Investment Tips: Another Dimensional
Last week saw the 40th anniversary of Dimensional Fund Managers being founded.
Dimensional may not be a manager you have come across previously – they don’t advertise in the mainstream media and their funds are generally only available through Adviser led investments.
Yet, they are the 8th biggest fund manager in the world. Currently I use Dimensional for the Global Fixed Interest and Global Smaller Companies sections of the Metric Wealth Portfolios.
If most investment groups launched in the 80s were run by Wall Street stock pickers dressed like Miami Vice extras, Dimensional were the other end of the spectrum being founded by Nobel Prize winning economists Ken French and Eugene Fama.
One of the other founders, David Booth, wrote a piece this week on the lessons he’s learned over the 40 years, from which I’ve lifted a couple of sections which I think are relevant to all of us and how I choose to advise on money.
1. Gambling is not investing, and investing is not gambling
Gambling is a short-term bet. If you treat the market like a casino, and you’re picking stocks or timing the market, you need to be right twice — in an aim to buy low and sell high. Eugene Fama showed that it’s unlikely for any individual to be able to pick the right stock at the right time — especially more than once. Investing, on the other hand, is long term. While all investments have risk, there are things you can do as a long-term investor to manage those risks and be prepared. As my dear friend and Nobel laureate Merton Miller said, “Diversification is your buddy.” Investing, to me, is buying a little bit of almost every company and holding them for a long time. The only bet you’re making is on human ingenuity to find productive solutions to the world’s problems.
2. Embrace uncertainty
Over the past 100 years, the US stock market, as measured by the S&P 500, has returned a little over 10% on average per year but hardly ever close to 10% in any given year. The same is true of dozens of other markets around the world that have delivered strong long-term average returns. Stock market behaviour is uncertain, just like most things in our lives. None of us can make uncertainty disappear but dealing thoughtfully with uncertainty can make a huge difference in our investment returns, and even more importantly, our quality of life.
3. Tune out the noise
If an investment sounds too good to be true, it probably is. When people ask me if I’m investing in the latest shiny investment idea, I tell them, “If I don’t understand something, I don’t invest in it.” That’s because I’ve seen a lot of fads come and go.
TV pundits handing out stock tips? Friends letting friends in on their next big investment? I see these more as entertainment than information. Stress is induced when people think that they can time markets or find the next winning stock, or that they can hire people who can. There is no compelling evidence that professional stock pickers can consistently beat the markets. Even after one outperforms, it’s difficult to determine whether a manager was skilful or lucky.
The good news is you can still do well without having to find what markets might have missed. While markets are unpredictable and may even seem chaotic at times, they have an underlying order. Buyers and sellers come together and trade, which is the activity that sets market prices. Unless each side agrees to a price, they don’t trade. New information and expectations about returns are quickly incorporated. Consistently finding big winners is difficult, but everybody can have access to the expected returns that a diversified, low-cost portfolio can generate.
4. Have a philosophy you can stick with
It can be difficult to stay the investment course during periods of extreme market volatility. At the end of March 2020, the S&P 500 was down nearly 20% for the year. Record amounts of money exited from equity mutual funds and went into money market accounts. Those investors who stayed out of the equity market missed out on the subsequent 56% gain in the S&P 500 over the next 12 months. We will all remember 2020 for the rest of our lives. It serves as an example of how important it is to maintain discipline and stick to your plan.
By learning to embrace uncertainty, you can also focus more on controlling what you can control. You can make an impact on how much you earn, how much you spend, how much you save, and how much risk you take. This is where a professional you trust can really help. Discipline applied over a lifetime can have a powerful impact.
