Every day it seems there is news of the stock market hitting all-time highs. But a look at your quarterly statement reveals a balance that is still below the level you reached in early 2018. Is there something wrong with asset class investing? With DFA? Do you need to retool your investment plan? Are you at risk of failing to achieve your goals? No, no, no, and no. The last few years have been challenging for a diversified asset class approach, but not unprecedented, and there is
Your Portfolio Isn’t the Dow or S&P 500
A typical portfolio for Servo clients consists of a US
Over the last year, conditions have become more extreme—US
Are We In Uncharted Waters?
There have been many conversations in financial circles over the last few years about whether diversifying globally and/or including
A look back at history reveals a similar stretch in the late 1990s. When the momentum behind the S&P 500 faded in 2000, the tide turned and we saw 14 years of almost uninterrupted superiority for
Should you switch to a US
What’s Up With DFA?
Along with the general underperformance of international stocks compared to US stocks, and value and small companies relative to
Our DFA funds aren’t picking stocks or trying to time the market. Each DFA fund is designed to capture a deep and pure subset of the stock market with unique returns known as an “asset class.” The DFA US Large Value Fund, for example, invests in the largest 90% of stocks, the DFA US Small Value Fund only the smallest 10% of stocks; both are restricted to those companies with the cheapest 30% of price-to-book values after accounting for relative profitability (higher profitability stocks are overweighted; less profitable stocks are underweighted or excluded). Certain types of stocks that don’t fit the asset class definition, such as REITs or regulated utilities, are also excluded. DFA then manages the portfolios on a daily basis, using dividends and cash inflows to update and rebalance the portfolios while selling shares that have gone up in size or price and no longer reside in the asset class.
Index funds don’t dig as deeply into the
If past returns aren’t convincing, then portfolio characteristics might help. Morningstar reports as of May 31 that the DFA US Large Value Fund holds stocks that are 28% smaller and 25% more value-oriented on a price-to-book basis than the Vanguard Value Index. The DFA US Small Value Fund holds stocks that are 55% smaller and 40% cheaper than the Vanguard Small Value Index. These more targeted portfolio allocations have hurt DFA’s relative returns over the last few years; however if
Dealing With Difficult Markets
We often think of difficult times to invest in terms of bear markets like 2000-2002 or 2008. But holding a diversified portfolio and watching it underperform the S&P 500 for five years or more can be equally frustrating. Unfortunately, in investing, what works isn’t always working. It’s an unavoidable fact that the short-term returns associated with successful investment strategies are random. There are, however, a few things you can do to ease the pain.
First, embrace uncertainty—it doesn’t make sense to worry about things you can’t control. Next, consider looking at your portfolio (far) less; your Servo Quarterly Report is sufficient to check on your ongoing progress, and an annual review can address most issues, questions, and needed changes. There’s nothing to be gained from watching your funds daily or weekly, but it can cause an urge to make an ill-advised change. Finally, recognize that you made a good and well-researched decision when you started on this path, so you should trust the process. Successful investing requires faith and patience. If you do your part, in time you’ll most likely find that your outcome converges to the plans you had when you originally began this journey.
Past performance is not a guarantee of future results. Diversification does not eliminate the risk of loss. Index and mutual fund returns include the reinvestment of dividends but not expenses or additional advisory fees. This article is for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service. Servo is a Registered Investment Advisor (RIA) with clients nationwide. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. For past Factors In Focus newsletters, please visit Servo’s website at servowealth.com. Edited by Kathy Walker.
Contact Eric Nelson, CFA at firstname.lastname@example.org with any questions, comments, thoughts, or to discuss your personal financial situation.