In six months we have conducted more than 200 portfolio assessments – the systematic basis for making inferences about one’s investment strategy. Using the measurement of risk as the common factor, we benchmark the appropriate AssetBuilder portfolio against your portfolio.

     Why the focus on risk? We feel our added value is in packaging investment risk. Our goal is to construct portfolios in such an efficient way, that we provide an optimal return for a measured risk. The alternative is market timing and we feel this is a futile exercise.

     Our second focus is on cost. The more costs we can take out of the process, the higher the return. As a fee-only advisor, there are only three costs associated with doing business with us. One cost is the management fee we charge. The second cost is the trading fee Charles Schwab charges. The third cost is the gross operating expense of Dimensional Funds.

     Why the focus on cost?  Fees and expenses are an important consideration because any costs lower your returns. Even small differences in fees can translate into large differences over time. For example, if you invest $10,000 in a fund that produced a 10% annual return for 20 years before expenses; with an operating expense of 1.5% you would have $49,725. However, if the fund had expenses of only 0.5%, then you would end up with $60,858.(http://assetbuilder.com/investing/assetbuilder_fees.aspx)

Our third focus is on diversification. Many investors hold many funds (or individual securities) but few have real diversification in asset classes. In fact, many are surprised by their lack of diversification.

Why the focus on diversification? In a word, “Dot-com bomb” – the well experienced horror story of investors too heavily weighted in one asset class (growth stocks). If you invested $1.00 on March 23, 2000 in the Russell 1000 growth index – measures the performance of the high price-to-book companies in the market’s 1,000 largest firms – on December 31st, 2006 that $1.00 would be 0.64 cents. However, if you invest $1.00 on March 23, 2000 in the Russell 2000 value index – measures the performance of the low price-to-book companies in the market’s 2,000 smallest firms – on December 31st, 2006 that $1.00 would be $2.73.

The Assessment

The following portfolio is the recommendation by a well-known brokerage firm.

Ticker Description Front End Load Deferred Load 12b-1 Fee Gross Exp Ratio Allocation Value
ANCFX Amer Funds Fundamen A 5.75% 0.00% 0.24% 0.61% 17.50% 17,500.00 Large Blend
AGTHX Amer Funds Grth Fund A 5.75% 0.00% 0.25% 0.65% 15.00% 15,000.00 Large Growth
AWSHX Amer Funds Washington A 5.75% 0.00% 0.24% 0.60% 30.00% 30,000.00 Large Value
CAIBX Amer Funds CpIncBldr A 5.75% 0.00% 0.23% 0.58% 17.50% 17,500.00 World Allocation
CWGIX Amer Funds CapWrld G/I A 5.75% 0.00% 0.22% 0.73% 20.00% 20,000.00 World Stock
Portfolio Operating Expense
0.64% 100.00% 100,000.00  

 

Observations:

  1. The front end load – sales commission – does scale down and will be waived for invested assets over $1 million. Used to compensate the Broker.
  2. The Broker said, “Won’t charge you any fees for buying and selling these funds”. The Broker uses 12b-1 fees to cover trade costs. Used to compensate broker/dealer part of the firm.
  3. The excess 12b-1 fee will be used to further compensate the Broker.
  4. Little to no targeted investment in other asset classes; US small, international small & emerging markets.
  5. The estimated portfolio gross operating expense is below the average and therefore is a plus for this portfolio.
  6. Needs additional fixed income.

The comparative AssetBuilder Building Block Portfolio 11.

Ticker Description Front End Load Deferred Load 12b-1 Fee Gross Exp Ratio Allocation Value  
DFIHX DFA 1 Yr Fixed Income 0.00% 0.00% 0.00% 0.18% 6.00% 6,000.00 Ultrashort Bond
DFGFX DFA 2 Yr Global Fixed Income 0.00% 0.00% 0.00% 0.19% 20.00% 20,000.00 World Bond
DFLCX DFA US Large Co 0.00% 0.00% 0.00% 0.19% 9.00% 9,000.00 Large Blend
DFLVX DFA US Lg Cap Value 0.00% 0.00% 0.00% 0.28% 7.00% 7,000.00 Large Value
DFSVX DFA US Sm Cap Value 0.00% 0.00% 0.00% 0.53% 6.00% 6,000.00 Small Value
DFSCX DFA US Micro Cap 0.00% 0.00% 0.00% 0.53% 5.00% 5,000.00 Small Blend
DFREX DFA Real Estate 0.00% 0.00% 0.00% 0.33% 15.00% 15,000.00 Specialty - Real Estate
DFIVX DFA Intl Lg Cap Value 0.00% 0.00% 0.00% 0.44% 8.00% 8,000.00 Foreign Large Value
DISVX DFA Intl Sm Cap Value 0.00% 0.00% 0.00% 0.70% 8.00% 8,000.00 Foreign Sm/Mid Value
DFEVX DFA Emerging Markets Value 0.00% 0.00% 0.00% 0.63% 8.00% 8,000.00 Diversified EM
DEMSX DFA Emerging Markets Small Cap 0.00% 0.00% 0.00% 0.81% 8.00% 8,000.00 Diversified EM
Portfolio Operating Expense
0.40% 100.00% 100,000.00  


Projecting performance of this Broker recommended portfolio back in time to 1/1/1999 provides the following historical results.

1/1999 - 9/2007 N Periods Geometric Mean (%) Standard Deviation (%)
American Funds Fundamental Invs A 105 9.60 14.60
American Funds Grth Fund of Amer A 105 10.01 18.15
American Funds Washington Mutual A 105 6.73 13.06
American Funds Capital Inc Bldr A 105 10.27 8.20
American Funds Capital World G/I A 105 13.85 13.67
Broker Portfolio 105 10.15 11.86

Definitions:

  1. Geometric mean – represents the real growth of your dollar. For example, if a stock fell 50 percent in the first year, and rose 50 percent 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 (-50% + 50%)/2 = 0%. According to this measure, you would still have your dollar. The correct calculation is the geometric mean which yields an average loss per year of 13.4 percent. Correctly reflecting the true value of your dollar at 75 cents.
  2. Standard deviation – is a measure used to determine how much something fluctuates. The S&P 500 Index has a standard deviation of 19.6 percent. This means that it will provide its long-term average return, about 10 percent, in any year plus or minus 19.6 percent. It will do this two-thirds of the time. So it will return somewhere between 30.6 percent and minus 9.6 percent (10% +/- 19.6%) in most years. The return will be greater, or smaller, the remaining one third of the time. The greater the standard deviation of an asset, the greater our risk.
  3. N Periods – number of months we can go back in time to review historical returns and standard deviation. From 1/1999 to 9/2007 is 105 months.

The comparative AssetBuilder Building Block Portfolio 11.

1/1999 to 9/2007 N Periods Geometric Mean (%) Standard Deviation (%)
DFA One-Year Fixed-Income 105 3.92 0.86
DFA Two-Year Global Fixed-Income 105 4.01 1.17
DFA Intermediate Government Fixed-Income 105 5.58 5.68
DFA Five-Year Government 105 4.96 3.44
DFA Five-Year Global Fixed-Income 105 4.78 3.08
DFA U.S. Large Company 105 4.01 14.53
DFA U.S. Large Cap Value 105 9.48 16.95
DFA U.S. Small Cap Value 105 15.45 20.85
DFA U.S. Micro Cap 105 14.09 24.86
DFA Real Estate Securities 105 16.72 16.82
DFA Intl Value 105 13.70 16.24
DFA Intl Small Cap Value 105 19.06 15.95
DFA Emerging Markets Value 105 25.76 27.76
DFA Emerging Markets Small Cap 105 23.89 25.17
AB BB 11 105 11.77 9.58

One key design goal of an optimal portfolio is to have a long-term historical standard deviation less than the long-term annualized return. The Broker Portfolio has a standard deviation of 11.86 percent. The Geometric Mean is 10.16 percent. The following table shows the fluctuations in returns based on the standard deviation.

One Year Annualized Return
  S&P 500 Broker Portfolio AB BB 11
1999 21.04 16.21 19.61 
2000 (9.11) 8.24 (1.10)
2001 (11.88) (2.94) 2.92
2002 (22.10) (12.19) (3.04)
2003 28.70 30.01 37.13
2004 10.87 14.15 19.95
2005 4.91 9.05 11.35
2006 15.80 18.77 22.21
2007 12.36 17.76 12.07

The reason risk is such an important design goal is to support the portfolio in withdrawal mode and its long term survivability.

The final component is the expected return. Since we are looking back in time, these figures represent past performance. The graph assumptions include dividend reinvest, annual rebalance, include mutual fund fees, but don’t include trading costs and management fees. The following graph compares the growth of a dollar invested in the S&P 500, Broker Portfolio, and AssetBuilder Building Blocks 11.

One of the most common questions we get; “The returns on my portfolio have not been as good as what you are showing me. Why?” The answer – management fees! Scott’s latest article, How Much Do You Pay For Financial Services? is just one of many devoted to this important topic.
http://assetbuilder.com/blogs/scott_burns/archive/2007/10/19/how-much-do-you-pay-for-financial-services.aspx

Our Value Proposition

The foundation of AssetBuilder started by putting into practice the basic investment principles Scott has been evangelizing since 1988 – low cost, index vs. managed funds, and diversification. We felt we could put a business around these concepts and use the internet to get our message out.

Click Here to let us review your portfolio!


The graphs above are representative of a compilation of DFA funds to achieve a probabilistic return for a measured level of risk.