Six Smart Steps To Investing
Approach
Persistance in Fund Outperformance: At the end of each year, funds are sorted within their category based on their five-year total return. Funds in the top quartile (25%) of returns are evaluated again in the following year based on one-year performance in order to determine the percentage of funds that maintained a top-quartile ranking. The analysis is repeated each year from 2007–2016. The chart shows average persistence of top-quartile funds during the 10-year period.
US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Index funds and fund-of-funds are excluded from the sample.
Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid- Cap Blend, Mid-Cap Value, Miscellaneous Region, Pacific ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock.
Fixed income fund sample includes the Morningstar historical categories: Corporate Bond, Inflation-Protected Bond, Intermediate Government, Intermediate-Term Bond, Muni California Intermediate, Muni National Intermediate, Muni National Short, Muni New York Intermediate, Muni Single State Short, Short Government, Short-Term Bond, Ultrashort Bond, and World Bond.
For additional information regarding the Morningstar historical categories, please see “The Morningstar Category Classifications” at morningstardirect.morningstar.com/clientcomm/ Morningstar_Categories_US_April_2016.pdf. See Dimensional’s “Mutual Fund Landscape 2017” for more detail. Benchmark data provided by Bloomberg Barclays, MSCI, Russell, Citigroup, and S&P. Bloomberg Barclays data provided by Bloomberg. MSCI data © MSCI 2017, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Citi fixed income indices © 2017 by Citigroup. The S&P data is provided by Standard & Poor’s Index Services Group.
Markets
In US dollars. Global electronic order book (largest 60 exchanges). Source: World Federation of Exchanges.
US Large Cap is the S&P 500 Index. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. US Real Estate is the Dow Jones US Select REIT Index. International Large Cap Value is the MSCI World ex USA Value Index (net dividends). International Small Cap Value is the MSCI World ex USA Small Cap Value Index (net dividends). Emerging Markets is the MSCI Emerging Markets Index (net dividends). Five-Year US Government Fixed is the Bloomberg Barclays US TIPS Index 1–5 Years. The S&P data is provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Dow Jones data provided by Dow Jones Indices. MSCI data ©MSCI 2017, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
Diversification
Illustration about outperforming markets–In US dollars. Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect expenses associated with the management of an actual portfolio. Source: S&P data provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Dow Jones data provided by Dow Jones indices. Dimensional Index data compiled by Dimensional. MSCI data © 2016, all rights reserved. The BofA Merrill Lynch Indices are used with permission; copyright 2016 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. Bloomberg Barclays data provided by Bloomberg. Citi fixed income indices copyright 2016 by Citigroup.
Illustration about global equity markets–In US dollars. Diversification does not eliminate the risk of market loss. Market cap data is free-float adjusted from Bloomberg securities data. Many nations not displayed. Total may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. China market capitalization excludes A-shares, which are generally only available to mainland China investors. For educational purposes; should not be used as investment advice.
Dimensions
1. Beta: A quantitative measure of the co-movement of a given stock, mutual fund, or portfolio with the overall market.
2. Price-to-Book Ratio: A company’s capitalization divided by its book value. It compares the market’s valuation of a company to the value of that company as indicated on its financial statements.
3. Profitability: A measure of a company’s current profits. We define this as operating income before depreciation and amortization minus interest expense, scaled by book equity.
Risk
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.
Expenses
Results assume a 10% average annual return and a 2.0% annual expense ratio. The results are hypothetical and do not represent any particular mutual fund. Source: personal.vanguard.com.
Quotes Sources
Warren Buffett, Letter from Warren E. Buffett to the shareholders of Berkshire Hathaway Inc. Berkshire Hathaway Inc.: Shareholder letters (1980).
Mark Hanna, from the Wolf of Wallstreet. Martin Scorsese. Paramount Pictures, 2013.
David Booth, “A veteran DFA exec tells what enduring RIA success is made of—and why the next-gen advisors will not disappoint,” RIA Biz (August 2013).
Merton Miller, Investment Gurus (New York: Simon & Schuster, 1997).
John Kenneth Galbraith, Future Babble: Why Expert Predictions Fail—and Why We Believe Them Anyway (Toronto: McClelland and Stewart, 2010).
John Maynard Keynes, The General Theory of Employment, Interest, and Money (London: Macmillan, 1936).
Merton Miller, Investment Gurus (New York: Simon & Schuster, 1997).
Kenneth French, “Stock price best value guide, war or not,” Australian Financial Review (March 2003).
Kenneth French, “Mission Improbable,” CFA Magazine (September/October 2005).
Paul Samuelson, “Mutual Funds Report; Just Relax, Put Your Feet Up, and Make Money,” New York Times (April 2004).
Burton Malkiel, “’Random Walk’ author Malkiel bullish on international index funds,” Oregonian (December 2010).
William Bernstein, The Intelligent Asset Allocator (New York: McGraw-Hill, 2001).
Eugene Fama, “Efficient Capital Markets: II,” Journal of Finance Vol. 46, No. 5. (Dec., 1991), 1575-1617.
Richard Feynman, The Pleasure of Finding Things Out (New York: Perseus Publishing Company, 1999).
Ron Ross, The Unbeatable Market: Taking the Indexing Path to Financial Peace of Mind (George Ross, 2001).
Michael Lewis, “The Evolution of an Investor,” Portfolio (2007).
Alan Abelson, Story Telling for Financial Advisors (Chicago: Dearborn Financial Publishing, 2000), 213.
Daniel Kahneman, The Little Book of Common Sense Investing (Hoboken: John Wiley and Sons, 2007).
Burton Malkiel, A Random Walk Down Wall Street (New York: W.W. Norton and Company: 1973), 246.
Friedrich Hayek, The Fatal Conceit: The Errors of Socialism (Chicago: University of Chicago Press, 1988), 76.
Robert Merton, “The Financial Innovator,” Business Times Weekend (August 2013), 10-11.
Most Warren Buffett quotes, TEBI, https://www.evidenceinvestor.com/warren-buffetts-advice-investors-25-quotes/. Robin Powell (May 2018).
Data Appendix
–Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation.
–Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes.
–CRSP is a non-profit center that also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26,500 stocks, both active and inactive. OTC bulletin board stocks are not included.
–US-domiciled mutual fund data is from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago.
–Certain types of equity and fixed income funds were excluded from the performance study. For equities, index funds, sector funds, and funds with a narrow investment focus, such as real estate and gold, were excluded. Index funds, money market funds, municipal bond funds, and asset-backed security funds were excluded from fixed income.
–Funds are identified using Lipper fund classification codes. Correlation coefficients are computed for each fund with respect to diversified benchmark indices using all return data available between January 1, 2001, and December 31, 2015. The index most highly correlated with a fund is assigned as its benchmark. Winner funds are those whose cumulative return over the period exceeded that of their respective benchmark. Loser funds are funds that did not survive the period or whose cumulative return did not exceed their respective benchmark.
–Expense ratio ranges: The ranges of expense ratios for equity funds over the five-, 10-, and 15-year periods are 0.01% to 4.90%, 0.01% to 4.72%, and 0.07% to 4.44%, respectively. For fixed income funds, ranges over the same periods are 0.02% to 3.09%, 0.06% to 2.67%, and 0.03% to 3.66%, respectively.
–Portfolio turnover ranges: Ranges for equity fund turnover over the five-, 10-, and 15-year periods are 1% to 1,535%, 1% to 1,388%, and 2% to 2,318%, respectively.
–Benchmark data provided by Bloomberg Barclays, MSCI, Russell, Citigroup, BofA Merrill Lynch, and S&P. Bloomberg Barclays data provided by Bloomberg. MSCI data © MSCI 2016, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Citigroup bond indices © 2016 by Citigroup. The BofA Merrill Lynch index is used with permission; © 2016 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. The S&P data is provided by Standard & Poor’s Index Services Group. Benchmark indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
–Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against a loss in a declining market. There is no guarantee investment strategies will be successful.
–Past performance is no guarantee of future results.
Additional Data Sources
personal.vanguard.com
us.dimensional.com
www.thefiduciaryinstitute.org
www.xyplanningnetwork.com
www.dalbar.com
www.barrons.com
www.ifa.com
www.riabiz.com
www.investmentnews.com
www.advisorperspectives.com
www.danielsolin.com
review.chicagobooth.edu
us.spindices.com/spiva
www.evidenceinvestor.com
