset is contributed to a donor-advised fund. Additionally, the taxable deduction is generally based on the donated asset’s market value at the time of the donation. This amount can be significantly higher than the price originally paid for the asset.

The type of asset and your adjusted gross income (AGI) dictate how much of a tax deduction is available. For example, deductions for appreciated property such as collectibles are capped at 30% of your contribution base. Any excess can be carried forward for five years.

A donor-advised fund must ensure that its grants go to qualifying purposes to keep its nonprofit 501(c)(3) exemption. Because of that, donors may only advise where the sponsor directs funds. The expectation is that the donor-advised fund will honor any donor recommendation that follows the fund’s guidelines.

The Internal Revenue Service (IRS) has specific rules on what qualifies as a charity. Political candidates, organizations and individuals are not considered charities. Qualifying purposes are:

“… charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

Donors, advisers to donors and related persons cannot receive anything other than an incidental benefit from a donor-advised fund, otherwise costly excise taxes apply. Tickets to events, memberships and dinners are some examples of prohibited benefits.

Contribution and Distribution Minimums

Each donor-advised fund sponsor has its own rules regarding contributions and distributions. As shown in Table 1, both Fidelity Charitable and DAFgiving360 allow a donor-advised fund to be set up for any dollar amount. National Philanthropic Trust requires a minimum $10,000 contribution, while Vanguard Charitable sets its minimum at $25,000.

Distribution rules also vary. Fidelity Charitable and DAFgiving360 allow for grants as little as $50 to be made. National Philanthropic Trust has a $250 per grant minimum, while Vanguard Charitable requires grants to be at least $500.

Beyond the grant size, pay attention to the rules about how often grants must be made. Fidelity Charitable, for instance, requires that at least one grant be made every two years. If this requirement is not met, Fidelity Charitable uses the donor’s fund to make a grant to a charitable organization of its choice.

Read the sponsor’s rules regarding grants before opening a donor-advised fund.

Investment Options for Tax-Exempt Growth and Income

Account holders may invest for tax-exempt growth and/or income, which can leverage the impact on their charities. Each sponsor has its own menu of investment options, like company 401(k) plans. Larger accounts might be able to add hedge funds, private equity and other alternatives with the sponsor’s approval.

DAFgiving360 has pools for index and actively managed growth; balanced, conservative and socially responsible investing pools; international pools; fixed-income options; and money market pools. Fidelity Charitable and Vanguard Charitable have similar offerings. Along with traditional options, National Philanthropic Trust has a wide array of impact investing funds, which screen investments according to additional criteria, such as investing in accessible housing, disaster relief and economic opportunity.

Some sponsors permit delegating investment responsibilities to an outside adviser and hold the assets in a segregated account. Investors may want this option to maintain a relationship with someone they trust or to continue a preferred investing strategy.

How Much Does a Donor-Advised Fund Cost?

There are two primary types of fees charged by donor-advised funds.

The first is an administrative fee. This fee covers the cost of servicing the donor-advised fund. Administrative fees are charged on a sliding scale based on the size of the donor-advised fund. The larger your fund is, the lower your fee will be on a percentage basis.

Again, read the fine print before picking a sponsor. National Philanthropic Trust charges a flat monthly fee of $17 for donor-advised funds that hold less than $250,000 in assets.

The second type of fee is investment fees. These are the expense ratios for each investment you choose. They vary by both sponsor and type of investment.

Vanguard Charitable describes its available investment options as having an average expense ratio of 0.04%. While most of the options do have very low expense ratios, its Private Assets Fund charges a hefty 3.29%.

Table 2 compares both the administrative and investment fees across the primary donor-advised fund sponsors.

Changes to Giving Under the New Tax Law

The OBBBA put a few twists into the giving game. There’s good news for taxpayers who take the standard deduction. Beginning with the 2026 tax year, you can get up to $1,000 of additional deductions ($2,000 if married filing jointly) for donating cash directly to a charity. If you plan to donate that amount or less, this is likely the best option. Don’t forget to get a receipt.

If you itemize your taxes, the math is a bit more complicated. Charitable gifts must now exceed a floor of 0.5% of your contribution base (typically AGI) before they may be deducted. For example, a couple with adjusted gross income of $100,000 who deposit $10,000 into their donor-advised fund this year would only be able to deduct $9,500 on their 2026 tax return. The remaining $500 deduction can be carried forward for up to five years, subject to meeting the floor test in future years.

Taxpayers in the highest 37% tax bracket (taxable income of at least $768,700 married joint/$640,600 single in 2026) will also see their total itemized deductions lowered by 2/37ths (5.4%). This effectively caps the benefit of all itemized deductions, including charitable donations, at 35% instead of 37%.

Bunching Can Help Navigate the New Floor on Deductions

Susie is a generous supporter of her local library foundation and likes to donate $3,000 each year. She has an AGI of $100,000, which establishes a $500 floor ($100,000 × 0.5%) before she may claim a deduction. If she donates $3,000 each year to a donor-advised fund, she would only be able to deduct $2,500, which is about 80% of her donation.

Rather than giving annually, she can “bunch” her gifts in advance and make annual grants from the donor-advised fund account. If she donates $15,000 in one year, she could deduct $14,500 that year. Then she can recommend that the donor-advised fund send recurring $3,000 grants for the next five years.

Combining Bunching With Regular Charitable Giving

Heather wants to support the University of Michigan’s Wolverines, her favorite football team, by donating $5,000 to their football program every year that they have a winning season. The University of Michigan has a 501(c)(3) charity to receive donations. There are a few local 501(c)(3) charities she’s also open to donating to, but she’s mainly passionate about the Wolverines.

Heather’s wealth comes from an actively managed stock portfolio with some substantial gains and losses, leading to wide swings in capital gains tax liability from year to year. Her children graduated from Michigan State University and don’t feel the same allegiance to the Wolverines as she does. Heather wants to donate enough each year to minimize her taxes.

If she donated $5,000 to her donor-advised fund account every year that the University of Michigan crushed it, she might be donating in years when she has a lower tax liability. She also might have years when she could use a much larger tax deduction. If she sold stocks with capital gains to fund her cash gifts, she would increase her taxes.

Both a private foundation and a donor-advised fund would allow Heather to address both her philanthropy and her desire to minimize her taxes, but a donor-advised fund is the better option. First, setting up a private foundation to accomplish a very specific goal seems needlessly expensive. Second, a private foundation is required to distribute 5% of its assets every year, which might become an issue when the Wolverines fail to notch enough wins in a season.

Heather should consider establishing an account with a donor-advised fund and funding it with highly appreciated stock in the years she has a high tax liability. This would allow her to avoid paying any capital gains on those stocks. In addition, if she has held the stocks for more than 12 months, she can deduct their full fair market value rather than just her cost basis.

She will have to pay attention to the 30% ceiling on deducting charitable donations of appreciated stocks—contributions cannot exceed 30% of her adjusted gross income in any single year. However, any excess amounts can be carried forward for up to five years.

Even with these restrictions and ceilings, combining bunching with a donor-advised fund is powerful. Heather is able to claim tax deductions on her charitable giving during the years they would benefit her most, sidestep capital gains taxes, and still limit her donations to the Wolverines to only the years when they have a winning season.

Because sponsors often have minimum disbursement requirements and the Wolverines could have a multiyear slump, Heather might want to designate one or more of her other favored charities to receive a contribution every year.

Legacy Planning for Donor-Advised Funds

Donor-advised funds also provide the option of giving after death.

Heather, for instance, should consider how she wants the account to be handled upon her death. If she does not leave instructions, the account’s assets will be disbursed or held according to the sponsor’s policies.

Donor-advised funds allow accountholders to appoint successors who assume responsibility for making grants. Note that the successor is not bound by the deceased account holder’s preferences. Depending on the sponsor, account holders can also list beneficiary charities (not individuals) who will receive lump sums or periodic payments.

“As I Give, I Get”

Perhaps no better quote (commonly attributed to Mary McLeod Bethune) describes the benefits of philanthropy. Giving not only helps others—it nourishes donors’ hearts. Along with enriching your spirit, selecting the right vehicle for your charitable efforts can boost your legacy.

When used properly, donor-advised funds allow donors to align their gifts with their tax situation. Then they can position those assets for tax-exempt growth or income and make grants according to the charities’ needs or the donor’s preference, all in a convenient account.

Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.7 percentage points to 32.1%. Bullish sentiment is below its historical average of 37.5% for the sixth consecutive week.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 0.5 percentage points to 18.1%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 88th time in 90 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 2.2 percentage points to 49.8%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the seventh consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 3.9 percentage points to –17.7%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the seventh consecutive week.

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This week’s special question asked AAII members what they thought about the Federal Reserve’s decision to keep interest rates unchanged.

Here is how they responded:

• They should have raised rates: 13.7%

• It was the right move: 66.5%

• They should have cut rates: 14.2%

• Not sure/no opinion: 5.6%

This week’s Sentiment Survey results:

Bullish: 32.1%, up 1.7 points
Neutral: 18.1%, up 0.5 points
Bearish: 49.8%, down 2.2 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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These are the updated findings of Hendrik Bessembinder. The Arizona State University business professor received much attention for his previous research showing that the stock market’s return has been attributable to just a small number of stocks. The median stock, in contrast, has lost value over the time it was listed.

Headlines and talking points from studies often obscure key details and takeaways. Bessembinder’s research is no different.

The first key detail is how Bessembinder calculated returns. He calculated buy-and-hold returns as “the final outcome per dollar initially invested for an investor who followed a buy-and-hold strategy, with each dividend reinvested in the same stock.”

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Bessembinder calculated a 355.7% return for Reddit Inc. (RDDT) based on the period from March 21, 2024—when the stock went public—through December 31, 2025. This return assumes that an investor bought the stock on the day of its initial public offering (IPO) and never sold it. The same methodology was used for all stocks. Bessembinder used closing prices as of either the day those stocks stopped being listed (because they were acquired, delisted, etc.) or the end of 2025.

Bessembinder’s second measure of return is shareholder wealth creation. This measure “considers net distributions (dividends, spinoffs, share repurchases, new share issuances, etc.) as well as share price changes for each stock during each month, but is measured as of the end of the sample period.” It compares the change in wealth for a company’s shareholders relative to the one-month Treasury bills.

This metric found that 40.9% of stocks improved shareholder wealth, while 59.1% reduced shareholder wealth, compared to what an investor could have earned by holding Treasury bills instead.

While the numbers do not sound encouraging for individual investors, the calculations ignore a key action: buying and selling stocks instead of holding them until they are delisted or a terminal date is reached (e.g., your death). Attractive stocks can stop being attractive even for long-term investors.

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A disciplined investing approach includes evidence-based rules for both buying and selling. Companies evolve and stock valuations change. What was once an attractive business several years ago may no longer be so today. Prudent investors part ways with stocks that no longer meet their criteria for buying and holding.

Bessembinder’s observation that the median stock appeared in his dataset for just 6.8 years supports the notion that investors should not hold a stock forever if it does not continuously meet their criteria. While some of these median stocks were acquired by competitors, others were delisted due to their own business struggles. All but the most optimistic investors either avoided or got out of self-driving truck company TuSimple Holdings Inc. before it was delisted in 2024. Yet its 83.7% loss of value is factored into Bessembinder’s calculations.

The professor also noted that a small group of stocks accounts for most of the gains. Apple Inc. (AAPL) and Nvidia Corp. (NVDA) account for a combined 10.6% of all shareholder wealth creation since 1926. Again, these numbers assume a constant buy-and-hold approach since the stocks first went public.

That said, it is not uncommon for a small number of stocks to have outsized influence on a portfolio’s return. Over the course of my career, I’ve seen seemingly boring or otherwise overlooked stocks deliver big returns. Identifying the biggest gainers in advance is difficult, which is why it is important to diversify. Overlaying disciplined sell rules prompts you to prune those stocks likely to hurt your portfolio’s returns and to hold onto those with better odds of boosting your returns.

Special Note

The AAII Stock Bracket Challenge is underway. Just like in the NCAA men’s basketball tournament, we are already seeing a fifth seed, AT&T Inc. (T), at risk of being upset by a 12th seed, Chevron Corp. (CVX). Starting next week, we will provide updates on the bracket along with insights on what’s moving the most popular stocks among AAII members. In the meantime, you can visit our How It Works page.

More on AAII.com

• The Role of Diversification in an Individual Stock Portfolio
  Managing the emotional realities of holding too many stocks or too few is one of the more subjective aspects of risk management through diversification.

• How to Buy and Sell Stocks Using AAII Stock Screens
  The same criteria used by a screen to find attractive stocks can help you make disciplined decisions about when to sell stocks.
  

• Opportunities for Donor-Advised Funds Opened by the OBBBA
  The March 2026 AAII Journal explains how donor-advised funds allow donors to align their gifts with their tax situation when used properly.

• AAII Sentiment Survey

Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment increased.

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Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.7 percentage points to 32.1%. Bullish sentiment is below its historical average of 37.5% for the sixth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 0.5 percentage points to 18.1%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 88th time in 90 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 2.2 percentage points to 49.8%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the seventh consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 3.9 percentage points to –17.7%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the seventh consecutive week.

This week’s special question asked AAII members what they thought about the Federal Reserve’s decision to keep interest rates unchanged.

Here is how they responded:

• They should have raised rates: 13.7%

• It was the right move: 66.5%

• They should have cut rates: 14.2%

• Not sure/no opinion: 5.6%

This week’s Sentiment Survey results:

Bullish: 32.1%, up 1.7 points
Neutral: 18.1%, up 0.5 points
Bearish: 49.8%, down 2.2 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

William O’Neil, the founder of Investor’s Business Daily (IBD) and author of “How to Make Money in Stocks,” developed a strategy called CAN SLIM, an acronym to help remember the seven factors that winning stocks tend to possess. AAII tracks three versions of the CAN SLIM approach: one based on O’Neil’s original strategy, one that removed the criteria to limit the number of shares held by the public (float) and one based on the revised third edition of O’Neil’s book. This week, we cover the O’Neil CAN SLIM No Float screen and give you a list of stocks currently passing our screen based on this approach.

The O’Neil CAN SLIM strategy aims to identify stocks with high historical and projected growth that are likely to have rapid price increases. The strategy includes a market-timing consideration since O’Neil found that investing only during a market uptrend helps to avoid “swimming upstream.” As of February 27, 2026, the O’Neil CAN SLIM No Float screening model has an annual gain since inception (1998) of 13.4%, versus 7.3% for the S&P 500 index over the same period. In this year’s volatile market, the O’Neil CAN SLIM No Float screen is up 10.6% year to date, compared to the S&P 500’s 0.6% increase over the same period.

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The CAN SLIM Philosophy

O’Neil was a strong believer in the sustained long-term growth of the American economy due to the freedoms and opportunities available, which he said made the U.S. a “prime success model” and a leader in high-growth, innovative entrepreneurial companies. The goal of investing in stocks, he believed, is to participate in that long-term growth.

With that basic outlook in mind, O’Neil started with the entire universe of stocks—those listed on the major exchanges, including the Nasdaq, but he favored the stocks of smaller firms, since most innovations and new products come from smaller and medium-sized companies. His system can best be described as a growth stock approach that seeks companies whose stock prices are poised to rise due to favorable fundamental factors within the firm and industry, such as increased earnings due to new products and services, as well as favorable technical factors regarding price trends and the supply and demand for the stock.

In his book, O’Neil said that his approach to investing stemmed from an analysis covering 40 years of market data, which examined each year’s stocks with the largest percentage price increase to find the common characteristics of the “most successful stocks.” These common characteristics include fundamental factors, inherent in the nature of the firm and industry, and technical factors from observing the price patterns of the stocks.

C = Current Quarterly Earnings per Share: How Much Is Enough?

The CAN SLIM approach focuses on companies with proven records of earnings growth while still in a stage of earnings acceleration. O’Neil’s study of winning stocks highlights the strong quarterly earnings per share of the securities prior to their significant price run-ups.

When screening for quarterly earnings increases, it is important to compare a quarter to its equivalent quarter last year—i.e., this year’s second quarter compared to last year’s second quarter. Many firms have seasonal earnings patterns, and comparing similar quarters takes this into account.

The CAN SLIM system looks for stocks with a minimum increase in quarterly earnings of 18% to 20% over the same quarterly period one year ago. When examining a percentage change, it is not only important to check the figures for unusually small base numbers that may distort the percentage change figures, but it is also important to check if any of the numbers in the calculation are negative. A change in sign, as in a negative to a positive, requires special consideration and may result in misleading screening results. When screening on user-defined fields such as custom growth rates, you may find it useful to include some secondary or qualifying criterion to help ensure proper screening results. In the CAN SLIM screen, positive earnings for the current quarter are required to help make the results of the growth rate calculation more meaningful.

Whenever you are working with earnings, the issue of how to handle extraordinary earnings comes into play. One-time events can distort the actual trend in earnings and make company performance look better or worse than a comparison against a firm without special events. CAN SLIM excludes these nonrecurring items from the analysis. Our screen examines growth in earnings from continuing operations only. The first two screening filters require a quarterly earnings growth rate greater than or equal to 20% and positive earnings per share for the current quarter.

Beyond looking for strong quarterly growth, O’Neil liked to see an increasing rate of growth. An increasing growth rate in quarterly earnings per share is so important in the CAN SLIM system that O’Neil warned shareholders to consider selling holdings of those companies that show a slowing rate of growth two quarters in a row. Our next screen specifies that the growth rate from the quarter one year ago to the latest quarter be higher than the previous quarter’s increase from its counterpart one year prior. Basically, the current quarter’s growth over the past 12-month period must be better than the previous quarter’s growth over the past 12-month period.

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A = Annual Earnings Increases: Look for Meaningful Growth

Winning stocks in O’Neil’s study had a steady and significant record of annual earnings in addition to a strong record of current earnings. The CAN SLIM system tries to identify the strong companies leading the current market cycle.

The primary screen for annual earnings increases that the CAN SLIM system uses is increasing earnings per share in each of the last five years. In applying this screen, we specify that earnings per share from continuing operations be higher for each year when compared against the previous year. To help guard against any recent reversal in trend, a criterion is included requiring that the earnings over the last 12 months be greater than or equal to earnings from the latest fiscal year. This group of criteria proved to be the most stringent independent filter.

N = New Products, New Management, New Highs: Buying at the Right Time

O’Neil thought that a stock needed a catalyst to start a strong price advance. In his study of winning stocks, he found that 95% of the winning stocks had some sort of fundamental spark to push the company ahead of the pack. This catalyst can be a new product or service, a new management team after a period of lackluster performance or even a structural change in a company’s industry, such as new technology. These are qualitative factors that do not lend themselves to easy screening. However, it is possible to study the companies passing the preliminary screens to see if any catalysts exist.

A second consideration O’Neil emphasized is that investors should pursue stocks showing strong upward price movements. Stocks that seem too high-priced and risky most often go even higher, while stocks that seem cheap often go even lower. Stocks that are making the new high list while accompanied by a big increase in volume might be prospects worth checking out. A stock making a new high after undergoing a period of price correction and consolidation is especially interesting. O’Neil said that decisive investors should have sold a stock long before it hits the new low list.

Members are looking for your input. Can you help with this question from the Stock Screening & Analysis Community?

“Do you find the CAN SLIM approach effective in today’s liquidity-driven, institution-dominated markets, or has its edge diminished?”

Click here and then choose the Join Community button on the right to answer this question or read other responses.

S = Supply and Demand: Small Capitalization Plus Volume Demand

As the catalyst starts pushing the price of a company’s stock up, those firms with a smaller number of shares outstanding should increase more quickly than those with many outstanding shares. In his study of winning stocks, O’Neil found that 95% of the winning stocks had fewer than 25 million shares outstanding, while the median for the group was 4.6 million shares.

O’Neil suggested that investors consider looking at the actual “float” of the stock. The float is the number of shares in the hands of the public—determined by subtracting the number of shares held by management from the number of shares outstanding. In the original CAN SLIM screen, we limited the float to 20 million shares. As companies have become larger, this float became increasingly restrictive. In addition, O’Neil did not explicitly lay out this requirement in his original book. Therefore, the CAN SLIM No Float approach eliminates the criterion for a specific float.

L = Leader or Laggard: Which Is Your Stock?

O’Neil scanned for rapidly growing companies that are market leaders in rapidly expanding industries. O’Neil advocated buying among the best two or three stocks in a group. You should be compensated for any premium you pay for these leaders with significantly higher rates of return.

The CAN SLIM system uses relative strength to identify market leaders. Relative strength compares the performance of a stock relative to the market. Relative strength is typically reported with a base level of zero or one—in which case the base level represents stock performance equal to the market index. Numbers above the base level reflect performance above the market index, while below-market performance can be seen with figures below the base.

Companies are often ranked by their relative strength performance, and their percentage ranking among all stocks is calculated to show the relative position against other securities. IBD presents the percentage ranking of stocks, and CAN SLIM requires stocks to have a percentage rank of 70% or better—performance better than 70% of all stocks.

When monitoring your portfolio, O’Neil recommended selling off your worst-performing stocks and keeping your best-performing stocks a little longer. You should try to avoid letting your ego dictate your actions. It is best to recognize a mistake early, before it becomes a major problem.

I = Institutional Sponsorship: A Little Goes a Long Way

O’Neil warned against selecting low-priced stocks with small capitalization and no institutional ownership because these stocks have poor liquidity and often carry a lower-grade rating. A stock needs a few institutional sponsors for it to show above-market performance. Three to 10 institutional owners are suggested as a reasonable minimum number. This number refers to actual institutional owners of the common stock, not institutional analysts tracking and providing earnings estimates on stocks. Beyond looking for a minimum number of institutional owners, O’Neil suggested looking at the past record of the institutions. The analysis of the holdings of successful mutual funds represents a good resource for the investor because of the widely distributed information on mutual funds. We established a screen for stocks to have at least five institutional owners.

It is difficult to strike a balance between looking for stocks with room to expand further and stocks that may be over-owned. While some institutional sponsorship is required, once everyone has jumped on the stock, it may be too late to buy into it.

M = Market Direction: How to Determine It

The final aspect of the CAN SLIM system looks at the overall market direction. While it does not impact the selection of specific stocks, the trend of the overall market has a tremendous impact on the performance of your portfolio. O’Neil focused on technical measures when determining the overall direction of the marketplace. Any good technical program or even a study of IBD or The Wall Street Journal should provide you with the necessary tools to study market movement.

It’s difficult to fight the trend, so it is important to determine if you are in a bull or bear market. If you are selecting your own stocks, follow and understand what the general market averages are doing every day. When the market peaks and begins a major reversal, the CAN SLIM approach recommends trying to put 25% of your portfolio into cash. It is important that you act quickly, especially if you have purchased your stocks on margin.

Other items to look for at a market top include heavy volume without significant price progress and the divergence of key averages. At market tops, you often find stocks that were past market leaders faltering, while poor-quality stocks are showing up on the most active lists. When the market starts down, it sometimes takes time for the volume to build. O’Neil warned that the market can be slow to acknowledge the downtrend.

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Conclusion

The CAN SLIM system has great appeal to the active investor looking for growth stocks. While the approach is specific, it also stresses the art of investing when analyzing companies highlighted by the approach and interpreting the direction of the market.

Companies Passing the O’Neil CAN SLIM No Float Screen (Ranked by 52-Week % Rank Relative Strength)

Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.

AAII is turning the thrill of stock picking and analyzing into a bracket-style showdown where 16 contenders battle it out round-after-round to win Stock Madness 2026!

So, do you have what it takes to crown the stock market champion?

The free-to-enter AAII Stock Bracket Challenge seeds stocks based AAII follower count with winners based on performance.

Brackets close Wednesday, March 25 – lock in your picks for a chance to win a free lifetime subscription to AAII Platinum!

Start Building Your Bracket

How It Works

• Visit our AAII Stock Bracket Challenge page

• Submit your bracket before Wednesday, March 25, 2026

• Each week, stocks advance or get eliminated based on returns

• We’ll send weekly email updates, plus you can check the AAII Stock Bracket Challenge leaderboard

• The last stock standing on April 22 takes the title of AAII Stock Bracket Champion

Tip #1: Before filling out your bracket, run your stocks through A+ Investor’s analysis tools like the A+ Stock Grades Screener to view their A-F grades. Try it for just $2.

Why Enter AAII’s Stock Bracket Challenge

First off, it’s FREE. Second, bragging rights are great, but let’s be honest, you’re also here for the prizes.

The champion of our AAII Stock Bracket gets AAII Platinum for Life (valued at $1,493 annually), which is our ultimate investor toolkit with 8 model portfolios, 8 stock watchlists, A+ Investor’s stock, ETF and fund tools, 2 premium analyzers, 7 newsletters and a Platinum Dashboard.

But we can’t forget our 2^nd and 3^rd runner ups.

• 1^st Place Champion: AAII Platinum for LIFE

• 2^nd Place Contender: 3-year AAII Platinum subscription FREE

• 3^rd Place Runner Up: 1-year AAII Platinum on us

And even if your bracket goes up in flames during week one, it’s the one time you can cheer for your portfolio like it’s the Final Four. Start filling out your bracket now.

Our 16 Stock “Teams”

You’re probably wondering who are contenders are for this year’s AAII Stock Bracket Challenge.

Our list of 16 stocks are seeded 1–16 based on AAII member popularity — specifically, how many AAII members have added the stock to their watchlists or portfolios. The #1 seed is the most-followed stock among AAII members.

We’ve got a little bit of everything from high-growth innovators and volatility-fighting defenders, to cornerstone staples of the U.S. economy. Each brings a different edge … but which one will come out on top in April?

Submit your bracket, challenge your friends and check back each week to see whether there’s a Cinderella trying to take the crown.

The stock that racks up the bigger return over the round moves on. If there’s a tie, the one with the stronger track record from earlier rounds takes the win and in Round 1, the higher-seeded stock gets the edge.

Join the Challenge

How to Pick Your Winners

Everyone wants an edge when it comes to winning a challenge like this. While we can’t give you a crystal ball, A+ Investor might be the next best thing.

With powerful tools rooted in objective, fundamental analysis, A+ Investor helps take the guesswork (and bias) out of your picks. You can quickly evaluate stocks, see which ones pass proven screening strategies and spot potential standouts, or avoid the duds altogether.

If you’re looking to build a smarter bracket (and maybe even win it all) this is your secret weapon. Just take a look to see what kinds of tools A+ Investor can offer you during our investor challenge:

• A-F Stock Grades: Compare stocks across Growth, Value, Momentum, Quality and EPS Revisions with AAII’s proprietary grading system.

• Stock Evaluator Pages: Get a full picture of each stock’s fundamentals at a quick glance without all the ads and fluff on other sites.

• Custom Stock Screener: Apply your own filters and criteria to pinpoint strong contenders.

• A+ Stock Grades Screener: Quickly find stocks that earn top marks in key categories like Value, Momentum, Growth and Quality.

• Guru and Factor Stock Screens: See which stocks already align with top strategies used by industry-leading investors like Warren Buffett, David Dreman and Peter Lynch, or filter using approaches like Dogs of the Dow, P/E Relative or Return on Equity.

If you sign up for a one-month trial subscription to A+ Investor, you can use the full array of tools to choose your winners from our list of 16 “teams”.

It’ll almost feel like having “insider intel” as you build your bracket.

Join A+ Investor for $2 Now

Only $2 for an ENTIRE MONTH of extra tools and resources to help you make smarter stock choices.

You’ll have plenty of time to put A+ Investor’s features to work during AAII Stock Madness 2026 to choose your bracket, and once your trial wraps up, we think you’ll want to keep them in your lineup.

After all, by then you’ll know exactly how these tools work and how they can help you pick winners, not just for your bracket, but for your real portfolio all year long.

Compete Against Friends

Why keep all the fun to yourself? Challenge your friends to fill out their own brackets and see who really knows their stocks.

Compare picks, trade playful trash talk, and of course, track each other on the leaderboard as the rounds unfold.

Invite Your Friends

Important Deadline! Wednesday, March 25

You only have the next few days to peruse the list of 16 stocks and build your winning bracket.

Remember, each stock you pick will face off in a single-elimination bracket over the four weeks.

Pick a winner for each matchup before the tournament begins, and the stock with the higher return in each round advances.

As your picks win, you earn points that increase each round, making later picks more valuable.

The ultimate goal is to rack up the most points and correctly predict the champion, plus its total % gain, to win the tiebreaker. We’ll wrap up the competition with our championship during the week of April 16–22, so be sure to follow along each week to see who comes out on top.

Lock In Your Picks Now

Are you ready to play against some of the brightest minds in the AAII investor member base?

It’s game time. May the best bracket win!

An examination of the ETF and mutual fund options that can fill the large-cap domestic equity portion of a portfolio.

by Cynthia McLaughlin | March 2026

Featured Tickers:BKLC,BSPAX,CFIMX,FDVV,FELC,FLCOX,FSPGX,ILCV,IVV,ONEQ,PREIX,PRF,QQQ,QQQM,

• Understand why AAII Asset Allocation Models use large-cap stocks as a core 20% portfolio component.

• Learn criteria for selecting low-cost, high-performing large-cap ETFs and mutual funds across blend, growth and value styles.

• Compare index and active fund options, expenses, risk measures and index construction to align choices with your objectives.

The AAII Asset Allocation Models provide sample allocations based on an investor’s time horizon and ability to withstand short-term market volatility. The models incorporate stocks, bonds and cash to build an allocation strategy. Allocations to diversified stocks decrease with investors’ time horizons and risk tolerance.

Previous articles on the AAII Asset Allocation Models have provided a broad overview of exchange-traded funds (ETFs) and mutual funds that could be used to meet both equity and fixed-income asset allocation needs. The rationale for casting a wide net was to provide options for those who face investment choice limitations or prefer a specific fund family.

Here, we take a closer look at the ETF and mutual fund options that can fill the large-cap domestic equity portion of a portfolio. Large-cap U.S. stocks are designed to provide long-term growth potential and are widely recognized for their liquidity, making them a core building block of well-diversified portfolios. A typical large-cap company has a market capitalization of about $10 billion or greater. Many of these companies also provide income through dividend payments.

We narrowed the list of large-cap funds to just those with strong AAII A+ Investor Grades for both expense and performance. Expense ratios are a big consideration because they directly determine how much of a fund’s gross return you get to keep. Both index and select actively managed funds are included to provide choices based on AAII member preferences.

How Large-Cap Funds Were Selected

We required mutual funds to be identified by Morningstar as true no-load funds and open to new investors. None were classified as adviser, institutional, other, retirement or S class shares.

Additionally, all funds have a minimum purchase requirement of $5,000 or less. They must be able to be purchased by individual investors directly through a brokerage account. Funds were required to have assets greater than $500 million.

Expense ratios were required to be lower than the category average. ETFs and mutual funds with fees greater than 0.70% were not included. Consequently, most have A+ Grades of A or B for their expense ratios.

Returns for one-year, three-year and five-year periods were required to rank in the range of 40% to 100% within their category. Most return grades are A or B. We only considered funds with at least a five-year history.

Large-cap equity categories for the funds include large blend, large growth and large value. The growth and value funds are options for those investors who wish to tilt their portfolios toward either style.

Large-Cap ETFs

Table 1 shows ETFs that could be used for large-cap stock allocation.

Download the Excel spreadsheet for Table 1.

Most of these ETFs are passively managed, with a median expense ratio of 0.07%, compared to 0.23% for the mutual funds.

Large Blend ETFs

The nine large blend ETFs provide different strategies and below-average expense ratios. Despite having the smallest asset base of the large blend ETFs, Xtrackers MSCI USA Selection Equity ETF (USSG) delivered the strongest overall performance across the one-, three- and five-year periods. This ETF tracks the MSCI USA Selection index, which screens the U.S. equity universe and selects a subset of stocks based on defined quality, valuation and profitability criteria.

BNY Mellon US Large Cap Core Equity ETF (BKLC) has an expense ratio of 0.00%. The zero cost is part of BNY Mellon’s pricing strategy for this ETF. The fund is offered “without fee waivers or other restrictions,” making it a genuinely fee-free product rather than one with a waiver that could expire later.

Familiar and popular ETFs such as iShares Core S&P 500 ETF (IVV), Schwab US Large-Cap ETF (SCHX), State Street SPDR S&P 500 ETF Trust (SPY) and Vanguard Large-Cap ETF (VV) offer above-average performance and below-average expense ratios. The first three track the S&P 500 index, while Vanguard Large-Cap tracks the CRSP US Large Cap index. [Vanguard S&P 500 ETF (VOO) is also an option for investors seeking an S&P 500–tracking ETF.]

Fidelity Enhanced Large Cap Core ETF (FELC) uses active management to seek capital appreciation. Its 0.18% expense ratio is the highest among the large blend ETFs in Table 1, but it is far below the large blend category average of 0.43%.

Large Growth ETFs

Invesco NASDAQ 100 ETF (QQQM) is included among the large growth ETFs because of its exceptional performance and comparatively low expense ratio of 0.15%. This ETF is the younger sibling of Invesco QQQ Trust (QQQ) and was launched in 2020 to provide an open-end ETF structure that offered a lower expense ratio with the same exposure to the Nasdaq-100 index. Invesco QQQ Trust recently converted to an open-end ETF structure but has a slightly higher expense ratio.

Fidelity Nasdaq Composite ETF (ONEQ) has 1,033 securities in its portfolio but is not diversified. Its top 10 holdings constitute 60.6% of its assets. Mega-cap companies heavily influence portfolio weights.

Schwab U.S. Large-Cap Growth ETF (SCHG) tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market index. This index uses six factors, including past and projected future growth, to classify stocks as growth or value. State Street SPDR Portfolio S&P 500 Growth ETF (SPYG) and Vanguard Growth ETF (VUG) track the more traditional S&P 500 Growth and CRSP US Large Cap Growth indexes, respectively.

Large Value ETFs

ETF choices for a large value allocation include Fidelity High Dividend ETF (FDVV). This ETF emphasizes stocks that offer higher dividend payouts relative to its peers, making it well-suited for investors seeking income. Its below-average category risk index of 0.91 is the lowest among the large value ETFs shown. Not surprisingly, it also has the highest yield of all the ETFs and mutual funds shown. Note that Fidelity High Dividend allocates 5.4% of its assets to foreign stocks.

Invesco RAFI US 1000 ETF (PRF) is passively managed but selects holdings based on four fundamental measures of firm size: book value, cash flow, sales and dividends. The 1,000 equities with the highest fundamental strength are weighted by their fundamental scores. Invesco RAFI US 1000’s expense ratio of 0.34% is the highest of all the large-cap ETFs shown.

iShares Morningstar Value ETF (ILCV) and Vanguard Value ETF (VTV) both offer the lowest expense ratios, 0.04%, for the large value ETFs.

Large value ETFs exhibit slightly lower category risk compared to large value mutual funds, which may result from the index-based structure of the ETFs compared to the active management typical of mutual funds.

Large-Cap Mutual Funds

Table 2 presents the large-cap mutual funds that could be used for the domestic large-cap stock allocation in the AAII Asset Allocation Models.

Download the Excel spreadsheet for Table 2.

Large Blend Mutual Funds

Of the nine mutual funds in the large blend category, Vanguard 500 Index Admiral fund (VFIAX) is the largest, with assets under management (AUM) of $1.5 trillion. It is followed in size by iShares S&P 500 Index Investor A fund (BSPAX), then by T. Rowe Price Equity Index 500 fund (PREIX).

Vanguard 500 Index Admiral is a classic large blend index mutual fund and is used as one of the proxies for calculating historical performance for the AAII Asset Allocation Models. It has the lowest expense ratio (0.04%) among the large blend mutual funds. While iShares S&P 500 Index Investor A provides the same index exposure, its investor A share class has an expense ratio of 0.35%. T. Rowe Price Equity Index 500’s expense ratio is in between these two at 0.18%.

Actively managed choices include State Farm Growth fund (STFGX) and State Street US Core Equity fund (SSAQX). The expense ratios for these two funds are among the lowest in our list of large blend mutual funds and are far below the large blend category average of 0.81%.

State Street US Core Equity has the best A+ Grades of all the large blend mutual funds in Table 2 for its three- and five-year returns. Launched in January 1980, this is one of State Street’s oldest mutual funds.

Approximately 38% of these large blend mutual funds’ total portfolios is invested in their top 10 holdings, reflecting the S&P 500’s current concentration.

Large Growth Mutual Funds

Five mutual fund choices exist in the large growth category. Their benchmarks and strategies are broader than those that track the S&P 500.

Fidelity Large Cap Growth Index fund (FSPGX) tracks the Russell 1000 index. This index represents the largest 1,000 U.S. companies by market cap.

The Russell 3000 index is even broader, containing the largest 3,000 U.S. companies. Actively managed T. Rowe Price Blue Chip Growth fund (TRBCX) uses the Russell 3000 as its benchmark, but that doesn’t mean it holds all 3,000 stocks in the index. This is a very concentrated mutual fund with only 64 securities in its portfolio. The top 10 holdings constitute 66.6% of the fund’s assets. Foreign stocks currently comprise 4.3% of its total assets. Fewer holdings allows the managers to focus on their best ideas. T. Rowe Price Blue Chip Growth’s 0.69% expense ratio is the highest among the large growth mutual funds shown, but it is well below the large growth category average of 0.96%.

VALIC Company I NASDAQ-100 Index fund (VCNIX), Vanguard Growth Index Admiral fund (VIGAX) and Victory NASDAQ-100 Index fund (THLCX) have performed the best over the one-, three- and five-year periods, earning A+ Grades of A. Vanguard Growth Index Admiral has the lowest expense ratio of the three and tracks the Dow Jones U.S. Total Stock Market index. The index is designed to represent the performance of the entire U.S. equity market, capturing nearly all publicly traded U.S. companies, regardless of market cap.

The category risk index values included in Table 2 relate the volatility of a fund to the average volatility for funds in the same investment category. Values of 1.00 suggest average risk. Values below 1.00 indicate lower risk, and those above 1.00 signal higher risk.

Large Value Mutual Funds

Clipper fund (CFIMX) is a standout among large value mutual funds, with A+ Grades of A for its one-, three- and five-year returns. The fund is actively managed and has the highest expense ratio (0.70%) among the all the mutual funds in Table 2, though it charges significantly less than the average mutual fund in the large value category (0.93%).

Thrivent Large Cap Value S fund (TLVIX) and VALIC Company I Systematic Value fund (VBCVX) are actively managed and have expense ratios that reflect the hands-on approach. Fidelity Large Cap Value Index fund (FLCOX) has the lowest expense ratio in the category at 0.04%, but it also has above-average one-year performance and average three- and five-year performance due to tracking the Russell 1000 Value index. Vanguard Value Index Admiral fund (VVIAX), which tracks the CRSP US Large Cap Value index, has above-average returns over all periods shown, a below-average expense ratio and the highest yield among all the large-cap mutual funds shown.

Three of the large value mutual funds included in Table 2 have category risk index values that are modestly above 1.00. Such risk indexes are assigned when a fund’s returns have been more volatile than those of their category peers over the past three years. VALIC Company I Systematic Value’s category risk index of 1.00 implies a level of risk equivalent to the average large value mutual fund.

In a test of rolling 20-year periods since 1926, lump-sum investing outperformed dollar-cost averaging 73% of the time.

by Gregg S. Fisher | March 2026

• Explains the mechanics of two strategies for getting a large amount of money into the market, along with their risks and behavioral appeal

• Shows historical evidence of lump-sum investing outperforming most periods

• Discusses when dollar-cost averaging may be preferred and introduces momentum-based variation

In light of the recent equity market rise, the potential for increased volatility and the several equity market crashes that have occurred over the last 30 years, a growing number of investors have become wary of putting large amounts of cash to work in the market at one time. At Quent Capital, we recently took an updated look at lump-sum investing compared to dollar-cost averaging (DCA).

What Is Dollar-Cost Averaging?

Dollar-cost averaging is a strategy by which investors gradually put money to work in the market by investing a set amount at a certain frequency (typically monthly) instead of investing it all at once—commonly referred to as lump-sum investing. The idea behind dollar-cost averaging is that a given amount of money buys more shares when prices are low and fewer shares when prices are high. Burton Malkiel discussed this principle in his seminal book “A Random Walk Down Wall Street” (W.W. Norton & Co., 1975):

“Periodic investments of equal dollar amounts in common stocks can substantially reduce (but not avoid) the risks of equity investment by ensuring that the entire portfolio of stocks will not be purchased at temporarily inflated prices. The investor who makes equal dollar investments will buy fewer shares when prices are high and more shares when prices are low. The reason why an investor is able to buy more when prices are low and less when prices are high can be explained by the following equation:

Number of Shares Purchased = Dollar Amount Invested ÷ Price per Share”

We can apply this concept to buying the whole market through an index fund or to buying a select set of securities (active management). Since the same dollar amount is being invested each month, this strategy forces investors to buy more shares at lower prices and fewer shares at higher prices.

Dollar-cost averaging is thus a type of value strategy, except it works across time rather than across stocks. Markets always fluctuate to a degree, and these up-down jumps allow the strategy to achieve an average per-share cost of the market or active portfolio that is lower than the average of the market’s levels over time.

This sounds brilliant, but in this article, I explain why it is actually less desirable than investing all of one’s assets at the beginning of the investment period.

But first, let’s settle some confusion that often arises when discussing dollar-cost averaging. I am talking about when to invest a parcel of new money that comes into the investor’s possession—that is, whether to buy the intended portfolio now or dribble it into the market over time. I am not talking about dribbling money into the market over time as you earn or save it, like one does when receiving a paycheck. Everyone does that, and they should. You can’t invest money that you don’t have yet.

The Intuitive Theory Behind Lump-Sum Investing

The most important intuitive reason why lump-sum investing is better than dollar-cost averaging is that, according to basic economic theory, the expected return on the stock market is higher than the riskless (Treasury bill or bond) rate. This is because stocks must be priced to yield a positive equity risk premium (ERP) in order for investors to choose them over riskless or low-risk stocks.

The equity risk premium varies over time, but since no one knows how it will vary in the future, it’s reasonable to assume that it will be the same in December as it is when the money is received in January. Because the equity risk premium is positive, the price of the stocks to be bought 11 months in the future is more likely to be higher than lower. Dollar-cost averaging is a bet that the market will instead fall, then rise again later. This is a possible outcome, but it has a less than 50% probability. So, you should invest your new money all at once, right now. That’s the ground-level intuition.

Here’s another way to express this: You must think that stocks are going to go up, or you wouldn’t be buying them. Why do you think stocks will go down first? If you think they’re going to go down, why buy them at all?

An advocate of dollar-cost averaging would say that they’re hedging their bets. Nobody knows the future direction of the markets, so hedging is rational. But dollar-cost averaging is a strange way to put on a hedge. If you’re not sure whether stocks will go up or down, why not hedge by constantly implementing a lower-beta strategy than the market? Conventionally, that is how investors diversify: by holding different assets at the same time so that the ups of one cancel out the downs of the other.

What Is Time Diversification, and Is It Beneficial?

Some proponents of dollar-cost averaging argue that time diversification strategies like these are beneficial because they reduce risk. On average, a portfolio that is only partly invested is less risky over time than one that is fully invested all of the time. If it is desirable to diversify between stocks and cash (or another low-risk asset like bonds) at any given point in time, what’s wrong with diversifying across time, holding more cash at the beginning of the investment period and more stocks as time passes?

What’s wrong is that, unlike the benefits of diversification across assets at a given point in time, the supposed benefits of time diversification do not exist. In a 1994 Financial Analysts Journal issue, celebrated financial analyst and investment manager Mark Kritzman wrote, “It is an indisputable mathematical fact that if you prefer a riskless asset to a risky asset given a three-month horizon, you should also prefer a riskless asset to a risky asset given a 10-year horizon,” presuming your risk aversion does not change over time.

This means that your favored allocation at the beginning of the investing year given market conditions and your own risk preferences will be the same in the second month, the third month and so forth through the end of the year. Unless there is a compelling reason, the asset mix should not change over time. A strategy that is low risk at the beginning of the year and gets riskier over time until it is high risk at the end of the year makes no sense.

Historical Comparison of the Two Strategies

To compare dollar-cost averaging and lump-sum investing over longer time horizons, we ran our own simulations using a 20-year investment period as well as one-year investment periods.

We tested the two strategies over the period from January 1, 1926, through September 30, 2025. The initial portfolio was assumed to be $1 million in cash, and the only investments available were cash and the S&P 500 index. (The S&P 90 index, the S&P 500’s predecessor, was used until March 1957.) Throughout this analysis, “the S&P” means the total return, including dividends, on the index. The strategies are explained below.

Dollar-Cost Averaging Strategy: 1/12th of the initial portfolio was invested in the S&P at the beginning of each month. This means that $83,333 was invested on January 1 of a given year and an additional $83,333 was invested on the first day of each month until December 1, when the entire $1 million was invested in equities.

Lump-Sum Strategy: The entire $1 million portfolio was invested in the S&P at the beginning of the first month and held without modification for the rest of the year. In other words, the portfolio was completely invested on Day 1.

For the purposes of this study, we assumed zero transaction costs. This assumption favors the dollar-cost averaging strategy since, by design, dollar-cost averaging involves much more trading, resulting in higher transaction costs. The objectives of this backtest were twofold:

• We identify which strategy was historically superior by comparing portfolio values at the end of the 12th month for all of the rolling one-year periods (rolled monthly). Thus, we computed the returns for each strategy for 1,186 rolling 12-month periods, the first running from January 1, 1926, to December 31, 1926, and the last running from October 1, 2024, to September 30, 2025.

• We calculate the average difference between the dollar amounts of the two strategies for rolling 20-year investment periods. In each 20-year period, we used dollar-cost averaging only in the first 11 months, so that after the end of the first year, both strategies were fully invested in the S&P for the subsequent 19 years. There was a total of 958 20-year periods, with the first one running from January 1, 1926, to December 31, 1945, and the last one running from October 1, 2005, to September 30, 2025.

To indicate which strategy performed better historically, we assigned a value of 1 to the dollar-cost averaging strategy if it won—that is, had a larger portfolio value—by the end of the 12th month and a value of 0 if it lost. We likewise assigned a value of 1 to the lump-sum strategy if it won by the end of the 12th month and a value of 0 if it lost. Note that the performance of the two portfolios was identical after one year because both were fully invested in the S&P; they only differed in the first year. It is critical to remember this last part because we’d expect the performance difference to be much less, on an annualized basis, over a 20-year period where the two portfolios were identical for 19 of the 20 years than it is over one-year holding periods where the portfolios were profoundly different for most of the year.

This methodology was repeated for every rolling 20-year holding period, and we added up the values of 1 for each strategy.

As shown in Figure 1, the lump-sum (LS) strategy outperformed the dollar-cost averaging strategy in 696 out of the 958 periods (73% of the time). Nearly three out of four times, one would have been better off investing a lump sum than using a dollar-cost averaging strategy.

On average, at the end of a 20-year period, an investor who chose the lump-sum strategy would have had $398,770 more (per $1 million initially invested) than an investor who chose the dollar-cost averaging strategy. The average ending dollar amounts over the 12-month and 20-year rolling periods for both the lump-sum strategy and the dollar-cost averaging strategy can be seen in Figure 2. Since the strategies were fully invested by the end of the first year, both strategies have the same returns from the beginning of Year 2 through the end of Year 20. All of the outperformance is a result of the difference between the strategies during the first year. (Remember that, during this first year, the lump-sum strategy was fully invested and the dollar-cost averaging strategy was gradually invested.) On average, over each 12-month rolling period (that had a corresponding 20-year period), the lump-sum strategy outperformed the dollar-cost averaging strategy by $59,732. The $398,770 average difference at the end of the 20 years corresponds to this average difference of $59,732 obtained at the end of the first year compounded at the S&P’s rate of return.

While these differences may not seem huge, they are between 6% (the one-year case) and 40% of initial capital invested. The remarkable 20-year outcome is entirely driven by the first year’s difference, compounded at the S&P’s return for the next 19 years. (In annualized terms, the lump-sum strategy had only a 0.22% per year advantage over the dollar-cost averaging strategy because the large first-year benefit was spread over the remaining 19 years.) Thus, the initial advantage of the lump-sum strategy had a profound effect on terminal wealth, almost certainly larger than one might guess from the small annualized “alpha.”

Looking at a Representative Single Year

It is instructive to home in on a single representative or typical year. Figure 3 shows a one-year example: the 12-month period from July 1, 1978, through June 30, 1979, in which the lump-sum strategy outperformed the dollar-cost averaging strategy by $61,347 (per $1 million invested).

We call this a representative 12-month period because the difference in performance between the strategies in that year was similar to the average difference in performance over all the years. In other words, the performance shown in Figure 3 is more or less what can be expected from the lump-sum strategy relative to the dollar-cost averaging strategy, on average.

Analysis of Winning and Losing Periods for Dollar-Cost Averaging

Figure 4 comprises two charts showing that, in the 20-year periods when dollar-cost averaging outperformed lump-sum investing (approximately 30% of the time), the magnitude of that outperformance was less than when lump-sum investing outperformed dollar-cost averaging. Specifically, during the 696 20-year periods in which lump-sum investing did better than dollar-cost averaging, the average cumulative outperformance was $822,017 on our initial $1 million investment. During the 262 20-year periods in which dollar-cost averaging did better than lump-sum investing, the average cumulative outperformance was $725,583.

To sum up this analysis, the lower frequency of dollar-cost averaging outperformance, coupled with the lesser amount of outperformance when dollar-cost averaging outperformed, resulted in average 20-year outperformance of lump-sum investing over dollar-cost averaging of $398,770.

Conclusion

Dollar-cost averaging has been a popular investing strategy with individual investors and is still recommended by many investing professionals. Although theoretical and empirical data demonstrate that dollar-cost averaging is inferior to lump-sum and buy-and-hold strategies, it is important to understand the underlying reasons that cause investors to choose dollar-cost averaging and investing professionals to recommend it. Risk-averse investors who may be unwilling to invest into risky assets all at once find the piecemeal approach of dollar-cost averaging strategies emotionally comforting.

Quent Capital research has shown that a momentum dollar-cost averaging approach—which involves investing more or less than the basic dollar-cost averaging amount depending on whether the market went up or down, respectively, in the previous month—results in higher returns than basic dollar-cost averaging. Momentum dollar-cost averaging is grounded in the notion of piecemeal investing that investors find appealing, but involves a slight modification that improves expected return. (See the box below for more information about this approach.)

Though momentum dollar-cost averaging is by no means an optimal solution, this small deviation from the basic strategy is a significant step in reconciling rational investing principles with irrational investor behavior.

Pessimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 1.5 percentage points to 30.4%. Bullish sentiment is below its historical average of 37.5% for the fifth consecutive week.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 4.1 percentage points to 17.6%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 87th time in 89 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 5.6 percentage points to 52.0%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the sixth consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 7.2 percentage points to –21.6%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the sixth consecutive week.

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This week’s special question asked AAII members which market-capitalization style of stocks they expect to outperform over the next six months.

Here is how they responded:

• Small-cap stocks: 19.1%

• Mid-cap stocks: 15.8%

• Large-cap stocks: 30.2%

• Not sure/no opinion: 34.9%

This week’s Sentiment Survey results:

Bullish: 30.4%, down 1.5 points
Neutral: 17.6%, down 4.1 points
Bearish: 52.0%, up 5.6 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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The Strait of Hormuz Blockade Has a Global Impact

About 20% of the world’s oil and liquefied natural gas (LNG) passes through the Strait of Hormuz, which is currently being blocked by Iran. While the U.S. is a net exporter of oil, most other countries are not. BlackRock noted that Japan, for instance, gets about 70%–90% of its oil and about 10%–15% of its liquified natural gas via the strait.

As we are all seeing at the gas pump, a disruption in one area of the global economy can have a far-reaching effect.

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The Rotation Among Asset Classes

We at AAII have observed a rotation among asset classes since the Iran war started. We are certainly not alone in making this observation. Yesterday, Ryan Detrick, CMT, of Carson Group shared this table. Notice that large-cap U.S. stocks have been falling less than other stock categories.

Source: Ryan Detrick.

Within U.S. large-cap stocks, energy and utilities stocks are outperforming, as shown in this chart posted yesterday by Charles Schwab’s Liz Ann Sonders.

Oil Stocks Have Risen Less than Oil Prices

Here is an updated version of a chart I shared in our Dividend Investing (DI) newsletter last week. United States Oil ETF (USO) tracks the daily price movements of light, sweet crude oil. The other fund in the chart, iShares U.S. Energy ETF (IYE), tracks an index of U.S. energy producers. Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) account for nearly 40% of the exchange-traded fund’s (ETF) portfolio.

The vertical line in the chart is set at February 27, right before the Iran war began. As you can see, there is a big difference in how each ETF has performed since then. This difference is due to oil’s price volatility being much higher than the ability of oil companies to adjust their production levels.

Source: AAII.com and QuoteMedia. Data as of 3/19/2026.

More Consensus at the Fed, For Now …

The headlines tell you that the Federal Open Market Committee (FOMC) voted to leave interest rates unchanged yesterday. Uncertainty about the Iran war factored into the committee’s decision.

What was not as widely reported is the tighter consensus among committee members for where interest rates will be at the end of 2026. Yesterday’s updated FOMC projections effectively call for just one 0.25% interest rate cut. Even the dovish Federal Reserve governor Stephen Miran adjusted his expectations closer to those of other FOMC peers. (Miran’s term is set to expire at the end of this month.)

As always, these forecasts are subject to change.

Source: Federal Open Market Committee.

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More on AAII.com

• Asset Class Returns: Highest Returns for International Stocks Since 2012
  Developed country stocks saw their returns bounce back in a big way in 2025.

• Fed Signals That Investors Should Watch and What They Mean
  Incorporating Federal Reserve policy shifts into an investing model rooted in 12 market anomalies.

• How the Components of A+ Grades Help You Analyze Stocks
  Read about how combining the criteria behind multiple grades provides more robust analysis than relying on a single factor in the March 2026 AAII Journal.

  
  AAII Sentiment Survey

Pessimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 1.5 percentage points to 30.4%. Bullish sentiment is below its historical average of 37.5% for the fifth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 4.1 percentage points to 17.6%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 87th time in 89 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 5.6 percentage points to 52.0%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the sixth consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 7.2 percentage points to –21.6%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the sixth consecutive week.

This week’s special question asked AAII members which market-capitalization style of stocks they expect to outperform over the next six months.

Here is how they responded:

• Small-cap stocks: 19.1%

• Mid-cap stocks: 15.8%

• Large-cap stocks: 30.2%

• Not sure/no opinion: 34.9%

This week’s Sentiment Survey results:

Bullish: 30.4%, down 1.5 points
Neutral: 17.6%, down 4.1 points
Bearish: 52.0%, up 5.6 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

Subscribe now

• Learn how to build a disciplined, repeatable investing process using structured stock screens and predefined buy/sell rules.

• Discover how AAII’s guru and factor screens identify stocks aligned with specific value, growth or momentum strategies.

• See a contrarian Dreman example showing how screening criteria guide stock selection, monitoring and disciplined selling

A successful long-term investing approach depends on having a clear and repeatable process. Investing without a plan is similar to starting a home renovation with no blueprint or budget. Enthusiasm gets you started, but discipline is what carries you to the finish line and saves you from numerous trips to the hardware store along the way.

Stock screens can help you uncover suitable candidates that deserve a place in your portfolio. Just as important in your plan is knowing what will trigger you to sell before making an investment. The same criteria used by a screen to find attractive stocks can help you make disciplined decisions about when to sell a stock.

I explain how you can incorporate stock screens into your investment discovery, buying and selling processes.

Replacing Guesswork With Structure

AAII has 55 stock screens that are designed to help individual investors apply discipline and structure to the stock selection process. They translate well-known investing philosophies or factors into rules-based screening models that investors can use to identify stocks that align with a specific strategy.

Guru stock selection strategies (Figure 1) are based on the philosophies of famous investors like Warren Buffett, Benjamin Graham, John Neff and James O’Shaughnessy. Factor screens (Figure 2) utilize attributes that have been shown to generate positive returns. These attributes, referred to as factors, include small size, low valuation, high price momentum and high yield.

AAII Stock Screens narrow a broad universe of securities into a manageable list that aligns with a specific strategy or set of criteria. Each screen highlights companies that currently meet defined characteristics. They cannot account for future market conditions, management decisions or unexpected events.

Guru and factor screens can be used to hone your considerations for purchasing stocks. You can also use them to establish sell rules that mirror the criteria you originally used to select stocks for your portfolio.

Investment factors are at the core of selecting stocks identified by AAII screeners. As shown in Figure 3, the All Screens table denotes which screens include criteria for value, growth, momentum, size, earnings estimate revisions/surprises, yield, quality, industry/sector rotation or other (a miscellaneous category that captures specialty screening strategies). Clicking on a factor’s initial in the column header makes it easy to identify the screens that utilize that particular factor (Figure 4). Click on the question mark next to the word Factors in the column heading to see what each initial stands for.

A Contrarian Approach Example

Many investors are drawn to contrarian strategies because they offer a disciplined framework for exploiting behavioral biases that can push prices away from underlying fundamentals. I use a popular contrarian screen as an example for setting buy and sell rules.

David Dreman attempts to avoid the behavioral traps of the market by following the principles of contrarian investing. Dreman finds the continuous overreaction of investors whose assessments of a firm’s earnings are wrong to be very predictable. It is upon that predictable variable that Dreman bases his investing approach of avoiding the stocks the crowd is pursuing and pursuing the ones the crowd is avoiding.

The AAII Dreman screen focuses on both value and growth criteria. Dreman recommends a low price-earnings (P/E) ratio strategy that is relatively simple and eliminates the need for complicated security analysis.

His approach includes tenets applicable to stock selection for individual investors. The first is to focus on a universe of mid- to large-cap companies, which tend to be more visible to investors and regulators, thus reducing the risk of accounting irregularities. These firms also typically have greater financial resilience and a lower likelihood of failure than smaller companies or start-ups.

The second tenet is to invest in stocks with low price-earnings ratios, specifically those ranking in the bottom 40% of all stocks by price-earnings ratio and trading below the S&P 500 index’s price-earnings ratio. Selecting from the bottom 40% of stocks ranked by price-earnings ratio creates a broad yet manageable universe of investment candidates.

Price relative to earnings is a valuation metric. As it increases, the stock is likely to become overvalued. Relative valuation metrics are helpful for setting buy and sell thresholds for value-based strategies.

Dreman also seeks stocks with a high and sustainable dividend yield. The screen considers stocks that provide a minimum dividend yield of 1.5%—high enough to be significant, yet low enough to not exclude many industries. A high dividend yield provides a measure of protection when prices drop and helps increase overall total return. Comparatively, the S&P 500’s median dividend yield is currently 1.4%.

Companies with low price-earnings ratios may have difficulty weathering unfavorable economic conditions. Addressing that, Dreman looks for companies with a strong financial position as measured by high ratios of current assets relative to current liabilities and low debt as a percentage of equity. High return on equity (ROE) and pretax profit margins help identify companies without structural flaws. The company should have delivered stronger earnings growth than the S&P 500 historically and should be expected to continue doing so over the next year. Precise estimates of future earnings are not needed, only a general sense of the direction of the firm’s earnings growth.

Buying Stocks From the Dreman List

Mechanical approaches built on Dreman’s core low price-earnings philosophy prioritize long-term ownership and strive to reduce portfolio turnover. These are used to further whittle the list of stocks in the bottom 40% ranked by price-earnings ratio.

Investors can buy and hold stocks ranking in the lowest 20% based on their price-earnings ratio. You could also choose a large company paying good dividends that is priced at a discount of 20% or more from the S&P 500.

The strategy emphasizes buying low price-earnings stocks and weeding out holdings periodically as the ratio improves or if they fail to perform as well as the S&P 500 over a given period.

Purchase the lowest 20% price-earnings ratio stocks and rerun the screen annually. Dreman notes that this turnover may appear to be high at first glance, but he found that less than half of low price-earnings ratio stocks usually move up in less than one year.

Figure 5 shows the companies that passed the AAII Dreman screen as of February 6, 2026. Companies are ranked by price-earnings ratio, which is calculated using the current stock price divided by diluted earnings per share from continuing operations for the last four quarters (trailing 12 months). The rank of stocks is shown in the % Rank-PE column. The dividend yield and estimated earnings per share growth (EPS Growth Est) are also shown. Dividend yield is calculated by dividing the indicated dividend by the current stock price.

Growth can be considered on both a long-term past and forward-looking basis. The earnings per share growth estimate shown for companies currently passing the screen is the median (midpoint) of analysts’ expected five-year growth rate per the S&P Global consensus estimates. The column labeled EPS Cont-Growth 5yr shows the compound annual increase or decrease in earnings from continuing operations over the most recent five-year period.

Passing stocks exhibiting historical and expected growth rates above the S&P 500’s median levels may be strong candidates for inclusion in the portfolio. There is one thing to note about growth rates that include consensus estimates: The further out the time horizon, the fewer reliable estimates there are to calculate growth rates.

Sell Rules for Dreman Stocks

Stocks with low price-earnings ratios or high dividend yields are only attractive if they are expected to grow and prosper in the future. The Dreman strategy calls for selling stocks when their price-earnings ratios approach that of the overall market, regardless of how favorable prospects look. The stock should then be replaced by another stock with a low price-earnings ratio. On the other hand, a stock that attains a high price-earnings ratio solely because of an earnings decline should not be sold, since the price drop is likely an overreaction to the earnings decline.

Dividend yield could be considered as an additional sell trigger. There are many ways to use dividend yield as a determinant for when to sell. A minimum yield threshold such as 1.0% can be set; or, stocks may become sell candidates if their median dividend yield falls below that of the S&P 500. Comparing the stock’s historical yield norm to its current dividend yield and then setting a lower threshold is yet another way to utilize the dividend yield.

Industry growth rates change as economic conditions, consumer demand and technological innovation evolve over time. Shifts in regulation, competitive dynamics and input costs can also accelerate or slow growth across an industry. Industry life cycles—which range from early expansion to maturity or decline—play a key role in determining how quickly companies within a sector can grow. Growth expectations also hinge on industry assumptions, and with that, analyst coverage can change. Fewer analysts covering a stock can result in less meaningful growth estimates. The historical five-year earnings growth rate and the consensus earnings long-term growth estimate can both be reexamined to see how far they deviate from the S&P 500 median and from historical values for the stock’s industry.

Table 1 compares the initial screening criteria for the Dreman screen to these possible threshold-based sell rules. This is just one example of how you might create sell rules based on a set of buy criteria.

Situations may arise that are not addressed by your original sell rules and require additional judgment. An example is when a company you own becomes the target of an acquisition. As these circumstances occur, incorporate them into your sell rules so you have clear guidelines to follow if similar situations arise in the future.

Using Stock Screens Wisely

Buy and sell rules provide you with clarity and lend direction to your investing strategy. Investors who fail to incorporate them when using stock screens may find it more difficult to make informed portfolio decisions.

All AAII members have access to all 55 AAII Stock Screens, the stocks passing those screens and the criteria used for determining each screen. You can now access the screens directly in the AAII Investor Hub.

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• Because net income can mislead, cash flow and free cash flow are better indicators of a firm’s true financial health

• Capex, working capital and reinvestment affect cash generation and business quality

• Free cash flow metrics drive long-term shareholder value

When asked to evaluate a firm’s performance, many investors look at net income and price metrics such as the price-earnings (P/E) ratio. That’s understandable since earnings numbers are widely reported and tell us how profitable a firm is. Unfortunately, a firm can’t spend “profits.”

A firm can report positive net income yet be unable to meet its obligations. This is because operating expenses such as wages, payments to suppliers, interest on debt and taxes are paid in cash, not accounting profits. Consider a simple example using a fictional company. Ball Bearings Inc. has operated profitably for many years. Its existing equipment has become obsolete, so the firm buys a new machine for $100 million with an estimated useful life of 10 years. Rather than recognizing the entire $100 million in the first year, management depreciates (that is, spreads the cost of) the asset over its 10-year life, charging an expense of $10 million per year.

Suppose that the company has revenue of $120 million and costs of $80 million, so its gross profit is $40 million. Subtracting depreciation to reflect the pro-rata cost of the machine, operating income is $30 million ($40 million – $10 million). If taxes account for $10 million, then net income is $20 million ($30 million – $10 million).

Investors focused only on the income statement will see a profitable company. However, an investor who focuses on the cash flow statement will see a different picture. To calculate the cash generated by the firm, we start with net income ($20 million). To this, we add back depreciation because it isn’t a cash expense, so cash from operations (CFO) is $30 million ($20 million + $10 million). See the September 2024 AAII Journal article “Money in, Money out: What the Cash Flow Statement Reveals” to learn more about the cash flow statement.

However, cash from operations isn’t the whole story. When the firm purchased the machine, it incurred a capital expenditure (capex) of $100 million paid in cash. The firm’s change in cash is therefore $30 million from operations less the $100 million paid for the machine, resulting in an outflow of $70 million. Even though the firm showed an accounting profit, it burned through $70 million in cash. Unless it can obtain that cash via bank financing or in the capital markets, it may be unable to meet obligations such as paying suppliers or employees. In that case, the firm is unlikely to be able to continue its operations. (Table 1).

Therefore, to truly understand a firm, investors must follow the money. Doing so can shed light on the true quality of a business, even when net income is showing a different picture.

Net Income Is Not Cash

Because U.S. firms reporting GAAP earnings use accrual accounting, they report revenue when earned and expenses when incurred, even if cash has not been received or paid.

For example, a firm can report revenue today even if the customer has purchased on credit. As I explained above, a firm can expend cash on assets today while the cost is only recognized gradually through depreciation.

The earnings picture becomes even less clear if there’s a chance that some of the customers who purchased on credit may default. Management must make allowances for expected defaults, but how much is appropriate?

Similarly, management has discretion in setting the useful life of the recently purchased machine, and in determining the “appropriate” annual depreciation expense. Net income is therefore subject to management discretion. As noted author on shareholder value Alfred Rappaport observed, “Profits are an opinion. Cash is a fact.”

What Is Free Cash Flow?

Investors therefore often focus on free cash flow (FCF)—that is, the cash that is available to reward bondholders and shareholders or to reinvest in the business.

• Net income reflects what the accountants say the company earned.

• Cash from operations shows how much cash the business generated from its core operations (after adding back noncash expenses like depreciation and adjusting for changes in working capital).

• Free cash flow shows how much is available after investing to maintain and expand the business.

Cash-focused investors begin by looking at cash from operations. Since cash from operations already reflects the readdition of depreciation and other noncash expenses, investors can use it but must still account for the firm’s capex. Maintenance capex is needed regularly just for the firm to continue in business—for example, by replacing machines that are becoming obsolete. Similarly, if the firm wishes to expand, growth capex is needed to fund the purchase of additional plant and equipment.

In general, free cash flow is equal to cash from operations minus capex. Some measures of free cash flow—such as Warren Buffett’s “owner earnings”—subtract only maintenance capex, while others use total capex. And since capex can be erratic, a five-year average is often used.

Working Capital’s Impact on Free Cash Flow

Cash and earnings can also diverge because of working capital, which is used to fund inventory and other expenses not funded by credit. Working capital is current assets less current liabilities.

When a firm is growing, more working capital is required to fund credit extended to customers (receivables), inventory and prepaid expenses. For example, if a company’s sales grow from $100 million to $150 million, it may need to carry 50% more inventory and extend 50% more credit to customers. Even though the income statement shows higher profits, the company must use cash today to fund that inventory and wait to collect from customers, reducing cash flow for this period. This is why high-growth firms can report significant earnings yet have negative free cash flow. It also explains why firms that misread the demand for their products and mismanage inventory, and firms that loosen their credit standards, may experience cash pressure well before earnings collapse.

Sources of Cash

As the September 2024 AAII Journal article explains, there are three sections on the cash flow statement.

• Cash from operations (CFO): Cash resulting from the firm’s core operations

• Cash from investing (CFI): Cash resulting from the firm’s net investments in assets

• Cash from financing (CFF): Cash resulting from net capital issuance and redemption and dividends paid

Added together, cash from operations, cash from investing and cash from financing are equal to the net change in cash. As I noted previously, investors tend to focus on cash from operations and capex when computing free cash flow. But it’s also important to look at the financing section to see whether cash shortfalls are being funded by new debt or equity issuance as well as whether dividends are supported by cash generated internally.

Growth or Business as Usual?

Free cash flow can be used to finance capex, pay dividends, repurchase shares, reduce debt, fund acquisitions and build cash reserves. While free cash flow is important, how management allocates it is critical to a firm’s success.

As mentioned previously, maintenance capex is required to simply maintain the firm as a going concern, while growth capex allows the firm to expand. If free cash flow is low, or negative, that is not necessarily a bad sign if the firm is investing in growth, as free cash flow is reduced by capex. But if the firm is exhibiting relatively low growth, then weak free cash flow suggests that the firm may have to invest significantly in “maintenance” just to maintain revenue. Clearly, that would be worrisome, which is why Buffett’s owner earnings can be illuminating. The calculation is:

Owner Earnings ≈ Cash From Operations − Maintenance Capex

Investors should therefore ask whether capex is funding discretionary growth or nondiscretionary maintenance. In practice, however, this can be difficult to determine, as firms tend not to distinguish between maintenance and growth capex. Investors must estimate it by examining trends and the financial statements of peer firms.

Return on Reinvested Cash

Generating free cash flow is only part of the story. What ultimately determines shareholder value is how productively management reinvests available capital, including free cash.

To generate economic value, capex, acquisitions and internal investments must earn returns above the firm’s cost of capital. When this is the case, future cash flows grow and intrinsic value rises; conversely, when returns are poor, value is being destroyed and free cash flow is squandered.

In other words, significant free cash flow does not by itself guarantee strong shareholder outcomes in the future. Investors should focus not only on how much cash is generated, but also on the returns earned on incremental invested capital.

The Different Types of Free Cash Flow

Opening a financial textbook will reveal that there are several variants of free cash flow. The way to think about these is to consider where the “free cash” is flowing and how it is calculated.

I have already mentioned one variant, measured as cash from operations less capex. This is generally how firms report free cash flow. A second variant is called free cash flow to the firm (FCFF), while a third variant is called free cash flow to equity (FCFE).

• Reported Free Cash Flow: Cash From Operations – Capex (Note: Because cash from operations starts from net income, which already includes interest paid, this measure is effectively post-interest cash flow.)

• Free Cash Flow to the Firm: Cash flow available to both debt and equity holders, often calculated by adding back aftertax interest expense to reported free cash flow to show cash before payments to capital providers

• Free Cash Flow to Equity: Cash flow available to equity holders after debt service and net borrowing effects

Investors typically use reported free cash flow as the operational “cash the business throws off” when judging the company’s performance.

They tend to use free cash flow to the firm when valuing the firm relative to its enterprise value (FCFF/EV), where enterprise value is the cost to acquire total control of the firm. It is calculated as the market value of both equity and debt, less the firm’s cash position. Free cash flow to the firm is usually discounted at the weighted average cost of capital, which includes both equity and debt.

Free cash flow to equity is used to value just the equity and is typically discounted at the cost of equity. For shareholders, free cash flow to equity is critical because it is the long-run source of payouts to shareholders. Over time, dividends and buybacks cannot exceed free cash flow to equity without raising new capital or drawing down cash.

Free Cash Flow Conversion

Investors can gauge where cash is going by comparing it to net income. One common metric is the free cash flow conversion ratio, calculated as free cash flow divided by net income. This ratio compares earnings to cash.

• Free Cash Flow Conversion < 100%: This suggests heavy capex investment, working-capital build or noncash components.

• Free Cash Flow Conversion ≈ 100%: Earnings translate into cash after capex. Earnings quality looks solid.

• Free Cash Flow Conversion > 100%: Cash is strong relative to earnings. (Working-capital release or depreciation is greater than maintenance capex.)

A reasonable rule of thumb is to look for a free cash flow conversion ratio above 0.8 (80%), a benchmark reflecting the fact that most mature businesses reinvest a significant share of earnings to maintain operations. However, this is a benchmark, not an absolute rule, and varies significantly by industry. Capital-light businesses like software may show conversion ratios above 1.0, while capital-intensive industries like utilities or manufacturing may consistently show ratios of 0.5 to 0.7.

Excellent companies investing heavily in growth may show poor conversion ratios during their investment phases, sometimes preceding strong turnarounds. Weak companies, on the other hand, can have impressive conversion ratios that are not sustainable because they are underinvesting, hindering future prospects.

Free Cash Flow per Share

While investors often focus on total free cash flow, ultimately what matters is free cash flow per share.

Even though a firm can report steady increases in free cash flow, existing shareholders will receive little benefit if new shares are being issued through stock-based compensation (SBC) or through equity offerings.

This is particularly important in the technology sector and other industries with significant stock-based compensation. Although stock-based compensation is added back to cash from operations as a noncash expense, it represents real economic dilution. If free cash flow is growing but the share count is rising at the same time, each shareholder’s claim on that cash may be stagnant or declining. The same is true of firms that have convertible debt or preferred shares outstanding.

For this reason, investors should examine both total free cash flow and free cash flow per share to confirm that cash generation is truly accruing to current owners.

Why Analyzing Free Cash Flow Matters

Free cash flow can explain company share price performance. If we look at Intel Corp. (INTC) in Table 2, we can see that operating cash flow declined sharply from 2020 through 2024, while capex remained very large. Even as net income was declining, the firm embarked on an aggressive program of retooling its chip fabrication business. The result was sustained negative free cash flow, starting with a sharp downturn in 2022. This illustrates how heavy reinvestment needs can swamp cash generation even for a large firm.

This pattern highlights the pressures that highly capital-intensive technology firms can face. In particular, note how this differs from a cyclical downturn. Intel’s negative free cash flow reflects the need to invest in a structural rebuilding of its manufacturing base, rather than merely being the result of temporary or cyclical weakness in demand. As their products become outdated or even obsolete, they must reinvest to remain technologically relevant, but those investments occur while operating performance is under pressure. This causes free cash flow to turn negative and remain so until the reinvestment bears fruit.

For Intel shareholders, the reduction in cash flows led to pressure on dividends, which were cut in 2023 before being eliminated. A key point for investors to remember is that traditional valuation models, based on earnings, become inappropriate when the firm is consuming cash rather than generating it. Investors are now betting on Intel’s multiyear business restructuring being successful, rather than simply purchasing a profitable business.

Even Cash Flow Can Mislead

Significant free cash flow is not always a sign of business strength. Sometimes firms can boost short-term free cash flow by cutting capex below maintenance levels, effectively running existing assets harder while deferring reinvestment.

Remember that reinvestment is always required to enable a firm to continue operating profitably on a “going concern” basis. Underinvestment that places a firm in “harvest mode” can temporarily inflate cash flow and conversion ratios, but it usually comes at the expense of future competitiveness. Over time, underinvestment can lead to declining product quality, market share losses or rising operating costs. It simply delays, and likely increases, the eventual investment required.

For this reason, unusually strong free cash flow should be examined carefully. Investors should ask whether cash generation reflects durable operating strength or simply postponed investment.

While cash flow can provide a more reliable picture of a firm’s operations, it too can be distorted. Investors should watch for:

• Underinvestment (capex cut below maintenance levels);

• Working capital adjustments (e.g., delaying payment of payables);

• Receivables sales/factoring (selling receivables to a third party, often at a discount, to accelerate cash, which boosts current-period cash from operations but may not be sustainable);

• One-time tax timing effects; and

• Significant stock-based compensation that boosts cash flow from operations while diluting shareholders.

As with most metrics, it is the direction, rather than the absolute level, that can offer the most insight. Investors should look at multiyear patterns and determine if cash flow aligns with economic reality.

Summary

Over the long run, the value of a firm’s equity is driven by the present value of future free cash flows to shareholders. This is why free cash flow is not just an accounting exercise but is central to valuation.

The income statement tells investors what a company earned under accounting rules, but that doesn’t tell the whole story about the firm’s continued ability to operate profitably. Free cash flow helps answer the difficult, but more important, question: How much cash did the business truly generate after funding reinvestment needs?

Pessimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 1.1 percentage points to 31.9%. Bullish sentiment is below its historical average of 37.5% for the fourth consecutive week.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 9.7 percentage points to 21.7%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 86th time in 88 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 10.9 percentage points to 46.4%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the fifth consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 12.0 percentage points to –14.4%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the fifth consecutive week.

This week’s special question asked AAII members what impact the military conflict with Iran is having on their short-term outlook for stocks.

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Here is how they responded:

• It is bearish for stocks: 38.0%

• It is a reason to be a little more cautious: 33.5%

• It creates a buying opportunity: 21.9%

• No impact: 4.6%

• Not sure/no opinion: 2.1%

This week’s Sentiment Survey results:

Bullish: 31.9%, down 1.1 points
Neutral: 21.7%, down 9.7 points
Bearish: 46.4%, up 10.9 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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My Portfolio will be accessible only on the AAII Investor Hub going forward. All member portfolios have already been automatically transferred over to the new My Portfolio. There is nothing you need to do if you have information saved in the legacy My Portfolio. Go to the Investor Hub to take advantage of the new features.

Those new features include:

• The ability to import holdings directly from your broker (coming soon)

• The ability to view your portfolio offline via the AAII Investor Hub app

• Customized views displaying your preferred metrics for stocks, such as sales and earnings growth (coming soon)

• Specialized metrics for subscribers to our premium newsletters and AAII Platinum

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Yes, you read the “offline” part of that second bullet point correctly. You can download the Investor Hub directly to your computer, smartphone or tablet and access your portfolio when you are offline. To download the Investor Hub, click Install in the Install App pop-up window that will appear when you log in to the Investor Hub.

Once you have downloaded the Investor Hub to your device, it will update when you open it while you have an internet connection.

Additional instructions for installing the AAII Investor Hub are available at the end of this article.

Secure Broker Integration

We know security matters to you. Broker integration will be provided via the Plaid network. Plaid is a read-only application widely used in the financial industry. Plaid only provides us with your portfolio holdings in the accounts you choose in a read-only format. We cannot alter or edit your portfolio holdings.

Other Investor Hub Enhancements

The AAII Stock Screens are also fully integrated into the AAII Investor Hub, including your favorite screens. Among the new features we’ve added are:

• The ability to sort passing stocks by the criteria that are most important to you

• A brand-new interactive chart that makes analyzing performance easier

• Access to historical lists of passing companies for each screen, with data dating back to the fall of 2024

Plus, if you find a stock you are interested in, you can add it directly to My Portfolio. This seamless integration makes it easy to jump back and forth between our idea-generating stock screens and your portfolios in the Investor Hub.

In addition to these new features, we’ve already included plenty of enhancements in the AAII Investor Hub, including access your saved AAII articles, the Ask James artificial intelligence (AI) chatbot feature and more. Most importantly, even more features are coming to the AAII Investor Hub. It is a great addition to your AAII member benefits.

Additional Ways to Install the AAII Investor Hub App

If you do not see the prompt to install the AAII Investor Hub on your device, here are other ways to install it.

On both Windows PCs and Apple Macs, install the app by clicking the monitor icon in the top-right corner of the Chrome browser or the box with the upward-pointing arrow in the top-right corner of the Safari browser. We suggest dragging the icon to the Windows taskbar or the macOS Dock at the bottom of your screen for easy access.

If you are using an iPhone or iPad, call up the Investor Hub in the Safari browser (the default web browser on iPhones) and click on the three horizontal dots at the bottom of the screen.

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Then click Share, scroll down the list options and select Add to Home Screen. (Note: If you do not see the horizontal dots at the bottom of your screen, look for a square with an upward-pointing arrow and click on it to bring up a menu similar to the one shown below.)

If you are using an Android phone (e.g., a Samsung Galaxy) or tablet, click the down arrow in the upper-right corner in the browser bar.

More on AAII.com

• Your Guide to the New AAII Investor Hub
  AAII’s new Investor Hub brings your portfolios, watchlists and research together in one place.

• Choosing the Right Stock Screen for Your Investing Strategy
  A well-designed screen can provide you with a preliminary list of stocks that hold promise.

• Dollar-Cost Averaging Versus Lump-Sum Investing: Which Builds More Wealth?
  In a test of rolling 20-year periods since 1926, lump-sum investing outperformed dollar-cost averaging 73% of the time. Get the details in the March 2026 AAII Journal.
  AAII Sentiment Survey

Pessimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 1.1 percentage points to 31.9%. Bullish sentiment is below its historical average of 37.5% for the fourth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 9.7 percentage points to 21.7%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 86th time in 88 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 10.9 percentage points to 46.4%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the fifth consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 12.0 percentage points to –14.4%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the fifth consecutive week.

This week’s special question asked AAII members what impact the military conflict with Iran is having on their short-term outlook for stocks.

Here is how they responded:

• It is bearish for stocks: 38.0%

• It is a reason to be a little more cautious: 33.5%

• It creates a buying opportunity: 21.9%

• No impact: 4.6%

• Not sure/no opinion: 2.1%

This week’s Sentiment Survey results:

Bullish: 31.9%, down 1.1 points
Neutral: 21.7%, down 9.7 points
Bearish: 46.4%, up 10.9 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

Subscribe now

This week, we cover a strategy that identifies companies with strong return on equity (ROE) and give you a list of stocks that currently pass the AAII Return on Equity screen. Return on equity may help to reveal profitable firms, but does Wall Street reward the stock prices of these firms? As of February 27, the AAII Return on Equity screen has an average annual gain of 12.6% since inception in 1998, compared to the S&P 500 index’s 7.3% return over the same period.

Measuring Profitability by What Shareholders Earned

Return on equity is a popular measure of profitability and corporate management excellence. The measure is determined by dividing the firm’s annual earnings by shareholder’s equity. This relates earnings generated by a company to the investment that shareholders have made and retained within the firm. Shareholder’s equity is equal to total assets of the firm less all its debt and liabilities. Also known as stockholder’s equity, owner’s equity or simply equity, it represents investors’ ownership interest in the company. It is also known as the book value of the company.

Warren Buffett considers it a positive sign when a company is able to earn an above-average return on equity. Buffett believes that a successful stock investment is first and foremost the result of the underlying business; its value to the owner comes primarily from its ability to generate earnings at an increasing rate each year. Buffett examines management’s use of owner’s equity, looking for management that has proven its ability to employ equity in new moneymaking ventures, or for stock buybacks when they offer a greater return. If the earnings are properly reinvested in the company, earnings should rise over time and stock price valuation will also rise to reflect the increasing value of the business.

Return on equity indicates how much the shareholders earned for their investment in the company. Annual net income of $100 million created on a base of $300 million in shareholder’s equity is very good ($100 ÷ $300 = 0.33, or 33%). However, $100 million in annual net income relative to $3 billion in shareholder’s equity would be considered relatively poor ($100 ÷ $3,000 = 0.03, or 3%). Generally, the higher the return on equity, the better. A return on equity above 15% is good, and figures above 20% are considered exceptional. However, it is important to compare return on equity with industry averages to get a true feel for the significance of a company’s ratio.

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Return on Equity Defined

Return on equity can be simply defined as net income divided by common shareholder’s equity. However, return on equity can be broken down into three components: net profit margin, asset turnover and financial leverage. Multiplying these three components together results in return on equity.

The net profit margin—net income divided by sales—reflects how efficient a firm is in operations, administration, financing and tax management per sales dollar. A rising or improving profit margin over time translates into an increase in earnings for a given level of sales.

Asset turnover—sales divided by total assets—shows how well a company utilizes its asset base to produce sales. Poorly deployed or redundant assets result in low asset turnover that adversely reflects return on equity and profitability.

Multiplying profit margin and asset turnover together results in return on assets (ROA). A firm can increase its return on assets, and thereby its return on equity, by increasing its profit margin or its operating efficiency as measured by its asset turnover. Margins are improved by lowering expenses relative to sales. Asset turnover can be improved by selling more goods with a given level of assets. This is why companies try to divest assets (operations) that do not generate a high degree of sales relative to their value, or assets with decreased sales generation. When examining profit margins or asset turnover, it is important to consider industry trends and compare them to how a company is doing within its industry.

Financial leverage completes the return on equity equation. Financial leverage—total assets divided by common shareholder’s equity—indicates the degree to which the firm has been financed through debt as opposed to equity sources. The greater the value of this leverage ratio, the greater the financial risk of the firm—but also the greater the return on equity. When equity is small relative to debt, generated earnings will result in a high return on equity, if the firm is profitable. The risk with high levels of debt is that a company will not generate enough cash flow to cover the interest payments during challenging times.

Debt magnifies the impact of earnings on returns during both good and bad years. When large differences between return on assets and return on equity exist, an investor should closely examine the liquidity and financial risk ratios.

The ideal firm would maintain a high net profit margin, utilize assets efficiently and do it all with low risk, as reflected by low financial leverage. The key in working with return on equity is examining and understanding the interplay between the determinants of the ratio.

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The Return on Equity screen identifies companies with high profitability, efficient asset use and steady growth compared with industry peers. In your opinion, is this model a reliable method for selecting promising stocks? Why or why not?

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Implementing the AAII Return on Equity Screen

The primary goal of the AAII Return on Equity screen is to identify companies with consistently high return on equity. Secondarily, the approach includes characteristics to filter out firms with high levels of debt, low margins and low asset turnover relative to industry medians.

The AAII Return on Equity approach starts by seeking out companies operating with a return on equity 1.5x their respective industry median over the last 12 months and for each of the last five fiscal years. These screens help to reveal companies whose management has consistently generated the highest profits from the firm’s equity capital. The AAII Return on Equity strategy does not simply screen for companies with return on equity levels of 20% or higher but instead looks for ratios that are high relative to industry norms to highlight firms outperforming their peers.

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As discussed above, return on equity is influenced by profitability, efficiency and leverage. Therefore, the next set of screens seeks companies outperforming their peers in these areas. First, the AAII Return on Equity approach requires that a firm’s net margin (net income divided by sales) exceeds the industry median over the last four quarters (trailing 12 months). Net profit margin looks at bottom-line profitability. Firms exceeding their peers are translating a higher percentage of sales into profits.

Next, the AAII Return on Equity screen makes sure that the asset turnover (sales divided by total assets) for a firm exceeds the industry median over the last four quarters. Asset turnover helps to measure the efficiency of a firm’s use of its asset base. Firms exceeding their peers are generating higher levels of sales dollars for a given level of assets.

The AAII Return on Equity approach also specifies that when looking at the financial leverage of firms, the ratio of total liabilities to total assets at the end of the most recent quarter is below the industry median. A high return on equity can be attained by having a very high amount of debt and, therefore, a very low shareholder’s equity. In such a case, return on equity would be high, but risky. Financial leverage increases return but also increases risk. Highly leveraged firms have more volatile earnings. Acceptable levels of debt vary from industry to industry. More stable industries such as utilities can comfortably carry more debt on their balance sheets than volatile industries such as oil and gas. By comparing levels of liabilities to industry medians, the AAII Return on Equity screen takes industry differences into account.

To help ensure some basic level of growth, the AAII Return on Equity strategy requires positive earnings and sales growth over the past 12 months. The approach also requires that the firm’s five-year historical growth rates in earnings and sales exceed their respective industry median. The approach does not specifically look for high absolute levels of growth, just signs that the firms are expanding faster than their peers.

The AAII Return on Equity screen also requires that a stock be listed on an exchange to help ensure trading liquidity. Therefore, stocks that trade over the counter (OTC) are excluded. Due to their special nature, the AAII Return on Equity screen also excludes real estate investment trusts (REITs), closed-end funds (CEFs) and American depositary receipts (ADRs).

Stocks Passing the Return on Equity Screen (Ranked by 12-Month Return on Equity)

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Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.

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Charles Rotblut leads a class in AAII’s new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Your AAII membership already gives you many benefits. Stock screens, model portfolios, educational articles, investment tools and webinars are all at your fingertips. But did you know that there is another member benefit you can take advantage of?

AAII local chapter meetings offer a smaller group setting where you can interact directly with speakers and ask questions in real time. These regular meetings feature speakers who cover a wide range of investing topics—from options and exchange-traded funds (ETFs) to estate planning, dividend strategies and macroeconomic trends. The speaker lineup varies by chapter, but the common thread is timely, practical education that is directly applicable to managing your own portfolio.

What makes these meetings different from simply reading an article on the same subject is the dynamic that only a live setting can create. When a speaker finishes their presentation, you can ask questions that are specific to your situation. You can also hear how other AAII members in the room think about the same issue. That back-and-forth often produces insights that no prepared remarks could anticipate.

Members consistently report that some of their most valuable takeaways from local chapter meetings come not just from the speaker presentations themselves, but from the questions asked by fellow attendees.

If you are already getting value from your AAII membership, attending a local chapter meeting—whether online, in person or hybrid—is the next logical step. Education does not stop at the page.

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Featured Tickers:GM

• Learn how AAII chart tools can help you analyze stock or ETF trends

• Add events such as earnings releases, dividends and splits to a stock’s chart

• Compare the percentage price change of two or more stocks or ETFs on one chart

In prehistoric times—pre-internet, anyway—many professional stock and market analysts spent hours each day putting rulers and pencils to expensive stock chart books, hoping to find tradable stock trends or price patterns. You may have heard of some of the more common ones, such as 200-day moving averages, candlestick chart patterns, pivot points and moving average convergence divergence (MACD).

Investors used to categorize themselves as either fundamental-driven or chart-driven, partly because it was too demanding to study both. As computers became ever more ubiquitous, investors and analysts began to practice what was once popularly known as “fusion analysis,” which combines both fundamental analysis and chart indicators. Now, we don’t even need to categorize ourselves as chartists, fundamentalists or fusion analysts. Tools are readily available and easy to use, especially on AAII’s Stock Evaluator page.

To access the Stock Evaluator page for a stock that interests you, first type its name or ticker symbol into the search bar located at the top of most pages on AAII.com. You can also access the Evaluator by clicking a stock’s ticker symbol in the lists at AAII Stock Screens, My Portfolio and other AAII webpages. For this example, we use General Motors Co. (GM). Once on the Stock Evaluator page, select the Charts tab to pull up a chart. The charting feature is available to all AAII members.

Among the Evaluator’s chart options is the ability to select how much time you want your chart to cover and how often the chart should plot the stock’s price (Figure 1). Chartists usually prefer to look at the long-term trend first and then work their way to the short-term trend, as they prefer to trade with the prevailing trend rather than against it. For General Motors, we start with a five-year chart, with prices plotted daily.

Examining a Stock’s Trend

At first glance, it’s obvious that General Motors’ stock price has been trending up. But we can also add indicators to our chart to show whether that trend is strengthening or weakening. Adding two moving averages—the 200-day moving average and the 50-day moving average—will answer that question. If the shorter moving average is higher than the longer one, the trend has been strengthening. If the shorter average is below the longer one, the trend might be weakening.

Figure 2 shows the indicators that can be overlaid on a stock chart. Adding one or more of these indicators is a snap. Click on the black Indicators button above the chart, and a menu will appear. The abbreviation for a simple moving average is SMA. Click Add, enter 200 for the period and choose a color for the line. Click Add Indicator and you’ll see a 200-day moving average line. Now repeat the same process to add a 50-day moving average line. When you are done, you should see a chart that looks like Figure 3. Hover over any spot on the chart to see the values for each moving average at that point, along with the open, high, low and close prices.

Most chartists would be impressed by how the 50-day moving average is accelerating upward faster than the longer 200-day moving average, but keep in mind that there’s a reason why chart indicators are called signals instead of guarantees.

Once you’ve decided to buy or sell, trend charts can help with timing or confirm that the market agrees with your buy or sell thesis.

You can add indicators below the chart, too, such as relative strength index (RSI) and MACD. If you’re evaluating whether a trend might be weakening, consider using the rate of change (ROC) indicator, which compares each price to an older price and scales it to 100. A reading of zero means the price momentum is flat. A negative number means the trend is weakening. When adding this indicator, you can enter a different period than you entered for the moving averages. Each indicator you use can have its own settings.

Adding Events and Saving Charts

Quarterly earnings reports, stock splits and dividends can lead to some dramatic stock moves. That makes it a good idea to add this activity to your charts. Click on the Events drop-down menu located right below the chart’s date range setting toward the top-left of the page. You can add any or all three of the events to your chart. They show up on the chart as circles with the abbreviations E, S and D inside. Hover over any circle to bring up details of the event. For earnings releases, it shows the actual earnings per share, consensus estimate and surprise percentage. For dividends, it shows the payment amount per share and payable date. For stock splits, it shows the split ratio.

Did you overload your chart with too many indicators? We’ve all done that! Thankfully, it’s easy to remove indicators by clicking the Indicators button, selecting the Active Indicators tab at the top-right of the menu and deleting the ones you no longer want. Alternatively, you can opt to start over fresh.

If you want to save your chart, you can print or download a PDF of it by selecting the three bars at the upper-right side of the chart.

Comparing Stocks on the Same Chart

It’s often useful to compare the price action of a stock against another stock, or even an exchange-traded fund (ETF). For example, you might want to see if one stock reacted more to a tariff announcement than another stock or the broader market, enabling you to choose the stock with the highest momentum.

After setting up a chart for one stock, select the Add Symbol button and type in the name or ticker symbol of the stock or index ETF you want to compare against the original stock. You can add more than one security to the chart.

It’s a good idea to scale the chart for percentage change instead of simply price because percentage change makes it easier to compare securities with very different prices. It’s more common for a $100 per share stock to move by $2 per share than it is for a $10 per share stock to move by $2 per share. If you are considering investing the same amount of money in one of the two stocks, then the percentage change is the most relevant measure. The Scale drop-down menu allows you to scale the chart on price, dollar change or percentage change.