How much more return would DFA funds produce?

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DebiT
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Joined: Sat Dec 28, 2013 1:45 pm

How much more return would DFA funds produce?

Post by DebiT » Fri Jan 12, 2018 9:56 pm

Background: just came from initial visit to fee-only financial advisor, because at age 60, 10 years away from full retirement, I want to check our assumptions, make sure I'm not missing anything, etc. For that I am willing to see if his thoughts are worth the $1000 - $1500 he is going to charge for a "financial plan".

He also gave us material read, which I will do, on DFA funds and their philosophy, which I will do, but I'm posting here first. I read the thread on Vanguard vs Dimensional at viewtopic.php?f=1&t=211879&p=3254737&hi ... d#p3254737, and already feel confused. Our portfolio is approx 50/50, with some cash held as dry powder. It's 16% international, with no value tilt, and whatever factor tilt is in the article, I don't understand it. My portfolio is below. For 2017 this portfolio's performance basically matched Vanguard's and other's 60/40 index funds.

My question: what % increase in performance could I reasonably expect from what a DFA portfolio would provide. Naturally there is a fee, for us about 0.6%. I don't know the expense ratios of whatever the FA would recommend. Before I go down a rabbit hole, I'd love to hear what those who are knowledgeable about these funds think. And my gut is already feeling uncomfortable with someone else like an FA having input on what funds to pick, but I have been known to be stubborn and say "no" to good things, so I don't want to error in that direction either.

ARTIX 4%
DODFX 4%
VXUS 8%
SCHD 8%
XLU 3%
VTI 11%
VXF 4%
RWO 4%
DODBX 4%
FAX 4%
ITR 2%
DODIX 4%
PONDX 10%
DLTNX 10%
BND 15%
TOTL 1%
CASH 3%
Age 60, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

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sdsailing
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Re: How much more return would DFA funds produce?

Post by sdsailing » Fri Jan 12, 2018 10:11 pm

It will certainly produce good returns for the advisor.

Jags4186
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Re: How much more return would DFA funds produce?

Post by Jags4186 » Fri Jan 12, 2018 10:22 pm

You could eliminate all but two or three of those funds and save yourself around 1-2% in expenses. Also won’t have to talk to a FA.

MrPotatoHead
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Re: How much more return would DFA funds produce?

Post by MrPotatoHead » Fri Jan 12, 2018 10:32 pm

DebiT wrote:
Fri Jan 12, 2018 9:56 pm
Background: just came from initial visit to fee-only financial advisor, because at age 60, 10 years away from full retirement, I want to check our assumptions, make sure I'm not missing anything, etc. For that I am willing to see if his thoughts are worth the $1000 - $1500 he is going to charge for a "financial plan".
I am not going to attempt to answer your question, but I am making some comments on a few points you might want to consider that may prove beneficial to you

One I am of the opinion you do not need a financial adviser as much as you need a financial planner, which goes beyond the scope of investments.

At your age having someone review your Social security options, review your estate plans, help you make an informed decision on how to fund potential long term care needs, discuss medigap plans or the need or the need not for them, power of attorney, heath care directives, estate planning, will, etc are for more complicated than investment direction. The standard Bogelhead mantra of low cost index funds,2,3, or 4 fund portfolios, maybe a value tilt or not will serve you well. If nothing else throw a dart to select one of the oft mention Boglehead configurations and you will do almost all of it right with little risk of downside. Ignore these other areas and you can devastate you future financial health and diminish your estate.

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pezblanco
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Re: How much more return would DFA funds produce?

Post by pezblanco » Fri Jan 12, 2018 10:45 pm

DebiT wrote:
Fri Jan 12, 2018 9:56 pm
Background: just came from initial visit to fee-only financial advisor, because at age 60, 10 years away from full retirement, I want to check our assumptions, make sure I'm not missing anything, etc. For that I am willing to see if his thoughts are worth the $1000 - $1500 he is going to charge for a "financial plan".

He also gave us material read, which I will do, on DFA funds and their philosophy, which I will do, but I'm posting here first. I read the thread on Vanguard vs Dimensional at viewtopic.php?f=1&t=211879&p=3254737&hi ... d#p3254737, and already feel confused. Our portfolio is approx 50/50, with some cash held as dry powder. It's 16% international, with no value tilt, and whatever factor tilt is in the article, I don't understand it. My portfolio is below. For 2017 this portfolio's performance basically matched Vanguard's and other's 60/40 index funds.

My question: what % increase in performance could I reasonably expect from what a DFA portfolio would provide. Naturally there is a fee, for us about 0.6%. I don't know the expense ratios of whatever the FA would recommend. Before I go down a rabbit hole, I'd love to hear what those who are knowledgeable about these funds think. And my gut is already feeling uncomfortable with someone else like an FA having input on what funds to pick, but I have been known to be stubborn and say "no" to good things, so I don't want to error in that direction either.

ARTIX 4%
DODFX 4%
VXUS 8%
SCHD 8%
XLU 3%
VTI 11%
VXF 4%
RWO 4%
DODBX 4%
FAX 4%
ITR 2%
DODIX 4%
PONDX 10%
DLTNX 10%
BND 15%
TOTL 1%
CASH 3%
1) When you present your portfolio ... you should follow the guidelines posted up at the top of the forum. Most of us will not have any idea of what these funds are nor what their expense ratios are.

2) The use or not of factors in investing is one of the big polemical subjects on Bogleheads. There are many many threads with people arguing passionately on one side or the other .... you'll learn nothing from one or two random people on this thread posting things like ... what a bunch of hooey! .... or sounds great! I strongly advise you to do some reading about factor investing and try to make up your mind. After you know what it is, come back to this forum and read some of the many threads discussing it. I don't know what you're looking for but most defiintely you do NOT want to commit your money to the factor enterprise until you have a good handle on what it is. (I recommend Larry Swedroe's books on factors .... you'll be hard pressed to do better than him.) (Full Disclosure: I have a heavily tilted factor portfolio.)

3) At one DFA access was a great thing ... they specialize particularly in the small and value factors in USA and ex-USA stocks. They are known for doing a good job with their product at a more or less reasonable cost. You can get access to DFA funds cheaper than paying .6 AUM however ... With so many new smart beta ETFs and now even Vanguard coming into the game .... it's not clear that DFA is quite the special company people thought (Full Disclosure: I own a lot of DFA funds)

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sergeant
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Re: How much more return would DFA funds produce?

Post by sergeant » Fri Jan 12, 2018 11:44 pm

You state that your 50/50 AA produces results in an up market similar to a 60/40 AA. If true I wouldn't change anything.
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nisiprius
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Re: How much more return would DFA funds produce?

Post by nisiprius » Sat Jan 13, 2018 7:20 am

There's no reasonable way to answer this question. You might look at the Bogleheads Wiki article on Dimensional Fund Advisors for some notes on DFA.

My personal belief is that you need to assess the value that you feel you get from the advisor. This is hard to do, of course, but it probably isn't any harder than assessing "how much more return would DFA funds produce!" You calculate the amount, in dollars, that you are paying the advisor and judge whether the advisor is worth that amount for the services he provides to you. If the advisor merits the fees for his services, then you use him.

Bogleheads are passive investors, so if you are convinced about passive investing, you would want an advisor who is knowledgeable about and supportive of passive investing. If your advisor uses DFA funds, he probably is. If you have decided that the advisor is worth this fees, then you collaborate with him in choosing your investments. Since DFA funds themselves are very low in cost (not quite Vanguard-low, but very low), they should get first consideration.

Here are the big problems with trying to estimate "how much more return DFA funds would produce."

1) DFA funds are tools for factor-based investing. Asking "how much more return would DFA funds produce" is closely related to asking "how much more money would I make using factor-based investing instead of settling for a Vanguard total market fund? Nobody knows.

2) "How much more return would DFA funds produce" is implicitly asking "how much outperformance will I personally see in my own portfolio going forward over the next few decades?" Even if factor-based investing is absolutely sound, consider these two statements. The first is by Jared Kizer, one of Larry Swedroe's colleagues, in a paper on factor-based investing--which Kizer supports:
Any transparent strategy, which applies to everything outlined in this piece [specifically size, value, momentum, and low-beta], is capable of extended periods of underperformance. There is nothing that preordains these strategies to work over any period of any length. Investors should either commit to these strategiesover an extremely long time horizon or not tilt toward these factors at all.
The second is that if you will read comments, again even from advocates of factor-based investing, you will a comment often expressed in the words "the value premium has been missing in action for fifteen years." Does that mean it is gone, killed by overgrazing, or that it is just experiencing one of those "extended periods of underperformance" to be expected... and likely to return, showing "mean reversion" that will make it all up and more?

3) Return always has to be considered in relation to risk. One of the commonest bits of phonus-balonus--this is very common with active funds--is the fund or portfolio that has slightly higher return than an index, and also has slightly higher risk... and boosters point to the return without even trying to assess the risk. On the stock side, factor-based portfolios involve the use of asset classes that generally have, in themselves, higher risk and higher return than the total market. Because of imperfect correlation, their combination into a portfolio does reduce that risk, but not by very much. DFA funds are not index funds, and they use the word "passive" in an idiosyncratic way. They are in a strange half-world, not quite passive. In exchange for being not quite passive, they tend to have higher loadings on the factors they represent, they are "better" factor funds, their micro cap fund is smaller, their value funds are more value-y, and so forth.

My judgement is that a number like 0.6% is going to be totally lost in the noise of the luck of what your chosen factors happen to be doing over the next, say, ten years.
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.

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nisiprius
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Re: How much more return would DFA funds produce?

Post by nisiprius » Sat Jan 13, 2018 7:40 am

Backtests, hindsight, lantern-off-the-stern, past performance yadda-yadda. I'm going to use one of the model portfolios published in 1998 in Larry Swedroe's The Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth Today. I implemented the model as best I could using DFA funds and using Vanguard funds. As always, published performance numbers are net of costs as we'd wish, so this is after costs.

Portfolio 1
Swedroe 1998 using DFA funds
DFELX DFA Enhanced US Large Company I 10.00%
DFLVX DFA US Large Cap Value I 10.00%
DFSTX DFA US Small Cap I 5.00%
DFSVX DFA US Small Cap Value I 15.00%
DFREX DFA Real Estate Securities I 5.00%
DFALX DFA Large Cap International I 10.00%
DFEMX DFA Emerging Markets I 5.00%
DFIGX DFA Intermediate Govt Fixed-Income I 10.00%
DFFGX DFA Short-Term Government I 20.00%
DFGBX DFA Five-Year Global Fixed-Income I 10.00%

Portfolio 2
Swedroe 1998 using Vanguard funds
VGTSX Vanguard Total Intl Stock Index Inv 10.00%
VFINX Vanguard 500 Index Investor 10.00%
VIVAX Vanguard Value Index Inv 10.00%
NAESX Vanguard Small Cap Index Inv 5.00%
VGSIX Vanguard REIT Index Investor 5.00%
VEIEX Vanguard Emerging Mkts Stock Idx Inv 5.00%
VFITX Vanguard Interm-Term Treasury Inv 10.00%
VFISX Vanguard Short-Term Treasury Inv 10.00%
CASHX Cash 10.00%
PGBIX PIMCO Global Bond (USD-Hedged) I 10.00%
VISVX Vanguard Small Cap Value Index Inv 15.00%

Source

Image

Observations: a) The CAGR difference over that time period was, in fact, 0.5% per year. If you like, it would have paid for most of the fee charged by a fee-only 0.6%-of-AUM advisor.

b) The CAGR difference does not tell the whole story because in fact the Dimensional-fund-based portfolio had a very slightly higher standard deviation and did expose the investor to a little more risk than the same strategy using true index funds. It's not oranges-to-apples but it might be oranges-to-tangerines.

c) The Sharpe and Sortino ratios are measures of risk-adjusted return, and they were higher for the Dimensional-based portfolio, so the Dimensional portfolio was still superior after allowing for the extra risk. To put it another way, if we tweaked the Dimensional portfolio, reducing stocks and increasing bonds, so as to equalize the risk with the Vanguard portfolio, we would almost certain still see a higher CAGR for the Dimensional portfolio--but not as much higher as before.
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.

carolinaman
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Re: How much more return would DFA funds produce?

Post by carolinaman » Sat Jan 13, 2018 7:46 am

MrPotatoHead wrote:
Fri Jan 12, 2018 10:32 pm
DebiT wrote:
Fri Jan 12, 2018 9:56 pm
Background: just came from initial visit to fee-only financial advisor, because at age 60, 10 years away from full retirement, I want to check our assumptions, make sure I'm not missing anything, etc. For that I am willing to see if his thoughts are worth the $1000 - $1500 he is going to charge for a "financial plan".
I am not going to attempt to answer your question, but I am making some comments on a few points you might want to consider that may prove beneficial to you

One I am of the opinion you do not need a financial adviser as much as you need a financial planner, which goes beyond the scope of investments.

At your age having someone review your Social security options, review your estate plans, help you make an informed decision on how to fund potential long term care needs, discuss medigap plans or the need or the need not for them, power of attorney, heath care directives, estate planning, will, etc are for more complicated than investment direction. The standard Bogelhead mantra of low cost index funds,2,3, or 4 fund portfolios, maybe a value tilt or not will serve you well. If nothing else throw a dart to select one of the oft mention Boglehead configurations and you will do almost all of it right with little risk of downside. Ignore these other areas and you can devastate you future financial health and diminish your estate.
+1. Excellent response and I totally agree. We often obsess over our AA and investments when a simple 3 or 4 index fund approach will get the job done. There are many things someone needs to consider in planning their retirement. MrPotatoHead provides a good list for consideration. i would add one more key one, tax planning to optimize taxes during retirement. Ten years from retirement, you are at a good age to begin planning a tax strategy to minimize your taxes in retirement. You need a retirement planner who is looking holistically at your retirement situation. Best wishes.

DebiT
Posts: 117
Joined: Sat Dec 28, 2013 1:45 pm

Re: How much more return would DFA funds produce?

Post by DebiT » Sat Jan 13, 2018 10:32 am

Someone above hit it on the head. I went in there wanting a review of my financial plan, checking assumptions, seeing if I'm missing anything. It annoyed me to be presented with all this DFA info, and I told him clearly that is not want I want. But of course, now I'm curious.

However, I decided that we will not change any specific investments. He is supposed to present us with a financial plan review in a few weeks. At that time, if he likes, he can also draw up a "paper portfolio" and we can compare performance over the year. I'm pretty sure I don't want to transfer what is a very easy and comfortable setup at Schwab to him, or anywhere.

I continue to trim the number of funds I have, and watch expense ratios vs performance, with an toward making it simpler and simpler.

Regarding whether or not value tilt, can any one point me to a thread on that, and whether now going forward looks like a good time?

Finally, I am going to redo my spreadsheet so it will easier to post in the correct manner. I do apologize.

Thanks for all the input

Deborah
Age 60, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

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pezblanco
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Re: How much more return would DFA funds produce?

Post by pezblanco » Sat Jan 13, 2018 10:39 am

nisiprius wrote:
Sat Jan 13, 2018 7:40 am
Backtests, hindsight, lantern-off-the-stern, past performance yadda-yadda. I'm going to use one of the model portfolios published in 1998 in Larry Swedroe's The Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth Today. I implemented the model as best I could using DFA funds and using Vanguard funds. As always, published performance numbers are net of costs as we'd wish, so this is after costs.

Portfolio 1
Swedroe 1998 using DFA funds
DFELX DFA Enhanced US Large Company I 10.00%
DFLVX DFA US Large Cap Value I 10.00%
DFSTX DFA US Small Cap I 5.00%
DFSVX DFA US Small Cap Value I 15.00%
DFREX DFA Real Estate Securities I 5.00%
DFALX DFA Large Cap International I 10.00%
DFEMX DFA Emerging Markets I 5.00%
DFIGX DFA Intermediate Govt Fixed-Income I 10.00%
DFFGX DFA Short-Term Government I 20.00%
DFGBX DFA Five-Year Global Fixed-Income I 10.00%

Portfolio 2
Swedroe 1998 using Vanguard funds
VGTSX Vanguard Total Intl Stock Index Inv 10.00%
VFINX Vanguard 500 Index Investor 10.00%
VIVAX Vanguard Value Index Inv 10.00%
NAESX Vanguard Small Cap Index Inv 5.00%
VGSIX Vanguard REIT Index Investor 5.00%
VEIEX Vanguard Emerging Mkts Stock Idx Inv 5.00%
VFITX Vanguard Interm-Term Treasury Inv 10.00%
VFISX Vanguard Short-Term Treasury Inv 10.00%
CASHX Cash 10.00%
PGBIX PIMCO Global Bond (USD-Hedged) I 10.00%
VISVX Vanguard Small Cap Value Index Inv 15.00%

Source

Image

Observations: a) The CAGR difference over that time period was, in fact, 0.5% per year. If you like, it would have paid for most of the fee charged by a fee-only 0.6%-of-AUM advisor.

b) The CAGR difference does not tell the whole story because in fact the Dimensional-fund-based portfolio had a very slightly higher standard deviation and did expose the investor to a little more risk than the same strategy using true index funds. It's not oranges-to-apples but it might be oranges-to-tangerines.

c) The Sharpe and Sortino ratios are measures of risk-adjusted return, and they were higher for the Dimensional-based portfolio, so the Dimensional portfolio was still superior after allowing for the extra risk. To put it another way, if we tweaked the Dimensional portfolio, reducing stocks and increasing bonds, so as to equalize the risk with the Vanguard portfolio, we would almost certain still see a higher CAGR for the Dimensional portfolio--but not as much higher as before.
Two comments:

1) The other way to go about this would be to find the factor loadings of the two portfolios and calculate the predicted outperformance. Looking at a backtest over the last 20 years tells you nothing about what factors actually showed up in that time, right?

2) Larry Swedroe's current portfolio recommendation (the LP) can be implemented with 2 DFA funds now ... quite a bit simpler. But I do like that you took his 1998 recommendation and saw how it performed since 1998 ... but Swedroe and his portfolio evolution is not really the point is it?

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pezblanco
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Re: How much more return would DFA funds produce?

Post by pezblanco » Sat Jan 13, 2018 10:42 am

DebiT wrote:
Sat Jan 13, 2018 10:32 am
Someone above hit it on the head. I went in there wanting a review of my financial plan, checking assumptions, seeing if I'm missing anything. It annoyed me to be presented with all this DFA info, and I told him clearly that is not want I want. But of course, now I'm curious.

However, I decided that we will not change any specific investments. He is supposed to present us with a financial plan review in a few weeks. At that time, if he likes, he can also draw up a "paper portfolio" and we can compare performance over the year. I'm pretty sure I don't want to transfer what is a very easy and comfortable setup at Schwab to him, or anywhere.

I continue to trim the number of funds I have, and watch expense ratios vs performance, with an toward making it simpler and simpler.

Regarding whether or not value tilt, can any one point me to a thread on that, and whether now going forward looks like a good time?

Finally, I am going to redo my spreadsheet so it will easier to post in the correct manner. I do apologize.

Thanks for all the input

Deborah
https://www.amazon.com/Your-Complete-Gu ... 692783652

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