Investing Is a Science, an Art, and a Practice
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.