Fruits of Your Labor

Perhaps we’re in a bit of a challenging mood, but as we write on this Labor Day, we simply want to know if our money is laboring as hard as we are.  With the great efforts and deep sacrifices you’ve made to accumulate the very nice pot of dollars you have in your accounts, you definitely deserve to know the same.

Here are the answers;

1. As you know, you are invested “passively”.  The alternative investment philosophy as you certainly recall is called ‘active’ (as in actively managed in one of its 3-4 permutations).  Yes, it is true your investments are unique passive structures versus the standard industry ‘index’, but they as still passive.  In the last Standard and Poor’s Index Versus Active measurement test (SPIVA) (five years ended December 31, 2012), fully 87% of the active investment managers in the top 15 asset classes DID NOT beat their benchmarks.  Thus, quite remarkably we add, instead of people paying those fund managers millions of dollars in compensation to have them pick the winning stock(s) or bonds, they would have done better simply by throwing darts at a page in the Wall Street Journal to select their stocks.  AND…as a result, they would have performed better than those nicely dressed men and women.
2. Beyond the abhorrent production evident in the above under-performance, we want you to be aware of a quite powerful statistic; of the 31 equity funds in the Dimension Fund Advisors line-up, 24 of them out-performed their respective benchmarks[i]. The Core Equity funds that I utilize for you and your family are comprised of those same out-performing funds (making up the domestic, international and emerging market elements that contain all the large, mid-size and small companies that at this point aggregate to more than 11,000 companies).

In summary, taking our last month communication’s main thrust along with this one, you can take substantial comfort (we could say pride) in three hard and fast realities;

1. The active approach is the manifestation of hope over wisdom. The under-performance mentioned here is not new…it has been witnessed consistently for the past 30 years.  It’s quite amazing what large marketing budgets can do.
2. The growing in acceptance passive / index approach is based on those sordid facts. For real evidence of that fact, consider the movement of some of the largest pension plans in the country to passive (see attached new article).  It is important to recognize these funds both can attract, and do pay, $10,000,000 or more to investment managers to show their stuff, and get higher performance.  Alas, hope-over-wisdom is now turning to wisdom.  Your actively-filtered deeply-passive approach actually started with pension funds / private equity in its initial days, though Dimensional stayed with the institutional market whereas John Bogle (Vanguard) used the same research knowledge to go the retail route.  But as stated, you are not simply ‘index’, but uniquely constructed passive which allows you to pull out that extra performance that you have been benefiting from and the 10 year history manifests.
3. Notwithstanding these realities, you still have to act on your investments correctly. Having the safest, or fastest, car in the garage is of no value if you don’t know how to drive it.  The same for investments, and the constant and unrelenting pull of greed and push of fear.  If you do not act in a disciplined fashion, if you succumb to emotions, if you pay more in taxes than you need, then it all comes to naught.  To be helpfully clear, this type of regimen and action is NOT easy, which is obvious in the fact that most investors get it wrong.  Fortunately, you have that overall financial plan to back up the veracity of the investment approach.

Those are the abc’s of good investing.  We think we can reasonably say you are in the top 5% of all investors due to the assemblage of all these items.

Now that’s laboring with a purpose.  Objectively speaking, you are experiencing the fruits of labor that should get you through the next 20-40 years in very good shape.

[i] 10 year annualized data as of January 31, 2013 measured against the funds respective benchmark (Russell 1000, 2000, and 3000 indices for the domestic funds, MSCI benchmarks for the international and emerging markets and the Dow Jones US Select REIT index from the real estate).