AssetBuilder - Registered Investment Advisor

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 school of thought.

Scott’s focus was ease of implementation and it supported a real do-it-yourself strategy. Vanguard has always been the foundation of his strategy because of its quality, index focus, availability, and low costs. He 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.

How do you build your portfolios?

Clients select from a menu of Model Portfolios that AssetBuilder constructs using asset allocation. Asset allocation is the division of a portfolio’s investments among asset classes to balance expected risk and expected reward. These asset classes include small and large stocks, value and growth stocks, domestic and international securities, emerging market securities, real estate and government bonds.

AssetBuilder’s approach to asset allocation is influenced by the work of Nobel Prize laureates William Sharpe and Harry Markowitz, who shaped the role of financial science in investing through their development of Modern Portfolio Theory. Modern Portfolio Theory states that a portfolio diversified across asset classes offers the best opportunity for an investor to achieve the highest possible return for a given level of risk.

AssetBuilder employs a “buy and hold” approach to asset management. The practice of this style of asset management is based on the belief that market timing is not proven as successful. The focus for the investor should be how much the investor can risk losing and how long they are willing to stay invested in the market.

AssetBuilder adheres to the following principles:

• Markets are efficient and for investing purposes assets are fairly priced.
• Diversification reduces the risk of uncertainty and asset allocation in numerous asset classes determines results in the portfolio.

Because no two investors are alike, AssetBuilder offers clients a range of Model Portfolios to choose from. Each Model Portfolio is designed to offer an optimized asset allocation based on varying levels of risk.

At AssetBuilder we use Dimensional Fund Advisor (DFA) funds to take four important steps to improve your investment results.

1. Simple indexing: We eliminate manager risk. We also eliminate the manager expenses that reduce the return on your money.
   
2. Simple diversification: We expand the number of asset classes in your portfolio, with the goal of reducing risk. Scott created and started writing about Couch Potato portfolios back in 1987. The Couch Potato portfolio takes the first two steps to improve your investment results. At AssetBuilder, we take two more steps.
   
3. Smart indexing: We go a step beyond market capitalization based indexes. We take advantage of the higher returns to small cap and value priced equities, per the Fama/French research.

Until recently, it wasn’t possible to take the third step because smart index funds simply weren’t available, except to institutional investors. Today, it is possible through a growing group of “smart” index funds and ETFs. We chose Dimensional Fund Advisors funds because they are the purest practitioners with the lowest costs.

4. Smart allocation: We go a step beyond “naïve” diversification. We use a technique called “mean variance optimization” that helps us get the highest return for the least risk from any given group of asset classes.

We call the result our risk calibrated portfolios. You can select your portfolio by its target return. If you want to learn more about your investment objectives or risk please click here.

What is 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 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. Finally, to get the tilt toward value and small cap funds, there are significant gaps in the Vanguard strategy.

See the Results for yourself

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.

How do I choose a portfolio?

I am ready to open an account?

Helpful Definitions

N Periods

– number of months of history limited in this comparison by the inception of the newest fund. For example, for the US Large Blend asset class, DFUSX and VFINX, the performance is based on 151 periods (months) which represents 01/1991 to 04/2012.

Standard Deviation

– is a representation of the risk associated with a given security (stocks, bonds, etc.), or the risk of a portfolio of securities. Risk is an important factor in determining how to efficiently manage a portfolio of investments because it determines the variation in returns on the asset and/or portfolio and gives investors a mathematical basis for investment decisions. The overall concept of risk is that as it increases, the expected return on the asset will increase as a result of the risk premium earned – in other words, investors should expect a higher return on an investment when said investment carries a higher level of risk.

Geometric Mean

– is the growth of a dollar. For example, if a stock fell 25% in the first year, and rose 50% in the second year, then it would be incorrect to report its “average” increase per year over this two year period as the arithmetic mean (-25% + 50%)/2 = 12.5%; the correct average in this case is the geometric mean which yields an average increase per year of only 6.0%. The reason for this is that each of those percents have different starting points. If the stock starts at $100 and fall 25%, it is now at $75. If the stock then rises 50%, it is now $112.50.