" A decade ago, I really did believe that the average investor could do it himself. After all, the flesh was willing, the vehicles were available, and the math wasn’t that hard. I was wrong. Having emailed and spoken to thousands of investors over the years, I’ve come to the sad conclusion that only a tiny minority, at most one percent, are capable of pulling it off. Heck, if Helen Young Hayes, Robert Sanborn, Julian Robertson, and the nation’s largest pension funds can’t get it right, what chance does John Q. Investor have? " William Bernstein, "The Probability of Success"

" The investor’s chief problem - and even his worst enemy - is likely to be himself. " Benjamin Graham (1894-1976) Legendary American investor, scholar, teacher and co-author of the 1934 classic, Security Analysis

" It is unwise to pay too much, but it's worse to pay too little. " John Ruskin (1819-1900)

Index Funds Advisors, Inc. (IFA) is a fee-only Registered Investment Adviser. Our account minimum is $100,000. We will provide our ADV Part II and client agreement prior to you becoming a client. 

A. What does IFA do to add value to your portfolio?


In order for us to answer this question, you need to examine four questions about your current portfolio.

What is the expected risk (standard deviation) of your portfolio based on twenty-five years of historical data?

What is the expected return of your portfolio based on twenty-five years of historical data?

What are your total annual fees and expenses as a percentage of your total investments?

What are the taxes associated with your investment strategy as a percentage of your total investments?

The Portfolio Simulator is the only way to thoroughly analyze the value IFA can bring to your financial planning. According to the Prudent Investor Rule, risk and time are so directly related that all investors have a duty and responsibility to analyze and make conscious decisions concerning the levels of risk appropriate to their individual situation. The chart below shows the results of the average equity mutual fund investor over the last seventeen years.

A study released by Dalbar in March 2009 came up with similar results, but over a much longer period. The study indicated that during the 20 years from 1989 through 2008, the average stock fund investor earned returns of only 1.87% per year, while the S&P 500 returned 8.35%. On an inflation adjusted return, the average equity fund investor actually lost $17,712 on the value of a $100,000 investment made in 1989, while the inflation adjusted growth of $100,000 invested in the S&P 500 would have been $292,329. Even better, an investor who owned an all-equity, small value tilted, globally diversified index portfolio such as IFA’s Index Portfolio 100 would have grown a $100,000 investment to an inflation adjusted $343,861 as shown in Figure 1-2.

Dalbar previously conducted similar studies in 1994 and 1998. The 1998 study found that the return of the S&P 500 was five and a half times greater than what the average investor earned. All three studies showed that the average fund investor earned much lower returns than the S&P 500 or the average mutual fund. Clearly, investor behavior can have a far more negative impact on investment performance than investors realize.

Figure 1-2 (Chart Link)

Dalbar, Inc. Investor Behavior Studies 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008
(Past IFA Dalbar Quantitative Analysis of Investor Behavior (QAIB) Charts)

Investors can benefit from enlisting an investment educator or mentor who will focus on changing their investing behavior, encourage long-term investing, and discourage the gambling practices of trying to beat a market.

The fund tracking service Morningstar started disclosing these "investor returns" in 2006. On the Data Definition page of their web site, they state that "Morningstar investor returns (also known as dollar-weighted returns) measure how the typical investor in that fund fared over time, incorporating the impact of cash inflows and outflows from purchases and sales. In contrast to total returns, investor returns account for all cash flows into and out of the fund to measure how the average investor performed over time. Investor return is calculated in a similar manner as internal rate of return. Investor return measures the compound growth rate in the value of all dollars invested in the fund over the evaluation period. Investor return is the growth rate that will link the beginning total net assets plus all intermediate cash flows to the ending total net assets."

Now that Morningstar is tracking such data, investors bad behavior is finally quantified, as well the advantages of using a passive advisor who helps reduce investor error. In the Morningstar Indexes Yearbook: 2005, they analyzed how the average index investor did on their own versus those that are guided by an advisor using asset class index-type funds from Dimensional Fund Advisors. Here is what they had to say:

"Consider the success Dimensional Fund Advisors (DFA) has had in selling its funds through advisors who undergo training on the merits of passive investing and in portfolio construction theory. Consider that over the past decade the dollar-weighted return of all index funds was just 82% of the time-weighted return investors could have gotten with those funds. Yet, the figures for DFA are much better. In fact, the dollar-weighted returns of DFA funds over the past 10 years are actually higher than their time-weighted returns [see Table 1-3]. Suggesting advisors who use DFA encourage very smart behavior among their clients, even buying more out-of-favor segments of the market and riding them up, rather than buying at the peak and riding the trend down, which is usually the case with fund investors."

Table 1-3

The emotions of active investors go up and down like a roller coaster, leading them to negative returns on average, after expenses and taxes are deducted. The lessons in this 12-Step Program should allow investors to resist the behaviors that have caused them such despair and poor results in the past.

Figure 1-4

As a contrast, passive investors invest whenever they have the money to invest and regardless of market conditions, as seen below.

Figure 1-4a

To make things even better for passive rebalancers, they do the opposite of active investors and trim back indexes that have grown beyond their target allocation and buy more of indexes that end up being under their target allocation. This may result in selling and selling assets to active investors at the most beneficial times. (see Step 12, paragraph 12.2.3 Rebalancing Portfolios)

Figure 1-4b

 

Ten reasons to hire an index funds advisor:

1. Just like other competitive fields in which professionals dominate, the amateur investor is not likely to enjoy success. The study above confirms this point. The average amateur investor only gets 18% of the overall market returns and only 16% of the DFA mix of indexes. This is due to their lack of knowledge about how risk and return are related. There is also an emotional bias that forces investors to avoid risk instead of buying and holding the proper amount of risk. The advisors at IFA are professionals who have invested years of research and study into modern portfolio theory. The content and design of this website provides the most comprehensive presentation of investment information available for the purpose of educating the prospective IFA client. Current academic research on financial markets is constantly applied to our clients' investments. The majority of investors do not have the resources, time or interest to do this.

2. Our fee may be considered a casualty insurance premium with our role being to protect investors and their capital from themselves. As Benjamin Graham (1894-1976), the legendary American investor, scholar, Warren Buffet mentor, teacher and co-author of the 1934 classic, Security Analysis, stated, "The investor’s chief problem - and even his worst enemy - is likely to be himself." According to behavioral finance author and professor, Mier Statman, "When the market drops, our instinctive fear to flight is so strong, even the most rational investors find themselves caving in to their own demise." IFA takes the emotions out of the decision making process.

3. The main concern with amateur investors is that they do not know the facts about the financial markets. This is clearly demonstrated by survey after survey. In a recent one by Money Magazine, the average score of 1,500 investors on twenty basic financial questions was a mere 37% correct. You will pay a high tuition for your lessons if you do not understand the potential risk exposure of the stock market and the efficient market theory. Amateur investors suffer from emotional swings of irrational exuberance for risk and subsequent irrational avoidance of risk. Remember that every trade, mutual fund, or stock has someone on the other side that probably knows more than you. Nearly 80% of trading volume is handled by professionals. The alarming fact is that many of these "professionals" have little understanding about the way the market works. In two different studies of ten year periods, 97% of stock pickers and 100% of market timers under performed a simple index fund. Investment policy is the only thing that matters. IFA will create, maintain, and add discipline to that investment policy. We act as your Chief Financial Officer and coordinate your financial management team of lawyers, accountants and insurance agents.

4. IFA provides extensive investor education and access to low cost, pure style, customized, and risk concentrated institutional index funds. These funds are not available to amateur investors. They are created by the number-one rated mutual fund company, Dimensional Fund Advisors. They are building blocks of risk, offering worldwide diversification in the risk factors that explain virtually all of stock market return levels. (See Step 8, page 5 and Investment Policy.)

5. IFA refines your Risk Capacity™ survey to insure that you are optimizing the maximum level of returns for your level of Risk Capacity™, based on long-term historical data of indexes. For example, Portfolio 90 has provided $371,000/unit of risk (14.6 units or Std Dev.) on a $100,000 investment for the last 33 years. These are index returns after IFA and DFA fees, but before taxes and transaction costs. Past performance is not an indicator of future performance. If this fact is missing from your current strategy or the concept is foreign to you, we can add significant value to your investment policy. Your Risk Capacity™ survey is only accessible by IFA and its approved affiliates and is stored for your password access through the web.

6. We have a very high level of customer service and contact due to our implementation of technology. You can talk or chat live with one of our advisors, while viewing a streaming video of them. With more than one advisor, we have coverage for times of absence. The ability to video conference with your advisor brings about an entirely new level of communication. Our team will provide the highest level of service to maintain your trust and confidence.

7. IFA will provide additional quarterly reviews of the performance and rebalance status of your accounts. We maintain our own portfolio management software that provides virtually any type of analysis of your investments. We choose what we believe to be the most relevant information and send it to you with our invoice at the end of each quarter.

8. IFA will monitor the balance of your current portfolio compared to the investment policy target portfolio and insure that your risk exposure is kept constant. We provide the complicated process of rebalancing the portfolio, minimizing trading costs and taxes, and maintaining investment policy. The time, computer hardware and software, data maintenance, and expertise are of significant value to our clients.

9. IFA provides the opportunity for you to spend your precious time on endeavors of interest to you instead of worrying about your investments. We want you to be well educated about the way the market works, allowing you to relax and enjoy the investment process even in times of market declines.

10. Finally, this quote is important to remember when deciding on whether you should hire an index funds advisor. "It is unwise to pay too much, but it's worse to pay too little." - John Ruskin (1819-1900)

B. Index Funds Advisors Management Fees:


Our recommended account minimum is $100,000.  According to the August 2001 issue of
Money Magazine, the average investment advisor charges 1.4% on the first $500,000; 1.2% on $500,000 to $1 million; and 0.9% on $1 Million to $3 million of your assets, annually.

C. Schwab Transaction Fees

D. Comparison of Transaction Fees Between Three IFA Custodians

E. DFA Annual Expense Ratios

Table 5   Mutual Fund Expenses: Please review the Mutual Funds Prospectus for full detailed information on mutual fees and expenses. Prospectus Funds Covered DFA Prospectus for many DFA Funds* DFA Mutual Funds for US, Intnl, and Fixed Income DFA Tax Managed Funds Prospectus DFA Tax Managed Mutual Funds   Table 6: This material is to be used only in conjunction with a current prospectus . Index Index Mutual Fund (All no load funds) Symbol Total Annual Operating Expenses (%)* 12b1 Fees, Front or Back Loads, Redemption Fees,      US Equities IFA US Large Company Index U.S. Large Company DFUSX 0.10% 0   Tax Managed US Equity DTMEX 0.22% 0 IFA US Large Cap Value Index U.S. Large Cap Value DFLVX 0.30% 0   Tax-Managed US Marketwide Value DTMMX 0.40% 0   Tax-Managed US Small Cap DFTSX 0.55% 0 IFA US Small Cap Index U.S. Small Cap DFSTX 0.40% 0   Tax-Managed US Targeted Value DTMVX 0.47% 0 IFA US Small Cap Value Index U.S. Targeted Value DFFVX 0.41% 0 IFA Real Estate Index DFA Global Real Estate Securities DFGEX 0.47% 0    International Equities   Tax-Managed International Value DTMIX 0.56% 0 IFA International Value Index International Value DFIVX 0.46% 0 IFA International Small Company Index Int'l Small Company DFISX 0.57% 0 IFA International Small Cap Value Index Int'l Small Cap Value DISVX 0.71% 0 IFA Emerging Markets Index Emerging Markets DFEMX 0.62% 0 IFA Emerging Markets Value Index Emerging Markets Value DFEVX 0.62% 0 IFA Emerging Markets Small Cap Index Emerging Markets Small Cap DEMSX 0.80% 0    Fixed Income Mutual Funds IFa One-Year Fixed Income Index 1-Year Fixed Income DFIHX 0.20% 0 IFA Two-Year Global Fixed Income Index 2-Year Global Fixed Income DFGFX 0.20% 0 IFA Five-Year Government Index 5-Year US Government DFFGX 0.25% 0 IFa Five-Year Global Fixed Income Index 5-Year Global Fixed Income DFGBX 0.30% 0 Table 7 Blended Expense Ratios for IFA Index Portfolios Portfolios Non-Tax Managed Index Funds for Tax-Deferred Accounts Tax-Managed Index Funds for Taxable Accounts IFA Index Portfolio 05 0.26% 0.27% IFA Index Portfolio 10 0.27% 0.28% IFA Index Portfolio 15 0.27% 0.29% IFA Index Portfolio 20 0.28% 0.30% IFA Index Portfolio 25 0.29% 0.32% IFA Index Portfolio 30 0.30% 0.33% IFA Index Portfolio 35 0.30% 0.34% IFA Index Portfolio 40 0.31% 0.35% IFA Index Portfolio 45 0.32% 0.36% IFA Index Portfolio 50 0.33% 0.37% IFA Index Portfolio 55 0.33% 0.38% IFA Index Portfolio 60 0.34% 0.39% IFA Index Portfolio 65 0.35% 0.41% IFA Index Portfolio 70 0.36% 0.42% IFA Index Portfolio 75 0.36% 0.43% IFA Index Portfolio 80 0.37% 0.44% IFA Index Portfolio 85 0.38% 0.45% IFA Index Portfolio 90 0.39% 0.46% IFA Index Portfolio 95 0.41% 0.48% IFA Index Portfolio 100 0.43% 0.50%   F. Morningstar Expense Ratio Comparisons Table 8 Fund Expenses of the Morningstar Mutual Fund Universe - December 2009 Mutual Fund Categories Morningstar Category Average DFA Average DFA Savings US Large Company Funds 1.18% 0.20% 0.98% US Small Company Funds 1.47% 0.41% 1.06% Real Estate 1.51% 0.47% 1.04% International Stock Funds 1.42% 0.55% 0.87% Emerging Market Funds 1.73% 0.69% 1.04% Fixed Income Funds 0.98% 0.24% 0.74% Fees are only a glimpse of the overall picture. Consistent exposure to the risk factors are the real value of a portfolio of DFA index mutual funds. Exposure to these particular risk factors, which were discovered through research going back to 1928, translates to higher expected returns over the long term.