Is there a better feeling than the one you get realizing you've made a great decision? Whether you put in a lot of time and research or you went with your gut, the sense of satisfaction is intoxicating. When you think about your best decisions, what comes to mind? Your career? Family? Finances? For most people, only the last thought escapes them. This doesn't have to be the case. If you invest the right way, you could consider financial planning and investing as one of your truly great decisions. Instead of looking at your monthly statement in terms of gains and losses, it could be a sense of pride and inspiration representing a really smart move you made in an area where so many people struggle to get ahead.
With investing, great decisions have tangible effects -- one is the potential for significantly greater wealth over your lifetime. Greater wealth might help you retire sooner, or spend more when you're retired, or leave more to your beneficiaries. We don't know what the absolute best investment approach will be, but we know a globally diversified stock portfolio that includes smaller and more value-oriented stocks (the Dimensional Equity Balanced Strategy Index) has been exceptional over many decades. Choosing it over the S&P 500 would have been a great decision.
Unfortunately, the vast majority of people don't invest this way. Why? They don't make great financial decisions. For example, they think investing is a "commodity" -- that all investment approaches are the same except for differences in fees -- and they instead opt for basic index funds like the S&P 500. The graphic above shows just how misguided this belief is.
Or if they start with a well diversified portfolio, such as the Dimensional Equity Balanced Strategy Index, that has higher expected returns than a basic index fund, they aren't able to stick with it. They struggle with the fact that it doesn't always "work." Over all one-year periods since 1970, the Dimensional Equity Balanced Strategy Index only outperformed the S&P 500 60% of the time. It underperformed, and appeared to not be "working," the other 40% of the time. 2018 was one of the worst years in terms of relative returns for a diversified portfolio relative to the S&P 500 Index, and predictably, many are questioning the benefits of this strategy going forward.
Deciding to invest in a well diversified portfolio has been a great decision, and committing to stick with it during challenging times can be another great decision. As we move beyond arbitrary one-year, three-year, or five-year periods of time and look at intermediate 10-year intervals, we see the odds that a diversified portfolio achieves a better return than the S&P 500 goes up considerably. Less than 20% of 10-year periods have seen the Dimensional Equity Balanced Strategy Index fail to outpace the S&P 500. Staying disciplined has historically been a really smart and rewarding move.
What about the truly long term? Even if you don't have 20 years left in your investing career, your beneficiaries probably do. Urging them to stick to the investment approach you have with the gifts you provide them or with the funds you will some day bequeath to them is another really smart move. The only two-decade stretch where the Dimensional Equity Balanced Strategy Index failed to beat the S&P 500 since 1970 was the 20 years ending in 1999 -- where the underperformance was less than -0.1% per year! For the 20 years ending 2018, the average outperformance for the Dimensional Equity Balanced Strategy Index compared to the S&P 500 was over 3% per year, showing that the great decision to invest in and stick with a well diversified portfolio wasn't an artifact of a single great run many decades ago. The average of all 20-year periods was a +2.8% per year better return for the Dimensional Index compared to the S&P 500. This dwarfs small differences in fund expenses or advisor fees.
Nothing beats the sense of accomplishment that comes from making great decisions. If you hold a globally diversified portfolio that includes exposure to smaller and more value-oriented stocks, inspired by decades of Nobel Prize winning Economic research, you've made a great decision. You improve upon that decision every time the short-term results don't conform to your long-term expectations, but you continue to trust the evidence and stick to your plan. When markets recover, or when outperformance resumes, you'll look back on these decisions with great pride and accomplishment and realize the challenges you faced were worth it.
I am passionate about helping you continually make great financial decisions.
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.