The Essence of Investing. Investing ArtScience What does art tell us about investing?

47
The Essence of Investing

Transcript of The Essence of Investing. Investing ArtScience What does art tell us about investing?

Page 1: The Essence of Investing. Investing ArtScience What does art tell us about investing?

The Essence of Investing

Page 2: The Essence of Investing. Investing ArtScience What does art tell us about investing?

Investing

Art Science

Page 3: The Essence of Investing. Investing ArtScience What does art tell us about investing?

What does art tell us about investing?

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Michelangelo - “The Libyan Sibyl (1511)

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What Does Art Teach Us?

Peal away the layers until you discover the essence of investing.

Keep revisiting the essence to gain a deep understanding.

Build out from your understanding of the essence.

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What is the Essence of Investing?

Getting paid to make your excess money (capital) available for the production and

sale of goods and services.

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How do you get paid?

Stocks:AppreciationDividendsBonds:InterestAppreciation

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In Essence

Paid to take on risk

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What Does Science Teach Us?

How to build out from the essence

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Two Routes to Build Investment Portfolios

Wall Street Academic

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Wall Street and the Alaska Gold Rush

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Alaska Gold Rush by the Numbers

100,000 attempted to reach the Klondike region of the Yukon

30,000 made it4000 struck gold600 found significant amounts of gold30 found enough gold to significantly exceed

expenses.

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Active Investing by the NumbersTen Year Period Ending 12/31/2012

17,785 funds examined9070 survived the ten years71 outperformed their index before fees2 outperformed after fees

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9.6%

6.3%

-0.6%

All US Stocks Excluding the Top 10% of Performers

Each Year

Excluding the Top 25%of Performers

Each Year

Compound Average Annual Returns: 1926-2012

Missing Opportunity

• Results based on the CRSP 1-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

• Strong performance among a few stocks accounts for much of the market’s return each year.

• There is no evidence that managers can identify these stocks in advance—and attempting to pick them may result in missed opportunity.

• Investors should diversify broadly and stay fully invested to capture expected returns.

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The Randomness of Returns

In US dollars. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. Russell data copyright © Russell Investment Group 1997-2013, all rights reserved. US Real Estate is the Dow Jones US Select REIT Index, provided by Dow Jones Indexes. International Value data provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Small Cap Value data compiled by Dimensional from Bloomberg and StyleResearch securities data. Emerging Markets is the MSCI Emerging Markets Index (gross dividends), copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. One-Year US Fixed is the BofA Merrill Lynch One-Year US Treasury Note Index, used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Five-Year US Government Fixed is the Barclays Capital Treasury Bond Index 1-5 Years, formerly Lehman Brothers, provided by Barclays Bank PLC. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years (hedged), copyright 2013 by Citigroup. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1030.10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Highest Return 28.6 66.4 31.0 14.0 7.6 69.2 35.1 34.5 36.0 39.8 8.8 79.0 28.1 9.4 21.223.1 33.0 22.8 12.3 5.1 66.8 33.2 24.1 33.0 8.2 6.6 48.6 26.9 3.4 18.615.6 30.2 9.0 8.4 3.8 60.2 32.1 22.6 32.6 8.0 4.7 47.8 24.5 2.3 18.210.2 21.5 8.3 7.3 3.6 56.3 30.6 15.1 27.5 6.3 -28.9 44.8 20.7 2.1 18.19.7 21.3 7.3 6.4 3.4 47.3 26.0 13.8 26.3 6.3 -33.8 28.5 19.2 0.6 17.58.4 21.0 7.0 2.5 -2.9 46.0 22.3 7.0 23.5 6.2 -36.8 27.2 19.2 0.4 17.17.8 7.4 4.0 -2.4 -6.0 36.2 18.3 4.9 22.2 5.9 -37.0 26.5 15.5 -4.2 16.85.9 4.0 -2.0 -5.6 -11.4 30.0 16.5 4.7 18.4 5.5 -39.2 20.6 15.1 -5.5 16.4

-2.6 3.6 -3.0 -6.5 -13.8 28.7 10.9 4.6 15.8 -0.2 -42.5 19.7 13.3 -15.1 16.0-6.4 1.9 -9.1 -11.9 -15.5 2.0 2.7 3.1 4.3 -1.6 -45.1 2.3 3.7 -15.6 2.1

-17.0 -1.5 -12.3 -15.4 -20.5 1.9 1.3 2.4 4.1 -9.8 -47.1 0.8 2.0 -17.1 0.9Lowest Return -25.3 -2.6 -30.6 -16.7 -22.1 1.5 0.8 1.3 3.8 -17.6 -53.2 0.2 0.8 -18.2 0.2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US Large Cap 28.6 21.0 -9.1 -11.9 -22.1 28.7 10.9 4.9 15.8 5.5 -37.0 26.5 15.1 2.1 16.0US Large Cap Value 15.6 7.4 7.0 -5.6 -15.5 30.0 16.5 7.0 22.2 -0.2 -36.8 19.7 15.5 0.4 17.5

US Small Cap -2.6 21.3 -3.0 2.5 -20.5 47.3 18.3 4.6 18.4 -1.6 -33.8 27.2 26.9 -4.2 16.4US Small Cap Value -6.4 -1.5 22.8 14.0 -11.4 46.0 22.3 4.7 23.5 -9.8 -28.9 20.6 24.5 -5.5 18.1

US Real Estate -17.0 -2.6 31.0 12.3 3.6 36.2 33.2 13.8 36.0 -17.6 -39.2 28.5 28.1 9.4 17.1Intl Large Cap Value 23.1 33.0 4.0 -15.4 -13.8 69.2 30.6 15.1 33.0 6.3 -45.1 48.6 13.3 -17.1 21.2

Intl Small Cap 10.2 30.2 -12.3 -16.7 -2.9 60.2 32.1 22.6 26.3 8.0 -47.1 44.8 20.7 -15.6 16.8Intl Small Cap Value 9.7 21.5 -2.0 -6.5 3.8 66.8 35.1 24.1 27.5 6.2 -42.5 47.8 19.2 -15.1 18.2

Emerging Markets -25.3 66.4 -30.6 -2.4 -6.0 56.3 26.0 34.5 32.6 39.8 -53.2 79.0 19.2 -18.2 18.6One-Year US Fixed 5.9 4.0 7.3 7.3 3.4 1.5 0.8 2.4 4.3 5.9 4.7 0.8 0.8 0.6 0.2

Five-Year US Government Fixed 7.8 1.9 9.0 8.4 7.6 2.0 1.3 1.3 3.8 8.2 8.8 0.2 3.7 3.4 0.9Five-Year Global Fixed 8.4 3.6 8.3 6.4 5.1 1.9 2.7 3.1 4.1 6.3 6.6 2.3 2.0 2.3 2.1

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The Randomness of Returns: Sectors

Mutual fund universe statistical data and non-Dimensional money managers' fund data provided by Morningstar, Inc. Morningstar’s Sector Index family consists of 11 sector indices that track the US equity market using a consumption-based analysis of economic sectors in a comprehensive, non-overlapping structure. Index constituents are drawn from the available pool of US-domiciled stocks that trade on one of the three major US exchanges. Real Estate Sector Index is not included in the above illustration. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1032.1

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Morningstar SEC/Basic Materials -7.05 23.95 -14.16 0.86 -9.09 37.62 17.94 5.96 14.98 27.51 -48.14 53.60 24.87 -14.12 16.46

Morningstar SEC/Consumer Cyclical 49.92 23.46 -40.14 -17.44 -37.31 19.84 14.39 -6.04 39.41 0.20 -38.17 35.63 23.16 0.64 32.39

Morningstar SEC/Consumer Dfnsve 31.22 17.65 -25.78 3.63 -23.78 41.04 15.39 -1.40 11.90 -8.69 -41.22 50.17 30.53 4.06 24.56

Morningstar SEC/Energy 17.79 -2.89 7.24 1.41 -6.31 17.43 10.10 3.01 15.12 12.58 -16.09 15.62 14.46 13.39 10.08

Morningstar SEC/Financial Svc -15.90 25.07 45.67 -14.86 -6.63 26.07 38.05 40.83 19.74 32.88 -38.39 33.97 23.38 5.05 4.32

Morningstar SEC/Healthcare 10.28 1.81 26.76 -7.11 -13.09 32.09 12.53 6.03 17.57 -17.88 -51.35 14.55 11.81 -16.51 29.05

Morningstar SEC/Industrials 38.70 -6.66 38.42 -12.77 -21.08 18.87 3.51 8.11 6.65 8.05 -23.35 20.97 5.11 11.90 19.32

Morningstar SEC/Technology 8.54 12.79 0.29 1.31 -23.58 34.83 19.24 5.17 15.44 11.95 -39.41 24.05 24.16 -0.71 15.28

Morningstar SEC/Communication Svc 61.93 82.58 -35.38 -28.40 -38.33 50.32 0.79 3.69 10.87 16.56 -41.99 61.85 13.39 -0.38 13.30

Morningstar SEC/Utilities 13.86 -14.64 54.05 -16.67 -23.84 24.71 23.25 14.75 21.76 17.18 -28.11 11.76 7.31 18.46 2.19

Highest Return

Lowest Return

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

61.93 82.58 54.05 3.63 -6.31 50.32 38.05 40.83 39.41 32.88 -16.09 61.85 30.53 18.46 32.39

49.92 25.07 45.67 1.41 -6.63 41.04 23.25 14.75 21.76 27.51 -23.35 53.60 24.87 13.39 29.05

38.70 23.95 38.42 1.31 -9.09 37.62 19.24 8.11 19.74 17.18 -28.11 50.17 24.16 11.90 24.56

31.22 23.46 26.76 0.86 -13.09 34.83 17.94 6.03 17.57 16.56 -38.17 35.63 23.38 5.05 19.32

17.79 17.65 7.24 -7.11 -21.08 32.09 15.39 5.96 15.44 12.58 -38.39 33.97 23.16 4.06 16.46

13.86 12.79 0.29 -12.77 -23.84 26.07 14.39 5.17 15.12 11.95 -39.41 24.05 14.46 0.64 15.28

10.28 1.81 -14.16 -14.86 -23.78 24.71 12.53 3.69 14.98 8.05 -41.22 20.97 13.39 -0.38 13.30

8.54 -2.89 -25.78 -16.67 -23.58 19.84 10.10 3.01 11.90 0.20 -41.99 15.62 11.81 -0.71 10.08

-7.05 -6.66 -35.38 -17.44 -37.31 18.87 3.51 -1.40 10.87 -8.69 -48.14 14.55 7.31 -14.12 4.32

-15.90 -14.64 -40.14 -28.40 -38.33 17.43 0.79 -6.04 6.65 -17.88 -51.35 11.76 5.11 -16.51 2.19

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Peter Lynch, Beating the Street (New York: Simon & Schuster, 1993), 60.

Peter Lynch• ME1120.4

“All the time and effort that people devote to picking the rightfund, the hot hand, the great manager, have in most cases led to no advantage.”

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Warren E. BuffettChairman and CEO, Berkshire Hathaway, Inc.

ME1130.2

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”

Berkshire Hathaway Inc., 1996 Annual Report, chairman’s letter, in www.berkshirehathaway.com.

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Academic Research

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Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no. 2

(May 1970): 383-417. Eugene F. Fama, “Foundations of Finance,” Journal of

Finance 32, no. 3 (June 1977): 961-64.

Efficient Markets Hypothesis• Eugene F. Fama, University of Chicago

The Hypothesis States:

• Current prices incorporate all available information and expectations.

• Current prices are the best approximation of intrinsic value.

• Price changes are due to unforeseen events.

• “Mispricings” do occur but not in predictable patterns that can lead to consistent outperformance.

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Total Equity Risk

Company Risk

Industry Risk

Market Risk

Unsystematic

Systematic

Capital Asset Pricing ModelWilliam Sharpe: Nobel Prize in Economics, 1990

Beta measures volatility relative to the total market. A beta higher than the market’s beta of 1 implies more volatility, and a beta lower than the market’s implies less volatility.

Unsystematic

• Specific to firm or industry (lawsuit, fraud, etc.)

• Diversifiable

• No compensation

Systematic

• Marketwide, affects all firms (war, recession, inflation, etc.)

• Non-diversifiable

• Investor compensation

• Measured by beta

RR1210.2

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The Risk Dimensions Delivered

Periods based on rolling annualized returns. 739 total 25-year periods. 799 total 20-year periods. 859 total 15-year periods. 919 total 10-year periods. 979 total 5-year periods.Performance based on Fama/French Research Factors. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Mutual funds distributed by DFA Securities LLC.

July 1926–December 2012

RR1271.5

Value beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 99% of the time.

Value beat growth 96% of the time.

Value beat growth 86% of the time.

US Value vs. US GrowthOVERLAPPING PERIODS

In 5-Year Periods

In 10-Year Periods

In 15-Year Periods

In 20-Year Periods

In 25-Year PeriodsValue beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 95% of the time.

Value beat growth 91% of the time.

Value beat growth 80% of the time.

US Small vs. US Large

Small beat large 97% of the time.

Small beat large 88% of the time.

Small beat large 82% of the time.

Small beat large 75% of the time.

Small beat large 60% of the time.

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The Risk Dimensions Delivered

Based on rolling annualized returns. Rolling multi-year periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences. International Value vs. International Growth data: 157 overlapping 25-year periods. 217 overlapping 20-year periods. 277 overlapping 15-year periods. 337 overlapping 10-year periods. 397 overlapping 5-year periods. International Small vs. International Large data: 217 overlapping 25-year periods. 277 overlapping 20-year periods. 337 overlapping 15-year periods. 397 overlapping 10-year periods. 457 overlapping 5-year periods. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Large is MSCI World ex USA Index gross of foreign withholding taxes on dividends; copyright MSCI 2013, all rights reserved.

RR1271.5

International Small vs. International Large

Small beat large 100% of the time.

Small beat large 97% of the time.

Small beat large 83% of the time.

Small beat large 80% of the time.

Small beat large 79% of the time.

Value beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 98% of the time.

International Value vs. International GrowthOVERLAPPING PERIODS

In 5-Year Periods

In 10-Year Periods

In 15-Year Periods

In 20-Year Periods

In 25-Year PeriodsValue beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 100% of the time.

Value beat growth 96% of the time.

January 1975–December 2012 January 1970–December 2012

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Structure Determines Performance

• The vast majority of the variation in returns is due to risk factor exposure.

• After fees, traditional management typically reduces returns.

sensitivity to market

[market return minus T-bills]

sensitivity to size

[small stocksminus big stocks]

sensitivity to BtM

[value stocksminus growth]

randomerrore(t)

++ + +=average expected return

[minus T-bills]

average excess return

THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING

Priced Risk• Positive expected return• Systematic• Economic• Long-term• Investing

Unpriced Risk• Noise• Random• Short-term• Speculating

Structured Exposure to Factors

Unexplained Variation

• Market• Size• Value/Growth

RR1260.4

THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING

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Precision in Portfolios

• Traditionally, “products” have been classified into rigid and sometimes arbitrary categories.

• Style boxes force crude strategic allocation.

• Using the three-factor model, the total portfolio is measured by factors that determine risk and expected return.

• Freedom from brittle definitions allows precisely tuned portfolios.

RR1250.2

Traditional Consulting Style Box

Large

Mid

SmallValue Blend Growth

Three-Factor Model Small

Growth Value

Large

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• Equity Market(complete value-weighted universe of stocks)Stocks tend to have higher expected returns than fixed income over time.

• Company Size(measured by market capitalization)Small company stocks tend to have higher expected returns than large company stocks over time.

• Company Price(measured by ratio of company book value to market equity)Lower-priced “value” stocks tend to have higher expected returns than higher-priced “growth” stocks over time.

Value

Large

Small

Growth

Increased RiskExposure andExpected Return

TotalStockMarket

Decreased Risk Exposure and Expected

Return

Dimensions of Stock Returns around the World

Risk and Return Are Related

Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (June 1992): 427-65.Eugene F. Fama and Kenneth R. French are consultants for Dimensional Fund Advisors. This page contains the opinions of Eugene F. Fama and Kenneth R. French but not necessarily of Dimensional Fund Advisors or DFA Securities LLC, and does not represent a recommendation of any particular security, strategy, or investment product. The opinions expressed are subject to change without notice. This material is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. Dimensional Fund Advisors (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described. ©2012 by Dimensional Fund Advisors. All rights reserved.

RR1274.3

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What to ExpectWhen markets go up – better

performance

When markets go down – poorer performance

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Bull and Bear Markets

Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by Standard & Poor’s Index Services Group. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

LT1370.15

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

6 mos.-30%

2 mos.-19%

6 mos.-21%

4 mos.-10%

44 mos.193%

2 mos.92%

6 mos.100%3 mos.26%

4 mos.12%

34 mos.-83%

23 mos.133%

9 mos.61%

5 mos.22%

13 mos.-50%

4 mos.-16%

31 mos.-30%

6 mos.-22%

49 mos.210%

116 mos.491%

5 mos.12%

48 mos.105% 43 mos.

90%26 mos.

52%

7 mos.-10%

5 mos.-15%

6 mos.-22%

8 mos.-16%

30 mos.76%

9 mos.55%

15 mos. 35%

19 mos.-29%

33 mos.86%

21 mos.-43%

3 mos.-11%

14 mos.-14%

20 mos.-17% 3 mos.

-30%

5 mos.-15%

2 mos.-15%

25 mos.-45%

61 mos.282%

92 mos.355%

30 mos.71%

24 mos.63%

61 mos.108%

Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market

Jun 201348%

10 mos.34%

14 mos.65%

5 mos.-16%

2 mos.-13%16 mos.

-51%

Average Duration Average ReturnBull Market 30 Months Bull Market 111%Bear Market 11 Months Bear Market -26%

S&P 500 Index (USD)Monthly Returns: January 1926–June 30, 2013

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Bull and Bear Markets

Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

MSCI EAFE Index, Net Dividends (USD)Monthly Returns: January 1970–June 30, 2013

LT1370.15

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

34 mos.103%

5 mos.-15%

7 mos.41%

4 mos.19%

39 mos.93%

13 mos.36%

18 mos.67%

37 mos.323%

57mos.93%

26 mos.47% 5 mos.

26%

15 mos.53%

8 mos.18%

55 mos.206%

18 mos.-42%

5 mos.-13%

9 mos.-13%

2 mos.-11 % 17 mos.

-20%

4 mos.-17%

2 mos.-15% 9 mos.

-31%

20 mos.-15%

4 mos.-11%

2 mos.-15%

39 mos.-48%

Feb 200916 mos.-57%

Jun 2013-18%

Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market

Average DurationBull Market 24 MonthsBear Market 11 Months

Average ReturnBull Market 87%Bear Market -23%

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Should You Change Your Allocation?

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20%

-2%

21%

1%

-4%

8%

35%

13%

21%

-5%

42%

12%

59%

50% 48% 50%

84%

Cumulative Total Return

After 1 year After 3 years After 5 years

October 1987:Stock Market Crash

August 1989:US Savings and

Loan Crisis

September 1998:Asian Contagion

Russian CrisisLong-Term Capital

Management Collapse

March 2000:Dot-Com Crash

September 2001:Terrorist Attack

The Market’s Response to Crisis

Balanced Strategy: 7.5% each S&P 500 Index, CRSP 6-10 Index, US Small Value Index, US Large Value Index; 15% each International Value Index, International Small Index; 40% BofA Merrill Lynch One-Year US Treasury Note Index.The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. US Small Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French. International Small Cap Index compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries in the bottom 10% of market capitalization, excluding the bottom 1%; market-cap weighted; each country capped at 50%; rebalanced semiannually. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.

Performance of a Normal Balanced Strategy: 60% Stocks, 40% Bonds

LT1385.5

September 2008:Bankruptcy of

Lehman Brothers

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Performance of the S&P 500 Index

Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2012 provided by Bloomberg. The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.

Daily: January 1, 1970-December 31, 2012

LT1330.9

Total Period Missed 1 Best Day

Missed 5 Best Single Days

Missed 15 Best Single Days

Missed 25 Best Single Days

One-Month US T-Bills

Annualized Compound Return 9.94% 9.66% 8.84% 7.47% 6.33% 5.30%

$58,769

$52,702

$38,212

$22,191

$13,999

$9,195

Grow

th o

f $1,

000

Page 41: The Essence of Investing. Investing ArtScience What does art tell us about investing?

What Does Science Teach Us?Stock returns are random and totally unpredictable in

the short-term.Long-term returns are more predictable.Small and value stocks outperform large and growth

stocks.Changing allocation because of changing market

conditions will reduce performance because key days will be missed.

Fees Matter

Page 42: The Essence of Investing. Investing ArtScience What does art tell us about investing?

A Word About Fees

Page 43: The Essence of Investing. Investing ArtScience What does art tell us about investing?

Fees Matter

• For illustrative purposes only.

• Over long time periods, high management fees and related expenses can be a significant drag on wealth creation.

• Passive investments generally maintain lower fees than the average actively managed investment by minimizing trading costs and eliminating the costs of researching stocks.

$4,983,951

$3,745,318

$2,806,794

1% Fee

2% Fee

3% Fee

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

1 Year 3 Years 5 Years 10 Years 20 Years 30 Years

Time

Dol

lars

Assumed 6.5% Annualized Return over 30 Years

Page 44: The Essence of Investing. Investing ArtScience What does art tell us about investing?

Fees

Active Mutual Funds• Management Fees = 1.41%*• 12(b)1 Fees = 1.0%• $50,000 investment

• First Year Fee = $1,205• On-going Fee = $1,205

* Investment Company Institute

ASA Portfolio• Fund Management Fees = 0.46%• 12(b)1 Fees = 0.0%• ASA Fees = 1.0%• Schwab Trading Fees = $50• $50,000 investment

• First Year Fee = $780• On-going Fee = $730

Page 45: The Essence of Investing. Investing ArtScience What does art tell us about investing?

Trading Costs

Page 46: The Essence of Investing. Investing ArtScience What does art tell us about investing?

Questions

Page 47: The Essence of Investing. Investing ArtScience What does art tell us about investing?

The Essence of Investing