Benefits of Including Flexibility

July 24, 2014

This article originally appeared at Forbes by Robert Schmansky, CFP®.

 

Following a rigid ideology can present weaknesses in life and an investment plan. 

 

The more experience I have as an advisor the more I realize that rigid models, rules of thumb and hard beliefs often benefit from a little flexibility.

 

While indexing is a great way to invest in the markets, is a straight market-cap weighted commercial index fund the best tool to use in assembling a portfolio? Or can we benefit from flexibility?

 

One of the reasons I recommend Dimensional Fund Advisors (DFA) funds for many asset classes is their inclusion of some flexibility in managing the tilt and inclusion of investments in an otherwise passive portfolio.

 

It’s always good to review whether or not that approach is actually working. As a regular review recently, I ran performance for a handful of funds that are as close to the same specific part of the markets that can be compared between Vanguard and DFA with some sort of performance history, and compared the final market value of a $100,000 investment at the beginning of the period.

 

 

 

I also compared the history of global real estate and inflation protected securities, both of which the history was not long enough to form any real judgment as to which approach is clearly better than the next, however, in both the DFA funds outperformed by a small margin.

 

While the above numbers cover a relatively short-time period, I believe one of the reasons for the outperformance in funds over a similar category is the flexible model that allows for some level of human involvement. Whether it is simply the weighting and tilt of the stock selections, or the ability to exclude or underweight stocks from companies that have not proven their long-term investment quality like IPOs or troubled companies like Enron or GM in the last decade, the benefits of flexibility shouldn’t be ignored or minimized.

 

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