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Hi eric,
chinwhisker
06-10-2007, 9:27 AM | Post #2398132
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May I answer for no one in particular?
We do have these debates quite often, and for good reason. There is no flat answer to the question "Is DFA better than Vanguard?" However, I would answer for the wide majority, "No." But, if DFA were offered in a 401K, I would change that to "Yes." See what I mean? -- already I have given two answers, because it depends on the investor's circumstances.
One reason for this is the wide majority here do not have enough money in their portfolio to make DFA an option. The ones who do, may have too much of their money tied up in 401Ks and taxable. For the taxable account, you have to ask whether or not it is worth the tax consequences of cashing it in on top of the expense of an advisor and higher expenses in the funds. And the young person cannot invest in DFA until their balance has gotten high enough to need consider tax consequences.
Now consider the investor who holds a Cool $million in tax deferred. How much small value does this investor want to be exposed to? If it is a young individual with a Cool $million, I imagine this young individual has no problems with paying an advisor, and wouldn't have time enough to worry over their money. Go for it. But, for the older individual, in or around retirement, ST-bonds, TIPS and commodities may make up an extreme percentage of their portfolio to begin with, and even more as they age.
Then there is the period dependency on small value. I would need ask, "Would we even be having this conversation in 1999?" You used the period 1997 - 2007 to make your point. What would the results have looked like had you used 1987 - 1997? Since small and value have had such a run lately, this would mean their valuations have gotten higher compared to large growth, so the retiree may not see the benefits of holding small value any time soon. And there is the chance you get a really good car salesman type advisor that can convince you to go higher percentages in small value and higher risk DFA funds you don't really need.
Now, turn around and look at the example you gave once more. What did you use for risk? Standard deviation is the same as beta. The whole idea behind FF3F is there are other risk factors inherent in small and value besides volatility risks. If beta is the flaw in CAPM, how can beta define risk in a portfolio? You still need to look at the inherent risk in small and value that do not show up in beta, or at least this is the idea behind FF3F, right?
The idea here is you have to take on higher risk to get higher return. If you take higher risk to get higher return, then pay higher expenses to take higher risk, how does this balance out?
Then you need to get down to the question of TSM being on the efficient frontier. What would the data look like if you went back to earlier than 1970 as IFA does, or begin in 1982, as opposed to beginning and ending when small value had uncommonly higher returns? What do the changes in valuation methods which have gotten away from beta, additional discounts for small and value, and are now looking at equity debt in growth mean for the future small and value premiums? What about Fama's idea that any anomaly that can be found can be quickly snatched up? For anyone who had doubts in the small value area, and reduce the small value exposure per these doubts, or doubted the future premiums for small value, DFA is going to be less attractive.
For those who are comfortable with the higher risks associated with small and value, have faith in the premiums continuing, and have enough of a balance in their portfolio to cover the expenses without reducing the additional returns of small and value, DFA may make sense.
For everyone else, the only honest answer I could offer would be "It depends."
Chin
Originally posted in thread: 59269
Topics
401(k)
Efficient Frontier
Gene Fama
large growth
small value
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