Index Funds Advisors Asset Class Comparison: As promised yesterday, the third video talk from Index Funds Advisors is located at this URL. Mark Hebner provides the large picture of the relationship between return and risk. If you missed the first two presentations, go back to this blog entry to pick them up. While you are on the IFA web site, I recommend each reader take the Risk Capacity Survey if you have not already done so. It is free and it will give you an idea how much risk you are willing to take with your investments. Most of the portfolios here at ITA fall between 55 and 80 on the IFA portfolio risk number scale.
Just a few comments about the make-up of IFA portfolios. In my opinion, holding anything below 3% in an asset class does not make sense as small percentages will not contribute significantly to portfolio performance. My preference is to hold a minimum of 5% in an asset class. Otherwise, one is playing mental feel-good games with the asset allocation plan.
You will note that Hebner does not advocate using Large-Cap Growth or Small-Cap Growth asset classes in his portfolios. From my studies, pushing these two asset classes that far down into the South East Quadrant is not born out of the facts. In other words, the return is higher and the risk lower than he shows on his Big Chart. As an investor, if you wish to reduce the number of asset classes in a portfolio, you can gain plenty of exposure to the growth side of the investing spectrum by using VTI, VO, and VB. In particular, VO and VB as blend ETFs will provide exposure to stocks that fall into both the growth and value sides of the U.S. Equities market. I don't want to quibble with Index Funds Advisors on this point as they are interested in skewing portfolios to the value side and I understand that bias. It is based on Fama-French studies.
Where Dimensional Fund Advisors (DFA) investors have an advantage is access to small-cap international value index funds. Also, there are pricing advantages in how DFA construct their index funds. The negative is that one pays 90 to 100 basis points for this access as one must go through an approved advisor to purchase DFA funds. Over a lifetime of investing, this fee adds up to a lot of money. If you doubt this fact, check out this article and all the associated links for more information.