Research shows that size, value, and profitability are reliable drivers of expected equity returns.1 This paper summarizes the premiums associated with these return drivers across countries and regions. It also shows, using simulated marketwide strategies that integrate multiple premiums, how investors can achieve better outcomes by diversifying across markets.
Each year, Dimensional analyzes returns from a large sample of US-domiciled funds. This year’s study updates results through 2023 and includes returns from mutual funds and exchange-traded funds (ETFs) domiciled in the US. Our objective is to assess the performance of fund managers relative to benchmarks.
The evidence shows that a majority of fund managers in the sample failed to deliver benchmark-beating returns after costs.
We believe that the results of this research provide a strong case for relying on market prices when making investment decisions.
Index funds are widely viewed as a way for investors to achieve broad, passive exposure to certain markets or asset classes. However, index fund investors may overlook the fact that the creation and maintenance of an index fund entails numerous active decisions. In practice, index providers make many choices that have important implications for the characteristics and returns of the benchmarks they produce. As with any investment strategy, it is imperative for investors in index funds to evaluate whether these choices align with and serve their investment objectives.
Many people start out managing their own investments. But as their earnings and assets grow, their financial needs and challenges become more complex—and continuing to go it alone could prove costly in terms of investing miscues. Consider three common mistakes that can reduce returns and increase anxiety:
Holding cash may seem like a safe harbor in the financial markets, providing liquidity and peace of mind. However, this comfort comes with a hidden price – the potential growth you miss out on when your money isn't working for you. With each passing day, your cash reserves could be foregoing valuable opportunities to earn interest, dividends, and capital gains. Over the long run, money market funds (a proxy for cash) have underperformed other fixed-income allocations. Even short-term fixed-income treasury notes have outperformed cash over the long run.
Financial innovation provides investors with a seemingly endless supply of new investment options. But the process of evaluating the merits of these investments remains the same even as the names change. Adopting a new component in one’s asset allocation represents a tradeoff that should carefully balance the expected benefit vs. the cost of its inclusion. The following framework highlights benefits investors may seek as well as potential drawbacks—a checklist that applies to any investment opportunity.
Properly evaluating whether something belongs in your portfolio begins with specifying the role it is expected to play. These roles come down to a) increasing your expected return or b) helping manage risk.
If the objective is to increase expected returns, what is the case for the asset in question accomplishing that? It is easy to link a positive expected return with equities, for example, as stock ownership gives you a claim on companies’ future cash flows. Similarly, bondholders expect to receive periodic interest payments and the return of their principal as stipulated in the bond’s covenant. But an asset that lacks a sound foundation for delivering a positive expected return should give investors pause, regardless of its past performance.
