The Path to a Better Investment Experience

News Upsets Man

“Don’t confuse entertainment with advice”. That’s one of the 10 components that Dimensional Fund Advisors – “DFA” as they’re known in the investment industry – includes in their “Path to a Better Investment Experience”. Using strategies rooted in academic research, DFA is a unique and significant money manager worldwide, managing over $300 billion worldwide. And, as a successful, low cost provider of mutual funds in Canada, that’s why they have a prominent place on our product shelf.

Even for those of us with many years of experience in financial services, the daily news and “expert” commentary in the media can be a test of our discipline and patience. Last week it was how to profit from the real estate “bubble”, this week the world is coming to an end because interest rates in the US may go up soon or banks in Europe are on shaky ground. Occasionally good advice, but too often more entertainment than advice, designed to attract readers or listeners. So, as DFA states, “If you are tempted to act, consider the source and know the difference between entertainment and real advice.”

Let’s run through the remaining 9 components of DFA’s philosophy.

  1. “Embrace market pricing”. The prices of securities are set every day by the millions of buyers and sellers in world markets. The information that each of them has is what sets prices.
  2. “Don’t try to outguess the market”. We’ve talked about this before in other publications where we looked at the low percentage of mutual fund managers who actually survive 10 years and beat their benchmarks.
  3. “Resist chasing past performance”. This is a tough one in practice. After all, you might say, how else can an investor judge a money manager? Research shows that mutual funds that have outperformed in the past seldom repeat as winners.
  4. “Let markets works for you.” Buy the market and invest long term.
  5. “Consider the drivers of return”. Academic research underlying DFA’s investment strategies have identified six equity and fixed income “dimensions” which contribute to differences in expected market returns — expected differences between stocks vs bonds, small companies vs large companies, “value” vs “growth” companies, and high profitability vs low profitability companies. For fixed income, it’s “term” – longer vs shorter maturity bonds, and “credit” – lower vs higher credit quality bonds.
  6. “Practice smart diversification”. Diversification does not eliminate the risk of market loss, but by broadening your investment “universe”, it helps reduce risk. Diversify globally, not just in Canada.
  7. “Avoid market timing”. From year to year it’s impossible to predict which sectors of the market will outperform, or when the best time to invest is. Hold a globally diversified portfolio.
  8. “Manage your emotions.” Easy to say, but tough to do. Markets go up and down. Investors’ emotions range from optimism and elation as markets rise, to nervousness and fear as they fall. Poor decisions based on emotion can hurt you.
  9. “Focus on what you can control”. Markets will do what markets will do. You can’t control them, but you can control fees, asset mix and taxes. As advisors we can design and implement a highly diversified strategy that will lead to a Worry Free Retirement Experience™.

The next time you’re tempted to act on a “hot tip”, keep these principles in mind. You’ll thank yourself in the long run!