DFA Funds: A Superior Approach to Investment Management
At F5 Financial, we use the investing methodology developed by Eugene Fama, an economist and winner of the Nobel Memorial Prize in Economic Sciences. Fama’s methodology focuses on capturing the “key” dimensions of the marketplace as investment indicators. These dimensions are:
F5 Financial is an approved advisor with Dimensional Fund Advisors, an asset manager whose mutual funds use Fama’s dimensional methodology. As an approved advisor with DFA, we can invest our client’s portfolios in DFA’s mutual funds, which are not available to the general public.
10 DFA Principles to Improve Your Odds of Success
Pursuing a Better Investment Experience
Embrace Market Pricing
The market is an effective information-processing machine. Each day, the world equity markets process billions of dollars in trades between buyers and sellers—and the real-time information they bring helps set prices.
US-Based Mutual Fund Performance, 2001–2020
Don’t Try to Outguess the Market
The market is an effective information-processing machine. Each day, the world equity markets process billions of dollars in trades between buyers and sellers—and the real-time information they bring helps set prices.
Resist Chasing Past Performance
Some investors select mutual funds based on their past returns. Yet, past performance offers little insight into a fund’s future returns. For example, most funds in the top quartile of previous five-year returns did not maintain a top-quartile ranking in the following five years.
Percentage of Top-Ranked Funds That Stayed on Top
Funds Remaining in Top Quartile of Returns in the Following 5-Year Period (2010–2020 average)
Growth of a Dollar, 1926–2020 (compounded monthly)
Let Markets Work for You
The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
Consider the Drivers of Returns
There is a wealth of academic research into what drives returns. Expected returns depend on current market prices and expected future cash flows. Investors can use this information to pursue higher expected returns in their portfolios.
Past performance is no guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
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Equities
- Company Size (Market Capitalization)
- Relative Price (Price/Book Equity)
- Profitability (Operating Profits/Book Equity)
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Fixed Income
- Term (Sensitivity to Interest Rates)
- Credit (Credit Quality of Issuer)
- Currency (Currency of Issuance)
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Practice Smart Diversification
Holding securities across many market segments can help manage overall risk. But diversifying within your home market may not be enough. Global diversification can broaden your investment universe.
Avoid Market Timing
You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well-positioned to seek returns wherever they occur
Annual Returns by Market Index
Avoid Reactive Investing
Manage Your Emotions
Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions.
Look Beyond the Headlines
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. When headlines unsettle you, consider the source and maintain a long-term perspective.
Focus on What You Can Control
A financial advisor can offer expertise and guidance to help you focus on actions that add value. This can lead to a better investment experience.
Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. This information is for illustrative purposes only.
Content courtesy of Dimensional Fund Advisors
Related Reading: How Are DFA Funds Different than Index Funds?
DFA funds differ from conventional investing & index investing. Read here to see how DFA funds differ & the benefits of this investment strategy.
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