logo small

The Active Passive Powerhouse

Factor-Based Investing and the benefits of working with a DFA affiliated financial advisor

For years it has been assumed that you have to be either an active or passive investor. It is also assumed (depending on which camp you’re in) that one is better than the other. In my opinion, the argument over active vs passive management can be put squarely to bed--And the answer to which investing strategy I use is...Both. This is called factor based investing and it is a strategy used by a company whose funds I use a great deal---Dimensional Fund Advisors (DFA).

A recent article from the Wall Street Journal, The Active-Passive Powerhouse by Jason Zweig, highlights the success of operating without the boundaries and dogma of staying in either and active or a passive strategy. It identifies DFA is the fastest growing mutual fund company in the US.
The founders and advisors of DFA are pioneers of financial science and champions of efficient market theory which is built on the foundation that “active management practiced by traditional stock pickers is futile, if not absurdity.”1

Markets Work

This is how DFA invests: “It designs its own indexes, often of small capitalization stocks, then waits—for weeks, if necessary—until an eager seller is willing to unload shares at below the prevailing asking price in the market. Such tactics can minimize and in some cases even erase transaction costs, providing a small but meaningful boost to returns.”2

When clients and potential clients ask how I invest--the answer is simple. I invest the way DFA invests; keeping transaction costs low, offering globally diversified portfolios and managing risk with returns and goals. Why do I invest this way? Because it is based in financial science, not prediction, and because it works.

Avoiding Behavioral Investing and the Institutional Advantage

In order to invest this way, one must have time, patience and not be swayed by outside forces that speak to the next big fund or stock or the pick of the day. One also must have a certain degree of access to institutional investments not available to the public. Dimensional Fund Advisors doesn’t currently offer its funds to individual investors mainly because they believe that investors should use an advisor if they wish to have long term success in investing for their goals. I agree.

A good financial advisor’s ability to spend my time executing this investing strategy, having access to these types of funds, to act as a buffer between your emotions and your investments and a fiduciary commitment to acting always and only in your best interest is why having using a financial advisor is the smartest and most efficient way to preserve and grow your wealth.

Sources:
The Active-Passive Powerhouse by Jason Zweig

 

Print Email

CONNECT WITH US ON SOCIAL MEDIA!