Happy young couple jumping into the pool while holding a bunch of balloons

The Lure of Excitement is Killing Your Returns

Reposted from

Dan Solin, Contributor
Author of the Smartest series of books
Happy young couple jumping into the pool while holding a bunch of balloons
Spend two minutes watching this video. Financial journalist, Robin Powell, interviews author Allan Roth about the lure of excitement to investors. Roth correctly explains this appeal. He notes we want to feel like we’re in control and “know what’s going on”. He observes how the securities industry uses our emotions “against us”, because it’s in their economic interest to do so.

If the industry dispensed sound, responsible advice, and told investors to limit their holdings to broadly diversified stock and bond index funds, it’s revenues would decline and many would go out of business.

The appeal of “doing something”

Roth’s views explain why recommendations from Jim Cramer about how to build a “North Korea-proof investment portfolio” appeal to some (albeit a dwindling number) of ill-informed investors. Cramer and other pundits foster the belief that investors need to “do something” to deal with current events. The “something” can range from “fleeing to safety” (like overweighting your portfolio in gold) to changing the mix of stocks you hold in your portfolio to favor those likely to prosper in the event geopolitical tensions continue to escalate.

Here’s what Wall Street and its shills in the financial media don’t want you know:

There’s no credible data that making adjustments to your portfolio as a reaction to publicly disseminated news does anything but harm your expected returns.

The dismal performance of tactical asset allocation funds

If anyone could profit from this “some something’ strategy it would be tactical asset allocations funds. These funds forecast the returns of asset classes and then adjust their holdings to purchase those likely to outperform. You’d think the professional managers of these funds would have insight far surpassing the talking heads in the financial media.

You’d be mistaken.

Most of these funds historically underperformed Vanguard’s Balanced Index Fund (VBINX). Reviewing this data, author Larry Swedroe had this takeaway: “Bottom line: big fees poor results. In other words, TAA [tactical asset allocation] is just another game where the winners are the product purveyors, not the investors.”

Keep this data in mind the next time Cramer and others encourage you to “do something.” They’re encouraging you to engage in a form of tactical asset allocation, which appeals to your emotions but is contradicted by strong evidence.

Who’s really smart?

Another way to combat your natural instinct to “take action”, is to ask this question. What’s the really smart money doing?

Before you respond, it’s important to define “smart money.” The media wants you to believe managers of hedge funds and self-styled experts who appear of cable news are “smart.”

I don’t quarrel with this characterization. They have been able to convince millions of investors to entrust them with their money and pay huge fees, despite the fact that the track record of most of them has consistently underperformed comparable index funds, which are far less expensive. But being “smart” enough to take advantage of you makes them uniquely unsuitable to give you advice.

Who qualifies as “smart” money? Academics who spend their life studying the financial markets and publishing the results of their research in peer reviewed financial journals.These academics include Ken French, Eugene Fama, Robert Merton and many others.

These researchers (many of whom have Ph.D in Finance) study the science of investing. It’s based on sound research and not musings or speculation. They have identified the real sources of investment returns and rejected “costly speculation and guesswork.” The fund family that has pioneered this academic approach to investing is Dimensional Fund Advisors. You can learn more at its website.

If you asked these professionals what they are doing to “North Korea proof” their portfolios, they would look at you in stunned silence.

You have a choice when you invest. Follow the pied pipers on the financial media who have few qualifications and little or no data to support their musings, or study the science of investing.

The “excitement” of “doing something” gets old fast when your returns continue to underperform low management fee index funds.

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information or content on this blog is for information purposes only and should not be construed as an offer of advisory services.


9 Reasons Investors Love Vanguard & DFA Funds

*** June 2015 article with information worth repeating***

Reposted from

Wow. Vanguard had tremendous growth in 2014. An intake of $214.5 billion last year pushed this fund giant’s total assets to $3.1 trillion as of December 31, 2014. That growth represents a 56% increase for Vanguard compared to 2013. Early this year, they passed State Street Global Advisors as the second-largest exchange-traded fund provider as they close in on the top dog BlackRock.

Dimensional Fund Advisors (Dimensional or DFA funds for short) is another fund company that has been experiencing strong inflows. DFA funds added nearly $28 billion in assets in 2014, which was the third highest dollar amount of inflows last year, trailing only Vanguard and JPMorgan Chase.

That type of growth is doubly impressive because Dimensional Fund Advisors flies under the radar of many investors. Last year’s growth, however (not to mention a relatively steady inflow of assets since its 1981 founding), makes it clear that investors are attracted to DFA. What explains its rising-rock-star appeal, given its (yawn) nerdy tagline, “putting financial science to work”? Maybe it’s the firm’s laser-like focus and steadfast approach to applying academic research into the factors or “dimensions” that are expected to generate long-term wealth – fads and fashions be damned. For this blogger, anyway, it’s hard not to prefer that level of discipline to the usual frenzy involved in active stock picking and reactionary market timing.

Then again, Vanguard’s index and exchange-traded funds are no flashes in the pan either, also built on an investment strategy of substance. Admittedly, it can be confusing at a glance to understand how these two similar, but different fund companies compare. Let’s take a closer look at nine characteristics that help differentiate them from the crowd … and from each other.


Reason 1

Both trust the market knows best.

Yes, we are all brilliant, of course. However, when you consider that in 2014 alone there were some 60 million daily worldwide trades representing more than $300 billion dollars, it may be wise to embrace market pricing instead of trying to outguess the market. Vast, real-time, electronic information makes the market a highly effective price-setting machine. Trying to consistently outguess 60 million of your fellow investors is not unlike expecting to find enough single needles to outweigh an entire haystack, and to succeed at it over and over again.

In contrast, if you invested $1 in 1927 in a U.S. large-cap index fund and let it ride, your investment would have grown to $3,955 by 2014. Not bad. Vanguard and Dimensional alike prefer to invest in market “haystacks,” albeit with some procedural differences in how the assets get bailed, so to speak.

Electronic Market


Reason 2

Both minimize trading.

Trades cost money, in both overt and clandestine ways. By trading according to plan rather than trying to time the market or jump into “hot” segments, both fund companies are well-positioned to trade less often. Since trading is expensive, we can expect lower costs with reduced drag on performance if we trade less often.

The DFA Difference

Beyond just reducing trades by avoiding market-timing or trend-chasing, DFA’s structured trading strategy is part of its secret sauce. Actually, it’s not such a secret: When it comes to trading, a trader who is in less of a rush to buy or sell can usually command better prices than one who is in a rush or under pressure to trade. By being more patient than an index fund manager can be and a market-timing manager chooses to be, Dimensional has developed a solid track record for minimizing the trading costs involved in capturing the asset class returns they are seeking.

Moreover, DFA takes it one step further and offers its funds through select financial advisors who have demonstrated a similar level of patience. The result? Less frenetic trading and even net inflows during times of market panic. For example, during the 2008-2009 market panic, most funds experienced massive redemptions, which wreaks havoc on a mutual fund management. However, DFA funds actually had net inflows during that time, and was able to put that new cash to work and buy securities at bargain basement prices. (This is a mutual fund manager’s dream!)

Patient Investing

Reason 3

Neither firm tries to guess what asset class will outperform.

Vanguard and DFA offer funds with “style purity.” They invest in the asset class they say they will–small-cap value for example–and stay there. They aren’t making any kind of tactical bets that one asset class will perform better than the other.

The chart below says it all. Each column is the year, and each colored square is a separate asset class. Follow one color, such as “red” (the S&P 500), year by year. Look how much it bounces around! The performance of each asset class each year is anyone’s guess.


Callan Periodic Table

Reason 4

They don’t keep betting on the horse that won the last race.

Another common investment mistake is to chase stocks that have been on a recent winning streak and/or abandon recent underdogs. This continues to happen, despite the volume of evidence that past performance does not inform us about future returns.

Both Vanguard and DFA do not make “bets” on individual stock performance. They simply hold a large basket of stocks that fall into their well-defined criteria (in DFA’s case) or follow a published index (in Vanguard’s case).

The DFA Difference

DFA does not invest in public indexes like most of Vanguard’s index funds. The problem with public indexes is, well, they are public; everyone knows when a public index will change (and how it will change). Stocks tend to rise when it’s announced they will be included in a public index, and index funds will buy that stock on the effective date at the higher price.

This forces the index funds to “buy high,” which is exactly the opposite of what investors should do. It’s why Dimensional can afford to trade more patiently, as described above.

Here’s a nice visual to explain the concept:

Index REconstruction

Reason 5

Both firms make “going global” easy.

Only about half of the global market’s capital is in the United States. That leaves a big opportunity set outside our borders. Moreover, many of those other countries respond differently to economic forces, which has many benefits to investors (a portfolio of investments that “zig” while others “zag” can actually increase return and lower risk).

Both firms offer funds that cover broad sectors of foreign markets, so you can easily stay globally diversified.

The DFA Difference

DFA offers foreign funds (and even emerging market funds) with higher “tilts” towards small-cap and value stocks, which have historically been a source of higher long-term returns. They also “tilt” towards companies that have exhibited higher profitability. As an asset class, these stocks also have a history of higher returns.

Global Investment Diversification

Reason 6

They help to manage your emotions.

When you are well diversified, both domestically and in foreign markets, you reduce the risk of any one investment taking a nosedive, which can be unnerving and cause you to panic if you are over-concentrated in that investment. With many of Vanguard and DFA’s funds holding thousands of individual securities, the impact of a few dogs isn’t going to hurt as much. You aren’t as likely to panic sell when you have a global back-up plan.

Take a breath. Talk to your advisor. Don’t react emotionally to a buy high and sell low outcome.

Investor emotions

Reason 7

Both firms help you to see beyond the headlines.

We are bombarded daily with catchy headlines about economic facts that seem to be on the verge of derailing our investment strategy. It’s easy to get swept into the hoopla about rising (or falling) oil prices, currency fluctuations, or political tensions in other countries. By participating in the market according to a disciplined, evidence-based process, turning to fund managers who help you accomplish that, it’s easier to take comfort in the fact that you are a long-term investor with a well-diversified global investment strategy.

Financial News

Reason 8

They help you focus on the real drivers of returns.

Many investors believe the factors that affect their returns are stock picking and market timing. In reality, the bulk of your returns are actually driven by how you decide to split your money between stocks and bonds. (Well, another huge determinant is your ability to stay the course once you build your sensible portfolio, without succumbing to your human behavioral biases, but that’s a subject for another post, such as this one.)


  • Stocks have historically offered a higher long-term return compared to bonds, but are more volatile.
  • Smaller companies have historically performed better than larger companies.
  • Value stocks have historically done better than growth companies (think WalMart vs. Groupon).
  • High-profitability companies have historically performed better than low-profitability companies.


  • Longer-term bonds have historically had higher yields compared to shorter-term bonds.
  • Lower credit quality (“junkier bonds”) have historically had higher yields compared to higher credit quality bonds.

This is an important decision, so work with your advisor to design a suitable portfolio based on these core drivers of returns.

The DFA Difference

DFA regularly and closely collaborates with academic scholars, some of whom have been awarded Nobel prizes for identifying these factors or “dimensions” of higher expected returns. As such, they have been particularly early, strong and ongoing proponents of this sort of factor-based or evidence-based investing.

DFA Financial Researchers

Reason 9

These firms help you focus on what you can control.

One of the few things you can control in investing is your costs. Both firms offer funds at significantly lower costs than many of their actively managed peers. They also offer a more disciplined approach to knowing what your own fund investments contain, so that it’s easier for you (especially with the support of an evidence-based advisor) to build and maintain a portfolio that you can stick with through thick and thin in your quest to build personal wealth. By minimizing the angst and second-guessing involved when you’re not sure just what is contained within your holdings, your own overall costs can be minimized as well.

You are in the busiest (and most profitable) time of your life. Working long hours. Struggling to figure out the best investments for your retirement. (Time, what time?) Why not work with a financial advisor who can help you clarify your goals and develop and plan to reach those goals?

An advisor will help you focus on factors you control — asset allocation, structuring a portfolio that takes into account the real drivers of expected returns and your ability to handle risk, broad diversification, low expenses, low trading costs and tax minimization.

DFA Financial Control


Both Vanguard and DFA offer low-fee funds that operate on the principle that the market is an effective, information-processing machine that is nearly impossible to outguess.

DFA takes it one step further with some distinct tactics and also allowing for “tilting” towards areas of higher expected returns like smaller stocks, value stocks and higher profitability stocks.

The growth of these firms shows that investors are waking up to the reality that investment success is about capturing global market returns and keeping costs low, not about hunting down the next “rock star” money managers.

Teresa Staker
Teresa Staker
Administrative Assistant
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