Why Dimensional Fund Advisors?

For Scott, the story begins in the summer of 1987 with some columns about the idea of an “all weather portfolio” – a portfolio that would be less vulnerable to declines. The All Weather Portfolio morphed into the Couch Potato portfolio and that, in turn, grew with additional flavors like Margarita, Six Ways from Sunday and finally the 10 Speed. The basic drivers were (1) low cost index funds, (2) “naïve” asset allocation, and (3) smart indexing ala Fama/French.

Scott’s focus was ease of implementation and it supported a real do-it-yourself (DIY) strategy. Vanguard has always been the foundation of his strategy because of its quality, index focus, availability, and low costs. We will continue to support Vanguard as the optimal fund company for the DIY investor.

When Scott and Kennon formulated the business model for AssetBuilder, we wanted to carry Scott’s consumer advocacy role forward. Our value premise is simple. We will do things that many individual investors fail to do. While lots of people "get it" when it comes to index investing, they drop the ball when it comes to execution. They let their money sit in cash. They let stray ideas and magazine articles influence their investment choices. Or they simply fail to re-balance when it is time to do it.

So their returns are less than they might be. They got the idea, but there are dozens of ways they could miss the boat for putting it to work.

We put the idea to work. We make it happen.

We take responsibility for all the details. We do this for 25 to 50 basis points a year. Add the cost of the underlying funds, and our typical account will have a total cost burden of about 75-85 basis points a year.

If you are a dedicated independent investor, you can do much of this yourself, and you can probably bring it in at an annual cost of about 30 basis points depending on where and how you build the portfolio. We think AssetBuilder will be worth the difference. Equally important, we know it will cost far less than the alternatives.

In addition to meticulous execution, we also believe we will add value by mean variance optimization – rocket science -- of portfolios rather than easier constructions such as the Couch Potato portfolios and similar ideas such as William Bernstein’s “Cowards Portfolio”, the Coffeehouse Portfolio, etc. The rocket science requires more work and a lot more than division by a small number. With it, however, we can generally deliver a measured return for a defined measure of risk. Our results are a fly-by-numbers operation versus a “wink-wink, we’ll do ya a good job”.

Part of our rocket science is based on a discipline called Modern Portfolio Theory. Modern Portfolio Theory suggests that your portfolio should be diversified with REITs, international, emerging market, and United States equities. For us, the emphasis is also on the Fama/French factors that would focus on small cap and value. The basic idea is to get the highest possible return with the lowest possible risk, measuring the risk by price fluctuations.

Our focus on Fama/French and Modern Portfolio Theory lead us to Dimensional Fund Advisors (DFA - www.dfaus.com). DFA investment strategies are grounded in robust academic research. Vanguard is a first generation of index funds. DFA is a second generation of index funds, what the industry calls quantitatively active and Scott calls smart index funds. In addition, DFA funds are institutional which means they have a higher minimum investment requirement (DFA $2 million) than the funds afforded the typical DIY investor. Finally, to get the tilt toward value and small cap funds, there are significant gaps in the Vanguard strategy.

The following performance results represent the equity asset classes of interest for the AssetBuilder portfolios. While we could provide a great deal of commentary on the funds, the numbers speak for themselves given our desired value premise. We are still huge fans of Vanguard and will continue to be for an investment strategy available to all of Scott’s many valued readers.