DFA News II

Our favorite fund groups keeps getting great press. The latest publication to sing the praises of Dimensional Funds (DFA) is Money magazine. In the January/February 2014 issue, they explain why they have taken a different approach to passive (or non-actively managed) investing. Instead of blindly following indexes, DFA has taken the results of scientific research to overweight certain segments of well-diversified, market-based portfolios based on what the firm calls “dimensions” of risk. Small company stocks and value stocks have beaten the overall stock market because they are, quite simply, riskier.

Dimensional’s CEO, David Booth, does not discourage investing is total market index products. He told the Money reporter, “If you want to hold a market portfolio, that’s fine.” He just believes that the research shows that you can do better and still keep costs low.

The numbers seem to back up his assertions, according to the 5-year figures (we would show 10 years, but the Vanguard fund has not existed that long) from Morningstar (as of 1/6/14).

Vanguard’s Total World Stock Index (VTWSX) fund has returned an average of 13.79% over the past 5 years.

DFA’s Global Equity I (DGEIX) has made investors 16.71% per year over the same 5 year period.

That’s almost 3% per year more with a less that 1% increase in volatility (as measured by standard deviation - VTWSX: 18.23%, DGEIX: 19.16%).

The Vanguard fund charges 0.30% per year and owns just under 3,000 stocks.

The DFA fund charges 0.33% and owns approximately 12,000 stocks.

Even after deducting a 1% annual fee (Vestory charges less) for the needed investment advisor (required to invest in DFA funds - more on that later) you would have still made about 2% more per year using DFA’s passively managed funds than by using Vanguard’s index product.

While that may not sound like much, take a look at the difference in the two funds after only 5 years. If you invested $100,000 in VTWSX 5 years ago, you would now be looking at almost $191,000. That same $100,000 in DGEIX would have grown to more than $207,000. That’s an extra $16,000+ dollars you could have enjoyed (and you would have had a personal money manager).

Yes, DFA has limited access to their funds. You must have an advisor directing your investments. This requirement serves multiple purposes. It helps you discover the asset mix (stock/bond ratio) that suits your risk profile. This reduces the chance that you will panic in market declines. Having a personal advisor keeps market timers out of the funds (which would lead to reduced returns and higher expenses) and also means that you are more likely to maintain the proper portfolio for you in both bad and good markets.