Hello everyone! My name is Greg Phelps and I want to just take a quick second to thank you for joining me on this webinar today which I’ll turn into a podcast. After the webinar is over I knock that down into just the audio file. You can find that podcast on iTunes as well . . . just look for RetireWire.

I see some new names and some friendly familiar names as well joining us today. For those of you who don’t know me my name is Greg Phelps.

I’m the President of Redrock Wealth Management here in beautiful sunny—and absolutely hot—Las Vegas, Nevada. Additionally, my blog is also RetireWire.com where I do these webinars and podcasts and so forth.

So just want to take a second to say thank you very much for joining us today!

And we will go ahead and dig right in because we’ve got an awful lot of information to cover and I’m going to kind of give you this caveat—this forewarning—because this is some really dry stuff unless you’re really into the nuances of investing in stocks and bonds and Sharpe ratios and Treynor indexes and all kinds of fun things like that.

Investing nuts and bolts are boring

This is kind of some really boring stuff. Now that being said we’re going to focus on the United States markets. We’re going to talk about the dimensional fund advisors strategy of tilting.

I’ll explain what tilting is, why we tilt in the portfolio, and why it hasn’t worked lately. I’m also going to give you some surprising facts—some performance numbers—towards the end where you might find some of these things interesting as far as the headwinds that we’ve had with the small cap investing and the value investing in the economy lately, in the markets lately.

So let’s go ahead and dig right in. First of all, when we’re investing we’re going to focus on the US markets today. We will touch very briefly on emerging or international or ex-US markets, but when we look at the entire US market, we kind of look at it like these grey balls that you see here on the screen, and they’re all just a bunch of stocks.

The entire US stock market
The entire US stock market

And so these thousands of different stocks . . . they make up all the stocks that are traded on the US exchanges. And if we were to go out and buy, for example, a total US stock market index we would just kind of equally weight them out by the same dollar amounts in each one. So it doesn’t give as many or much in the way of variance.

It’s just kind of that old index type of philosophy, that passive index type of strategy. So what we actually do here—and what we believe in—is to kind of explore some of those areas of the marketplace that have what we would call “an expected higher rate of return over long periods of time.”

I cannot emphasize that enough! It’s definitely over long periods of time and you’ll see why here in a second.

So on the left which you’re looking at is the typical total stock market index and all those balls kind of have some color now. Some of those balls have a higher expected rate of return. We’ll talk about why and how that works here in a second.

Tilting investment towards dimensions of higher expected returns

Some of the other balls—they don’t! They have a lower expected rate of return.

So what does this mean? What do we want to do as a passive mutual fund investor?

It means we want to overweight those securities—those stocks, those equities—that have a higher expected rate of return. Then we will underweight—or put fewer dollars—into those that have a lower expected rate of return. Makes perfect sense, right?

I mean, we’re not going to throw the baby out with the bathwater and just put everything into these few securities that have a higher expected rate of return. We’re going to kind of diversify a little bit heavier into them, and a good way to kind of think of this is if you think about an ice cube tray.

So you’ve got this ice cube tray and you’re holding it flat and everything’s equal and all the dollars are being applied equally to each of these different stocks—each of these different cubes. Now if we were to kind of tilt that tray to one corner you would see some of those cubes in the upper end—they would start to spill their water over into the other cubes.

The ones down at the bottom would be full! And so it’s kind of the same thought process. We’re just going to tilt that ice cube tray and we’re going to allocate more of the investment dollars into those securities—small cap and value—with a higher expected rate of return.

So let’s talk real quick about those securities . . . those expectations of higher rates of return. I don’t have a slide on this so ignore what you see there for a second, but it’s really simple.

First one is the small versus large company. So small companies on the US markets we would consider maybe 300 million dollars or less.

These large companies we would consider, for example, five billion dollars in market cap or more! And so everything else in the middle is going to be your medium-sized companies.

So what we found just through the statistics and the data going back decades and decades is that these smaller companies, they have a higher rate of return than the larger companies.

I’m not going to bore you with an Ibbotson chart right now just because I’m sure you’ve all seen plenty of them over time. But if you were to look at those Ibbotson charts right now, what you would see is effectively the small company is going up and up and up and the larger companies being a little bit less . . . a little bit more of a lagging index.

Why is that your small companies outperform large companies over time? And again long periods of time . . . it’s a risk-reward story!

These smaller companies, they’re riskier! Investors who are going to allocate their dollars into these companies expect a higher rate of return. It’s not as if you’re buying Walmart or Amazon or Apple or IBM. You’re buying these little companies that could easily go out of business.

So it’s a higher expected rate of return. So it’s pretty simple. Everybody’s seen those Ibbotson charts before where small caps outperform large caps over the history of the stock market—not in every market cycle though—so keep that in mind.

Now the one that gets a little bit trickier as the one that you’re looking at right now, which is value versus growth.

So what I did just to kind of illustrate this concept, is I went and I looked at the Vanguard large cap value fund and the Vanguard large cap growth fund and I said, let me go find a couple of different industries.

Vanguard Value Fund and Vanguard Growth Fund holdings to compare value versus growth investing

So I’ve got Microsoft and Apple—similar industries. I’ve got Walmart and Amazon—similar industries, you know retail/consumer products. And then I’ve got JP Morgan & Visa—similar Industries—financials.

On the left, in the Vanguard value holdings, you can kind of see how do we judge what is a value company relative to a growth company?

And on the left, you see those three companies Microsoft, Walmart, JP Morgan. If we look at their financials, if we look at the fundamentals of that company, we’re going to see a lower PE ratio (price divided by the earnings per share).

So that means effectively you as the investor, you’re paying less premium per share that you’re buying versus the growth counterparts which you’re paying more because now over to the right side you can see Apple, Amazon, Visa. Their PE ratio on average is about 42, which is about twice the PE ratio of the value side.

So you’re paying about two times as much for the same dollar of earnings on the growth side. Doesn’t sound like a bargain to me . . . the value stocks are typically more of a bargain!

So then you can also look at dividend yield. Value companies are typically going to have a higher dividend payout and you can see a 2.2 percent dividend versus the .68 dividend on the growth side.

And then finally if we were to take these companies and just liquidate them, what is the book value per share? How much money would we get back as an investor in these companies if we just wiped them off the planet? And you can see the price of the book value as well.

You’re paying less per share of book value on the value company side versus the growth side.

Now, why is that? It’s just the way that these companies shake out people, you know, tend to flock towards the Apples and so forth . . . the high flyers that make all the news and make all the headlines! Maybe the Starbucks versus the Wendy’s—which is kind of an old stodgy story, just kind of a grind it out company.

But again, it goes to this whole story of risk and expectations of higher returns. If I go to a KMart versus a Walmart, KMart is not nearly run as well, it’s not nearly as stable as a Walmart—so I expect a higher rate of investment return if I’m going to make this riskier investment.

Same thing with Wendy’s versus Starbucks or Microsoft versus Apple or JPMorgan versus Visa.

So I have a higher expectation of a rate of return that’s above the growth companies because—number one—it’s out of favor . . . it’s riskier!

You can see by the financials that it’s been kind of—I guess you could say beaten down relative to its high flying growth counterpart in the growth mutual fund. So that’s just a little bit about value versus growth investing.

Those of you that have come in and met with us, you know that we talk about this quite a bit.

So what are these premiums? What can we actually—and I don’t want to say expect because expect is a horrible horrible concept, there are no expectations other than I believe the economy will be larger in 5 to 10 years than it is today—but what have these premiums delivered historically?

What have these value and small cap premiums delivered for us to tilt that ice cube tray? For us to take that ice cube tray and kind of tilt it down? To put more of our assets into these small companies that have a higher expected rate of return . . . more of our assets into these value companies that have a higher expected rate of return?

What have those things delivered historically for the tilting to make sense?

Small cap and value tilting

It has to be consistent across the different marketplaces. US, international, emerging. This is one of those few times I’ll talk about non-us equity markets, but that’s because it has to be consistent.

It also has to be easy to execute—meaning that it doesn’t have these excessive fees to try to implement a certain strategy. It also has to be pervasive over multiple time periods.

And again, we’re not talking about 1, 3, or 5 years. We’re talking about longer time periods. And so as you can see on the left side, let’s begin here.

Small, value, and profitable companies premium performance

If we’re looking at small companies versus large companies in the US market going back to 1928, small companies have outperformed large companies by about two and a quarter percent! And again, it’s consistent across market place.

Small cap investing and value investing have proven to deliver good premiums over long periods of time

It’s about 5% of outperformance on the international, and it’s almost two percent of outperformance on the emerging side.

And so these are the types of things that we look for. It works in emerging it works in the US, it works in international, and it is a premium that’s delivered. So that’s the small cap versus large cap story over a long period of time.

Then we look at the value versus growth story. We look at those JP Morgan’s versus the Visas of the world. And in the US market. it’s about a three and a half percent premium that you get by being a value investor versus a growth investor. And that number goes up for international and it’s very similar for emerging markets as well.

So these are the types of premiums that you would kind of expect historically, or that we’ve seen historically, by being a small cap and a value investor when tilting that ice cube tray. But it doesn’t always hold true!

So we’re going to touch on that in a second. Finally, the bottom row is profitability, which is a just another dimension that Dimensional Fund Advisors puts into a lot of their portfolios—and please keep in mind—we are not affiliated or tied to Dimensional Fund Advisors or DFA funds whatsoever.

They happen to do a really good job at a very very low cost to our clients. So that’s why we tend to lean towards them, but we’ve also removed their funds from our portfolios before as well.

So anyway moving on to the profitability story, which is another aspect that Dimensional does building into their funds. Let’s just say you’re driving down Main Street USA, and there’s a lemonade stand on each side of the street and little Jane over to the right, she’s sold $100 with of lemonade today and her cost of goods sold was 50 bucks.

So she doubled our money, and little Johnny on the left, he sold $100 also but his cost was $75. He didn’t make as much profit so we’re gonna invest in Jane because she’s got the higher profitability.

So it’s a very simple concept, but when you take this across the entire marketplace, you can find those companies that have that expectation that profitability—it’s a little bit higher than average for the industries.

So how often does this happen? We just talked about going back to the entire length of data that we have for US, which is the 20’s and 70’s for international and a little bit more recent for emerging markets. But let’s take a look at the US market circling back to their—going back to the 20s again—out of ten year periods.

Small cap investing premium performance

Now we’re talking about ten-year rolling periods. It’s out of those ten year rolling periods the small companies have outperformed large companies about 73 percent of the time. So it’s a pretty good track record there.

Small cap over large cap investing premium performance

Now when you dial that back and you shorten that time frame to a five-year number drops to 63 percent or a one-year number, it drops into the 50s.

So again, we’re not talking about year by year or three or even five years by five years. We’re talking about the lifetime of your investment. The lifetime of your retirement, even our clients who are retired or just retired or about to retire—they’re still investing for well into their 80’s or their 90’s typically if we’re doing their plan. And so we’re talking about decades of investment experience, not just one, three, five years.

Value investing performance

Now let’s talk about the value side of things. How has value investing performed relative to growth going back to that same time period in the 20’s. And we’re looking at a 10-year rolling period outperformance of about 83 percent of the time. So the overwhelming majority of tenure rolling periods.

Value companies have outperformed growth companies over long periods of time

You’re going to have value companies—the JP Morgan’s versus the Visas—we’re gonna have the JP Morgan’s are going to outperform the Visas of the world and the Microsoft’s will outperform the Apples. It may seem very counterintuitive, but part of that reason that seems counterintuitive is because you’re not thinking about you’re paying much less per share.

If you’re paying less per share you have a much smaller hurdle to go for those returns. So we’ve seen, you know, over these rolling five-year periods for value outperforming growth—it’s about three-quarters of the time. It drops to about 60% for the one year periods.

Well, we happen to be in one of these 1, 3, 5 year type of periods right now.

So let’s talk about that. What has the experience been for the value versus growth or the small versus large story recently?

Recent performance of small cap and value investing

So what you’re looking at here is basically it’s breaking down the returns. So you’ve got your large cap companies on average going back over the last 12 months at about .93 per month positive.

Recent performance of small cap investing and value investing

You’ve got your small caps a little worse than a break-even, they have a very very slight loss. So right here, we’re seeing over the last year big companies have just dominated small companies.

Okay, it does happen. We didn’t say that the premiums were there every period, we said that they are their most periods . . . over long periods.

Now if we look at large growth companies, we’ve got over the last year about a 1.2 percent return and value companies that about half of that about 0.68. Again, it has not been in favor over the last 12 months and the same thing for small. You’ve got a small return positive about a quarter of a point on the growth side and losing .3 or 30 basis points—a basis point is just one-hundredth of one percent—losing point three on the value side.

So clearly the last year has been horrible for our ice cube tray! We would have been better off flipping it the other way but that’s just one of those things that we cannot predict—when those factors kick in and when they turn around. Now, let’s take it into a little bit of longer-term context.

So now you’ve got your large cap companies that have returned over the last average monthly returns over the last five years. So on average every month over the last five years about 1.2 percent. Whereas your small caps about 1.2 as well. So now we’re starting to even out. We’re looking at a longer time frame.

Small cap and value performance over 5 years

We’re starting to see more parity. Additionally, when you look at large growth at one point three versus large value 1.14 again, very very very close. Not a huge differentiating factor there and the same holds true on the small cap growth to the small cap value side.

So you’ve got one point two five percent in return average monthly for small cap growth, 1.16 percent return average monthly over the last five years for small cap value.

So now you’ve seen that the five-year numbers these tilts—this ice cube tray is starting to look a little bit more . . . Okay. Well, we’re not getting clobbered like the last 12 months. 

Now moving on to the ten-year numbers. So now we’re going to take a look at the ten-year numbers where it’s really going to start to kind of show you the long-term value—benefits—of the strategy of tilting the ice cube tray.

So now you’ve got your ten-year number at large cap companies average monthly returns at about point nine percent, and you’ve got the small caps at about one point one. So this makes sense.

The long term value of small cap investing and value investing relative to growth and large performance

Now, we’re talking about a strategy that going back over long periods of time—a 10-year return—you’ve got value that does beat growth in additionally when you look at growth large at .85 and growth value at .94.

You’ve got value that beats growth, you’ve got large that is not beating small so small as well now is winning.

Same thing on the small side. You’ve got growth at point nine one percent average monthly return over the last 10 years and small value at one point two eight percent.

So now we’re seeing what we have seen historically going back through the history of the market, and that’s just because we took it from a one-year period to a five-year period where it started to get a little bit more even, and now we’re looking at the longer term.

So what can you take away from these charts? Well, you can take away that recently the one, three, five year period has not been good for tilting the ice cube tray. You can also take away that once you stretch this out into more of a retirement lifetime or a lifetime of investing which is decades, it’s not just one, three, five years. Now the strategy starts to make sense!

And, and so sometimes we get these questions: “Well, it’s been so out of favor the last year, so out of favor the last three years, and it’s kind of like “Well, yeah. Well, the stock market was really out of favor in 2008! So I mean was it a good time to be an investor in the strategy of buying stocks or was it a bad time to be an investor in the strategy of buying stocks?”

Just food for thought personally. It’s just one of these things that does happen periodically, we’ll look at a few more stats and we’ll talk about Dimensional Fund Advisors (DFA Funds) performance as well.

Small cap investing performance premiums

So what you’re looking at here is small – large performance. So on the right-hand side, you’ve got the blue bars, and the blue bars illustrate that small cap companies have beat large-cap companies and this goes back to the 20s.

Small cap investing performance over large cap investing one year periods

And you can kind of say “Well that’s about a bit more than 50% of the time that small beat large” but also keep in mind when you look at when small does not beat large—the red bars which are negative over here—they’re not as pronounced as the blue bars to the right. So even when the strategy is out of favor, it’s not as painful as it is productive for you when it is in favor.

And so let’s kind of move on and look at this a little bit longer time period as well. Now when we start to extrapolate out and move into longer time periods—five-year rolling time periods—the blue bars are starting to take over.

5 year rolling periods of small cap investing premium performance

We’ve got many more periods here where the blue bars—where small beat large companies—is much more dynamic! And so we’re going to look at that eyeball it and say it’s about two-thirds of the time—60% of the time

But again, the blue bars to the right are much more pronounced. The gains and the outperformance from the premiums that you’re getting are much more pronounced than when small does not outperform.

And then finally if we look at the returns after because that’s what everybody wants to know. Okay, so we’re in one of these periods, right?

Small is not beating large. In fact the last 12 months it just got Trumped, trounced, whatever you want to say.

Subsequent performance of small cap investing after underperforming 5 years

So what are the returns that have happened historically after one of these cycles? So because we’re in this nasty cycle of small underperforming large, which doesn’t go well for the tilt.

I’ll show you also how severe the tilts are, that’s probably not as bad as you’re thinking. But for example, here, we’ve, we’re, let’s just take this negative five-year return where small underperforms large.

Looking at the numbers here in the left column, you’ve got 1969 to 1973. I realize that might be hard to read so that five-year period by about 15% small underperformed large cap. That’s a massive number!

Subsequent 5 year periods after small underperforms large

But look at the following five years. It out performed by almost 16%—small dominated large by almost 16 percent!

So I don’t want to go line by line on this, but what I do want to point out here is if you look down towards the bottom and if you look here at the averages, of all of these periods where small underperformed large or underperforms big, the average is when it underperforms for a five-year period it’s about an underperformance of 5%

Now on the bright side is the outperformance that follows that negative five year period is seven and a half percent.

Now, will we get that in the next five years? I don’t know. Again, it’s I hate to use that word “expectation.” We’re just talking about stats and history and what we’ve seen in the past

I don’t know that that’s going to happen now, but looking at this these factors historically this is what has happened. And you can also see in the right column very very few red numbers, which means that the subsequent five years have pretty much predominantly been very very positive.

And so again, I would say “Well it’s not the right time to change, if you’re in 2008 it’s certainly the right time to be a buyer of the equity strategy!”

I would say right now since the small has underperformed so much, it’s probably the right time to be a buyer of the small cap strategy looking at ten year numbers for small minus large.

Again, the blue numbers are really kind of dominating now much more. So it’s about 70% of the time that the small is going to outperform large. What happens to these premiums that we may hope to get in the future when you look at ten-year rolling numbers?

Ten-year small cap versus large cap premium performance

Well, the average underperformance for these 10-year numbers is about 1.9 percent. Let’s say 2%.

So, over 10-year rolling periods small has underperformed—when it has underperformed—by an average of about 2% a year. It’s been a lagger.

Small cap investing premiums over ten-year rolling periods – the subsequent return

However, the following 10 years it’s outperformed by four and a half percent per year! So that’s something to get excited about . . .

We’re not, you know, we’re in some grey territory with the ten-year numbers now. But if that holds true then I certainly want to be an investor in small now!

Value investing premium performance

Let’s talk a little bit about value. When we look at where we’re at historically, how have the value premiums done versus the growth premiums done, and where are they trading that versus historical averages?

So what you’re looking at here are these bar charts. So going back, the value index has averaged twelve point seven percent per year going back to 1926 . . . and all these stats are through the end of last year. So value has averaged is about 12 .7% per year and over the last five years, it’s only 43% percent of its historical average at 5.5 percent.

Is value investing cheap or expensive right now?

Over the last 10 years, it’s still lagging at 87% of its historical average! So we’re looking at one subset of stocks. We’re looking at the Microsoft’s, we’re looking at the JP Morgan’s that have severely underperformed what their long-term averages have been.

And then if we look at growth, so you say you want to be a growth investor right now? Well, growth over the last five years is trading at 158% over the last five years.

Even better, a hundred and fifty-eight percent of its historical average of 9.5. And again, keep in mind we’re looking at value 1926 to 2018 earning 12.7 per year and growth 9.5% / year.

So that just again shows you that value does have a long-term outperformance over growth, but you’re paying right now a lot more for those growth stocks—a hundred and fifty-eight percent!

It’s earned 15.1 percent per year over the last five years in your plan so much more for that. Excuse me, that’s the last 10 years you’re paying so much more for that than you would have historically.

So again, it begs the question. “Do you really want to be a growth investor now or a value investor? Something that has not performed well recently?”

And again, we’re going to talk about some of the DFA mutual fund performance and returns, which will probably surprise you!

Or do you want to pile onto the growth story and wait for that to come back to earth? Because eventually, it will come back to earth.

It’s—in my opinion—it’s impossible to have this race here where you look at growth companies and you look at value companies and the growth just keeps going up and up and up and values doing Okay.

I mean, it’s still (value investing) earning but it’s not expanding exponentially like these growth stocks are. It just seems implausible that these don’t come back to earth and it equalizes and starts to shift back to historical norms, because, think about this for a second. Are you going to see Apple trading at you know PE’s in the thousands and you’re going to see Wendy’s trading at a PE of 10?

It just doesn’t make a whole lot of sense! People will eventually flock back to the value.

Value minus growth premium performance over 5 year rolling periods

So now let’s talk about again the value. I don’t want to belabor this too much. You’ve already seen it and you get the point these blue bars. There’s about 70% of them are so are positive which means that value is outperformed growth going back through 5-year rolling periods to 1932.

Value mins growth investing premiums over rolling 5-year periods

So the overwhelming majority of the time you’ve got the value that’s beating growth. You do have red bars, but again, they’re less pronounced.

I would enjoy the out production of the value over growth story a lot more than than I would feel or be sad about the underperformance. So looking at value versus growth going back five-year periods again, let’s talk about the averages.

I mean we can look at any one of these years, but the averages are an underperformance when you have that underperforming five-year period of about four percent. So value has underperformed by 4%. That’s the average going back to the history of the stock market over these rolling periods.

Value investing subsequent returns after a negative 5 year period

However, the subsequent five years rolling period or the subsequent to the five-year underperformance is an outperformance of almost six percent!

So we’ve got an underperformance of four but then an outperformance of six, it’s just something to keep in mind again. We don’t know that this is going to happen. We certainly don’t know when! We don’t know, you know, what’s going to be the catalyst for this, but this is just the long term track record.

Value minus growth premium performance over 10 year rolling periods

And then if we look again at ten years, your story . . . you’ve got again this is about 80% of the time value is going to beat growth.

Very few times does it not. Of course, you can see here on the chart this is one of these times where value has underperformed as I’m circling this—the most recent 10-year period—happens to be the second-worst one in history. So those things do happen—you have to have those red bars to get the blue bars!

Value dominates growth over ten-year rolling periods

And then if you look at the subsequent returns on the ten-year numbers . . . now keep in mind there are fewer data points here because you’ve got to have a 10-year rolling period number one and number two. There are less ten-year rolling periods where value underperformed growth.

But when you look at the data and this is the ten year numbers, you’ve got an average underperformance of about 2.3 percent

And the subsequent 10-year period outperformance of about 8.5%. So if this is like one of those normal, you know rebounds in the economic cycle for value versus growth . . . I mean, I think there’s a lot to look forward too with those numbers! And they’re very encouraging to me versus disappointing.

Value investing premium performance over 10 year rolling periods

DFA mutual funds tilts

But again, we’re going to dig a little bit deeper into where are you at with your portfolio?

So when we look at a box of the stock market, this is kind of how we break things down with all those grey balls. They can kind of fit into this box that you’re looking at, and as we go up, we’re looking at bigger companies and as we go down on the box, we’re looking at smaller companies.

Breakdown of the US stock market indices relative to DFA mutual funds core portfolios 1 and 2

Now to the right we’ve got our growth companies. On to the left side, we’ve got our value companies.

So where does The S&P 500 fall? This is what everybody’s watching on TV. This is what everybody gets wrapped up in, is where’s the S&P 500?

And you can see it’s very much large-cap blended portfolio of stocks. So when they talk about the S&P 500, they’re not talking about a small cap value.

They’re not talking about, you know, small cap growth. They’re talking about big, big companies. These are the five billion-plus companies.

Now, where is the average of the entire market? That’s the CRSP right here . . . the Dow Jones total stock market. It’s a little bit lower because we’re going to average in all of these small companies to get there.

So it’s a little bit lower than the S&P which is just the big. Now, where is the DFA mutual fund core equities? That’s what we really want to see on the scatterplot.

So you’ve got core equity one—Dimensional Fund Advisors, and core equity two which are a little bit lower and to the left on the small cap/value scale.

And down here in the lower left-hand corner we’ve got the vector equity, which honestly I’m kind of excited about. We’re looking at moving our 401K just to get that DFA mutual fund because I like to buy things that have underperformed. I don’t like to buy things at the peak.

And so this Vector equity which is highly aggressive would be something I wouldn’t mind adding to my 401k!

So, so that’s where the Dimensional Core Equity portfolios fall relative to the S&P 500.

DFA mutual funds core equity performance

So how have those DFA core equity strategies done again? We’re just focused on US markets.

The numbers are actually much better for the dimensional core equity international, much better for the emerging core equity as well. We’re just focused on the US because that’s what you’re going to see on the news every day, and that’s what you’re going to anchor your beliefs, your perceptions about investing and your performance to—so we’re just talking about that.

DFA mutual funds core equity performance versus the market indices

So looking at the ten-year numbers now net of fees, keep in mind, this is . . . it’s not a fair fight because we’re comparing a mutual fund just like Fidelity or a Vanguard mutual fund, we’re comparing a mutual fund that would have trading costs embedded. They would have fees . . . the management fees or expense ratio.

And so we’re comparing that to the Dimensional Core Equity Funds to the Russell 3000. The Russell 3000 is just a group of stocks—all the stocks on the market—that’s kind of a proxy for the total market, but it doesn’t include trading fees, it doesn’t include management fees. It doesn’t include any expenses.

So right off the bat if you were it’s not an Apples to Apples comparison. It’s kind of a pie in the sky because if you can beat that Russell 3000, you know, which has no fees you’re doing pretty darn good!

But looking at the ten-year numbers you can kind of see that the core equity here Core 1 and Core 2 are in that mid 14 percent range going back 10 years—and so is the Russell 3000 at about 14 .67.

So looking at the ten-year numbers, you would think based off of all the doom and gloom that I just shared with you about value underperforming and small-cap underperforming you would think that we were getting clobbered by two, three, four points a year! And it’s just not the case!

In the face of all of these headwinds where large beat small, where growth beats value, all of these headwinds, the core equity portfolios have still held their own pretty well!

And if you were actually going to compare those to a value index they’re actually pretty much dominating the value—the Russell 3000 value! So that’s just something to think about!

Really quickly, I don’t want to I mentioned international and emerging. The numbers are just substantially better for international and for emerging markets for the DFA mutual funds core portfolios.

Now looking at since Inception . . . so going back to 2005 is when these kind of came to light here, since inception you’re looking at the core equities that about 8.2%. 8.6%.

Every one of our private practice clients and our 401K clients as well. They own these DFA core equity portfolios in some form or fashion.

Maybe they on the component funds, maybe they own the core equity themselves. But what you’re seeing here is going back to the inception of these funds.

You’ve got the Russell 3000 value at 8.8%, and these two core equities in the eight percent range. Not quite as good but really close! And keep in mind there’s no management expense ratio or anything built into that number for the Russell 3000. So these numbers kind of surprised me!

I would have expected again, I would have expected much worse results for these DFA mutual funds in your time frame, however, you know in the face of as I said all of those headwinds, the DFA core equity portfolios have done pretty good!

Dimensional mutual funds core equity versus the benchmark

So again, let’s kind of highlight—and I hate to keep coming back to this negative news—but looking at, for example, the one-year numbers on these two verses the index. Well, the one your numbers are absolutely abysmal, you know, it’s just been a bad 12 months going through June of this year.

Same thing with the three years. They’ve been not so good. Same thing with the five years. We have this strategy it’s just out of favor and again, keep in mind we’re talking about 9% or eight percent versus ten percent. So it’s underperforming, but you also in your portfolio have the international core which is actually outperformed. Or the emerging core equity which is outperforming.

DFA mutual funds versus the benchmark index

And you’ve also got bonds and things that the government can’t print like commodities in real estate so keep that in mind. You don’t own just US stocks if you’re one of our clients. You own a highly diversified investment portfolio.

And if you’re not one of our clients, hopefully, you’re not all in US stocks as well unless that’s appropriate for your situation (and you’re probably about 25 years old). But again, going back to the longer-term those ten-year numbers, they’re all very, very close.

The core equity portfolios have held their own, and if anything the takeaway from this is staying the course just makes all the sense in the world! Because the longer we stick with this strategy the more likely we are to get the higher premiums over long periods of time.

DFA mutual funds versus the industry performance

And so additionally, just a little bit of background on Dimensional—and this is just important for people to know we talk about this when they come into the office—when you look at the overall mutual fund industry and you look at these periods of 10 years, 15 years, 20 years, you’ve got about out, oh let’s see 4,600 mutual funds.

Let me highlight this real quick here, the ten year period in the industry out of 4,600 mutual funds only 26 beat their benchmark! 26% of 4,600 beat their benchmark!

DFA mutual funds dominate the industry overall

But worse yet only 62% of them actually survived! That means about 40%—looking at 10 years ago—you could have bought a mutual fund—any mutual fund—and there was a 40 percent chance that thing got went belly-up because the performance was horrible and the manager said: “Roll it up into this fund over here, which performance is good.”

You got all the bad performance and then you get to all the gains on the other portfolio. It’s not a good deal. The interesting thing to me to is if you’re looking at 26% outperformed looking at 15 years only 17 percent in twenty years only 17% outperform and over 20 years, there’s a 60% chance roughly that your fund would be out of business!

So this is important because you need to compare and contrast. What’s going on with Dimensional mutual fund portfolios versus the industry? Now if we look at Dimensional you’ve got 98% that survived.

So I’ve been saying for years that Dimensional has never closed a mutual fund. This is news to me as of a few weeks ago.

They did. They had a 401k provider that wanted an international mutual fund ex tobacco mutual fund. So Dimensional went and created it because it was a very large 401K provider.

They didn’t have enough demand. The performance was good, but they didn’t have enough demand. So they ended up closing that fund.

So that’s the story on Dimensional closing a mutual fund. They have closed one, which is very very rare in the industry. But you’ve also got 65 percent have outperformed.

65% of all Dimensional mutual funds have beat their benchmark, and the interesting thing is if you’re looking at a 15 year period that number goes up to 71% if you’re in it longer, if you’re in it for 20 years, 85% of Dimensional mutual funds have outperformed their benchmark!

So rather than the industry where that number just drops and drops, Dimensional just gets better and better because they’re designed for this long-term investing experience. And that’s just something to keep in mind when you look at your performance and you think “You know I saw the S&P was up 15%” or whatever the time frame was. And you look at your returns, number one keep in mind that you don’t own the S&P 500. You own the entire US market that’s tilted like the ice cube tray.

You also own international and emerging markets and also own some commodities. You also own some bonds and things like that, and some REITs. So you’ve got a very diversified portfolio.

You cannot gauge everything by what you see the S&P 500 did, but all of that being said when you take these Dimensional mutual funds, you match them up against the industry, they are very very good.

You match them up against who are beating their benchmark, they are dominating and getting stronger the longer that they have to season.

DFA mutual funds flagships versus index performance

And this real quick and then I’m going to kind of wrap it up. But now what you’re looking at here is the Dimensional flagship mutual funds. So these are the funds that they have the most money in.

And as you can see here, if you want to compare the indexes, I’ve said for years if you’re an index fund investor you by the Vanguard 500 Index or the Fidelity index or whatever it is . . .

DFA mutual funds performance relative to the industry and indices.

You’re going to beat seven out of ten your neighbors in terms of performance for that asset class! And that’s just because seven out of ten your neighbors have an active fund. Their fees are higher, the transaction costs are more, the internal training costs etc.

The market impact costs are more also, and so if you have an index fund, you’ve got this nice kind of lumbering giant, which is very very good, but they don’t have tilting the ice cube tray.

Which again, we’ve seen the last few years hasn’t been necessarily advantageous. But long term it has!

So if you are going to compare your portfolio as a passive investor, not an index fund investor, they’re very similar. But as a passive investor, that’s not held to traditional index rules, and that’s a whole other webinar.

You can see that these circles here are the index fund performance. And you can see that the black bars for example, right here are the Dimensional DFA mutual fund placement relative to the peer group in every single category.

The Dimensional funds beat the index. And these are again their flagship mutual funds that have the most money!

The yellow bars towards the bottom of the funds, they went out of business because we already discussed how quickly they can go out of business if they’re not gathering assets. And then, of course, you’re going to have some funds outperform Dimensional, that’s just that’s part of the process.

But this is every fund that they have with 15 years of seasoning or more as of the middle of last year. So the performance of these DFA mutual funds is absolutely stellar!

And if you have Dimensional funds at all, you most likely have these funds in some form or fashion or through the core portfolio.

But the process is the same—the philosophy is the same—what they do is the same! And they’ve just done a great job of delivering the asset class performance, which coincidentally is why they haven’t closed the fund. They haven’t had to close a mutual fund because they’ve delivered what they were supposed to deliver, even if the tilts are out of favor.

So that’s an interesting chart.

I’m going to go ahead and open it up to questions and see if there are any.

If there are questinos you can go ahead and type it in the comment box while I kind of wrap up here.

Value and small cap investing relative to DFA mutual fund performance in summary

Real quick again, this was a lot of information very quickly. I apologize for the dryness of the subject, but I think it’s important to get out in front of the questions, you know when the market swinging 600 points a day positive . . . negative—all over the place!

And then when you look at your investment performance and you think well, wait for a second. I should have had this I should have had X performance or Y performance.

You know, these are things the contemplate. You don’t own the S&P 500 or the Dow Jones, you have a diversified portfolio most likely if you’re doing it correctly.

And even if you have this small and value ice cube tray the performance is actually not been too bad over a long period of time. So the moral of the story is stick with the program!

This would be the absolute worst time to abandon the program because number one, the performance isn’t that abysmal we still have other things in the portfolio to diversify you, and number two, if historical statistics will shine through again, if we see these returns of the subsequent five years and the subsequent ten years for the small and the value premiums—if we see those kick in you’re in for a heck of a really good ride here!

I cannot say for sure it’s going to happen or when, but you’re in for one heck of a really good ride.

So anyway, I want to thank you again for your time. I see that I don’t have any questions right now to field. If you do have questions offline, give me a call! Shoot me an email and I would be happy to tackle those.

Again, this is a webinar produced through my blog retirewire.com. Please feel free to go into YouTube or the podcast, rate, review, subscribe because that’s where I will post these videos first as they will end up on YouTube and through the podcast and then eventually as a blog on the website.

So thank you very much and have a wonderful rest of your day. And if you’re here in Las Vegas, make sure you stay hydrated!