Dimensional was started in 1981 around a set of beliefs. These ideas remain core to their business and key to the experience they deliver.

 1. Investing is a Science

Professional money managers have offered their services for centuries, but until the 1960s, there was no empirical way to hold them accountable for their results. When computers became powerful enough to analyze immense amounts of data, researchers could start gathering and learning from historical stock returns. Now economists could measure the success of different investment strategies compared with the performance of the broader market. The science of finance took off.

 Early pioneers of this new academic discipline discovered that:

• Diversification reduces risk.
• Uncertainty creates opportunity.
• Flexibility adds value.
• Conventional active management isn’t worth the cost.

“Conventional active management” is just another way of naming a strategy that relies on stock picking, market timing, or both. Stated a different way, it’s people who think they can beat the market. Once historical stock-return data had been analyzed, early empirical research showed that conventional active management delivered inconsistent returns and charged high fees. Not only did active managers not beat the market, they actually did worse than the market on average.

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The first half of 2023 marks the 10th time since 1926 that value stocks have underperformed growth stocks by more than 20 percentage points over a two-quarter period. More often than not, value has responded like the hero in an action movie, beating growth over the following four quarters in seven of the nine previous instances and averaging a cumulative outperformance of nearly 29 percentage points.

The sample size may be small, but a positive average value premium following a large negative period is not too surprising. In fact, looking at the other side of the value performance distribution, there have been 19 two-quarter periods with the value premium exceeding positive-20%. In 11 of these, value outperformance continued over the next four quarters. The average premium across all 19 was 3.6%.

It’s notoriously challenging to find an indicator that consistently predicts negative value premiums. Regardless of value’s recent performance, investors should expect positive value premiums going forward. That’s a strong incentive for investors to maintain a disciplined stance to asset allocation, so they can capture the outperformance when value stocks deliver.

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Sudden market downturns can be unsettling. But historically, US equity returns following sharp declines have, on average, been positive. A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines. Cumulative returns show this trend to striking effect, as seen in Exhibit 1.

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Investing and health can be two of the most important things in life, but sometimes they also can be the most confusing. There’s so much data and advice, so many articles—and unfortunately, they often don’t agree.

So, I wasn’t surprised to see that one of the bestselling books of the year is physician Peter Attia’s Outlive: The Science & Art of Longevity, which looks at recent scientific research on aging to explore strategies for not only living longer but also living healthier. I was struck by the parallels between how he talks about health and how we at Dimensional think about investing.

Here are some of his main observations about health:

• There's no one-size-fits-all solution.
• There are no quick fixes.
• It's better to prevent problems than find yourself in the position of having to fix them.

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How many investors appreciate the role financial science has had in the way we invest today? Before financial science emerged in the middle of the 20th century, there was only one way of investing—the traditional active way. People would research individual stocks and bonds and buy a few that they thought were underpriced.

That changed when Harry Markowitz, a Ph.D. candidate at the University of Chicago, introduced the idea of Modern Portfolio Theory in his 1952 paper “Portfolio Selection.” This theoretical paper suggests the steps an investor can take to build a portfolio that balances efficiently the tradeoff between expected return and volatility. It was the first big breakthrough in financial science and is still taught today as one of the cornerstones of financial theory. Markowitz later became a Nobel laureate for this work.

Traditional active stock picking, however, remained about the only investment approach until the early 1970s, when indexing emerged. This new approach offered broad diversification, low cost, and transparency by holding all securities in a market index. These characteristics appealed to investors who were familiar with the research of Michael Jensen, another Ph.D. student at Chicago, who in 1968 illustrated how few fund managers outperformed the market, especially after their fees and costs were deducted.

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