Dimensional Fund Advisors is as popular as hemp in a commune of hippies. According to Investment News, a 2014 survey said DFA’s investors were more loyal than investors with any other firm.

One reason is that the mutual fund company has posted strong performances. Bloomberg reports that nearly 90 percent of DFA funds with a 15-year track record beat their benchmarks.  AssetBuilder regularly updates a series of DFA fund returns.  They compare them to Vanguard’s funds.  Their results often humble those of the indexing giant.

Contrary to what many people think, investment success (at least most of it) doesn’t come from picking the right funds. Investment behavior is far more important. Take Vanguard’s S&P 500 index.  According to the SPIVA scorecard, it beat more than 86 percent of large cap actively managed funds in 2014.  During the past decade, 82 percent of its active counterparts swam in the index’s wake.

So the index was a smart investment. But most of its investors were somewhat schizophrenic. During the 10 years ending March 31, 2015, the index averaged a compounding annual return of 7.89 percent.  According to Morningstar, its investors averaged just 5.82 percent.

That’s some expensive sputtering. Someone investing $10,000 in the S&P 500 would have turned it into $21,370…if they had left the money alone.  But the fund’s average investor turned it into just $17,606.  The reason is simple.  When the fund rose in value, people added more money.  When it fell, people sold or ceased to buy.

DFA investors appear to be different.   DFA’s U.S. Large Cap Value Fund (DFLVX) compounded an 8.06 percent average return over the past 10 years.  Its investors averaged 7.34 percent. Their steady behavior allowed them to net more of what their funds’ returned.

When stocks crashed in 2008/2009, most mutual fund investors lost their heads. Take a look at the chart below.  You’ll see that investors sold stock market funds as the equity markets fell.   In other words, investors sold when they should have been buying.  But when the market bottomed after March 2009 they were reluctant to buy. Net redemptions continued through the early years of the recovery.  Those who sold as stocks were falling missed the opportunity to recover their losses.

Of course this doesn’t make sense.  Human emotions prevent most people from buying and holding.  Fear and greed make us speculate.  It’s the reason most investors underperform the results of the funds they own.

Mutual Fund Industry’s Inflows And Outflows versus Those of Dimensional Fund Advisors

Mutual Fund Industry’s Inflows And Outflows versus Those of Dimensional Fund Advisors

DFA investors did something different.  Whether the markets were falling or rising, they continued to add steadily to DFA’s funds.

What influenced them?  Credit DFA’s financial advisors, who are Registered Investment Advisors. You can’t buy a DFA fund without one. And to sell DFA products, North American advisors must have attended a two-day educational conference (at their own cost) in Austin, Texas or Santa Monica, California.  Advisors from outside North America, like Singapore based Marc Ikels, attended one of DFA’s European subsidiaries so he could qualify to sell the funds.  He’s the only advisor at his firm, Proinvest, who can sell them to retail investors in Singapore.

“DFA educates us so we can educate our clients,” says Montreal-based financial advisor, Sonny Wadera. Every quarter, Wadera reminds his clients at Kelson Financial that nobody can consistently predict the stock market’s direction.  And nobody can forecast each upcoming year’s winning asset class or fund.  “We maintain diversified portfolios for our clients.  And we rebalance them.  Many investors are afraid to do that.”

“Our disciplined rebalancing,” says Wadera, “allows our clients to capture much more of the market’s return.”

According to Morningstar’s data, not all financial advisors have such influence. Take the American Funds family of actively managed products.  As with DFA, their investors must use a financial advisor to buy their funds, in this case a securities broker.  And like DFA, their fund returns are outstanding.
But DFA’s investors do a heck of a lot better.  I compared fund returns versus investors’ returns in 4 equity categories. They included U.S. Large Cap, Emerging Markets, Broad International Equity and Small Cap Equity (combining international with domestic).  I looked at 10-year comparisons.

I was less interested in how the funds performed.  Instead, I wanted to see how investors did.  You could call the results a fool’s barometer. Fortunately for DFA’s investors, they look pretty smart in all four categories. On average, they lagged their funds by just 0.67 percent per year.  In contrast, those with American Funds underperformed their funds by an eye watering 1.71 percent per year.  Such advisors, it appears, had less power over their clients’ emotions.  Or they speculated themselves.

You might have the emotional strength to rebalance a portfolio of index funds on your own.  In that case, you might not need an advisor—through DFA or otherwise.  Having said that, Oscar Wilde’s words are worth considering.  "I think that God, in creating man, somewhat overestimated his ability."

Investor's Behavior

American Funds Versus DFA

10 Year Fund Return 10 Year Investor Return Investors’ Underperformance/Over-performance
American Funds AMCAP A (AMCPX) +8.77% +7.44%
American Funds Growth Fund of America (AGTHX) +8.61% +6.81%
American Funds American Mutual A (AMRMX) +7.83% +6.89%
American Funds Fundamental Investors A (ANCFX) +8.85% +7.36%
American Funds Washington Mutual A (AWSHX) +7.49% +5.60%
DFA U.S. Large Cap Value DFLVX +8.06% +7.34%
DFA U.S. Large Cap Value II.  DFCVX +8.17% +5.65%
DFA U.S. Large Cap Value III. DFUVX +8.20% +7.89%
U.S. Large Cap Category Average
American Funds Category Average +8.31% +6.82% -1.49%
DFA Category Average +8.14% +6.96% -1.18%

10 Year Fund Return 10 Year Investor Return Investors’ Underperformance/Over-performance

American Funds New World A (NEWFX)

+8.70% +5.93%

DFA Emerging Markets DFEMX

+8.62% +7.91%
Emerging Market Category Average
American Funds +8.70% +5.93% -2.77%
DFA +8.62% +7.91% -0.71%

5 Year Fund Returns 5 Year Investor Returns* Investors’ Underperformance/Over-performance
American Funds International Growth & Income Fund (IGAAX) +6.65% +5.65%
DFA International Value DIVTX +5.14% +7.67%
DFA Global Equity I DGEIX +7.5% +7.5%
DFA International Value DFIVX +4.98% +2.98%
Broad International Category Average
American Funds Category Average +6.65% +5.65% -1.0%
DFA Category Average +5.87% +6.05% +0.18%

10 Year Fund Returns 10 Year Investor Returns Investors’ Underperformance/Over-performance
American Funds Small Cap World A SMCWX +8.98% +7.41%
DFA U.S. Small Cap DFSTX +9.82% +10.05%
DFA U.S. Small Cap Value DFSVX +8.50% +6.76%
DFA International Small Cap Value DISVX +6.91% +5.53%
Small Cap Category Average
American Funds Category Average +8.98% +7.41% -1.57%
DFA Funds Category Average +8.41% +7.44% -0.97%
Overall Investors’ Underperformance/Over-performance (based on 4 equity categories)
American Funds +8.16% +6.45% -1.71%
DFA +7.76% +7.09% -0.67%

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.