DFA vs Vanguard Portfolios - Big Difference Over Last 10 yrs

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DFA vs Vanguard Portfolios - Big Difference Over Last 10 yrs

Postby Mazz » Thu Mar 03, 2011 10:09 pm

My DFA advisor sent me an e-mail today with a link to their website that shows a good DFA & Vanguard comparison.

I thought that others may find this interesting.

The details can be found at the following link:

http://financialplanning.com/vanguard/d ... y-new.html

or

Vanguard.FinancialPlanning.com
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Postby gkaplan » Thu Mar 03, 2011 10:13 pm

Altruist does a similar thing on his website.
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Postby normaldude » Thu Mar 03, 2011 10:22 pm

That's just FinancialPlanning.com data mining & cherry picking portfolio mixes, in order to justify their own fees.
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Postby Mazz » Thu Mar 03, 2011 10:37 pm

Did you click on the fund by fund comparison?

I don't think that this is data mining since they are showing a fund by fund comparison on an annual basis for the last 11 years.

http://financialplanning.com/vanguard/d ... -etfs.html
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Postby normaldude » Thu Mar 03, 2011 10:44 pm

Mazz wrote:Did you click on the fund by fund comparison?

I don't think that this is data mining since they are showing a fund by fund comparison on an annual basis for the last 11 years.

http://financialplanning.com/vanguard/d ... -etfs.html


You can go to any salesperson at a for-profit business, and they will massage the numbers a million ways, until they come up with a chart that shows that they are #1, and you that you should pay them money.
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Postby livesoft » Thu Mar 03, 2011 11:00 pm

To compare portfolios, I like to use the Morningstar X-ray tool. To say that portfolios are similar, one should make the 9-box style grid similar AND the average market cap should be similar. One should probably make sure the US-alone and foreign-alone also give similar numbers and not just look at a combined portfolio. The M* X-ray tool is not as strict as some factor-loading folks would want, but it is good enough for me.

So for the DFA portfolio:
16-13-08
14-10-04
17-12-06
69% US, 30% foreign, no bonds, average market cap $5,154 million

and the Vanguard comparison portfolio (oops, their allocation adds up to 110%, so they can't do math to start with):
18-15-09
14-14-08
10-08-05
72% US, 27% foreign, no bonds, average market cap $8,505 million

My conclusion: They did a very poor job making a similar Vanguard portfolio. The DFA portfolio is much smaller in market cap; the bottom row (small cap) sums to 35% for the DFA and only 23% for the Vanguard portfolio.

But I'm still laughing at how they gave 110% of your money to the Vanguard allocation. I'll take a free 10% any day of the week.

Bottom line: the portfolios are more different than they would want you to believe.
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Postby Multifactor Advisor » Thu Mar 03, 2011 11:08 pm

Wow, the race to the bottom is heating up! $1,000 annual fee? By my math, this now makes the 0.25% and $2,000-$3,000 per year firms extremely expensive and overpriced, no? By extension, can you still call yourself a "low fee advisor" when you charge 2-3X what other advisors charge?

What am I missing? :wink:
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Postby Avo » Thu Mar 03, 2011 11:38 pm

A big table of numbers is pretty hard to assimilate. Much better to go do plots at M*.

If you do that, you'll see why the DFA sales people didn't do it for you.
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Postby baw703916 » Thu Mar 03, 2011 11:59 pm

Another point is that they restricted the Vanguard portfolio to funds that have been around 10 years. One major thing that's missing is Small FTSE, which would make the portfolio look a lot more DFA-ish.

What they don't do is to compare a "bet fit" ETF portfolio using things like EFV, DLS, DGS, DEM, VSS. Granted, these don't have a ten year history, but the fastor exposure and asset allocation would much more colsely replicate a DFA based portfolio.

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Postby KyleAAA » Fri Mar 04, 2011 12:08 am

The best thing about DFA is they offer a few juicy asset classes that Vanguard doesn't. I would use them for that reason if I were inclined to use an advisor. I don't those asset classes would juice my returns enough to overcome the additional cost an advisor brings to the table, though.
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Not good comparison for taxable

Postby Random Walker » Fri Mar 04, 2011 1:34 am

One of the major advantages for DFA in my opinion is for taxable investors. With DFA you can basically access these asset classes and factor loads through core funds and tax managed funds. VG has no TM value funds. And with DFA you can get the same tilts to small and value with less beta exposure.

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Postby Bongleur » Fri Mar 04, 2011 4:54 am

What about the capital gains cost to convert a late accumulator's portfolio? I don't think you could ever recover.
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Postby rustymutt » Fri Mar 04, 2011 9:22 am

livesoft wrote:To compare portfolios, I like to use the Morningstar X-ray tool. To say that portfolios are similar, one should make the 9-box style grid similar AND the average market cap should be similar. One should probably make sure the US-alone and foreign-alone also give similar numbers and not just look at a combined portfolio. The M* X-ray tool is not as strict as some factor-loading folks would want, but it is good enough for me.

So for the DFA portfolio:
16-13-08
14-10-04
17-12-06
69% US, 30% foreign, no bonds, average market cap $5,154 million

and the Vanguard comparison portfolio (oops, their allocation adds up to 110%, so they can't do math to start with):
18-15-09
14-14-08
10-08-05
72% US, 27% foreign, no bonds, average market cap $8,505 million

My conclusion: They did a very poor job making a similar Vanguard portfolio. The DFA portfolio is much smaller in market cap; the bottom row (small cap) sums to 35% for the DFA and only 23% for the Vanguard portfolio.

But I'm still laughing at how they gave 110% of your money to the Vanguard allocation. I'll take a free 10% any day of the week.

Bottom line: the portfolios are more different than they would want you to believe.


Hilarious funny math! Why would believe a chart that's got bad math to began with?
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Postby rustymutt » Fri Mar 04, 2011 9:25 am

KyleAAA wrote:The best thing about DFA is they offer a few juicy asset classes that Vanguard doesn't. I would use them for that reason if I were inclined to use an advisor. I don't those asset classes would juice my returns enough to overcome the additional cost an advisor brings to the table, though.


I would argue that you can get those same asset classes as ETFs through VBS.
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Postby staythecourse » Fri Mar 04, 2011 10:15 am

Couple of points:

1. Last 10 yrs. has been good for small and value so it would figure a company that overweights those 2 factors will overperform.

2. To have a mature discussion on the comparisons ER and cost of the annual advisor to access the funds should be discussed.

DFA and Vanguard are both fine companies. The big restriction to DFA is the costs to access AND if you whole heartedly agree with the tilting.

Those are decisions every investor must make individually so no amount of pretty charts will make the difference.

Good luck.
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Postby Roy » Fri Mar 04, 2011 11:31 am

staythecourse wrote:Couple of points:

1. Last 10 yrs. has been good for small and value so it would figure a company that overweights those 2 factors will overperform.

2. To have a mature discussion on the comparisons ER and cost of the annual advisor to access the funds should be discussed.

DFA and Vanguard are both fine companies. The big restriction to DFA is the costs to access AND if you whole heartedly agree with the tilting.


Those are decisions every investor must make individually so no amount of pretty charts will make the difference.
.


All good points, staythecourse. If one is a Total Markets investor, this doesn't matter much. And Vanguard is just fine.

Also, once past the advisor fee, the DFA outperformance would seem to apply more in portfolios that are heavily weighted to equities, as that it is where their fund structural advantages appear to the greatest extent. I have not looked carefully at DFA vs. Vanguard fixed income to see the comparative performance there. But there too, I suppose DFA would do well (though perhaps not as dominant as with their equities), and their shifting maturity strategy is likely helpful in that. A fine, intelligently-run fund family, that's for sure.

All I can say is that if one has lots of fixed income in a portfolio (70+% say), I wonder how compelling the DFA expected outperformance is going to be (cause you still have to add that same advisor fee), especially if that is the sole reason one wants to access an advisor (which it should not be the sole reason).

Rick seems to think that funds or ETFs that are structurally similar to DFA will become available without advisor fees. We'll see on that.
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Postby 1210sda » Fri Mar 04, 2011 11:50 am

I agree with Roy's observations.

I'll use a 50/50 AA as my example and assume the same 10yr return for fixed income of 5.5% for both portfolios (this is the 10 yr compound return for VBMFX).

In this case, the DFA portfolio return is 7.6%. After deducting 1% for the advisor, you have 6.6%.

The Vanguard portfolio has a return of 6.2% . A difference after advisor costs of 0.4%. Is this statistically significant ??

What about when small and value start to underperform ?

I think financialplanning.com is just doing a little marketing....
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Postby Roy » Fri Mar 04, 2011 12:24 pm

1210sda wrote:I agree with Roy's observations.

I'll use a 50/50 AA as my example and assume the same 10yr return for fixed income of 5.5% for both portfolios (this is the 10 yr compound return for VBMFX).

In this case, the DFA portfolio return is 7.6%. After deducting 1% for the advisor, you have 6.6%.

The Vanguard portfolio has a return of 6.2% . A difference after advisor costs of 0.4%. Is this statistically significant ??

What about when small and value start to underperform ?

I think financialplanning.com is just doing a little marketing....
1210


Hi, 1210,

What were the comparative equity funds you used?

The best reasons to use an advisor are not for the DFA fund access. Yet, many advisors on the net use DFA returns for tangible comparisons (gets the most attention most explicitly) to get the clients but without doing as good a job at explaining the better reasons for using the advisor. Admittedly, these better reasons, beyond hand-holding, are harder to explicate, not as thrilling as showing returns, and often apparent only when one uncovers the particular wealth management complexities on a client-to-client basis. I think Larry has done a lot to help explain those reasons and how an advisor can add other value. And Rick has done a good job explaining why one should not use an advisor just to access DFA funds.
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Postby Rick Ferri » Fri Mar 04, 2011 1:08 pm

Let's stop beating a dead horse.

If you believe what DFA/Fama/French say, the DFA portfolios excess returns are a result of higher small-cap and value risks that investors take with those DFA funds. The Vanguard portfolio returns are a result of more market centric risks that investors take with Vanguard funds. To the extent that small cap and value stocks significantly outperformed the total market over the past decade, it is expected that the riskier DFA portfolios with greater tilts to value stocks and small cap stocks would have higher returns during the period measured. If they didn't outperform over the past 10 years, then DFA had real operational issues.

In the end, what drives 97% of equity portfoilo performace is the amount of tilt your portfolio has to the market, to value stocks and to small cap stocks. The other 3% is the actual funds you invest in, and the cost to invest in those funds (not to mention the cost of an investment manager).

Rick Ferri

I propose that these intentionally biased DFA/Vanguard comparisons be banned on this forum.

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Postby livesoft » Fri Mar 04, 2011 1:13 pm

Rick Ferri wrote:Let's stop beating a dead horse.

Almost all topics on this forum are dead horses at this point in time. :)
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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Postby Rick Ferri » Fri Mar 04, 2011 1:17 pm

livesoft wrote:
Rick Ferri wrote:Let's stop beating a dead horse.

Almost all topics on this forum are dead horses at this point in time. :)


You have over 15,000 posts. So I would say that's probably true in your case! :wink: But, in fariness, for the sake of new investors, I suppose that beating a dead horse to a pulp has some benefit. BTW, I heard from Ric Edelman that Vanguard has 1.4% in hidden fees in their funds. Is that true? :roll:

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Postby yobria » Fri Mar 04, 2011 1:29 pm

Funny how these comparisons pop up right after DFA has a good year (in this case 2010)...

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Postby Virajith Wijeweera » Fri Mar 04, 2011 1:38 pm

First of all, I work for www.FinancialPlanning.com.

I noticed that our DFA vs Vanguard comparison that we recently emailed to our clients has been posted here on the Bogleheads site.

The data for DFA was derived from Morningstar Principia, and the data for Vanguard was derived from the Vanguard website so for everyone out there who is claiming that data has been manipulated, please go the respective websites, and you will find the historical performance to be exact for each individual fund.

Our math skills are just fine!

The reason why the VG allocation adds up to 110% is because the VG Midcap Value fund was not available till 2007 so we used VG Midcap Blend to fill the gap between the years of 2000 and 2006 (I thought we made that clear by putting the years in paranthesis).

Also, we do not merely provide people access to DFA funds. Apparently that is how some participants on Bogleheads.org view it. Nothing on our website nor business model says anything about "pay us to access DFA"

We are a RIA who embraces passive investing and the utilization of engineered passive strategies such as DFA and Wisdom Tree.
In fact many of the strategies that we have on our website can be used by investors without having to go through our platform.

We offer a robust package of services for a very reasonable fee.
The question should not be "why are we so cheap", but rather "why are most advisors so expensive"
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Postby Multifactor Advisor » Fri Mar 04, 2011 1:48 pm

My life would be so much easier if there were some non-DFA funds I could use. We've even joked about throwing a Vanguard/Bridgeway fund or ETF somewhere just to have another "name" in our lineup. But of the 5-6 asset classes that make up our base portfolios, there is nothing in the same ballpark today as what I've always used with DFA. And as a fiduciary, I certainly cannot justify that.

Used to be I could make a case for a Vanguard S&P 500 or Total Stock Index, but for clients that aren't all-value, the Core's effectively took that off the table.
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Postby Multifactor Advisor » Fri Mar 04, 2011 2:03 pm

Virajith Wijeweera wrote:First of all, I work for www.FinancialPlanning.com.

I noticed that our DFA vs Vanguard comparison that we recently emailed to our clients has been posted here on the Bogleheads site.

The data for DFA was derived from Morningstar Principia, and the data for Vanguard was derived from the Vanguard website so for everyone out there who is claiming that data has been manipulated, please go the respective websites, and you will find the historical performance to be exact for each individual fund.

Our math skills are just fine!

The reason why the VG allocation adds up to 110% is because the VG Midcap Value fund was not available till 2007 so we used VG Midcap Blend to fill the gap between the years of 2000 and 2006 (I thought we made that clear by putting the years in paranthesis).

Also, we do not merely provide people access to DFA funds. Apparently that is how some participants on Bogleheads.org view it. Nothing on our website nor business model says anything about "pay us to access DFA"

We are a RIA who embraces passive investing and the utilization of engineered passive strategies such as DFA and Wisdom Tree.
In fact many of the strategies that we have on our website can be used by investors without having to go through our platform.

We offer a robust package of services for a very reasonable fee.
The question should not be "why are we so cheap", but rather "why are most advisors so expensive"


Good points Virajith. You are a threat to some on this board who have been trumpeting "low costs" as the only or at least deciding factor when hiring an advisor. You have lower costs than them, so by logical extension, there should be no reason for their clients to continue to pay higher fees.

PS -- The "boglehead rules" are when doing comparisons: if Vanguard doesn't offer a fund in a particular asset class, you are prohibited for using that DFA fund in comparisons. You are in effect forced to handicap yourself due to Vanguard's shortcomings. Twisted logic, I know. But that is the protocal if you want to conform! :lol:

Also, when benchmarking a Vanguard fund to DFA US Targeted Value (small/mid value), you can just use the Vanguard SV fund. It has about the same buy range (but excludes micro caps to their detriment), so you don't need to add distinct mid cap/mid value. And, we aren't supposed to mention that a 60% Core 1, 40% Targeted Value Index mix has outperformed 100% MSCI Small Value Index since 1992 (and MSCI 1750 Value has been the best performing small value retail index since its inception)
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DFA vs. Vanguard -- the first 18 years ?

Postby Taylor Larimore » Fri Mar 04, 2011 2:11 pm

Hi Bogleheads:

Every now and then we get threads debating the superiority of DFA or Vanguard. Personally, I believe both are two of the very best mutual fund companies. Nevertheless, no one can predict winning funds in advance.

About 10 years ago, Morningstar's Research Director, John Rekenthaler, conducted an 18 year comparative study of DFA vs. Vanguard.

This leads neatly to the Question of the Week, posed by Alex Frakt.* Alex, known to you Vanguard Diehards as "lowwall" (what’s that all about?) asks me to adjudicate the Vanguard versus DFA debate. As he puts it, "The former group holds that anything other than owning the market by capitalization weight is just making a bunch of sector bets. The latter says that anything other than equally weighted sectors is making one sector bet: large growth. What do you think?" Vanguard, in a landslide.


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Re: DFA vs. Vanguard -- the first 18 years ?

Postby Multifactor Advisor » Fri Mar 04, 2011 2:26 pm

Taylor Larimore wrote:Hi Bogleheads:

Every now and then we get threads debating the superiority of DFA or Vanguard. Personally, I believe both are two of the very best mutual fund companies. Nevertheless, no one can predict winning funds in advance.

About 10 years ago, Morningstar's Research Director, John Rekenthaler, conducted an 18 year comparative study of DFA vs. Vanguard.

This leads neatly to the Question of the Week, posed by Alex Frakt.* Alex, known to you Vanguard Diehards as "lowwall" (what’s that all about?) asks me to adjudicate the Vanguard versus DFA debate. As he puts it, "The former group holds that anything other than owning the market by capitalization weight is just making a bunch of sector bets. The latter says that anything other than equally weighted sectors is making one sector bet: large growth. What do you think?" Vanguard, in a landslide.


Investing is not Engineering

* Alex Frakt and Larry Auton, are the owners and contributors of this forum.


Taylor,

Uh, do you think there was any end point bias in that study? Do you have the updated results through 2010? Rekenthaler's article is the indexers' version of the Dow 36,000 book--but I don't believe I've heard John's mea culpa? :lol:

That being said, I agree, both DFA and Vanguard are great fund families. That's all I'll say.
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Postby 1210sda » Fri Mar 04, 2011 2:36 pm

Roy wrote:

"Hi, 1210,

What were the comparative equity funds you used? "


In their website, financial planning states that the 10 yr annualized average return for their "DFA Global Equity Folio" is 9.73% and the "Vanguard Global Equity Folio" was 6.98%. This shows a 2.75% advantage for the DFA portfolio. (100% equity BTW).

I was just trying to show that if I had a 50/50 portfolio instead of a 100% equity portfolio, and using their equity numbers and the 10yr avg for Vanguards Total Bond Market fund, the DFA advantage (after deducting advisor fee of 1%) would not be 2.75%, but 0.4%.

So again, I used their numbers for the equity portion of the portfolio.

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Postby Rick Ferri » Fri Mar 04, 2011 2:41 pm

I'll repost this:

In the end, what drives 97% of equity portfolio performance is the amount of tilt your portfolio has to the market, to value stocks and to small cap stocks. The other 3% is the actual funds you invest in, and the cost to invest in those funds (not to mention the cost of an investment manager).


I'm an advisor also and I'm agnostic to DFA, Vanguard, WisdomTree, Bridgeway, et. all. I don't care which family of funds outperformed last week, last month, or last year. All I want is exposure to certain market risks that I select and in the cheapest way possible. If I can get those exposures with one fund company, OK; two fund companies, better, ten fund companies, even better.

I say this again because the dead horse we're beating is quickly becoming unrecognizable as this opinionated conversation continues.

Rick Ferri



.
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Bias ?

Postby Taylor Larimore » Fri Mar 04, 2011 2:41 pm

MultifactorAdvisor:

Taylor, Uh, do you think there was any end point bias in that study?


Every study of past performance has "end point" and "period" bias.
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Postby Rick Ferri » Fri Mar 04, 2011 2:55 pm

MultiFactor Investor,

Like you, I consider FinancialPlanning.com a great service to all investors who absolutely must have DFA funds in their portfolio. The firm allows you to pick from pre-packaged portfolios OR you can build your own DFA portfolios using whatever strategy blows your hair back (as they put it, "the client can create his or her own mixture of funds.")

DFA strongly discourages advisors from selling access to DFA funds, but that hasn't stopped firms from doing it. I, for one, am glad firms like FinancialPlanning.com sell this service so that people who are only in the hunt for cheap access to DFA will call them and not me. I am an investment manager, not a mutual fund wholesaler.

Rick Ferri

On caveat, like most advisors who promote the past performance of DFA funds, FinancialPlanning.com is showing the long-term performance of portfolios that did not actually exist, and in some cases, before the DFA funds existed. In addition, they're don't disclose that the returns are simulated, and least not anywhere that's in plain sight. This means the firm has not yet been audited by the Securities and Exchange Commission. Once the SEC looks at this, the firm will need to comply by providing proper disclosures concerning simulated fund returns and simulated portfolio performance.


.
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Postby pkcrafter » Fri Mar 04, 2011 3:15 pm

Thanks to Livesoft for posting the M* x-ray. After seeing that I would just mention the same old conclusion. The comparison is not equal--it's a small and value story.

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Postby Roy » Fri Mar 04, 2011 3:22 pm

Virajith Wijeweera wrote:The question should not be "why are we so cheap", but rather "why are most advisors so expensive"


How much extra—beyond your DFA access fee— do your "wealth management services" cost?
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Postby YDNAL » Fri Mar 04, 2011 3:23 pm

Mazz wrote:My DFA advisor sent me an e-mail today with a link to their website that shows a good DFA & Vanguard comparison.

A little more beating the dead horse. :)

One striking thing (of 2) is comparing 35% Targeted Value (DFFVX) to 10% slices of NAESX, VMVIX/VMISX plus 15% slice of SC Value (VISVX). The other striking thing is the significant disconnect in comparing International holdings.
financialplanning.com wrote:DFA Global Equity Folio
Fund Name Ticker Allocation
DFA Large Company Institutional Index Fund DFUSX 15.00%
DFA Large Cap Value Fund DFLVX 15.00%
DFA Targeted Value Fund DFFVX 35.00%
DFA REIT Fund DFREX 5.00%
DFA International Value Fund DFIVX 8.00%
DFA International Small Cap Value Fund DISVX 5.00%
DFA International Small Company Fund DFISX 5.00%
DFA Emerging Markets Fund DFEMX 3.00%
DFA Emerging Markets Value Fund DFEVX 4.00%
DFA Emerging Markets Small Cap Fund DEMSX 5.00%

Vanguard Global Equity Folio
Fund Name Ticker Allocation
Vanguard 500 Investor Fund VFINX 15.00%
Vangurad Large Value Investor Fund VIVAX 15.00%
Vanguard Small Cap Value Investor Fund VISVX 15.00%
Vanguard Small Cap Investor Fund NAESX 10.00%
Vanguard Mid Cap Value Investor Fund (2009‐2006) VMVIX 10.00%
Vanguard Mid Cap Blend Investor Fund (2006‐2000) VIMSX 10.00%

Vanguard REIT Investor Fund VGSIX 5.00%
Vanguard International Value Investor Fund VTRIX 8.00%
Vanguard International Explorer Small Cap Investor Fund VINEX 10.00%
Vanguard Emerging Markets Investor Fund VEIEX 12.00%


This is M*'s valuation of DFFVX:
00 00 00
15 08 03
36 26 12

This is the Vanguard combo:
01 00 00
14 16 14
23 20 11

I would expect a MORE logical* comparison using 35% slices of each DFFVX and DISVX.

* but, logic may have nothing to do with this.
Last edited by YDNAL on Sat Mar 05, 2011 3:02 pm, edited 2 times in total.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Postby Roy » Fri Mar 04, 2011 3:27 pm

Mazz wrote:My DFA advisor sent me an e-mail today with a link to their website that shows a good DFA & Vanguard comparison.

http://financialplanning.com/v....y-new.html



This is your "DFA advisor"? Since this company offers access to fund families other than DFA, did they provide links to those comparisons with Vanguard too?
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Postby Random Musings » Fri Mar 04, 2011 3:58 pm

Rick Ferri wrote:

I heard from Ric Edelman that Vanguard has 1.4% in hidden fees in their funds.


I think I have figured out how Ric has come to this conclusion. If you use his financial services at those outrageous prices, he has finally decided to call those charges "hidden fees". Sounds better that AUM or his cute acronym for it.

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Postby Virajith Wijeweera » Fri Mar 04, 2011 4:09 pm

Rick Ferri wrote:MultiFactor Investor,

Like you, I consider FinancialPlanning.com a great service to all investors who absolutely must have DFA funds in their portfolio. The firm allows you to pick from pre-packaged portfolios OR you can build your own DFA portfolios using whatever strategy blows your hair back (as they put it, "the client can create his or her own mixture of funds.")

DFA strongly discourages advisors from selling access to DFA funds, but that hasn't stopped firms from doing it. I, for one, am glad firms like FinancialPlanning.com sell this service so that people who are only in the hunt for cheap access to DFA will call them and not me. I am an investment manager, not a mutual fund wholesaler.

Rick Ferri

On caveat, like most advisors who promote the past performance of DFA funds, FinancialPlanning.com is showing the long-term performance of portfolios that did not actually exist, and in some cases, before the DFA funds existed. In addition, they're don't disclose that the returns are simulated, and least not anywhere that's in plain sight. This means the firm has not yet been audited by the Securities and Exchange Commission. Once the SEC looks at this, the firm will need to comply by providing proper disclosures concerning simulated fund returns and simulated portfolio performance.


.


Rick,

I appreciate your advice and concerns. We'll worry about SEC if that time arrives.

You are NOT our competition. Our competition is the overpaid brokers at all the full-service brokerage firms.

I also don't have time to keep responding to your posts or other users' posts.

Frankly, your company managing $1 Billion in assets, I don't know how you find the time to post on bogleheads on a very frequent basis, but I guess that's your problem and not mine.

If you have questions, or want to discuss anything, please feel free to call us or email us.
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Postby staythecourse » Fri Mar 04, 2011 6:36 pm

Virajith Wijeweera wrote:
Rick Ferri wrote:MultiFactor Investor,

Like you, I consider FinancialPlanning.com a great service to all investors who absolutely must have DFA funds in their portfolio. The firm allows you to pick from pre-packaged portfolios OR you can build your own DFA portfolios using whatever strategy blows your hair back (as they put it, "the client can create his or her own mixture of funds.")

DFA strongly discourages advisors from selling access to DFA funds, but that hasn't stopped firms from doing it. I, for one, am glad firms like FinancialPlanning.com sell this service so that people who are only in the hunt for cheap access to DFA will call them and not me. I am an investment manager, not a mutual fund wholesaler.

Rick Ferri

On caveat, like most advisors who promote the past performance of DFA funds, FinancialPlanning.com is showing the long-term performance of portfolios that did not actually exist, and in some cases, before the DFA funds existed. In addition, they're don't disclose that the returns are simulated, and least not anywhere that's in plain sight. This means the firm has not yet been audited by the Securities and Exchange Commission. Once the SEC looks at this, the firm will need to comply by providing proper disclosures concerning simulated fund returns and simulated portfolio performance.


.


Rick,

I appreciate your advice and concerns. We'll worry about SEC if that time arrives.

You are NOT our competition. Our competition is the overpaid brokers at all the full-service brokerage firms.

I also don't have time to keep responding to your posts or other users' posts.

Frankly, your company managing $1 Billion in assets, I don't know how you find the time to post on bogleheads on a very frequent basis, but I guess that's your problem and not mine.

If you have questions, or want to discuss anything, please feel free to call us or email us.


Everyone is entitled to their own opinions, but I will stick up for Mr. Ferri. He has spent much of his time helping regular joe advisors like many of us on this board improve our financial IQ without asking for anything in return. That type of attitude is the reason I am sure he has an much AUM as his company does. I for one appreciate Mr. Ferri's views and his willingness to answer the same mundane questions over and over and over and...

p.s. Makes me nervous as a individual investor when you or any company says "We'll worry about SEC if that time arrives".
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Postby Virajith Wijeweera » Fri Mar 04, 2011 6:50 pm

staythecourse wrote:
Virajith Wijeweera wrote:
Rick Ferri wrote:d

p.s. Makes me nervous as a individual investor when you or any company says "We'll worry about SEC if that time arrives".


That comment might have came across as us having a cavalier attitude, but that was only meant as a rebuttal to the comment that was made, that'a all.

We comply by all the rules and regulations that are placed by the State and the SEC.
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Postby Roy » Fri Mar 04, 2011 6:59 pm

I'm not bothered these guys are pushing DFA access on the cheap; it's a competitive market. I'm bothered more by the pretense that this isn't what they are doing, no matter how it gets spun.
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Postby nisiprius » Fri Mar 04, 2011 7:10 pm

To me, the real question is: what does ten years prove anyway? One of the reason I love Morningstar charts so much is that they let me go back more than ten years.

Of course there's a philosophical issue as to whether there is any amount of past performance that tells you anything about future results. Intuitively I feel that 30-50 years really does tell you more than 10 years, although this is certainly not a point on which to trust intuition.

I don't know whether the segmentation of market history into "bull markets" and "bear markets" is objectively valid, but clearly there is, let's say, plenty of noise energy down in the 2-per-decade frequency range. After the fact, it looks like the market did one thing for four, six, eight years, than another thing for another three, five, nine years, etc. You would like to be looking at a period that is at least long enough to include a good representative sample of market behavior, and ten years doesn't come close to doing it.

Obviously any ten-year chunk that includes a big piece of 1993-2000 (the Great Bull Market of the Nineties) is anomalous. Any ten-year chunk that includes a big piece of 2000-2010 (the Lost Decade) is anomalous. Any ten-year chunk that falls within 1966-1982 (let's call it the Death of Equities era) is anomalous.

I do have a proposal, but of course it falls in the fat-chance category. Engineers and statisticians have known for a long time that it is really lousy analysis to use moving boxcar averages, or, in general, to use samples that begin and end sharply at specific instances. It's asking for trouble. In fact it will actually manufacture cycles in random data that is not cyclic. Furthermore the razor-edged start and end sort of undo some of the good that the averaging does. A lot of the results that supposedly apply to the whole period actually are dominated by just two points, the start and the finish.

Really it would be better to use statistics that follow a smoothed out weighting pattern or window function. [quote="Wikipedia editors"]In signal processing, a window function (also known as an apodization function or tapering function) is a mathematical function that is zero-valued outside of some chosen interval.... In typical applications, the window functions used are non-negative smooth "bell-shaped" curves, though rectangle and triangle functions and other functions are sometimes used.
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Postby Rick Ferri » Fri Mar 04, 2011 7:25 pm

Virajith Wijeweera

I'm just trying to make a suggestion to an advisor who I believe has a good model, fair pricing, and is trying to help investors. My message to all newer advisors who are focused on gathering assets is to NOT brush off regulations, particularly when it comes to marketing performance numbers that didn't actually happen. State and federal regulators have more power than any advisor who has not been audited could ever imagine. No disrespect intended to FinancialPlanning.com.

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Postby LazyNihilist » Fri Mar 04, 2011 7:46 pm

staythecourse wrote:Everyone is entitled to their own opinions, but I will stick up for Mr. Ferri. He has spent much of his time helping regular joe advisors like many of us on this board improve our financial IQ without asking for anything in return. That type of attitude is the reason I am sure he has an much AUM as his company does. I for one appreciate Mr. Ferri's views and his willingness to answer the same mundane questions over and over and over


+1. I am a financial newbie and the contributors (Rick Ferri, livesoft, nisiprius, and lots of others) here are amazing. They give sound advice for free and help others. I love the Bogleheads :)
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Postby tronik » Fri Mar 04, 2011 10:39 pm

+2. I have also been very impressed by the level of help that the contributors here give to the forum, especially to those who are just getting started! :)
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Re: Bias ?

Postby Multifactor Advisor » Fri Mar 04, 2011 11:56 pm

Taylor Larimore wrote:MultifactorAdvisor:

Taylor, Uh, do you think there was any end point bias in that study?


Every study of past performance has "end point" and "period" bias.


Sorry Taylor,

I can't let you off the hook that easy. John points to a cherry picked period where small underperformed large and concluded the Fama/French model was invalid. Conveniently, he didn't mention the previous 16 years saw stocks underperform t-bills (and small beat large by more than 5% per year). And I have yet to see him produce an update to his study. If he did, it would find stocks underperform t-bills by 1% per year from 00-10, while small beat large by 5.6% and value beat growth by 7.0%. Now that's a landslide

I am betting John Rekenthaler wishes you would stop bringing this article up. Between this and "Is the S&P 500 a Value index", he has a special place in the Hall of Shame next to the Dow 36,000 guys.
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Postby Multifactor Advisor » Sat Mar 05, 2011 12:06 am

Rick Ferri wrote:MultiFactor Investor,

Like you, I consider FinancialPlanning.com a great service to all investors who absolutely must have DFA funds in their portfolio. The firm allows you to pick from pre-packaged portfolios OR you can build your own DFA portfolios using whatever strategy blows your hair back (as they put it, "the client can create his or her own mixture of funds.")

DFA strongly discourages advisors from selling access to DFA funds, but that hasn't stopped firms from doing it. I, for one, am glad firms like FinancialPlanning.com sell this service so that people who are only in the hunt for cheap access to DFA will call them and not me. I am an investment manager, not a mutual fund wholesaler.

Rick Ferri

On caveat, like most advisors who promote the past performance of DFA funds, FinancialPlanning.com is showing the long-term performance of portfolios that did not actually exist, and in some cases, before the DFA funds existed. In addition, they're don't disclose that the returns are simulated, and least not anywhere that's in plain sight. This means the firm has not yet been audited by the Securities and Exchange Commission. Once the SEC looks at this, the firm will need to comply by providing proper disclosures concerning simulated fund returns and simulated portfolio performance.
.


No, Rick, I said that if low costs are all that matter (including the lowest advisory fees), as many including yourself would have us believe, then FP is the lowest fee firm I have seen and should therefore be the default decision for investors needing an advisor. Investors paying higher fees should probably switch to the new lowest fee model.

What am I missing?
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Postby Multifactor Advisor » Sat Mar 05, 2011 12:17 am

Rick Ferri wrote:I'll repost this:

In the end, what drives 97% of equity portfolio performance is the amount of tilt your portfolio has to the market, to value stocks and to small cap stocks. The other 3% is the actual funds you invest in, and the cost to invest in those funds (not to mention the cost of an investment manager).


I'm an advisor also and I'm agnostic to DFA, Vanguard, WisdomTree, Bridgeway, et. all. I don't care which family of funds outperformed last week, last month, or last year. All I want is exposure to certain market risks that I select and in the cheapest way possible. If I can get those exposures with one fund company, OK; two fund companies, better, ten fund companies, even better.

I say this again because the dead horse we're beating is quickly becoming unrecognizable as this opinionated conversation continues.

Rick Ferri
.


Wait a minute. Weren't you once the one speaking out against "spindexes" like the fundamental strategies from Wisdomtree/RAFI? Now they are all the same?

And if 97% of returns is simply your exposure to market, size, and value, and the Russell 2000 Value Index has a greater size tilt and the same value tilt as the DFA Targeted Value fund, yet has underperformed by 2.5% per year since 2000 despite large positive small and value premiums, what am I missing? Thats a big difference to be explained by "the other 3%".

Thanks!
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Postby davidkw » Sat Mar 05, 2011 8:30 am

And if 97% of returns is simply your exposure to market, size, and value, and the Russell 2000 Value Index has a greater size tilt and the same value tilt as the DFA Targeted Value fund, yet has underperformed by 2.5% per year since 2000 despite large positive small and value premiums, what am I missing? Thats a big difference to be explained by "the other 3%".


During the past 10 years, value stocks did well especially in the 2000 - 2002 market, and during the 90s, the growth stocks did well. Be interesting to see how the DFA funds do when value stocks dominate
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Postby Rick Ferri » Sat Mar 05, 2011 11:44 am

Multifactor Advisor wrote:
Rick Ferri wrote:I'll repost this:

In the end, what drives 97% of equity portfolio performance is the amount of tilt your portfolio has to the market, to value stocks and to small cap stocks. The other 3% is the actual funds you invest in, and the cost to invest in those funds (not to mention the cost of an investment manager).


I'm an advisor also and I'm agnostic to DFA, Vanguard, WisdomTree, Bridgeway, et. all. I don't care which family of funds outperformed last week, last month, or last year. All I want is exposure to certain market risks that I select and in the cheapest way possible. If I can get those exposures with one fund company, OK; two fund companies, better, ten fund companies, even better.

I say this again because the dead horse we're beating is quickly becoming unrecognizable as this opinionated conversation continues.

Rick Ferri
.


Wait a minute. Weren't you once the one speaking out against "spindexes" like the fundamental strategies from Wisdomtree/RAFI? Now they are all the same?

And if 97% of returns is simply your exposure to market, size, and value, and the Russell 2000 Value Index has a greater size tilt and the same value tilt as the DFA Targeted Value fund, yet has underperformed by 2.5% per year since 2000 despite large positive small and value premiums, what am I missing? Thats a big difference to be explained by "the other 3%".

Thanks!


I didn't say I used WisdomTree, et. all. I said the more index fund choices we have, the better. These index funds are available for analysis whether we use them or not, and more competition drives down management fees. So it's all good.

Also, you couldn't have picked a worse index to use in your comparison of one DFA fund. It's well documented and widely known that the Russell 2000 has sustained 2% loss every year due to trader front-running before Russell's annual reconstruction. This is the reason Vanguard switched from the Russell 2000 to MSCI small cap in 2003.

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Postby Multifactor Advisor » Sat Mar 05, 2011 1:37 pm

Rick: what you said was "I'm an advisor also and I'm agnostic to DFA, Vanguard, WisdomTree, Bridgeway, et. all". That sure sounds like "all indexes are basically the same and you can pick any combo of them (controlling for h and s slopes) and get the same results". We of course know that is not the truth. Fund selection matters a lot.

My only point about the Russell 2000 Value example above is there is more much to consider than just historical 3F slopes. R2K just happens to be closest to DFFVX in value exposure (and a higher size loading than DFFVX) so it illustrates the point well.

And, for all it's shortcomings, I can't help notice the Russell 2000 Value ETF has outperformed the S&P 600 Value ETF by 0.6% annually over the last decade. So it appears I could pick a worse index! (incidentally, this underperformance penalty acts like a hidden "opportunity cost" to investors whose active indexing methodology choose the wrong index)
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