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Can
You Do Better?
"Indexes
will beat three-quarters of active managers. If you look at a global
portfolio, if you actively manage each of 10 asset classes, chances
are you'll lose. To win in one asset class, you can be lucky and
beat the index. But if you're an investor, you need to beat the
benchmark in at least seven or eight of the asset classes if you're
investing in 10 to 15 asset classes. The chances of doing that are
close to zero."
--William
Bernstein
Stage
Three: Asset Class Investing
...divides
the investment universe into the asset classes that
actually determine investment outcomes:
large stocks, small stocks, growth stocks, and value stocks.
Financial
economists at the University of Chicago and elsewhere (notably Eugene
Fama and Ken French) have factor-analyzed the historical returns
from equity markets around the world. Their research shows that
investors get a better return for the risks they take by diversifying
beyond the S&P 500 Index to overweight value and small cap stocks,
both domestically and globally. Why should this be the case? Robert
Arnott weighs in with an opinion in the Financial
Analysts Journal. Jeremy Siegel offers his "noisy market
hypothesis" to explain it here.
Enter
Dimensional Funds
At
present, the only way to precisely access some of these asset classes
is through Dimensional
Fund Advisors (DFA) -- the firm started by the professors who
did the research in the first place in order to capture the returns
they uncovered. These Dimensional Funds are only available to large
institutional investors, or through selected investment advisors
like Conservative Wealth Management.
DFA's
normal balanced strategy (in green, below) would have surpassed
the benchmark S&P 500 Stock Index/Lehman Brothers Government
Bond Index (in red) by about 3 percentage points per year over the
past 28 years:

To
put it another way, a portfolio of DFA diversified global equities
would have captured the returns of the total U.S. stock market over
the past twenty years -- but done so while maintaining a 40% bond
allocation.
Concentrated
Positions
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