Paul Merriman: DFA Better Than Vanguard

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Leesbro63
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Paul Merriman: DFA Better Than Vanguard

Post by Leesbro63 »

Paul Merriman, in this podcast, kinda makes me wonder if we'd all not be better off paying an adviser and having DFA over Vanguard. What am I missing here?

http://www.paytaxeslater.com/radioshow/LMH-090314.mp3
larryswedroe
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Re: Paul Merriman: DFA Better Than Vanguard

Post by larryswedroe »

Lees
First the issue isn't should you hire an advisor and then use DFA.

The first question should be should you hire an advisor, would you benefit from the value an advisor can bring. If interested you can look at my book Think, Act and Invest Like Buffett in which I ask questions to see if at least IMO you should be a DYIer. So that has nothing to do with using DFA or Vanguard.

Once you decide to hire an advisor there are clearly IMO better choices in many cases (though not all, like with TSM, if that's what you want) than pure index funds, funds that via construction rules maximize the benefits of indexing and minimize the negatives. And it's not DFA vs Vanguard it's other alternatives (some of which may not be accessible without an advisor--like DFA).

Larry
livesoft
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Re: Paul Merriman: DFA Better Than Vanguard

Post by livesoft »

I didn't listen to the link. I will say that in the past year or so, DFA is doing worse than Vanguard LifeStrategy and Target Retirement funds because
(a) emerging markets are doing worse
(b) international markets are doing worse
(c ) small-caps are doing worse

and DFA portfolios typically overweight all three of the above. Indeed, DFA portfolios are suffering from severe tracking error (relative to total market weights) in the past 18 months or so. Can folks hold their noses and still buy foreign, emerging, and small-caps? :twisted: If they do not, then they will not reap the rewards that those asset classes are supposed to promise folks.
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Re: Paul Merriman: DFA Better Than Vanguard

Post by larryswedroe »

livesoft
Can add value to that list, especially small value, and funds with higher loadings on size and value will likely underperform in such environments
Larry
gwrvmd
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Re: Paul Merriman: DFA Better Than Vanguard

Post by gwrvmd »

I agree with Livesoft and Larry. All those people who thought that a Small Cap Tilt was the Holy Grail are all learning what Jack Bogle means when he says "Most things revert to the mean"..........Gordon
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Day9
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Re: Paul Merriman: DFA Better Than Vanguard

Post by Day9 »

Here is one comparison between DFA and Vanguard

http://www.altruistfa.com/dfavanguard.htm
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nedsaid
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Re: Paul Merriman: DFA Better Than Vanguard

Post by nedsaid »

In fairness to Paul Merriman, he has said that a pure Index portfolio of Vanguard Index funds would outperform DFA Funds during times when growth does better than value. He expects value to do better than growth more often than not so he expects small and value tilts to do better over time than the market weighted indexes. For this tilting strategy to work, Merriman counsels investors to wait through these times of underperformance as we are experiencing now.

This is also why Merriman advises a split of a stock portfolio between the Indexes and more passive Value Funds. The broad Indexes have a lot of the growth stocks, so during periods when Growth outperforms Value an investor won't get creamed. So a Merriman portfolio still has a lot of large growth stocks that everyone loves but less than the market indexes.
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Re: Paul Merriman: DFA Better Than Vanguard

Post by livesoft »

Actually, I don't think folks can simply wait through times of underperformance. In order to get the benefits of a small-cap and value-tilted portfolio, they MUST rebalance back into the underperforming asset classes. That is, they must ACT. They cannot simply wait. This is not a small psychological hurdle to overcome. :)
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nedsaid
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Re: Paul Merriman: DFA Better Than Vanguard

Post by nedsaid »

Oh man, I finished my small waves of mild rebalancing from stocks to bonds which I executed from July 2013 to June 2014. Last month, I probably anticipated the guilt I would feel from Livesoft's post and did some mild growth to value rebalancing. But probably not enough. You mean that I MUST do more? Oh well, you just can't please some people.
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Re: Paul Merriman: DFA Better Than Vanguard

Post by Robert T »

.
When you compare historical performance of a fund with higher size and value loads with one with lower loads (all else held equal), and the size and value premiums have been positive over the period of comparison, of course the fund with the higher loads does better. This doesn't mean that there is additional alpha beyond factor exposure. In this respect, the main reason for the outperformance of DFA over Vanguard funds is higher factor loads. If you are not seeking the greatest tilt to size and value (i.e. 100% small value globally), then its possible to match the factor load of an all DFA portfolio with a non-DFA portfolio and achieve very similar returns. i.e. what matters over the long-term is factor exposure and expense (whether from DFA or elsewhere, as long as the alphas are close to zero).

I have been tracking an all DFA portfolio with a factor matched non-DFA (largely ETF) portfolio from 11-06-08. Annualized returns since then according to M* is 13.1% vs 13.0%, almost identical annualized returns over this period (although there have been significantly larger annual differences). The mainly ETF portfolio had the marginally higher return which interestingly (and perhaps coincidentally) is equivalent to the expense ratio difference between the two portfolios.

In my view, its not worth using an advisor simply for DFA access. In saying this, I do like DFA funds a lot, particularly the tax-managed funds, and use them in 529 investments (Utah) given the alternative options. But what the evidence shows (if you look beyond some of the, often noisy, marketing hype) is that DFA funds don't provide returns beyond factor exposure - and expecting them to do so will only lead to disappintment IMO. I am weary of advisors who compare non-factor matched portfolios to claim the superiority (positive alpha) of DFA portfolios. Not saying all advisors using DFA funds do this, but some do.

Robert
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Re: Paul Merriman: DFA Better Than Vanguard

Post by chipmonk »

gwrvmd wrote:I agree with Livesoft and Larry. All those people who thought that a Small Cap Tilt was the Holy Grail are all learning what Jack Bogle means when he says "Most things revert to the mean"..........Gordon
I have been small cap tilting for a couple years and don't see any reason to change now. Stay the course and all that, especially since I have a long-term view and haven't read any convincing arguments for why SV will definitely underperform in a long-term average.

I am doing it in what is probably the cheapest and most boring way possible (thus most Boglehead-ish?). I just own a whole big pile of VSIAX on top of VTSAX :-). I've cranked my SV allocation up from 3% is TSM to 16% of my personal USA stock allocation.
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Re: Paul Merriman: DFA Better Than Vanguard

Post by jaab »

I have a semi-related question. Not about DFA's returns, but about it's transparency for individual investors.

The DFA website does not have much details about what they really do, e.g. what they track (HML?) or want to deliever, the momentum screen and hold ranges, not buying extreme SG stocks at all(?), sampling and so on. While the current factsheets at least mention some of these things, for years you would only have known this via "advior leaks". Sometimes there are DFA research PDFs from investment conferences or some academic studies DFA funds (e.g. the one study about the original CRSP 9-10 fund). But all this is not offical let alone legaly binding.

What do clients of a typical advisor get to know or CAN get to know if they wish? (I realize that may investors don't want to know the details at all.) Do they recieve the "advisor-only" stuff (at request)? Do they get regular studies/emails/whatever directy from DFA? How is the transparency compared to, say, what you can read about the RAFI (or "Smart Beta" in general) methodoly, portfolio construction, tracking error/attribution analysis and so on?
Last edited by jaab on Sat Sep 27, 2014 7:07 pm, edited 1 time in total.
DFAMAN
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Re: Paul Merriman: DFA Better Than Vanguard

Post by DFAMAN »

gwrvmd wrote:I agree with Livesoft and Larry. All those people who thought that a Small Cap Tilt was the Holy Grail are all learning what Jack Bogle means when he says "Most things revert to the mean"..........Gordon

I also agree with Livesoft and Larry - but I'm taking something different away from it than I believe you are. Tracking error does not bother me, and I see times in history (like the late 90's) when that tracking error has been significant as precursor of big overperformance by small and value. I certainly don't see it as some sort of disproof that there is a small or value premium (and, in fact, I think it is the opposite). I don't think Larry (or anybody else who is knowledgeable) is saying there is a "Holy Grail" of small/value that will work in the short term in every environment, but for the long-term investor, I'm very happy to tilt to small and value. We'll see what happens in the long run, but I would be willing to guess that I won't be sitting here in 20 years bemoaning the fact that I tilted.
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Re: Paul Merriman: DFA Better Than Vanguard

Post by larryswedroe »

Just add these points to keep in mind

There is significant value to having what DFA calls "core" funds, funds that own multiple asset classes in one fund. The benefits are not only in the reduced trading costs caused by migration (estimated at about 12-15bp) and more tax efficiency, but the big and often overlooked benefit is in taxable accounts you don't have to rebalance with YOUR money, the funds do it with other people's money. That saves taxes.

Also while for lightly or moderately tilted portfolios you can get same portfolio loadings using funds with lower loadings you do that by having to own more BETA risk, which then increases tail risks, not a good thing IMO. And bad for those in withdrawal phase

Larry
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