When you select an investment advisor, there are many factors that you may consider. When we formed our investment firm years ago, we wanted to adopt a long term investment philosophy that would be successful for our clients and us. Then, we had to find investment solutions to effectively implement this strategy. Dimensional Fund Advisors (DFA) has been one of the keys to the effective implementation of our investment principles.
Our long term stock investment philosophy is based on fundamental principles. They include:
- Data that shows that “active” money managers do not consistently outperform their benchmarks over time.
- It is extremely difficult to identify what managers can outperform, in advance and with confidence.
- Broad global diversification is vital to a successful investment experience.
- Small and value companies outperform large and growth companies over the long term, both in the US and internationally.
- Accept that no one can consistently and accurately predict the future.
- Costs should be as low as possible, but not at the risk of reducing investment returns.
- Minimizing taxes should be an important part of everyday portfolio management.
After adopting these core beliefs, we needed to determine how to implement these philosophies. As discussed in our blog post dated July 25, 2013, A Philosophy You Can Stick With, we found Dimensional Fund Advisors stock mutual funds to be most effective in consistently implementing these investment principles.
Our decision to use DFA mutual funds has proven the test of time. Dimensional Fund Advisors has grown as investors have realized the benefits of this philosophy and DFA’s ability to implement it. DFA did not grow because of marketing, advertising or paying commissions. Today, DFA is the 8th largest mutual fund family in the country, managing over $330 billion. When we began using DFA in 2003, they were around the 35th largest mutual fund company.
The 2013 Nobel Prize in Economics was awarded to Eugene Fama, whose research inspired the founding of DFA. This provides us with further confidence in our investment strategy and method of implementation. Fama is a long time member of DFA’s Board of Directors and its Investment Policy Committee. See further information in our blog post dated October 14, 2013, Nobel Prize in Economics, Our Firm and You.
DFA does minimal advertising. DFA does not sell their mutual funds directly to individual investors, and with good reason. They want their fund investors to focus on the long term. This is best done with the use of an investment advisor. This proved valuable during 2008 and 2009, as DFA was probably the only mutual fund company to have positive cash flows. DFA does not compensate advisors to recommend their funds. This is another way DFA can have very low cost mutual funds. We choose to use these funds because we feel it is in our clients’ long term best interest. And if we find better investments for the long term, we will make changes.
Recently, DFA was featured in an extensive set of articles in the January 6, 2014 issue of Barron’s Magazine. Barron’s stated: “Dimensional’s funds all operate on the same principles – that it’s hard to beat the market, and impossible to do it consistently, by stock – picking. There are, however, various factors that can be exploited to provide market – beating returns. That, along with sophisticated trading strategies, a keen eye towards tax – efficiency, and lower expenses (the average DFA fund charges just .39%) has led to Dimensional’s success.”
David Booth, one of DFA’s founders and CEO, said “We are trying to beat the market without forecasting in the usual sense.” The article concludes with a quote from Booth. He says, Dimensional’s strategy requires staying the course. “Where people get killed is getting in and out of investments. They get halfway into something, lose confidence, and then try something else. It’s important to have a philosophy (emphasis added).”
We have an investment philosophy and we are sticking to it.
Do you have an investment philosophy? Or do you need a new one? If you want to discuss ours, please contact us.
Note: As independent registered investment advisors, we are not compensated by DFA or any other mutual fund family. While we primarily use Dimensional Fund Advisors mutual funds, we use other mutual funds as appropriate. We select investments based strictly on what is in the best interest of our clients. We will have reprints of the Barron’s article cited above in the near future.