Is It Wise To Pay An Advisor For Access To DFA Funds?

Save the Fees

Save the fees and manage your own money using low cost ETFs.  You are going to be dollars ahead and here is the evidence.  Let me describe the process I went though to come to this conclusion – and I am not finished with the analysis.  This data is not going to win me friends among DFA advisors.

I logged on to one of the premier web sites on the Internet to find examples of recommended portfolios.  There were ten options and I have yet to analyze all of them.  I first selected the most aggressive portfolio, expecting it would yield the greatest returns as the five-year period includes the great bull market beginning in March 2009.  The period of analysis I selected runs from 6/28/2007 through 6/28/2012.  When the data available, I can include information from today.

Return from Portfolio X = 1.43% annualized with a standard deviation of 23.38%.  These are actual historical results, not projections into the future.  I can provide projected data, and will at some point.

Platinum readers have frequently read about the "Swensen Six" portfolio, so I ran the numbers on that simple portfolio.  Here are the results.

Swensen Portfolio = 5.28% annualized with a standard deviation of 16.9%.  The Swensen outperformed the aggressive Portfolio X by 3.85% annually, and did it with lower risk. 

There are no fees associated with the Swensen as all six ETFs are commission free for TD Ameritrade customers.  With Portfolio X, management fees are somewhere between 50 and 90 basis points depending on the size of the portfolio.  And the fees are annualized so choose one of the numbers and subtract that from the 1.43% return.  The annualized return is below 100 basis points annualized.

With this data in mind, are you going to believe the sales talk that an advisor can add alpha to a portfolio by providing access to DFA mutual funds?

Disclaimer:  1) Other time periods need to be selected to make sure this was not a unique case.  2) Other asset allocation plans need to be tested.  For example, I will run a test using the Schrodinger Portfolio as it is a passive portfolio.  3) Less aggressive portfolios need to be selected from the Internet web site.  Below is the data from one more portfolio.

After running a test on the most aggressive portfolio, I selected the portfolio smack in the middle of the tame to aggressive line-up of portfolios.  Here are the results.

Portfolio Y = 1.86% annualized return with a standard deviation of 12.8%.  While this portfolio was less risky compared to the Swensen Six, the performance still lagged by 3.42% points – annualized.  Once more, one needs to subtract at least 0.50% from the 1.86% return.  Fees are a drag on performance.

Platinum members can manage their own portfolios.  Cut fees, increase returns, and do it with a less risky line-up of non-managed index ETFs.

The Stock Market Is Stronger Than You Might Assume

With all the negative news one picks up, are you aware that the stock market is showing signs of strength, particularly when the different sectors are analyzed?  Tomorrow, I will be posting the latest data on the Bullish Percent Indicators (BPI) for the broad markets as well as ten sectors.

This morning the NYSE BPI is showing that the offense has the ball as there are X's in the right-hand column.  When I checked the ten sectors, five were positive.  The specifics will be posted tomorrow.

My last sector test was to examine ten individual sector ETFs.  These are not to be confused with the BPI for the ten sectors.  Of the ten individual sector ETFs, nine are currently showing X's in the right-hand column.  We need to watch what happens in July as these positive results may be due to money managers polishing their portfolios for the end of the second quarter.


How Does A Beginning Investor Use The ITARR Model?

When one has been saving and investing as long as I have, it is easy to forget many of the initial steps necessary to launch and manage a portfolio.  In this blog post, I will attempt to fill in a few gaps, and even with this effort, I will most likely miss something.  That is why I appreciate questions.  I am using the Gauss Portfolio as my model for several reasons.  1) It is a young portfolio and therefore does not have a lot of entries.  Beginning investors can adapt it for their own purposes.  2) All seventeen asset classes are used and activated.  It is easier to not use one or more asset classes vs. want to use them but not have them available in the portfolio.  3) It is one of the five ITA Risk Reduction model portfolios.  Readers tracking this portfolio can see how I am using this model to increase return while reducing risk.

Gauss Dashboard:  After saving sufficient monies to open a discount broker account, one of the first required steps is to lay out an asset allocation plan.  I've written about a number of model portfolios over the years on this blog.  There are many models available on this blog.  If the seventeen asset class portfolio shown below is too complicated, then examine the "Swensen Six" as explained in this article.  Determine the number of asset classes to use and then locate commission free ETFs to populate each asset class.  If anyone has any questions as to what ETFs I use for the different asset classes, a list is shown in the second screen shot.


Portfolio ETFs:  In this blog post I am not interested in the performance numbers.  Instead, readers should concentrate on the individual ETFs that make up this portfolio.  Note how the selection of the ETFs provide global coverage.  Diversity is one of the keys to setting up a portfolio that has the potential to serve the client well over a lifetime of investing.

After the broker account is open, asset classes identified, and percentages allocated to the different asset classes, what does one do at this juncture?  Let's use U.S. Equities or VTI as the first example.  Since we want to be involved in the U.S. market, I will assume all investors will hold some percentage of VTI in the portfolio.  If you are using another investment vehicle to represent the U.S. market, the principles will be the same.

Is it time to buy VTI or should I wait?  As I am writing this, the price of VTI is slightly above its 195-Day EMA.  That indicates a buy is in order.  However, our second check is the Point and Figure graph (PnF) and it is telling us to be cautious.  Here is the link to the PnF graph.  Please note that this can change today if the market were to move up sharply.  What would I do?  I would invest approximately one-fourth of my Large-Cap Blend (VTI) allocation to this ETF and continue to do so each month so long as the price stays above its 195-Day EMA.  If the price drops below the 195-Day EMA, I would suspend adding new money until the price goes back up above the EMA.

Should the slope of the line in the PnF graph flip from positive to negative, I would consider selling off my positions in VTI, but be careful not to incur any short-term trading costs.  If the price of VTI were to rise sufficiently to cause the PnF graph to show X's in the right-hand column, I would max out the investment in VTI or the Large-Cap Blend asset class.

Now let's take another example asset class that is not on the cusp of a buy as we have for VTI.  Examine the situation for VOW, our emerging market ETF of choice.  Once more, VWO is a low cost ETF with an expense ratio of 20 basis points.  For TD Ameritrade customers, it is commission free so long as you sign up for this service.  There is no reason not to request this service.

Once more we examine two graphs for VWO.  1) The price and 195-Day EMA graph is our first point of examination.  The current price is not even close to moving from below to above the 195-Day EMA as the separation is a few dollars.  We need to look further into the PnF situation.  2)  Examine the PnF graph for VWO.  This graph is also telling us to stay in cash with our VWO monies or emerging market dollars, as we are in a state of decline.  Supply exceeds demand in this asset class and it is not time to make a purchase.

We walk through both of these technical graphs for each ETF, making decisions one at a time.  Let's take one more example, real estate.  If you look at the above Dashboard for the Gauss Portfolio you will observe that REITs are well below the target percentage.  If today were review day for the Gauss Portfolio, what would I be doing with VNQ, my domestic REIT ETF of choice?

Not visible on any of the screen shots, but available within the Gauss TLH Spreadsheet is a table telling me how many shares of VNQ are required to bring the REIT asset class back into balance.  Twenty-six shares are required so I would place a limit order for 25 shares of VNQ when the timing signals are positive.  So let's look at the two critical graphs to see what they are telling us.

Examining the price and 195-Day EMA graph, I see where the price of VNQ is above the Exponential Moving Average.  That is definitely a Buy signal.    Now we move on to the PnF graph for confirmation.  This graph confirms VNQ is a Buy.  Since we are dealing with a commission free ETF we can purchase it in small increments.  I suggest setting limit orders for five shares at a time until we have purchased the required 25 shares needed to bring this asset class back into target.

If this were the fall and the election were over, I would likely jump in and purchase all 25 shares and be done with it.  However, as we enter the summer months, there is a high probability we will be provided with the opportunity to pick up shares of VWO at lower prices than are currently available.