Now, here's the context. (To make the chart above, I screen-captured their chart, erased text, re-colored and re-labeled the bars).
To their credit, as nearly as I can tell, the heights of the three bars are in fact rendered as accurately as the screen resolution allows. The dark blue bar is two or three pixels higher than the light blue one (blurry at the top due to antialiasing), and that's the quantitatively correct amount.
Let me ask the following leading questions.
- Would you have even noticed the difference in height between the first bar and the third if they hadn't emphasized it by choice of color and numeric label?
- What, exactly, is the second bar? The text refers to "Take, for example, a portfolio that holds just US stocks (S&P 500 Index), a portfolio that holds just Japanese stocks (MSCI Japan Index), and a portfolio that holds both. As illustrated above..." Why is the illustration labelled "MSCI EAFE index" rather than "MSCI Japan index?"
- Does DFA recommend, or has DFA ever recommended a portfolio consisting of a mix of just U. S. and Japanese stocks? Is U.S. + Japan a good practice and reasonable model for illustrating diversification? Since DFA's only Japanese stock fund is the "Japanese Small Company Portfolio," wouldn't it have been more appropriate to use the MSCI Japan Small-cap index, in order to tie the illustration to something actually realizable in practice using their funds?
- If one assumes that U.S. + Japan is an intentionally exaggerated example--to show a principle and not to represent a good practice--could 10.1%, compared to 9.9%, be taken as the best that diversification can do, i.e. an extra 0.2% of return?
- Is "number of down quarters" a standard metric for risk? Why is it the only one presented? Is it a good metric? Should a small down be counted the same as large down?