What Are You Betting On?

Most investors have never heard of Dimensional Fund Advisors. This privately held firm manages nearly $250 billion of index funds, but you can only own its funds through an investment adviser who achieves a hard-won entitlement from DFA.

DFA has made the world of investing a much, much better place. Their index funds are low cost and highly competitive. DFA even argues that they possess better indexing skills and thus, achieve superior returns than its rivals.

But DFA is doing something even more revolutionary: DFA has convinced investors not to bet on a stock. Not even on a sector like utilities or technology, or even a country like China or Canada. DFA investors don’t want to bet on a few bonds in a laddered bond portfolio.

No, what DFA so brilliantly helps investors understand is that if you can just have confidence in the capital markets, your savings will grow in the fastest and safest way possible.

Capital ideas

This means, at the highest level, a bet on capitalism. When an investor loans money to a firm or government, or owns a part of an enterprise, he is entitled to his share of rewards for his capital. World markets reward investors for their capital and businesses and governments must compete with each other for investment capital. Investors in turn compete with each other to find the most attractive opportunities.

DFA educates us on why we should just focus on capturing our share of these returns at the lowest fee possible. Instead of thinking that Apple is mispriced, or developing our prediction of solar power, bet on capitalism. Over the years, capitalistic economies thrive.

It is a much better way to sleep at night and outperform most other investors. Once you have confidence that capital markets will grow over time, you can then leverage proven science to build a portfolio to capture your rightful returns. That’s where DFA has shown investors how to build a sophisticated portfolio that is truly diverse.

DFA has illuminated and implemented asset allocation strategies that heretofore were the domain of sophisticated endowments and pensions. Arming advisers with great tools for educating investors, DFA has helped many to leave the active “beat the market” circus, lower their fees, and diversify their savings.

Enter the ETF

For years, DFA was the only firm offering portfolios that harnesses this investment science, largely because they had all of the component funds at a low cost. But with the rise of ETFs, no longer is DFA the exclusive purveyor of this strategy.

DFA Funds are great. Their small and micro cap funds DFA U.S. 9-10 Small Company Portfolio, The DFA U.S. Small Company Portfolio and DFA U.S. Small Cap Value Portfolio have made investors about 10% yearly, compounded for about 20 years.

But low-cost ETFs now occupy every asset category offered by DFA. Investors who felt locked into a DFA set of products, are now able to build their own portfolios without going to a DFA adviser.

Moreover, DFA doesn’t always win in every asset class. Over the last five years in emerging markets equities, for example Vanguard MSCI Emerging Markets ETF has outperformed DFA’s Emerging Markets Portfolio. DFA U.S. Small Cap Value has strong competition from iShares SmallCap 600 Value Index Fund.

Vanguard’s innovation was the index fund, and DFA took that to the next level with a marketing model to proliferate index fund portfolios. Now, widespread ETFs in every asset class and portfolio building software and expertise, takes DFA’s contributions to investing to every investor, not just those who can afford high-priced help.