Dimensional Fund Advisors, is an investment management company that takes a unique approach to the mutual fund investment strategy.
As with traditional mutual funds, DFA allows investors the opportunity to pool their funds with other investors to buy blocks of securities, but the strategy behind selecting assets for a DFA mutual funds differs significantly.
The techniques used to select assets are guided through academic research that follows the science of investing rather than simply making predictions based on past market performance or the success or failure of certain companies.
Dimensional Fund Advisors (DFA) was founded by David G. Booth and Rex Sinquefield in 1981. David Booth, a professor at the University of Chicago’s Booth School of Business, played a significant role in developing DFA’s investment philosophy.
DFA’s investment philosophy is data-driven and relies on empirical evidence rather than speculation. This is influenced by groundbreaking research in finance, including the efficient market hypothesis and studies on factor-based investing such as the three-factor model developed by Eugene Fama and Kenneth French.
DFA takes the emotion out of the equation to deliver reliable results. It has shown over time that it is possible to seek higher expected market returns through the use of science without having to outguess the market.
Over the past several decades this data-driven philosophy has proven successful and has become a preferred mutual fund strategy for investors who share in the belief that success is not arbitrary.
DFA follows a philosophy that uses empirical evidence to arrive at carefully determined “premiums,” or factors, to guide the investment strategy.
Rather than simply looking at past performance and market trends, they take into account these select premium attributes which include relative price, company size, and profitability, all of which aim to have an impact on the fund’s end results and the investor’s bottom line.
1. Company Size: The size factor refers to the historical evidence that smaller companies tend to outperform larger companies over the long term.
In practice, a factor-based strategy might involve overweighting or investing in small-cap stocks compared to their market capitalization weights. This approach aims to capture the potential excess returns associated with the size factor.
2. Relative Price (Value): Stocks with lower valuation metrics, such as low price-to-earnings (P/E) or price-to-book (P/B) ratios, tend to outperform stocks with higher valuations.
Implementing the value factor could involve constructing a portfolio that emphasizes stocks with attractive value metrics relative to their peers.
3. Profitability: Companies with higher profitability, as measured by metrics like return on equity (ROE) or operating margins, tend to deliver better long-term performance.
A factor-based strategy might involve directing the portfolio towards stocks with strong profitability characteristics.
DFA’s investment strategy revolves around carefully selecting securities that demonstrate these factors, aiming to capture systematic sources of risk and long-term market returns within a modern investment framework.
DFA mutual funds and index mutual funds share the same purpose of building wealth with pooled investments, but there are some key differences in their approach:
| Dimensional Funds | Index Funds |
| Accessible through authorized advisors | Direct access for individual investors |
| Managed by individuals who meet DFA’s high standards | No specific requirements for advisors |
| Philosophy based on following the science of investing | Reflects current market trends and past performance |
| Favors small-sized companies with long-term outperformance potential | No specific bias towards company size |
| Considers value in comparison to growth | No specific focus on value or growth |
| Emphasizes profitability as a determinant of long-term performance | No specific emphasis on profitability |
DFA’s mutual fund strategy employs several market strategies to emphasize diversification across different market segments, providing investors with a robust risk management mechanism.
DFA aims to provide investors with exposure to a wide range of market segments, including domestic and international equities, fixed income securities, and alternative asset classes. A few notable strategies include:
DFA encourages investors to adopt a long-term perspective and resist short-term market timing or reacting to market fluctuations. This patient approach allows investors to benefit from the long-term performance of the market segments they are invested in.
The company’s commitment to rigorous research, data-driven methodologies, and a long-term investment perspective has contributed to its strong performance track record.
It’s important to note that past performance is not indicative of future results, and investing involves risks. Factors such as economic conditions, market volatility, and specific company or industry risks can impact investment outcomes.
Therefore, it’s crucial for individuals to conduct a thorough assessment of their financial goals, risk tolerance, and time horizon before making any investment decisions.
Consulting with financial professionals, such as fiduciary advisors or certified financial planners CFP®, can help assess risk profiles, develop appropriate investment strategies, and provide ongoing monitoring and adjustments as needed.
Unlike index mutual funds, DFA mutual funds are not readily available to the general public. Investors can only access them through select financial advisors who have undergone a rigorous and lengthy selection process.
This ensures that those advisors managing investor accounts understand and respect DFA’s philosophy of investing based on academic research and the science of investing.
Ferguson-Johnson Wealth Management collaborates with DFA by providing expertise and guidance to clients interested in investing in DFA funds.
As a fee-only fiduciary with more than 40 years of experience, our firm is well-versed in various investment styles, including those aligned with DFA’s philosophy of investing based on academic research and the science of investing.
We work closely with clients to understand their investment goals and leverage our knowledge of DFA funds to build diversified portfolios that align with their objectives.
By incorporating DFA funds into our tailored investment strategies, we aim to maximize profitability and provide our clients with the benefits of DFA’s approach to investing.
Use our guide of questions that are essential to ask an advisor before you hire them. Don’t make a mistake by working with the wrong financial advisor. Ask the right questions to determine if a financial advisor is right for you.
