Vanguard vs. Dimensional Fund Advisors (DFA)

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Vanguard vs. Dimensional Fund Advisors (DFA)

Postby bobsmith » Sat Mar 23, 2013 7:44 pm

I'm a big believer in Vanguard index investing. I keep it simple and invest for the long haul. Essentially, I really only own Vanguard's TStockMI, TInternatnioalSMI, and TBondMI. However, I recently listened to a talk given by a Dimensional Fund Advisor. The lecture was very good and laid out the advantages of index investing over active management. All the general advice was very sound. However, the guy segued into a comparison of Vanguard with DFA. 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. Naturally, given all the snake oil out there, I'm a little skeptical, but overall the lecture seemed very sound.

I've done a little homework on Dimensional funds, but I'm having a hard time making an apples to apples comparison. Does anyone here have any experience with DFA? What's their reputation? I'd really appreciate some feedback.

Company Home Page
http://www.dfaus.com/

Funds they sell
http://www.ifa.com/

(for those who don't mind indulging me further...)
Checking out their website, the first thing I noticed was a wide variety of allocations. I can certainly understand why you would want different Stock to Bond ratios depending upon your age, risk, goals, etc, but if Dimensional's philosophy is INDEX investing, why would they need so many different kinds of portfolios to cover Domestic and International Stocks?

Anyway, in particular, he talked about the IFA Index Porfolio 90, but this isn't a fund of funds, but rather a portfolio of funds (with tickers) that breaks things into 60/40 allocation US Stocks/Foreign. I got busy with Excel and I tried running it against a 60/40 TStockMI/TInternationalSMI, but again, it's not apples to apples and I'm finding some contradiction on the website. For example, the Return (%) line says this portfolio did 9.9% return, but when I actually total up the last ten years from the bar graph, I get 12.86%. Meanwhile, using Vanguard Admiral Share data in a 60/40 mix, I get 10.93% return for the last 10 years.
http://www.ifa.com/portfolios/p090/

Any help or information is GREATLY appreciated!
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby Taylor Larimore » Sat Mar 23, 2013 8:20 pm

Hi Bob:
He claimed that, historically, Dimensional Index funds outperformed Vanguards Index funds by at least 1% which would offset his fee.


This is what Morningstar's Research Director, John Rekenthaler wrote in response to a question by Alex Frakt (in 2000):
In its 18 years of existence, DFA’s small-value tilt has harmed it more than helped. You’d have made a lot more money following Vanguard’s cap-weighted approach.

Investing is Not Engineering

Best wishes.
Taylor
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby retiredjg » Sat Mar 23, 2013 8:24 pm

bobsmith wrote: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.

I think the 3 factor investment model is a good one and I use it to a certain extent myself. But I'm skeptical that it consistently outperforms the market by more than 1% each year.

What might be true and what he might have said (even though you heard something else) is that a DFA advisor's portfolio might outperform the average investor (who has no idea what he is doing, pays loads, pays high expense ratios, chases returns and maybe even day trades)....by 1%. That's easy to believe. Or if he actually meant Vanguard investors, the average investor who is chasing returns and repeatedly sells low and buys high. I would not find that too hard to believe either. But, absent investor stupidity, beating the market by over 1% on a regular basis? Hmmm. That is a little tough to swallow, for me anyway.

Apples and Apples? I think it might be hard to do. A value tilted portfolio carries more risk than a market weight portfolio of the same stock to bond ratio. So even if you compared 80/20 to 80/20, it would not be apples and apples. How to compare? Good question. I don't know. But you can be sure any comparison a salesperson shows you will argue for a sale instead of the opposite.

I'm looking forward to hearing what others say about this. Particularly our members who actually sell DFA funds themselves. We have several whose comments I would trust on the matter.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby stevewolfe » Sat Mar 23, 2013 8:25 pm

bobsmith wrote: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.


Many more knowledgeable than myself will answer about DFA vs. Vanguard as there have been many discussions here about this in the past. However, re-read the above sentence and then consider a possible re-phrasing "He charges a 1% management fee, but he claimed that, historically (e.g., in the past, can't be captured - may or may not materialize in the future), Dimensional Index funds outperformed Vanguard Index funds by at least 1% (e.g., by taking on more risk? Is this 1% out performance risk adjusted?) which would offset his fee (leaving you with just the greater risk for, potentially no greater reward other than the knowledge that his fee was offset).".

In my opinion, if you are comfortable with what you have, keep the 1% management fee in your pocket and move on. If you really do want access to DFA funds, take a look at Portfolio Solutions, they likely can get you access to those funds with a lower fee than 1% (depending on the size of your account): http://www.portfoliosolutions.com/faq/ (I have no affiliation and am not a customer - Rick merely posts here often).
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby retiredjg » Sat Mar 23, 2013 8:32 pm

That's a good point. If you decide you do want DFA funds, there are places that charge less than 1%.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby nisiprius » Sat Mar 23, 2013 9:14 pm

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

Image
15,513.21 versus 15,297.10, the DFA fund earned $216, not enough to pay an advisor's fee of at least $700.

Image
13,772.52 versus 13,738.79, a princely $33 more... do I need to do any math?

Image
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.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby EDN » Sat Mar 23, 2013 9:53 pm

Here are the DFA/Vanguard comparisons for the asset classes in the IFA 90 Portfolio for the last 10 years:

DFA Enhanced US Large = +7.9%
Vanguard 500 Index= +7.8%

DFA US large Value = +9.8%
Vanguard Value Index = +8.6%

DFA US Small ='+12.3%
Vanguard Small Index = +12.4%

DFA US Small Value= 13.2%
DFA US Targeted Value = 13.2% (same size/value exposure as Van SV)
Vanguard Small Value Index = +11.5%

DFA REIT = +11.7%
Vanguard REIT= 12.0%

DFA Int'l Large Value = +11.1%
Vanguard Int'l Value = +10.3%

DFA Int'l Small = +13.7%
DFA Int'l Small Value = 14.5%
Vanguard Int'l Explorer =+13.5%

DFA EM = +17.2%
DFA EM Value = +19.9%
DFA EM Small = +19.9%
Vanguard EM Index = +15.9%

So, of the 11 asset classes in the IFA 90, DFA beat the closest Vanguard index fund by 4% per year in 2 of them, almost 2% in 1 of them, about 1% in 4 of them, and in 4 of them they were virtually tied. An annually rebalanced mix of the DFA version did about 1% better than the Vanguard version.

If you need an advisor, then consider this one. If not, use the allocation you think makes sense with the Vanguard versions of the asset class funds. This allocation has provided significant benefits since the LG bubble burst in 2000. Here is the growth of $10k for each fund and your Vanguard TSM and TISM through Friday (in order of growth):

DFA Enhanced US large = $13,803 (S&P 500 index = 13,590)
Vanguard Total Int'l = $14,473
Vanguard Total US = $14,722
DFA Int'l Value = $21,070
DFA US Large Value = $24,612
DFA Int'l Small = $30,518
DFA US Micro = $30,876
DFA Int'l Small Value = $37,456
DFA EM Value = $38,896
DFA US Small Value = $40,014
DFA EM Small = $40,468
DFA REIT = $47,318

If that doesn't convince you of the benefits of multi-asset class diversification, I'm not sure what would! To put those $ growth figures in perspective, the DFA One Year Fixed fund, about as close to the "risk free rate" as it gets outside of a MMACT, grew to $14,783, more than TSM or TISM for the last 13+ years.

Good luck,

Eric
Last edited by EDN on Sat Mar 23, 2013 11:34 pm, edited 1 time in total.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby nedsaid » Sat Mar 23, 2013 9:57 pm

I have gone to a similar seminar. It was with the folks at Merriman in Seattle, WA. They gave a good presentation.

I made some changes to my portfolio based on the presentation. I tilt my portfolio towards small and value, though I am still broadly diversified. I would expect a DFA "slice and dice" portfolio to outperform a portfoiio of Vanguard Index Funds during times when value outperforms growth. When growth outperforms value, I would expect that the Vanguard Portfolio would outperform. I think a DFA "slice and dice" portfolio may reduce volatility but will only increase returns if the value and small premiums assert themselves over your investing lifetime.

Is DFA worth the 1% management fee? I thought long and hard and passed on the offer.

The seminar you went to was worth your time. The problem with slice and dice is that it is somewhat complicated and they keep coming up with new asset classes to invest in. The slices are getting small enough that you begin to wonder if any one slice by itself will make any difference in the long term performance of your portfolio. The slices are getting pretty thin.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby nisiprius » Sat Mar 23, 2013 10:15 pm

EDN wrote:An annually rebalanced mix of the DFA version did about 1% better than the Vanguard version.
Is that before or after the advisor's 1% fee?
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby wjo » Sat Mar 23, 2013 10:39 pm

DFA makes good funds. They have been around long enough to be a trustworthy fund manager and seem to have an institutional culture that supports investor interests - with the caveat, of course, that they are a for-profit firm. Vanguard's mutual structure is superior in terms of low cost and alignment of interests.

That said, there is little reason to go with an advisor because of any claimed out performance. There are an increasing number of small and value oriented funds available to the retail investor. One can construct a low cost, DFA style, slice and dice portfolio with a combination of Vanguard funds and ETFs from a few others.

The reason to go with an advisor is because you don't want to/can't do it yourself -- and doing it yourself includes picking a portfolio, keeping tabs on it and taking action to rebalance when needed, and the courage to stay the course. Advisors can help with these things. Advisors can also be there to back you up should you no longer be capable of managing your investments.

So you find a low cost advisor capable of helping you with setting up and managing the portfolio...1% is way too high a price IMHO when there are others perfectly capable of doing so at a much lower cost.

If you do decide to hire an advisor, finding one with access to DFA funds is a nice perk.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby livesoft » Sat Mar 23, 2013 10:45 pm

I as well as others have found it relatively easy to reverse-engineer and create a DFA-style portfolio of funds without using any DFA funds and without paying any advisor fees. That is, one can easily duplicate the results claimed by DFA proponents without DFA funds, fees, and expenses.

One thing you need to know is that Vanguard Small-Cap Value Index is not the same as DFA US Small Value, so there is no point in directly comparing them. This goes for many other single DFA fund vs single Vanguard fund comparisons like the ones shown by EDN earlier in this thread. One needs to create a portfolio with the same "factor loadings" and not a portfolio of similar fund names.

So if you can't reverse-engineer your own portfolio or you can't figure out how to tax-loss harvest or you can't figure out how to be tax-efficient or you can't figure out how to rebalance or your can't manage your own portfolio, then by all means select an advisor that can do all those things for you. But don't pay too much for the work of that.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby Calm Man » Sat Mar 23, 2013 10:46 pm

The guy makes his living getting assets to put in the DFA funds. What else would you expect him to say? I am a critic of DFA because they do an unusual marketing style - getting advisors that they certify and it is only through these advisors that a person can invest. So they get salespeople for free. I doubt you would do better with DFA and I suspect you would do about 1% worse plus the additional 0.2% or so that the funds cost. I know -- tilt this, tilt that -- that's hooey to me.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby EDN » Sat Mar 23, 2013 11:00 pm

Bob,

One other submission for you in your effort to research/learn more about this stuff. Here is an article from Bill Bernstein from 10 years ago where he looks at these balanced portfolios and your Total Stock Index mix: http://www.efficientfrontier.com/ef/404/grail.htm

The chart at the bottom compares various stock/bond combos and it appears, for a given level of standard deviation, he found the DFA Balanced Strategies outpace the Vanguard TSM mixes by about 2% per year from 1988-2003.

This article (http://www.efficientfrontier.com/ef/404/personal.htm), from the same quarter, put the advantage at about 3% for the 20 years through 2003. It also takes a balanced look at some of the challenges of holding these more asset class diversified portfolios.

Hope this helps,

Eric

PS-- DFA funds are only available to fee-only independent advisors who receive no compensation from DFA or any other fund family they use, so if they use DFA for a given asset class, they believe they make the most sense. They are paid for their advice/council and on portfolio growth, so their incentives are aligned with their clients. Some confuse these professionals with commission based salesmen. It's hard to look at the "growth of $1" figures I provided above and not conclude the advice has been pretty darn good.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby KyleAAA » Sat Mar 23, 2013 11:20 pm

DFA is great but I doubt even the company itself would seriously argue it can consistently outperform by 1% per year.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby bobsmith » Sat Mar 23, 2013 11:39 pm

Wow, such an outpouring of information! Thanks!

I'm still looking these posts over and will do a better forum search for old DFA posts. Just to be a little more clear, I identified myself to the speaker as a Vanguard investor who only invests in index funds. That's about all he knew of me. It's true he didn't say "historically" but he did suggest that DFA's index funds were good enough to make up the 1% difference he would charge to manage my investments. (that's for you Nisiprius, and btw, thanks for those charts!) The main reason for my post here is to ask if DFA's Index funds outperform Vanguard's. After years of learning things the hard way and making the usual mistakes, I'm now fairly comfortable and confident managing my own simple investments. I do a very vanilla index allocation with 10% TBondMI, 90% stock. (63% TStockMI, 27% TInternationalSMI.) I reallocate yearly when I make my personal Roth contribution and I don't buy/sell on emotion. I don't engage in more advanced strategies like loss harvesting, but I am aware of tax consequences and I take advantage of all the retirement accounts I can, going Roth when I can. If "slice n dice" means I have to watch the market and do much more than re-allocate to keep on target, then I'm not that interested unless the gains are substantial. I offer this description of what kind of an investor I am in order to show what I'm comparing to DFA. At one point the speaker compared the IFA Index Porfolio 90 to the S&P 500 which I thought was a bit disingenuous, but overall I got a good vibe from the speaker and he wasn't pushy. He did say the only way you could get DFA's was to go through an agent. Anyway, to be clear, I just want to know if DFA's funds are better and if so, how much better and why. I seem to have already gotten some good info about this.

Oh, at least with the IFA Index Porfolio 90, I was surprised to see them running a 60 domestic/40 international mix. That seemed a little heavy on the international side, but maybe that's a sign of the times as the world becomes more global with less US influence.

As a novice investor, I really appreciate the advice here at bogleheads. It's always generous when people take the time to type our a response, give links or even charts. So thank you for that. However, as I found often happens here, the advice I get from people usually contradicts as is the case with this thread where I've read everything from "it's hooey" to suggestions that DFA has a 2%-3% advantage. That sort of leaves me no better than when I started.

Okay, just wanted to clarify things a bit about where I'm coming from. I'll check back on this thread tomorrow. Thanks again.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby EmergDoc » Sat Mar 23, 2013 11:48 pm

I think DFA funds in general are better than Vanguard funds, but the difference, IMHO, is less than the typical advisor fee. If you can get your fee down under 0.5% then I think you can start arguing for using the DFA funds.

One thing to keep in mind is that DFA's funds tend to be smaller and more valuey than comparable Vanguard funds. So while you would expect a higher long term return, it comes at a higher risk. When comparing funds, you have to allow for this or you'll come to the wrong conclusions.

I thought Taylor's quote above was interesting as I hadn't seen it. But keep in mind the time period. Any comparison ending in 2000 would heavily favor a large growth portfolio, i.e. a Vanguard TSM type index fund over a smaller and more valuey fund.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby cheapskate » Sun Mar 24, 2013 12:17 am

1) IFA is a particularly aggressive marketing company. Not saying this is good or bad. But this is the way IFA is.
2) In Finance, you can prove anything by cherry picking your timeframes. There are periods where DFA will outperform Vanguard and there are periods where Vanguard will crush DFA. The truth is that over YOUR investing lifetime, there is NO guarantee that tilting to Value or Small Cap or Growth or Momentum (or insert your favorite tilt) will outperform the market. If you slice and dice, you need to enter with that clear understanding.
3) You should never hire an advisor for access to DFA funds, but for the other benefits that the advisor brings to table. If you hire an advisor, only do so with the clear understanding that the advisor's portfolio will very likely lag a comparable Vanguard Target Retirement portfolio by the amount of the advisory fees.
4) If DFA access is what you want, there are much cheaper ways of getting DFA access. There is a growing number of fixed fee DFA advisors (with yearly fees in the $1000-$3000 range). These advisors have a significantly lower customer service level compared to the 1% of AUM ones. They will work on defining an IPS, implement it, and forget it. They will conf call with you once a year, rebalance and tax loss harvest once a year. $1000-$3000/year is a lot more palatable fees to pay for DFA access (for > 100K portfolios).
5) Finally, there are plenty of non-DFA alternatives out there for every asset class that anyone can buy. Check out the page on altruistfa and search on this board.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby bobsmith » Sun Mar 24, 2013 2:07 pm

Thanks everyone for your time and effort in responding to my question. I very much appreciate being able to get thoughtful advice from generous people. I've come to a few conclusions based on my own situation:

- It's very hard to make a long term historical apples to apples comparison between like funds and investments. This would explain why I've gotten such a wide variety of conflicting answers as to whether or not Dimensional Index Funds are superior to Vanguard's Index Funds. Given this thread and other places I've looked, I'm concluding that Dimensional funds probably did do a little better than Vanguard's index funds, but I don't think there's enough evidence to determine if this is a trend that will continue. More importantly, if there is a difference I don't believe the gains are large enough to justify the 1% I'd be paying more in fees to an advisor. It was suggested I might get access to other DFA funds through other means for as little as 0.37% (as I recall from a website), but again I just don't know if it's worth it, nor do I want the hassle of being more hands on.

- I'm a very basic vanilla investor. I'm still learning but I've got a solid understanding of the basic principles of investing and I'm comfortable doing it myself. I don't feel a need for an advisor, nor do I believe getting one would likely get me a return good enough to justify the extra 1% I'd pay in fees. I'm not interested in tracking the market and trying to splice and dice together an allocation then monitor it for drift and changes to internal fund allocations. I think I'm certainly savvier than your average investor, but much less so than the average booglehead poster.

- I'm a index investor. Philosophically, to me this means you don't try to beat the market. You just try to match it as cheaply as you can. When I went to the lecture, and the speaker discussed Dimensional in relation to Vanguard, he suggested that Dimensional was a more finely tuned method of indexing. Where Vanguard might hold 100 companies within a certain sector, Dimensional might instead hold 120. The idea, as was explained to me, was that you get an even more diversified investment and therefore you reduce your overall risk. However, from this thread and other sources, I've learned that's not really whats going on. What instead seems to be happening is Dimensional starts with solid indexing, but then tilts its investments in certain directions that actually represent the true diversification of the market LESS accurately. (Value, small cap, etc). My own calculations actually show Dimensional investment to be slightly more volatile when compared to Vanguard which is what you'd expect with a slightly riskier allocation. So philosophically, as good as Dimensional funds may or may not be, they are straying slightly from the Index Investing strategy. This goes against my core investment philosophy.

- I like Vanguard not just because I think they are the best choice for me, but because even among no-load companies they stand out. No one at Vanguard works on commission. I've found them to be very transparent, patient, and helpful when I call. Etc. I like supporting an organization that I think has a good business model for consumers.

So, in conclusion, for my purposes I think I'll stick with Vanguard.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby wish2bCFP » Sun Mar 24, 2013 6:16 pm

Scott Burns is a recognized investment journalist who now hosts a website named AssetBuilder.com which offers access to DFA funds at a discount. The fees start at 0.45% and go down as your assets grow. He uses Schwab as the fiduciary and their trading fees are added to the 0.45%. Check it out.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby nisiprius » Sun Mar 24, 2013 6:44 pm

bobsmith, I feel very much the same way you do about Vanguard. I'm just a plain vanilla investor myself. But it's more like Vanguard is my thing, DFA is not my thing, than any terribly strong convictions about which way is better.

Just one other thing about DFA's background. It would be very interesting to have a sociogram of who was talking to whom and what was "in the air" when index funds were created. And it would be interesting to know what John C. Bogle thinks of David G. Booth, and vice versa. But both DFA and Vanguard are very "respectable" companies with deep roots in the passive investing field. There's a thumbnail sketch of DFA in the Bogleheads' Wiki that you might want to glance at.

Very broadly speaking, the idea of index funds and passive investing was out there waiting for someone to try it; in 1973, in the first edition of A Random Walk Down Wall Street, Burton Malkiel wrote:
What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out "You can't buy the averages." It's time the public could.
He added that the New York Stock Exchange ought to "sponsor such a fund and run it on a nonprofit basis" and said that it "incidentally has considered such a fund."

Now, the circumstances of Bogle's creation of the Vanguard 500 Index Fund are interesting. One of the reasons why Vanguard was the first to do it is that it was a way he could make an end-run around some restrictions in Vanguard's contractual relationship with Wellington Management.

DFA was founded for the purpose of creating a small-cap index fund, probably following up on academician Ralph Banz's 1980 "discovery" of the small-company effect (and you can get an argument going here any time by suggesting that the small-company effect has been overstated and is somewhat discredited).

DFA itself is much larger and more successful than you might think; it has a fairly low profile because of its business model of working through advisors. It has been successful enough for founder David G. Booth to be able to give $300 million to the University of Chicago School of Business, now the University of Chicago Booth School of Business.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby wolf433 » Sun Mar 24, 2013 8:01 pm

[/quote]In my opinion, if you are comfortable with what you have, keep the 1% management fee in your pocket and move on. If you really do want access to DFA funds, take a look at Portfolio Solutions, they likely can get you access to those funds with a lower fee than 1% (depending on the size of your account): http://www.portfoliosolutions.com/faq/ (I have no affiliation and am not a customer - Rick merely posts here often).

I will add, yes, Portfolio Solutions had access to DFA Funds but you will not get an all DFA portfolio. Quite the contrary, you will probably get only a little in Emerging Markets and Int Small Cap Value. Moreover, you don't dictate to them what to buy, rather they will build your portfolio for you. After all,that is what you are paying them to do.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby Rob5TCP » Sun Mar 24, 2013 11:01 pm

Here is an interesting comparison with DFA and Vanguard
(please note - they have an agenda - they sell DFA and other funds).

http://www.altruistfa.com/dfavanguard.htm
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby dr_g » Tue Sep 24, 2013 1:43 am

Very instructive thread. Thank you all!

I just started to focus on indexing. I'm even working on leaving instructions to my trustees to index after I turn in my keys!For the long term, I'm convinced indexing is the way to go. ...as long as we remain a capitalistic society.

Reading with interest the comparison between DFA and Vanguard and performance metrics for comparing comparable funds from both of those suppliers. I also understand the efficient frontier and the stock/bond mix, but from there I'd appreciate some perspective.

To keep it simple, let's say you don't care about bond indexes and your risk tolerance or external assets are such that you're only interested in equities (efficient frontier notwithstanding). DFA claims to have over 100 equity index funds which their "1% advisor" presumably mixes and matches. I don't know how Vanguard goes through a selection process, but i assume it exists. Within the 100 or so DFA index funds, there are small caps, value, large, geography A, geography B, etc, etc. My question is this: how do you blend the funds to compose a single equity index portfolio?

I suppose one way would be to weigh them by world wide capitalization. Another way would be to "tilt" them according to past performance and some theories by Nobel Prize winners. Yet another way would be to throw darts. All this under the "indexing" umbrella.

Are some of the prior posters saying they are comfortable creating their own "tilts?" Seems that with Vanguard you have to create your own blend and rebalance yourself, whereas maybe DFA does the picking and rebalancing for you ...or maybe the "1% advisor" helps? On the other hand, I would think Vanguard offers some type of selection and rebalancing service. ...or are you on your own? Does the perfect blend for a 100% equity index portfolio depend on each person's temperament and beliefs? That could take you right back to stock picking!

As I thought about this, I realized that "index investing" is much more than buying an S&P 500 index ETF!

Thanks for any help or enlightenment.

Gerry
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby Valuethinker » Tue Sep 24, 2013 6:06 am

It is important to understand that DFA is not an index fund manager.

DFA is an active quantitative fund manager. ('active quant'). It manages its funds using mathematical algorithms but with 'smart indexation' to minimize for example dealing costs.

If you want indexation in US equities you want Vanguard TSM. Lowest costs, and its inclusion of the broadest possible index should lower dealing costs and turnover.

Where DFA has at least a theoretical advantage is in the pursuit of the 3 factor anomaly.

What research has shown is that :

- the value and small cap anomaly exists but we don't know why therefore it may simply be there is higher risk in certain circumstances (usually extreme economic and financial stress eg 2008-09 Crash)

- if you strip out dealing costs, and liquidity impact (the fund manager moves the prices of small cap and value stocks against herself by buying and selling) it's difficult to capture it for investors in the fund

DFA fights that by explicitly not being an index fund, but by structuring its funds to minimize dealing costs, plus making it difficult for its clients to 'trade' in and out of funds (if a fund has big inflows or outflows, performance is transferred from the long term holders of units to those buying and selling, because the individual stocks are sold at bid, bought at offer (losing the spread between them, which can be 10% for a small cap stock) but units in the fund are bought/ sold at the mid price ie the NAV).

it appears from historic data that this approach yields higher returns in the international arena (there are also things like cleaning accounting numbers, to create a better picture of 'value'-- some international financial reporting is not to the standard of US GAAP).

Also DFA has identified 'tweaks' to the 3F such as momentum (stocks doing well keep doing well, and vice versa) and now, profitability.

The mature view is probably that:

- most people don't need DFA

- where you want DFA it's in the Small Cap Value arena, especially international. And that is worth a gamble, a punt as we say, but only to the extent of 10-20% of total assets. One has to understand that SCV strategies can underperform general markets by, say, 10% (I don't know what the exact worst case is, but in the early 1990s SC strategies really fell apart). And one has to have a firm grasp of Behavioural Finance-- ie DFA's whole methodology of meaning it's hard to panic out as a client. SCV will be the best possible strategy at times when, emotionally, you really want to panic out (September 2008- March 2009 for example)

I am not familiar with DFA's large cap strategies (where I think the advantage would be much less over VG funds) or bond strategies (ditto). Again DFA might offer better returns internationally vs VG's 'naive' indexation, than in US markets (which are liquid and efficient-- the most developed capital markets in the world).

A DIY approach using Vanguard is perfectly possible. TSM has lots of small cap value stocks in it.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby grap0013 » Tue Sep 24, 2013 10:17 am

I always find it interesting that SCV is "more risky" but in crashes it only goes down marginally more than TSM. If risk really matched rewards the minimize fat tails portfolio (30% SCV/70% treasuries) shouldn't work in up markets. However, historically it has gotten the same/better returns with a heavy dose of bonds as TSM. Therefore, the upside of SCV is much higher than the downside.

Back to topic, it doesn't matter what you call DFA, their funds have such low turnover it is a "passive" approach. This is the same reason Vanguard's active funds do well. They are low cost with low turnover. It's the cost and turnover that matter.

I use a DFA fund through my work retirement plan. I would never pay for access to their funds. Average Joe has access to Fundamental Index funds so you'd be crazy to pay for DFA.
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Re: Vanguard vs. Dimensional Fund Advisors (DFA)

Postby livesoft » Tue Sep 24, 2013 10:28 am

Gerry,

You asked questions that were already answered in this thread. Can you ask more specific questions?

Also perhaps read Robert T's Collective Thoughts thread: viewtopic.php?f=10&t=7353
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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