I think this will be a long and interesting thread. Vanguard and DFA are rivals in passive investing. Dunkin' Donuts versus Starbucks... PC versus Mac... Vanguard versus DFA...
bobsmith wrote:After the talk, I spoke to him briefly. He charges a 1% management fee, but he claimed that, historically, Dimensional Index funds outperformed Vanguards Index funds by at least 1% which would offset his fee.
Well, what do you expect
him to say? "You shouldn't use me because I will cost you more than I am worth?"
Some details. Dimensional's funds are not index funds
, and if he said they were he misspoke. I doubt that he actually said "historically, Dimensional Index funds outperformed Vanguards Index funds by at least 1%" but that's what you thought you heard, and I think he probably did not go out of his way to correct any misunderstanding, so let's do a reality check on that statement.
I am going to pick the three core Vanguard funds that are often used in a three-fund portfolio
, and I am going to do my honest best to pick out the three most-closely-corresponding DFA funds. I haven't actually done this before, by the way. In all cases, I will go back to fund inception of the shorter of the two funds, and I will plot the DFA fund in blue and the Vanguard fund in orange.
DFA supporters will probably respond in this thread and say this is the wrong comparison to make. However, I am not comparing the performance of a DFA investor in an advisor-recommended multi-asset factor-informed portfolio to a Vanguard investor in a simple three-fund portfolio, I am looking specifically at the claim--which you thought you heard, but probably did not
--that "Dimensional Index funds outperformed Vanguards Index funds by at least 1%". For fixed income I don't really see anything comparable to Total Bond, so I will use DFA Intermediate Govt Fixed-Income I DFIGX and compare it both to Total Bond and Vanguard Intermediate-Term Treasury.
I'm a little lazy about doing the math so let me state at the outset: if you invest $10,000 in each of two funds, A and B, and both earn a positive return, then in order to earn the advisor's fee, fund B will have to earn AT LEAST $100/year more than A.
DFA U. S. Core Equity 1 Portfolio (DFEOX) <-> Vanguard Total Stock Market Index (VTSMX)
DFA International Core Equity I (DFIEX) <-> Vanguard Total International Stock Market Index (VGTSX)
DFA Intermediate Govt Fixed-Income I DFIGX <-> Vanguard Total Bond Index Fund (VBMFX) and Vanguard Intermediate-Term Treasury Fund
15,513.21 versus 15,297.10, the DFA fund earned $216, not enough to pay an advisor's fee of at least $700.
13,772.52 versus 13,738.79, a princely $33 more... do I need to do any math?
OK, I'd better do the math on this one. I'm going to call this a 21.5-year period. The annualized returns are about:
DFA Intermediate Govt Fixed-Income, 6.70%/year
Vanguard Total Bond Market Index, 6.26%/year
Vanguard Intermediate-Term Treasury, 6.64%/year
In short, the difference between what I think are the corresponding funds is only 0.06% per year. However, if you had intended to invest in Total Bond, and an advisor convinced you to use DFA Intermediate Govt instead, the advisor would have gotten you an extra 0.44%... which is nowhere near enough to pay a 1% fee.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.