Dimensional Fund Advisors

Rick is in new York today on a due diligence trip where he is interviewing a potential new money manager for KFG clients, Dimensional Fund Advisors (DFA).

DFA is primarily an institutional money manager with $240 billion under management. They are not available to retail investors.  About 50% of their assets come from fee-only advisors who are stringently vetted by DFA. We are in the final stages of being approved by DFA to allow our clients access to their funds.

I had a chance to listen to David Booth, CEO and founder of DFA. He commented on the recent volatility saying that volatility is part of the market. The reason you have the chance to earn higher returns is because you take higher risk. The two go hand in hand.

“If you could forecast the market, you wouldn’t need a manager like us.”

People have lost faith in governments globally and investors are demanding higher returns, hence the equity markets are under pressure.

What will determine your long-term success is what you do when markets are not doing well.

DFA believes in a combination of passive selection of securities and actively managing the trading. Their performance consistently bests Vanguard’s approach of total passivity.

He says the idea of efficient markets is counter intuitive. While the incentives are huge for individuals to have a competitive edge it’s not the same with managing money. And the good news is “there is much less stress in managing money with a buy and hold strategy and better returns.” I couldn’t agree more.

Booth says, “Professional money managers don’t do any better than random selection. We have 45 years of empirical evidence of this. Indexing gets you 80% to 90% of the way there. But you don’t need to be a genius to figure out that on the day a stock goes in or out of an index, you don’t want to be buying or selling it. This is especially true with small caps that have thinner markets.”

Booth explained that as a money manager the risk of having institutional money and retail money under management are the inflows and outflows inherent in retail money. Those individuals or advisors that jump in and out of the funds penalize the other shareholders. That is why DFA vets advisors so diligently and doesn’t allow retail investors access to our funds.

He concluded that investors need to focus on what they can control,  expenses, asset class diversification, minimizing taxes, and not selling during market panics.

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