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The Essence of Investing
Investing
Art
Science
What does art tell us about
investing?
Michelangelo - “The Libyan Sibyl (1511)
What Does Art Teach Us?
 Peal away the layers until you discover the
essence of investing.
 Keep revisiting the essence to gain a deep
understanding.
 Build out from your understanding of the
essence.
What is the Essence of Investing?
Getting paid to make your excess money
(capital) available for the production and
sale of goods and services.
How do you get paid?
Stocks:
Appreciation
Dividends
Bonds:
Interest
Appreciation
In Essence
Paid to take on risk
What Does Science Teach Us?
How to build out from the essence
Two Routes to Build Investment Portfolios
Wall Street
Academic
Wall Street and the Alaska Gold Rush
Alaska Gold Rush by the Numbers
100,000 attempted to reach the Klondike region of
the Yukon
30,000 made it
4000 struck gold
600 found significant amounts of gold
30 found enough gold to significantly exceed
expenses.
Active Investing by the Numbers
Ten Year Period Ending 12/31/2012
17,785 funds examined
9070 survived the ten years
71 outperformed their index before fees
2 outperformed after fees
Missing Opportunity
• Strong performance among a
few stocks accounts for much
of the market’s return each
year.
Compound Average Annual Returns: 1926-2012
All US Stocks
Excluding the Top 10%
of Performers
Each Year
Excluding the Top 25%
of Performers
Each Year
9.6%
• There is no evidence that
managers can identify these
stocks in advance—and
attempting to pick them may
result in missed opportunity.
6.3%
-0.6%
• Investors should diversify
broadly and stay fully
invested to capture expected
returns.
• Results based on the CRSP 1-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago.
The Randomness of Returns
DV1030.10
Annual Return (%)
Highest Return
Lowest Return
US Large Cap
US Large Cap Value
US Small Cap
US Small Cap Value
US Real Estate
Intl Large Cap Value
Intl Small Cap
Intl Small Cap Value
Emerging Markets
One-Year US Fixed
Five-Year US Government Fixed
Five-Year Global Fixed
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
28.6
23.1
15.6
10.2
9.7
8.4
7.8
5.9
-2.6
-6.4
-17.0
-25.3
66.4
33.0
30.2
21.5
21.3
21.0
7.4
4.0
3.6
1.9
-1.5
-2.6
31.0
22.8
9.0
8.3
7.3
7.0
4.0
-2.0
-3.0
-9.1
-12.3
-30.6
14.0
12.3
8.4
7.3
6.4
2.5
-2.4
-5.6
-6.5
-11.9
-15.4
-16.7
7.6
5.1
3.8
3.6
3.4
-2.9
-6.0
-11.4
-13.8
-15.5
-20.5
-22.1
69.2
66.8
60.2
56.3
47.3
46.0
36.2
30.0
28.7
2.0
1.9
1.5
35.1
33.2
32.1
30.6
26.0
22.3
18.3
16.5
10.9
2.7
1.3
0.8
34.5
24.1
22.6
15.1
13.8
7.0
4.9
4.7
4.6
3.1
2.4
1.3
36.0
33.0
32.6
27.5
26.3
23.5
22.2
18.4
15.8
4.3
4.1
3.8
39.8
8.2
8.0
6.3
6.3
6.2
5.9
5.5
-0.2
-1.6
-9.8
-17.6
8.8
6.6
4.7
-28.9
-33.8
-36.8
-37.0
-39.2
-42.5
-45.1
-47.1
-53.2
79.0
48.6
47.8
44.8
28.5
27.2
26.5
20.6
19.7
2.3
0.8
0.2
28.1
26.9
24.5
20.7
19.2
19.2
15.5
15.1
13.3
3.7
2.0
0.8
9.4
3.4
2.3
2.1
0.6
0.4
-4.2
-5.5
-15.1
-15.6
-17.1
-18.2
21.2
18.6
18.2
18.1
17.5
17.1
16.8
16.4
16.0
2.1
0.9
0.2
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
28.6
15.6
-2.6
-6.4
-17.0
23.1
10.2
9.7
-25.3
5.9
7.8
8.4
21.0
7.4
21.3
-1.5
-2.6
33.0
30.2
21.5
66.4
4.0
1.9
3.6
-9.1
7.0
-3.0
22.8
31.0
4.0
-12.3
-2.0
-30.6
7.3
9.0
8.3
-11.9
-5.6
2.5
14.0
12.3
-15.4
-16.7
-6.5
-2.4
7.3
8.4
6.4
-22.1
-15.5
-20.5
-11.4
3.6
-13.8
-2.9
3.8
-6.0
3.4
7.6
5.1
28.7
30.0
47.3
46.0
36.2
69.2
60.2
66.8
56.3
1.5
2.0
1.9
10.9
16.5
18.3
22.3
33.2
30.6
32.1
35.1
26.0
0.8
1.3
2.7
4.9
7.0
4.6
4.7
13.8
15.1
22.6
24.1
34.5
2.4
1.3
3.1
15.8
22.2
18.4
23.5
36.0
33.0
26.3
27.5
32.6
4.3
3.8
4.1
5.5
-0.2
-1.6
-9.8
-17.6
6.3
8.0
6.2
39.8
5.9
8.2
6.3
-37.0
-36.8
-33.8
-28.9
-39.2
-45.1
-47.1
-42.5
-53.2
4.7
8.8
6.6
26.5
19.7
27.2
20.6
28.5
48.6
44.8
47.8
79.0
0.8
0.2
2.3
15.1
15.5
26.9
24.5
28.1
13.3
20.7
19.2
19.2
0.8
3.7
2.0
2.1
0.4
-4.2
-5.5
9.4
-17.1
-15.6
-15.1
-18.2
0.6
3.4
2.3
16.0
17.5
16.4
18.1
17.1
21.2
16.8
18.2
18.6
0.2
0.9
2.1
In US dollars. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the
Russell 2000 Value Index. Russell data copyright © Russell Investment Group 1997-2013, all rights reserved. US Real Estate is the Dow Jones US Select REIT Index, provided by Dow Jones Indexes. International Value data
provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Small
Cap Value data compiled by Dimensional from Bloomberg and StyleResearch securities data. Emerging Markets is the MSCI Emerging Markets Index (gross dividends), copyright MSCI 2013, all rights reserved; see MSCI disclosure
page for additional information. One-Year US Fixed is the BofA Merrill Lynch One-Year US Treasury Note Index, used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Five-Year
US Government Fixed is the Barclays Capital Treasury Bond Index 1-5 Years, formerly Lehman Brothers, provided by Barclays Bank PLC. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years (hedged),
copyright 2013 by Citigroup. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future
results.
23
The Randomness of Returns: Sectors
DV1032.1
Annual Return (%)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
61.93
82.58
54.05
3.63
-6.31
50.32
38.05
40.83
39.41
32.88
-16.09
61.85
30.53
18.46
32.39
49.92
25.07
45.67
1.41
-6.63
41.04
23.25
14.75
21.76
27.51
-23.35
53.60
24.87
13.39
29.05
38.70
23.95
38.42
1.31
-9.09
37.62
19.24
8.11
19.74
17.18
-28.11
50.17
24.16
11.90
24.56
31.22
23.46
26.76
0.86
-13.09
34.83
17.94
6.03
17.57
16.56
-38.17
35.63
23.38
5.05
19.32
17.79
17.65
7.24
-7.11
-21.08
32.09
15.39
5.96
15.44
12.58
-38.39
33.97
23.16
4.06
16.46
13.86
12.79
0.29
-12.77
-23.84
26.07
14.39
5.17
15.12
11.95
-39.41
24.05
14.46
0.64
15.28
10.28
1.81
-14.16
-14.86
-23.78
24.71
12.53
3.69
14.98
8.05
-41.22
20.97
13.39
-0.38
13.30
8.54
-2.89
-25.78
-16.67
-23.58
19.84
10.10
3.01
11.90
0.20
-41.99
15.62
11.81
-0.71
10.08
-7.05
-6.66
-35.38
-17.44
-37.31
18.87
3.51
-1.40
10.87
-8.69
-48.14
14.55
7.31
-14.12
4.32
-15.90
-14.64
-40.14
-28.40
-38.33
17.43
0.79
-6.04
6.65
-17.88
-51.35
11.76
5.11
-16.51
2.19
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Morningstar SEC/Basic Materials
-7.05
23.95
-14.16
0.86
-9.09
37.62
17.94
5.96
14.98
27.51
-48.14
53.60
24.87
-14.12
16.46
Morningstar SEC/Consumer Cyclical
49.92
23.46
-40.14
-17.44
-37.31
19.84
14.39
-6.04
39.41
0.20
-38.17
35.63
23.16
0.64
32.39
Morningstar SEC/Consumer Dfnsve
31.22
17.65
-25.78
3.63
-23.78
41.04
15.39
-1.40
11.90
-8.69
-41.22
50.17
30.53
4.06
24.56
Morningstar SEC/Energy
17.79
-2.89
7.24
1.41
-6.31
17.43
10.10
3.01
15.12
12.58
-16.09
15.62
14.46
13.39
10.08
-15.90
25.07
45.67
-14.86
-6.63
26.07
38.05
40.83
19.74
32.88
-38.39
33.97
23.38
5.05
4.32
Morningstar SEC/Healthcare
10.28
1.81
26.76
-7.11
-13.09
32.09
12.53
6.03
17.57
-17.88
-51.35
14.55
11.81
-16.51
29.05
Morningstar SEC/Industrials
38.70
-6.66
38.42
-12.77
-21.08
18.87
3.51
8.11
6.65
8.05
-23.35
20.97
5.11
11.90
19.32
Morningstar SEC/Technology
8.54
12.79
0.29
1.31
-23.58
34.83
19.24
5.17
15.44
11.95
-39.41
24.05
24.16
-0.71
15.28
61.93
82.58
-35.38
-28.40
-38.33
50.32
0.79
3.69
10.87
16.56
-41.99
61.85
13.39
-0.38
13.30
13.86
-14.64
54.05
-16.67
-23.84
24.71
23.25
14.75
21.76
17.18
-28.11
11.76
7.31
18.46
2.19
Highest Return
Lowest Return
Morningstar SEC/Financial Svc
Morningstar SEC/Communication Svc
Morningstar SEC/Utilities
Mutual fund universe statistical data and non-Dimensional money managers' fund data provided by Morningstar, Inc. Morningstar’s Sector Index family consists of 11 sector indices that track the US equity market using a consumption-based analysis of economic sectors in a comprehensive, non-overlapping
structure. Index constituents are drawn from the available pool of US-domiciled stocks that trade on one of the three major US exchanges. Real Estate Sector Index is not included in the above illustration. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is not a guarantee of future results.
•
Peter Lynch
“All the time and effort that people
devote to picking the right
fund, the hot hand, the great
manager, have in most cases led
to no advantage.”
Peter Lynch, Beating the Street (New York: Simon &
Schuster, 1993), 60.
ME11
20.4
ME1130.2
Warren E. Buffett
Chairman and CEO, Berkshire Hathaway, Inc.
“Most investors, both institutional
and individual, will find that the
best way to own common stocks
is through an index fund that
charges minimal fees.”
Berkshire Hathaway Inc., 1996 Annual Report, chairman’s letter, in www.berkshirehathaway.com.
Academic Research
Efficient Markets Hypothesis
• Eugene F. Fama, University of Chicago
The Hypothesis States:
• Current prices incorporate all available information
and expectations.
• Current prices are the best approximation of
intrinsic value.
• Price changes are due to unforeseen events.
• “Mispricings” do occur but not in predictable
patterns that can lead to consistent
outperformance.
Eugene F. Fama, “Efficient Capital Markets: A Review of
Theory and Empirical Work,” Journal of Finance 25, no. 2
(May 1970): 383-417.
Eugene F. Fama, “Foundations of Finance,” Journal of
Finance 32, no. 3 (June 1977): 961-64.
Capital Asset Pricing Model
RR1210.2
William Sharpe: Nobel Prize in Economics, 1990
Total Equity Risk
Unsystematic
Company
Risk
• Specific to firm or industry (lawsuit, fraud, etc.)
• Diversifiable
Unsystematic
• No compensation
Industry
Risk
Systematic
Market
Risk
Systematic
• Marketwide, affects all firms (war, recession, inflation, etc.)
• Non-diversifiable
• Investor compensation
• Measured by beta
Beta measures volatility relative to the total market. A beta higher than the market’s beta of 1 implies more volatility, and a beta lower than the market’s implies less volatility.
29
The Risk Dimensions Delivered
July 1926–December 2012
US Value vs. US Growth
US Small vs. US Large
OVERLAPPING PERIODS
In 25-Year Periods
Value beat growth 100% of the time.
Small beat large 97% of the time.
In 20-Year Periods
Value beat growth 100% of the time.
Small beat large 88% of the time.
In 15-Year Periods
Value beat growth 99%
95% of the time.
Small beat large 82% of the time.
In 10-Year Periods
Value beat growth 96%
91% of the time.
Small beat large 75% of the time.
In 5-Year Periods
Value beat growth 86%
80% of the time.
Small beat large 60% of the time.
Periods based on rolling annualized returns. 739 total 25-year periods. 799 total 20-year periods. 859 total 15-year periods. 919 total 10-year periods. 979 total 5-year periods.
Performance based on Fama/French Research Factors. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Mutual funds distributed by DFA Securities LLC.
RR1271.5
The Risk Dimensions Delivered
January 1975–December 2012
January 1970–December 2012
International Value vs. International Growth
International Small vs. International Large
OVERLAPPING PERIODS
In 25-Year Periods
Value beat growth 100% of the time.
Small beat large 100% of the time.
In 20-Year Periods
Value beat growth 100% of the time.
Small beat large 97% of the time.
In 15-Year Periods
Value beat growth 100% of the time.
Small beat large 83% of the time.
In 10-Year Periods
Value beat growth 100% of the time.
Small beat large 80% of the time.
In 5-Year Periods
96% of the time.
Value beat growth 98%
Small beat large 79% of the time.
Based on rolling annualized returns. Rolling multi-year periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences.
International Value vs. International Growth data: 157 overlapping 25-year periods. 217 overlapping 20-year periods. 277 overlapping 15-year periods. 337 overlapping 10-year periods. 397 overlapping 5-year periods. International Small vs. International Large data: 217 overlapping 25-year periods. 277
overlapping 20-year periods. 337 overlapping 15-year periods. 397 overlapping 10-year periods. 457 overlapping 5-year periods. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg,
StyleResearch, London Business School, and Nomura Securities data. International Large is MSCI World ex USA Index gross of foreign withholding taxes on dividends; copyright MSCI 2013, all rights reserved.
RR1271.5
Structure Determines Performance
RR1260.4
Structured Exposure
to Factors
• The vast majority of the variation in
returns is due to risk factor exposure.
• Market
• Size
• Value/Growth
• After fees, traditional management
typically reduces returns.
Unexplained Variation
THE
THEMODEL
MODELTELLS
TELLSTHE
THEDIFFERENCE
DIFFERENCEBETWEEN
BETWEENINVESTING
INVESTINGAND
ANDSPECULATING
SPECULATING
average
expected
return
[minus T-bills]
=
average
excess
return
+
sensitivity
to market
[market return
minus T-bills]
+
sensitivity
to size
+
[small stocks
minus big
stocks]
Priced Risk
• Positive expected return
• Systematic
• Economic
• Long-term
• Investing
sensitivity
to BtM
[value stocks
minus
growth]
+
random
error
e(t)
Unpriced Risk
• Noise
• Random
• Short-term
• Speculating
32
Precision in Portfolios
Traditional Consulting Style Box
RR1250.2
Three-Factor Model
Small
Large
Mid
Growth
Value
Small
Value
Blend
Growth
Large
• Traditionally, “products” have been
classified into rigid and sometimes
arbitrary categories.
• Using the three-factor model, the total
portfolio is measured by factors that
determine risk and expected return.
• Style boxes force crude strategic
allocation.
• Freedom from brittle definitions allows
precisely tuned portfolios.
33
Risk and Return Are Related
RR1274.3
Small
Dimensions of Stock Returns around the World
• Equity Market
(complete value-weighted universe of
stocks)
Stocks tend to have higher expected returns
than fixed income over time.
• Company Size
(measured by market capitalization)
Small company stocks tend to have higher
expected returns than large company stocks
over time.
• Company Price
(measured by ratio of company book value
to market equity)
Lower-priced “value” stocks tend to have
higher expected returns than higher-priced
“growth” stocks over time.
Increased Risk
Exposure and
Expected Return
Value
Growth
Decreased Risk
Exposure and Expected
Return
Total
Stock
Market
Large
Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (June 1992): 427-65.
Eugene F. Fama and Kenneth R. French are consultants for Dimensional Fund Advisors. This page contains the opinions of Eugene F. Fama and Kenneth R. French but not necessarily of Dimensional Fund Advisors or DFA Securities LLC, and does not represent a recommendation of any particular security,
strategy, or investment product. The opinions expressed are subject to change without notice. This material is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. Dimensional Fund Advisors (“Dimensional”) is an investment advisor
registered with the Securities and Exchange Commission. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or
endorsement of any particular security, products or services described. ©2012 by Dimensional Fund Advisors. All rights reserved.
What to Expect
When markets go up – better
performance
When markets go down – poorer
performance
Bull and Bear Markets
LT1370.15
S&P 500 Index (USD)
Monthly Returns: January 1926–June 30, 2013
116 mos.
491%
Average Duration
Bull Market
Bear Market
Average Return
Bull Market
Bear Market
30 Months
11 Months
Months = Duration of Bull/Bear Market
% = Total Return for the Bull/Bear Market
111%
-26%
92 mos.
355%
61 mos.
282%
44 mos.
2 mos.
193%
92%
6 mos.
49 mos.
210%
100%
3 mos. 23 mos.
26%
133%
4 mos.
9 mos.
12%
61%
48 mos.
105%
43 mos.
90%
5 mos.
22%
61 mos.
108%
9 mos. 33 mos.
30 mos. 55%
86%
26 mos. 76%
15 mos.
52%
35%
30 mos.
71%
24 mos.
63%
14 mos.
65%
10 mos.
34%
Jun 2013
48%
5 mos.
12%
6 mos.
4 mos.
-30% 13 mos. -16%
2 mos. -50%
31 mos.
34 mos. -19%
-30%
-83% 6 mos.
-21%
4 mos.
-10%
1925
1930
1935
1940
7 mos.
-10%
5 mos.
-15%
6 mos.
-22%
1945
1950
1955
3 mos.14 mos. 20 mos.
6 mos. 8 mos.
-11% -14% -17%
19 mos.
-16%
-22%
-29% 21 mos.
-43%
1960
1965
1970
1975
1980
1985
5 mos.
3 mos. -15%
-30%
1990
2 mos.
-15%
1995
25 mos.
-45%
2000
Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P
data are provided by Standard & Poor’s Index Services Group. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must
achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear
market are designated as a bull market.
5 mos.
-16%
2 mos.
16 mos. -13%
-51%
2005
2010
Bull and Bear Markets
LT1370.15
MSCI EAFE Index, Net Dividends (USD)
Monthly Returns: January 1970–June 30, 2013
Average Duration
Bull Market
Bear Market
37 mos.
323%
24 Months
11 Months
Average Return
Bull Market
Bear Market
87%
-23%
55 mos.
206%
Months = Duration of Bull/Bear Market
% = Total Return for the Bull/Bear Market
34 mos.
57mos.
39 mos.
103%
93%
67%
7 mos.
41%
93%
18 mos.
47%
36%
4 mos.
5 mos.
-15%
-13% -13%
18 mos.
9 mos.
2 mos.
-11 % 17 mos.
-20%
53%
5 mos.
8 mos.
26%
19%
5 mos.
15 mos.
26 mos.
13 mos.
4 mos.
2 mos.
-17%
-15%
18%
20 mos.
9 mos.
-15%
4 mos. 2 mos.
-11% -15%
-31%
Jun 2013
39 mos.
-42%
Feb 2009
16 mos.
-48%
-57%
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must
achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a
bear market are designated as a bull market.
2010
-18%
Should You Change Your Allocation?
The Market’s Response to Crisis
LT1385.5
Performance of a Normal Balanced Strategy: 60% Stocks, 40% Bonds
Cumulative Total Return
After 1 year
After 3 years
After 5 years
84%
59%
50%
50%
48%
42%
35%
21% 21%
20%
13%
8%
12%
1%
-2%
October 1987:
Stock Market Crash
August 1989:
US Savings and
Loan Crisis
-5%
September 1998:
Asian Contagion
Russian Crisis
Long-Term Capital
Management Collapse
March 2000:
Dot-Com Crash
-4%
September 2001:
Terrorist Attack
September 2008:
Bankruptcy of
Lehman Brothers
Balanced Strategy: 7.5% each S&P 500 Index, CRSP 6-10 Index, US Small Value Index, US Large Value Index; 15% each International Value Index, International Small Index; 40% BofA Merrill Lynch One-Year US Treasury Note Index.
The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. US Small
Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French. International Small Cap Index compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries in the bottom 10% of market capitalization, excluding
the bottom 1%; market-cap weighted; each country capped at 50%; rebalanced semiannually. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be
construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.
39
Performance of the S&P 500 Index
LT1330.9
Daily: January 1, 1970-December 31, 2012
$58,769
Growth of $1,000
$52,702
$38,212
$22,191
$13,999
$9,195
Total Period
Annualized
Compound Return
9.94%
Missed 1 Best Missed 5 Best Single Missed 15 Best Single Missed 25 Best Single
Day
Days
Days
Days
9.66%
8.84%
7.47%
6.33%
One-Month
US T-Bills
5.30%
Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2012 provided by Bloomberg.
The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from
sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results.
Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.
Date of first use: June 1, 2006.
40
What Does Science Teach Us?
Stock returns are random and totally unpredictable in
the short-term.
Long-term returns are more predictable.
Small and value stocks outperform large and growth
stocks.
Changing allocation because of changing market
conditions will reduce performance because key days
will be missed.
Fees Matter
A Word About Fees
Fees Matter
• Over long time periods,
high management fees
and related expenses
can be a significant drag
on wealth creation.
•
For illustrative purposes only.
1% Fee
$4,983,951
$5,000,000
Dollars
• Passive investments
generally maintain lower
fees than the average
actively managed
investment by
minimizing trading costs
and eliminating the costs
of researching stocks.
Assumed 6.5% Annualized Return over 30 Years
$4,000,000
2% Fee
$3,745,318
$3,000,000
3% Fee
$2,806,794
$2,000,000
$1,000,000
1 Year
3 Years
5 Years
Time
10 Years
20 Years
30 Years
Fees
Active Mutual Funds
• Management Fees = 1.41%*
• 12(b)1 Fees = 1.0%
• $50,000 investment
• First Year Fee = $1,205
• On-going Fee = $1,205
* Investment Company Institute
ASA Portfolio
• Fund Management Fees = 0.46%
• 12(b)1 Fees = 0.0%
• ASA Fees = 1.0%
• Schwab Trading Fees = $50
• $50,000 investment
• First Year Fee = $780
• On-going Fee = $730
Trading Costs
Questions
The Essence of Investing