At BRIO Financial Planning, our investment philosophy is guided by our conviction that markets work.
For decades investors have been trying to “beat the market” by picking the right hot stock, the right fund, the star manager, or the next big thing.
In most cases they have failed.
Curious about how markets work? This video from Dimensional Fund Advisors explains how security prices are set and how they change based on the collective knowledge of buyers and sellers. Armed with this information, investors will better understand how and why markets work. As a fee-only financial planner, I do not receive any compensation from DFA.
Why Dimensional Funds?
Dimensional Fund Advisors (DFA) was founded on the work of Professor Eugene Fama (University of Chicago). Fama won the 2013 Nobel Prize in Economics for his pioneering work in investment management. DFA is a global investment firm that has been serving investors for more than 30 years. They offer investment solutions across asset classes, including global equities, fixed income, and REIT’s. They currently manage $548 billion for investors worldwide.
A Different Approach to Investing
The conventional (Active) Manager’s thinking is that Markets are inefficient. Performance comes from identifying “mispriced” securities or accurately predicting economic and market conditions. The Index (Passive) Manager’s view is that Markets are efficient and that the best an investor can do over the long-run is to replicate the market. Thus, commercial indices attempt to represent asset class returns, requiring index funds to follow the portfolio construction and rebalancing decisions of the index provider. DFA on the other hand believes the best way to invest is to identify differences in expected returns and balance the tradeoffs among competing premiums, diversification, and costs.
Brings Research to Practice
Many of the greatest advancements in finance have come from the academic community. DFA works closely with leading financial academics to identify new ideas and research that may benefit investors. In addition, advancements in research and technology inform their investment strategies and keep them responsive to evolving markets and client’s needs.
A Clear View of Expected Returns
Decades of research and rigorous testing underpin their approach to pursue higher expected returns. DFA has identified specific dimensions that point to systematic differences in expected returns. The first is that stocks are riskier than bonds and have greater expected returns. Relative performance among stocks is largely driven by the two other dimensions: small/large and value/growth. Many economists believe small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk. The fourth dimension is Expected Profitability. Firms with higher expected profitability have higher expected returns than companies with lower expected profitability.
A Dynamic Investment Process
DFA’s goal is to add value over benchmarks (Index) and peers (Active Managers) through an integrated and robust process. Using information in market prices throughout the process, DFA, carefully structures and implements portfolios to target higher expected returns. Their integrated, flexible approach considers the interactions among premiums, market frictions, costs, and diversification.
Investment Track Record
DFA has a long history managing time-tested investment strategies for clients. By evolving with advances in financial science, DFA has delivered long-term results for investors.
Selective Process to become a DFA Advisor
DFA Funds are only available through Fee-Only registered investment advisors and only after they meet DFA’s strict selection criteria.
The DFA Investment Policy Committee
Their investment board of directors consists of some of the most notable living finance professors and nobel laureates, including:
- Eugune Fama, Nobel Laureate – University of Chicago
- Kenneth French, Dartmouth (collaborator with Eugene Fama on the Fama/French Model)
- George Constantinides, University of Chicago
- Roger Ibbotson, Yale (known for his annual book: Stocks, Bonds, Bills and Inflation)
- Myron Scholes, Nobel Laureate – Stanford (co-author, Black-Scholes options pricing model)
- Robert Merton, Nobel Laureate – MIT and Harvard