Comparing DFA Small Value to Vanguard Small Value
- Created on Sunday, 19 April 2015 19:00
By Jared Kizer
Over the past few months, the difference in historical performance between DFA Small Value (ticker: DFSVX) and Vanguard Small Value (VISVX) has narrowed. For example, for the 10-year period ending December 2014, the compound annual return of DFSVX was 7.9 percent while VISVX earned 8.3 percent. Comparatively, for the 10-year period ending December 2012, compound annual returns were 11.3 percent for DFSVX and 9.6 percent for VISVX. What explains this reversal?
Examining the Early Period
From January 2003 through December 2012, a factor analysis shows the two funds had roughly comparable exposure to value, but DFSVX had markedly higher exposure to market risk (i.e., beta risk) and owned much smaller companies. Since both the equity market and small-cap stocks did exceedingly well during this period, with an average annual equity premium of 8.0 percent and a size premium of 4.3 percent, it’s not surprising to see that DFA Small Value had substantially higher performance than Vanguard Small Value.
Examining the Later Period
From January 2005 through December 2014, a factor analysis shows essentially exactly what we found in the earlier period: DFSVX had markedly higher exposure to market risk and small-cap risk than VISVX. Both the market premium and size premium were positive over this period, albeit the average annual size premium was just 1.0 percent. So, what explains the slightly lower returns of DFSVX compared with VISVX?
First, it’s worth noting that the average annual returns of DFSVX were slightly higher than VISVX, but the compound returns were lower due to the higher volatility of DFSVX (24.2 percent volatility) compared with VISVX (20.5 percent volatility). The primary explanation for the performance differential was that the higher volatility of DFSVX compared with VISVX more than offset the incremental return benefit of having more exposure to market risk and small-cap risk. In periods such as 2003–2012 when the size premium is closer to its historical average, the additional volatility does not tend to offset the higher average annual returns.
Second, DFA Small Value excludes both REITs and highly regulated utilities while Vanguard Small Value does not. Over this later 10-year period, both REITs (using the Dow Jones U.S. Select REIT Index) and utilities (using Ken French’s utilities industry series) had higher returns than Vanguard Small Value itself, indicating that this is likely another explanatory factor. The higher returns of these two sectors, which are frequently a substantial portion of VISVX’s portfolio, likely pulled VISVX’s returns up relative to what they would have been had Vanguard followed the same sector-exclusion methodology as DFA.
This commentary originally appeared March 30 on MultifactorWorld.com
Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Three Ways to Write Your Own Story, Like Baseball’s Daniel Norris
- Created on Sunday, 19 April 2015 19:00
By Tim Maurer
Yesterday, a bearded 21-year-old surfer who lives in a 1978 VW bus, and on a self-imposed annual allowance of $10,000, mowed down my beloved Orioles with a 96-mile-per-hour fastball.
Blue Jays pitcher Daniel Norris isn’t striving to make a statement with his apparently Spartan existence. He’s simply choosing to live life according to his priorities. He’s writing his own story.
According to ESPN, Norris’ values system is strengthened by generational ties and rooted in the topography of Johnson City in northeast Tennessee: “Play outdoors. Love the earth. Live simply. Use only what you need.”
The point of this article is not to compel you to adopt Daniel Norris’ values, but to convince you to live by your own. Here are three ways to do so:
1) Know your values.
The challenge to knowing your values is learning how to discern and articulate what’s most important to you without simply parroting a corporate slogan or a Successories poster. (Hint: “Integrity” is already taken.) Most of us, in response to the direct question, “What are your values?” will inadvertently list someone else’s. Consider a less direct, but perhaps more difficult, path to discernment.
Especially if you are a visual processor, glance at this exercise—the Wheel of Life—courtesy of Money Quotient founder Carol Anderson:
On each spoke, rate your satisfaction in the corresponding area of life between zero and 10—10 being the best. After connecting the dots, note the roundness or wobbliness of your wheel as a whole. Consider why your satisfaction in some areas is high while in others it might be low.
Now, while ruminating on your reaction to the exercise, write a few words—or perhaps a few sentences—addressing what is most important in life to you. Start with two to five of the areas of life represented on the wheel. The result may be a nicely packaged articulation of what you value most.
If you want to go deeper—or you’re more verbal than visual, or if your Wheel of Life exercise was fruitless for any reason—consider George Kinder’s “3 Questions” exercise. It may be another eye opener.
2) Have the courage to live according to your values.
Truly living life according to your values is not for the faint of heart. It takes courage because social convention prefers efficiency. There are few venues where non-conformity is prized less than it is in sports, and “perhaps nowhere is consistency more valued than in baseball,” says Eli Saslow of ESPN.
Being true to yourself could cost you. It cost Carmen Segarra her job—and likely forevermore limited her prospects in her chosen profession—when she challenged Fed regulators to actually, well, regulate.
Of course, the objective is not non-conformity for its own sake, and definitely not visible self-righteousness. Daniel Norris won’t compromise his conviction not to consume alcohol, for example. But he also doesn’t opt-out of the rookie hazing ritual that involves carting around the veterans’ booze. Originality doesn’t necessarily have to mean unmitigated individuality.
Originality is attractive when it is genuine, but repellant when it is contrived or copied.
3) Outperform.
If Daniel Norris was just another dude living out of a VW bus down by the river, his non-conformist path would be unknown. Having inspired values alone doesn’t make Norris an inspiration. Applying himself to them in an exemplary fashion does.
Via Twitter, Norris tells us exactly how he’s decided to apply his values:
“I live to find 3 things.
- Eternal life.
- The strike zone
- Good waves.”
My Orioles are certainly aware that he’s mastered at least one of the three. So are his teammates, who have learned that Norris’ unique way of approaching life—and the game—has netted positive results. They may not understand his method, but they appreciate it. Similarly, you will be given more leeway to be yourself in whatever you choose to pursue if you do so with excellence.
Life isn’t a bullet list of values or a spreadsheet for calculating progress toward your goals—it’s a story, a narrative. I hope my suggestions aid you in writing your story, but please don’t confine yourself to my prescriptions. Regardless of whether or not we follow any particular method to discerning our values and pursuing our goals, we’re still creating a body of work. Everybody’s life tells a story. The only question is, Who’s writing yours?
This commentary originally appeared March 27 on Forbes.com
Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Diversification Is the Sane Alternative to Betting Big on One Investment
- Created on Sunday, 05 April 2015 19:00
By Carl Richards
You made a huge mistake last year with your money. You know this now, right? The only investments in your portfolio that did very well were probably United States stocks. Bonds may have held their own, but everything else was just pitiful. International stocks performed horribly and emerging markets weren’t much better.
What were you thinking? Clearly you missed a big opportunity in 2014. You should have skipped diversifying and gone all in on United States stocks.
This is the problem with the diversification strategy you stubbornly insist upon. Every year you’re going to be unhappy with something in your portfolio. Most years, if you own five distinct asset classes, one or two might do well, one will sit in the middle, and two will perform badly. And you can’t tolerate that, no way. After all, why would anyone settle for anything less than top performance?
Luckily, the solution is an easy one. On Jan. 1 of each year, just figure out which asset class will do really well and move all your money into that investment. Forget diversification. Just pick the winner!
Lest you think all of the sarcasm up until this point does not reflect the worldview of many investors, I had a client in my past life whom we will call Dave. He had a lot of money. I remember having a conversation in which he was really mad over this very issue. He said to me, “This is simple. All I want you do is tell me what to buy before it goes up and what to sell just before it goes down. That’s it.” I remember replying, “Really? Why didn’t I think of that?”
But seriously, with no proven model for picking the next winner, can you really afford to bet big on any one investment? If you had to, could you even pick one, and only one, investment for the rest of this year? The answer can’t be no! Don’t you know by now who the winner will be in 2015? How can you not know?
So in all seriousness, perhaps the better choice really is to stay diversified. Yes, a diversified portfolio all but guarantees you’ll be unhappy with at least one investment each year. But the investments that make you unhappy change from one year to the next. One set of investments zigs while another set zags. Take this unhappiness as a sign you’re doing diversification right. That’s the way markets work, after all.
Plus, on a scale of 1-10, with 10 being abject misery, I’m willing to bet your unhappiness with a diversified portfolio comes in at about a 5, maybe a 6. But your unhappiness if you guess wrong on your one and only investment for the year? That goes to 11.
Beyond diversifying, there’s rebalancing, which is something else that will probably make you unhappy. You’re selling at least some of an investment that’s done well and buying more of one that hasn’t. This unnerves people. They don’t see it as buying something on sale but as trading a winner for a loser.
In years like 2014 with an obvious winner, diversification becomes everyone’s favorite whipping boy. One type of investment does so much better than the others, it seems insane to diversify, let alone rebalance.
But that’s the problem with judging a tool like diversification from one year to the next. You need to judge diversification’s value over the long term, and by long, I’m referring to decades. You’re not diversifying because of how stocks or bonds did last year. You keep diversifying because you don’t know how they’ll do over the next 10 years.
Sure, your brother or sister-in-law or some talking head on television may have tried picking the investment winner of 2014 and gotten it right. In that year. But if you try and get it wrong, make sure you have a calculator handy. You’ll need it to figure out how much longer you’ll have to keep working to make up for the loss.
This commentary originally appeared March 16 on NYTimes.com
Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.