My blog seems like a good place to announce that Cascade Wealth Management will begin offering funds from Dimensional Fund Advisors in the very near future. I am very excited about this, as I believe DFA offers funds built on the finest academic research in the investment community.
DFA Funds are not directly available to retail investors. Investors can access them through a Registered Investment Advisor (e.g. CWM) which has been authorized by DFA to offer their funds.
DFA has several key principles:
Markets Work. DFA believes that the Efficient Markets Hypothesis (EMH) is valid. The EMH suggests that securities are generally properly priced and that it is very difficult, essentially impossible, to consistently identify securities that are mispriced. Consequently, it is misguided to attempt to outperform the overall market through active management strategies such as individual security selection and timing strategies.
Risk and Return are Related. The idea is that investors are rewarded for taking risk. The amount of the reward (i.e. return) is directly related to the amount of risk. However, the founders of DFA, Eugene Fama and Kenneth French, have developed a multifactor model which is the basis for DFA funds. I will come back to this model in a future blog.
Diversification is Essential. Portfolios should be structured to provide comprehensive diversification within and across global asset classes. Portfolio risk is composed of diversifiable or non-systematic risk and non-diversifiable, systematic or market risk (all interchangeable terms). Investors are only compensated for taking market risk. Investors must diversify sufficiently to eliminate non-systematic risk.
Structure Determines Performance. Asset allocation explains most of the variation of portfolio returns. DFA posits that over 96% of the variation in return is due to risk factor exposure. Thus, investors must get asset allocation right in order to be successful.
Look for more information about DFA funds in subsequent postings.
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