Change. Progress. Risk.
Phones used to be stationary, immovable objects. They were tethered to a desk or attached to a wall. Then phones were introduced which you could walk around your house with. This did not involve much risk, so most people quickly adopted them. They made your life easier and better.
Bag phones were introduced. These were the first “car” phones most people used. They were large and bulky. Then came flip phones, which were used only for calls. In the past 10 years, cell phones became smart phones, with the introduction of the iPhone and similar devices.
Technology gradually evolves. Progress occurs. Our habits change. We get used to the new innovations. They have made our lives better (mostly!) and enabled us to communicate, share information and always be in touch.
In terms of investing, some people have long held individual stocks and watched these stocks grow over the decades. They rely on the dividends these large US companies regularly pay. Others invested in actively managed mutual funds, which have investment managers and researchers to hopefully outperform others, or at least to try to beat an appropriate benchmark or index.
The investment industry has changed over the last few decades. Academic research regarding stocks and investment management has spurred on these changes.
One of the implications from extensive research is that professional money managers cannot consistently outguess and beat the stock market. This is supported by years of industry performance data. (See further data below**) This is one of the core investment principles which we believe.
Our firm adopted this philosophy, based on evidence and much research in 2000-2003, that using globally diversified asset class mutual funds, similar but different than index funds, was better than holding individual stocks or actively managed stock mutual funds.
If you have always held individual stocks, this may seem counter-intuitive. Like transitioning to new technology or other innovations, it may at first seem risky or uncomfortable. Over time, we feel that our investment approach should provide you with greater expected returns and less risk through better diversification.
Another core investment belief is derived from academic research done in the 1980 and 1990s, which showed that stocks have higher expected returns than bonds, that small companies have higher expected returns than large companies and “value” companies have higher expected returns than “growth” companies. Subsequent research showed that these concepts apply also to international stocks. This research, done by Eugena Fama, led to him being awarded the Nobel Prize in Economic Sciences in 2013. He is a co-founding member of the DFA Board of Directors and he serves on DFA’s Investment Policy Committee. DFA is the primary mutual fund firm we use to implement our stock investment philosophy.
If you own mostly large US “legacy” stocks, which I refer to as some of the large US companies of the past 10-40+ years, this research and our real world interactions over the past 15 years shows that you are missing out on significant long-term growth opportunities in your portfolio. You would be missing higher expected returns by not having allocations to small, value and international asset classes. You are also missing investments in other companies, by not diversifying your legacy holdings.
When I considered starting this firm around 2000, I was not aware of this research and this approach to investing. We adopted concepts that were different than how most people then invested. When we first began working with DFA in 2003, they were large, maybe the 38th largest mutual fund company in the US. Today, DFA manages $460 billion in the US, and more globally, and DFA is the 8th largest mutual fund company in the country.
We were curious back then. The more questions we asked, the more we read, the more logical and rational this approach appeared. Now we are quite confident. We still ask questions. We still challenge conventional wisdom. That is part of our job.
Just as technology and the world changes, the financial world is continuously changing. We keep learning, researching and monitoring, all with the goal of providing you and your family with a better investment experience.
Have you and your investments evolved and changed for the better over time? Are you using the optimal method?
Are you using a “bag phone” or a “smart phone”?
**From Dimensional Fund Advisors website, only 15% of US equity and fixed income funds that were around in 2000 beat an industry benchmark, 15 years later. Over the same time period, 82% of US equity and fixed income Dimensional funds outperformed their benchmarks.
Source: Some of the above information is from DFA’s book, 35 Quotations on a Better Way to Invest.