Yes, You Can Beat the S&P 500 Index

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	Philip DeMuth, Ph.D. Conservative Wealth Management LLC Registered Investment Advisor E-mail: Phil DeMuth

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