Eric Nelson, CFA
@ServoWealth
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*CEO of Servo *Simply Smarter Investing *Tweets =/= financial advice *Need a 2nd opinion on your investments?
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Want to learn how you can have a better investing experience at
@Betterment
by working w/an independent advisor thru
@Better4Advisors
to get a better asset allocation implemented w/Dimensional asset class funds & ETFs?
Let’s talk…
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One of the hardest things for investors to understand and accept?
Good companies are not good stocks.
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If you retired in 2000 w/$1M wanting $50k/yr adj for inflation & invested in:
The Vanguard Total Stock Index Fund, you ran out of $ in 2018.
The DFA 100/0 Equity Balanced Strategy, you have over $2.5M net of withdrawals thru 10/2021
Dont trust your retirement to basic indexing
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You could invest for the next 30 years and never see a time again where you can buy int’l value stocks at at P/E of 10, int’l small value at 9, or emerging markets value at a P/E of 7.
Please pass this on to anyone who is claiming “stock prices are too high.”
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Value stocks are cheap. Small stocks are cheap. Foreign stocks are cheap. Short term bond fund yields are 6%.
Serious question: Is this easiest time in recent memory to invest?
🎉 🎈 🎊
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The best kept secret in investing?
Small cap value stocks have historically outperformed the market by about as much as stocks have outperformed bonds.
Everyone knows the latter, almost no one knows the former…
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This is why some ppl are 100% S&P 500 today, and why no one was 10+yrs ago.
Recency bias.
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How many ppl know what happened during 2000-2009 lost decade?
S&P 500 = -1.0%
US large value = 4.4%
US microcap = 6.3%
Int’l value = 6.7%
Int’l small cap = 8.7%
US small value = 9.1%
EM large = 9.5%
US REITs = 10.5%
Int’l small value = 11.3%
EM small cap = 12.3%
EM value = 13.9%
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The most common question I get about investing?
“Is now a good time to invest?”
Yup.
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The greatest investment run I’ve ever seen?
Late 90s Nasdaq? Nope
2000s real Estate? No
2010 FAANG stocks? Still no.
Late 80s, international small value stocks.
Total moonshot.
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Now that anyone can own Dimensional funds (via ETFs), hopefully we can all agree that this is one of the most impressive track records/feats in investing…that no one knows about!
We always hear “it’s hard to beat an index…”
Not for Dimensional.
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@morganhousel
1. Low fees are all that matter
2. I'm smart enough, I should be able to manage my own $
3. Investing is easy, I'll stay the course
4. Investing is a commodity
5. ETFs are always more tax efficient than mutual funds
6. The last 3-5 years of returns is a good predictor of future
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If ________ wins the election I’m selling my stocks!
So dumb.
(courtesy IFA)
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The last time small cap value underperformed the S&P 500 by more than 10% in a month, as is the case in March, small value went on to outperform the S&P 500 by over 50% in the following 12 months.
Give that a second thought before you bail on small value after a bad month.
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Why doesn’t anyone like value investing today?
Two words:
Recency. Bias.
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The fear of bear markets don’t keep me up at night.
The fear of lost decades do.
So I diversify.
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No one ever failed to reach their financial goals because of a 1% fee.
But a lot of people have made a lot of financial mistakes that a 1% fee could have saved them from.
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If you’re been a financial advisor for a while this quote will really resonate with you
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Last 3yrs:
DFA US Small Value = 77%
Vanguard Small Value = 48%
So maybe there’s more to investing than lowest expense ratio? 🤔
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If you retired 20yrs ago w/$1M needing $50k/yr adjusted for inflation, you’re living easy today if you invested in a diversified equity portfolio (despite 2008).
In Vanguard’s off-the-shelf retirement/income funds? You’re on track to run out of $.
There’s more to investing than
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Latest research paper from Dimensional is a doozy—portfolios where stock allocation is tilted to size/value/profitability vs. basic index, has lead to significantly better wealth, income & legacy outcomes w/better “good” results & importantly, less “bad” results or runs.
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Ready to have your mind blown?
$1 invested in 1973 in the NASDAQ Index has grown to $200 today.
In small cap value stocks? $1,200.
In the long run, the tortoise always beats the hare…
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For 25 years from 1970 to mid 1990s, int’l stock's trounced US stocks & investors wanted to be hugely overweighted to non-US companies.
Over last 28 years the opposite has been true and now investors are agog for US-only stock allocations.
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Bonds have had no real returns since 2009…and some hourly “advisors” have been recommending 70%+ in bonds for retirees the whole time because they’re “safe”
Cheap advice =\= Good Advice
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@realifeanyiezeh
It’s a model portfolio of mutual funds DFA has been publishing w/o making a single change for 25 years. No backtest/hindsight bias.
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Ready to have your mind blown?
Value is now ahead of growth over the last decade…
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What about the decade-long stretches where S&P 500 loses $ while every other asset class gains?
The easiest way to build wealth is to consistently buy the S&P 500 and Chill 😎
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@morganhousel
@Schuldensuehner
Adjusted for Tom Brady Super Bowl wins, the S&P 500 is negative since 2000 😂
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This is simply one of the best things I’ve ever read on investing. Doesn’t need to be more complicated than this.
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Is this the GOAT of investing marketing pieces?
lmk what you think?
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Stock prices (outside big cap tech) look very reasonable, in some corners of the world (small value, int’’l/EM) they’re downright cheap; short-term high quality fixed income yields are north of 5%…
We might be in the golden age of investing opportunity.
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If this continues, the retirement crisis won’t just be a boomer issue
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Here’s how I get my wife to stay the course with small cap value…
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Excluding unprofitable stocks from the small cap universe (ie Dimensional) has been very profitable…
Over 40% of Russell 2000 companies have negative earnings
Back in 2006, this number was under 20%
In just 17 years, the number of small caps with negative earnings has more than 2x
This is not a healthy market environment for small caps
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Feast your eyes on the valuations (P/Es) of US & int’l small value and EM value stocks!??
Wowzers!
(technical term)
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From 2000-July 2023, the Vanguard S&P 500 Fund returned 6.8%/yr
If you thought you could take 6% every yr out for retirement & be ok, you were wrong. You ran out of $ in 2017.
But if you had held a more diversified equity portfolio you coulda taken 6% & had 2.5x more $ by 2023.
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I’m not sure which result is more shocking?
1. The amount of funds/ETFs that don’t even manage to survive a 15-year period
2. The % of funds that a simple index outperforms
3. The consistency with which DFA funds beat index funds in each category
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Did this tweet move the market?
Value stocks are cheap. Small stocks are cheap. Foreign stocks are cheap. Short term bond fund yields are 6%.
Serious question: Is this easiest time in recent memory to invest?
🎉 🎈 🎊
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Novice investor: “what are the fees?”
Experienced investor: “what are the expected returns (net of fees), the long-term consistency of returns (say, in a lost decade), and the range of possible returns we can expect?”
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Holding an all-US stock portfolio is like being the GM of an NBA basketball team & limiting yourself to only US players.
Lots of opportunities from overseas missed out on.
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This is a friendly reminder that you cannot, in fact, spend “lower expense ratios.”
Only higher returns put actual $ in your pocket.
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No one has ever failed to achieve their long-term financial goals due to a bear market.
A lot of people have failed to reach those goals due to their attempt to avoid, or their reaction to a bear market.
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I stumbled upon this book in early 2000 as a deeply unhappy bank broker (already former stock broker) that was doing & had done everything the wrong way.
The rest, as they say, was history…
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the selloff in long-term bonds (nominal or TIPS, doesn't matter) that started in August of 2020 is nearing the depths of the S&P 500 loss in 2009...
Wow
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I’m going to start sharing Dimensional’s weekly Above The Fray blog that goes out to advisors & can’t be found on the public site.
Check in every Thursday & forward to someone who would find the content interesting.
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Are you disappointed that small value hasn’t beaten the S&P 500 (DFA US Large Company) in the last 15yrs? You shouldn’t be…
Small value has just done what it does—almost 14%/yr for last decade and a half
It’s the S&P 500 that’s done 50% better than its long-run, 10% average
😳
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I hate the fact that everyone cites the returns of a “60/40” as US stocks & US bonds.
It should be ACWI & Global Agg …
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Think “stocks are expensive”?
Think again.
A globally diversified, small/value tilted portfolio trades at a P/E of 15 vs 23 for the S&P 500, and US small value, international & emerging markets value trade at a P/E of 8.
This is a great time to be an equity investor.
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This spells trouble for the “put it all in big cap indexes” crowd…
(From M*)
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Almost no investor appreciates how truly awful small cap growth stocks with the lowest profitability & highest investment and asset growth are.
They’re only 2% or so of the market, but excluding them, as Dimensional does, leads to a reliably better broad/total market fund.
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“Simon’s Law”:
The most talented investors quickly privatize their talents by shutting their portfolios to all but family and employees. If someone’s skilled enough to regularly trounce the market, they don’t want to manage your money.
-4 Pillars of Investing, 2nd Ed.
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Anyone investing in the NASAQ Index today is suffering from an egregious amount of recency bias.
I feel for younger investors who’ve only experienced the last 5-10yrs & who think it’s a great investment.
Give this historical perspective some serious consideration.
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Small value has trailed the market by 20% in the last year—shades of 2020.
No wonder roboadvisors are dumping value stocks.
The smart $ is buying small/cheap stocks.
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…I’m not sure now’s a good time to invest. What if we have a recession?…
It will be ok.
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The latest Dimensional Above The Fray looks at why investing in stocks based on dividend yields may not lead to higher returns
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Think I’m exaggerating?
Here are model portfolios that Vanguard gives TO ADVISORS to manage at Betterment for Advisors.
🤢🤢🤢
When I think about the tens of $billions$ in robo-advisors, target date, and asset allocation funds getting basic index returns and not a better designed portfolio 😡🤬🤯
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The whole point of investing in a globally diversified, multi-factor portfolio appropriate for your long -term goals is that YOU NO LONGER HAVE TO WORRY ABOUT DAY TO DAY MARKET MOVEMENTS & FLUCTUATIONS! They’re unpredictable & out of your control.
Tune out & get on w/your life!
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There’s a big difference between fees for:
(1) failed attempts at security selection & timing (no value)
and
(2) ongoing planning, evidence-based investment management + emotional coaching (value far greater than fees)
Not everyone will grasp this, but don’t stop trying.
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If you’re not going to diversify globally, at least diversify within your home market instead of putting all your $ in S&P 500.
Sincerely,
Your investor friends in Japan
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58% of mutual funds that were in business 20 years ago no longer exist.
100% of DFA mutual funds that were in business 20 years ago still exist.
The first step in outperformance is staying in business.
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@DiminSweaterGuy
If you can live off dividend distribution (say 2.5% or less withdrawal rate) then yes.
If not, put 2-3 years of annual spending in a short-term bond fund & the rest in the Equity Strategy
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How to build a great advisory business from day 1?
1–Focus on retirement income planning & investing
2–Offer full-time advice for AUM fee
3–Adopt an evidence-based investment philosophy
4–Use Dimensional Core Wealth Models
5–Stress behavioral coaching
6–Spread your message
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How to minimize sequence risk in retirement?
1. Planning: spend < you earn
2. Allocation: put ~5yrs of income in short-term bond fund
3. Spending: stocks in bull mkts, bonds in bear mkts
4. Diversify: globally across small/value stocks to help in “lost decades”
#Servoinsights
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There’s been a handful of periods historically where US small value has trailed the S&P 500 over long periods (20yrs); fast forwarding just 3yrs later, the 20-yr return has looked way different.
Will it be different this time?
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The S&P 500 has been top dog over the last decade, but it was dead money during the prior 14yrs.
Combining these periods, it’s been globally diversified portfolios with value/small cap stocks that are way ahead this century, not US large growth stocks.
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Why you rebalance:
The best/worst performing asset classes in the DFA Equity Balanced Strategy from...
2000-2009
BEST: Emerging Mkts Value = +266.7%
WORST: S&P 500 = -9.1%
2010-2019
BEST: S&P 500 = +250.0%
WORST: Emerging Mkts Value = +18.1%
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2023: “why would I invest in a globally-diversified portfolio w/small cap/value/profitability tilts? S&P 500 has done almost 3%/yr better?”
2013: “why would I invest in S&P 500? A globally-diversified portfolio w/small cap/value/profitability tilts has done almost 3%/yr better?”
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Most investors haven’t been investing very long so they have absolutely no idea how great the value premium had been up until a few years ago.
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If history is any guide, investors chasing NVDA stock, as opposed to putting their $ in a well-diversified portfolio, are going to be disappointed.
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I’ve never met—I don’t think one exists—an index fund investor who would sit through a 10-year period of negative returns in their S&P 500/Total Market Fund while other asset classes (ie small value) are up almost 10%/yr.
Basic indexing is the behavior gap in the making…
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Should you be afraid to invest after the market has hit an all-time high?
Nope.
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Small cap value has done about the same since 2010 as it did from 2000-2009. It’s the market that’s had the busts & booms.
Better to hold both.
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“Why are you sitting on hundreds of thousands in cash?” I’ll ask prospective clients.
Their answer?
“I think the market is top-y, I’m waiting for a better time to invest.”
Unfortunately they’ll probably be waiting a loooong time…
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If it’s been a while since you’ve seen this, or you weren’t even investing in the 00s, allow me to blow your mind with the unbelievable returns on emerging market stocks from 1999-2010.
Sure, you hate them today, but once upon a time EM was all anyone talked about!
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Over the last 25yrs of live fund returns, the DFA Equity Balanced Strategy didn’t just outperform a comparable Vanguard Index fund version…
It outperformed EVERY SINGLE Vanguard Index fund.
Wow.
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@ValueStockGeek
It’s not the vol that led to S&P 500 failure, it’s the concentration: 100% US large growth stocks.
A similar vol portfolio (all-stock) that’s globally diversified & has small cap & value tilts, the DFA Equity Balanced Strategy, saw $1M grow to > $2M net of $50k/yr withdrawals
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It’s not just that you can’t time the market.
It’s that you don’t need to.
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The biggest cost most investors pay is the impact of their own decisions
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Want to learn the nuts and bolts of how to be a successful investor, but don’t have the time or patience to read a bunch of books?
Check out Dimensional”s newly updated Pursuing a Better Investment Experience brochure.
Brilliant in its brevity.
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Small value underperforming has been a US-only anomaly. It’s outperformed in recent years every where else.
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Dude, this is crazy
Here's a double-click on those Price-to-Earnings (P/E), Price-to-Book, (P/B) ratios
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Odd how several obvious aspects of successful investing are so controversial:
1. Don’t be 100% US
2. Small/value tilted asset class portfolios > basic Total Market Index mixes
3. Holding as much stock exposure possible (inc 100%) is best
4. if you hold bonds stay short & safe
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If I could give an investor just one piece of advice, it wouldn’t be to index, own small value, none of that.
It would be:
Don’t time the market or hire an advisor who promises you their tactical system will work.
It’s pure snake oil.
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Who knows what the future returns of Apple, Microsoft, Amazon or NVIDIA will be?
What I do know is their past returns look just like the left side of this chart, so I see no reason why their future returns won’t look like the right side.
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25yrs ago if an investor w/$1M tried to duplicate DFA Equity Balanced Strategy using Vanguard Index funds, they wound up costing themselves $800k in missed out on returns vs hiring an advisor & just getting on with their life
There’s more to investing & life than low expenses
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Imagine thinking you can get out of stocks before they drop & then get back in before they go back up?
Successful market timing looks impossible
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The long-term evidence on stocks & bonds is clear:
1. Low-risk investments (t-bills) have had no (real) returns
2. There’s been a bond maturity premium, but only out to 5yrs
3. Biggest return payoff comes from bonds -> stocks
4. Within stocks, small/value > large/growth.
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This is a truly great article chock-full of insights & perspectives that answers a lot of the common investor questions.
Check it out & pass it on…
“What Every Investor Should Know”
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Friendly reminder, if you have all your $ in your own country’s big cap index, you could earn no return for a third of a century or longer…
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Trying to get clients/investors to stick w/US stocks was extremely difficult 12 yrs ago.
All anyone wanted was international stocks.
My old colleague at Equius actually wrote a newsletter explaining how much “value” there was in US stocks!
How times have changed!
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Are they a driver of investment returns?
Stock vs bond ✔️
Value vs growth ✔️
Small vs big ✔️
High vs low profit ✔️
Dividend yield🚫
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