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Dimensional Bond Funds—Doing What They Are Supposed to Do

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by Mark Hebner and IFA Contributors
Monday, May 19, 2014

What is the proper role of fixed income in a diversified portfolio? As far as we at Index Fund Advisors are concerned, fixed income performs two vital functions. First, it dampens the volatility of the equity side of the portfolio which facilitates the adjustment of the ...Read More

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  • Fairholme and Sequoia—No Great Performance Here

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    by Mark Hebner and IFA Contributors — Thursday, May 15, 2014

    Recently, we received a question from a client that we will paraphrase as follows: “While I know that the returns I have gotten from index funds have beaten the majority of active managers, would I not have been better off in funds like the Fairholme Fund (FAIRX) or the ...Read More

  • When Reality Confronts Investor Expectations

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    by Mark Hebner and IFA Contributors — Wednesday, May 14, 2014

    A recent survey of 1,050 American investors conducted by Natixis Global Asset Management found that they said they needed average annual returns of 9.8% above inflation to meet their financial needs such as providing income in retirement, housing expenses, and health care ...Read More

  • The American Enterprise Institute Honors Eugene Fama

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    by Mark Hebner and IFA Contributors — Monday, May 12, 2014

    The American Enterprise Institute for Public Policy Research (AEI) is a private not-for-profit think tank whose stated mission is "to defend the principles and improve the institutions of American freedom and democratic capitalism—limited government, private ...Read More

  • Do Active Investors Have a Gambling Problem?

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    by Mark Hebner and IFA Contributors — Wednesday, May 7, 2014

    Index Fund Advisors’ 12-Step Program for Active Investors suggests that active investing is a disease akin to alcoholism, drug addiction, or gambling addiction. While we certainly do not say that all active investors suffer from an addiction that requires treatment, we ...Read More

  • IFA's Scientific Approach to Investing

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    by Mark Hebner and IFA Contributors — Tuesday, May 6, 2014

    Since its inception, Index Fund Advisors has always strived to take a scientific or academic approach to investing. We follow the evidence (i.e., long-term returns data) to wherever it leads us and we live by the Latin motto of the Royal Society, “Nullius in ...Read More

  • Manager Picking is a Mug's Game

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    by Mark Hebner and IFA Contributors — Friday, May 2, 2014

    The search for investment managers who will deliver alpha is an activity that accounts for billions of dollars that is spent by foundations, endowments, pension plans, and other institutional investors. To determine if these dollars are well-spent, it is fair to ask how ...Read More

  • Risk Aversion vs. Ambiguity Aversion and 401(k) Plans

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    by Mark Hebner and IFA Contributors — Thursday, May 1, 2014

    In a news briefing regarding Saddam Hussein’s weapons of mass destruction before the invasion of Iraq, former Defense Secretary Donald Rumsfeld famously stated: “Reports that say there’s—that something hasn’t happened are always interesting to me, ...Read More

  • Small-Cap Face-Off: Russell 2000 vs. S&P 600

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    by Mark Hebner and IFA Contributors — Thursday, May 1, 2014

    Investors who decide to index the small-cap portion of their portfolios face a bewildering array of choices from index mutual funds and exchange-traded funds (ETFs) that track indexes from providers such as Russell, S&P Dow Jones, MSCI, and Morningstar. At Index Fund ...Read More

  • Capturing the Momentum Factor—Simple but Not Easy

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    by Mark Hebner and IFA Contributors — Tuesday, April 22, 2014

    Last year, we wrote this article about momentum, which as the name suggests, is the tendency of securities that have outperformed (or underperformed) the market over a three- to twelve-month period to continue to outperform (or underperform) the market. In other words, momentum ...Read More

  • When a Negative Is Actually a Positive

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    by Mark Hebner and IFA Contributors — Monday, April 21, 2014

    Last week, BlackRock Inc, the world’s largest money manager released its quarterly earnings report for the first quarter of 2014. Normally, we don’t pay much attention to these things, but something caught our eye in this Reuters story that we thought was worth ...Read More

  • Pension-Gate Continues: Some Good Advice for the Hawkeye State

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    by Mark Hebner and IFA Contributors — Thursday, April 17, 2014

    At Index Fund Advisors, we are always gratified to read articles such as this one which give a good airing of the arguments in favor of indexing pension funds for public employees. One fund that would clearly benefit is the $27 billion Iowa Public Employees’ Retirement ...Read More

  • Connecting the Dots

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    by Jim Parker, Dimensional Fund Advisors — Thursday, April 17, 2014

    Human beings love stories. But this innate tendency can lead us to imagine connections between events where none really exist. For financial journalists, this is a virtual job requirement. For investors, it can be a disaster. “The Australian dollar rose today after Westpac ...Read More

  • The Problem of High 401(k) Costs

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    by Mark Hebner — Monday, April 14, 2014

    In December of 2012, Demos, a liberal think tank, published The Retirement Savings Drain—The Hidden and Excessive Costs of 401(k)s. It caused quite a stir and provided much of the source material for the PBS Frontline Documentary, The Retirement Gamble. Recently, another ...Read More

  • Will "Go-Anywhere Funds" Get You to Your Destination?

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    by Mark Hebner — Monday, April 14, 2014

    When discussing the issue of style drift with prospective clients, we commonly hear an objection that goes something like, “Why should I care where my fund manager chooses to invest, as long as he is picking the asset class and securities with the highest returns?” ...Read More

  • When Mythology Is Confused with Reality

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    by Mark Hebner and IFA Contributors — Friday, April 11, 2014

    In the investment industry, the term “white paper” carries a lot of currency. As for what distinguishes an ordinary article from a full-fledged white paper, it is usually just a matter of length or the number of charts included. It is important to bear in mind that ...Read More

  • Morningstar Takes a Closer Look at Survivorship Bias

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    by Mark Hebner and IFA Contributors — Wednesday, April 9, 2014

    One of the problems with commonly cited mutual fund returns data is that it ignores the issue of survivorship bias, the tendency for mutual funds with poor performance to be merged into other funds or shut down. Specifically, if we look at the ten-year average returns of all ...Read More

  • The Gadfly from Yale Continues to Buzz the 401(k) Industry

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    by Mark Hebner and IFA Contributors — Tuesday, April 8, 2014

    Last year, we wrote about the exploits of Professor Ian Ayres of Yale Law School. You may recall him as the fellow who sent letters to 6,000 plan sponsors whom he identified as having especially high expenses. Essentially, he gave them an ultimatum to improve their plan or else ...Read More

  • Seven Ways to Fool Yourself

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    by Jim Parker — Tuesday, April 8, 2014

    The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag. We delude ourselves for a number of reasons, ...Read More

  • The First Quarter of 2014 in Review

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    by Mark Hebner and IFA Contributors — Friday, April 4, 2014

    In the first quarter of 2014, risk was rewarded, but not to the extent to which we may have become accustomed to in 2013. With the exception of emerging markets and emerging markets value, all of the specific IFA indexes had a positive return. The strongest showing came from ...Read More

  • How Concerned Should You Be about a "Rigged" Stock Market?

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    by Mark Hebner and IFA Contributors — Wednesday, April 2, 2014

    Unless you have been hiding under a rock the past few days, you have doubtlessly heard about Michael Lewis’s new book, Flash Boys: A Wall Street Revolt. Perhaps you saw the Sixty Minutes interview of Lewis along with the primary protagonist of the book, Brad Katsuyama, or ...Read More

  • The 4% Retirement Spending Rule: Is It Still Relevant?

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    by Mark Hebner and IFA Contributors — Monday, March 31, 2014

    The 4% retirement spending rule was developed 20 years ago by William P. Bengen, a financial planner who published his results in the Journal of Financial Planning. Essentially, the 4% rule says that retirees who begin with spending 4% of their portfolio and increase their ...Read More

  • International Diversification vs. Home Bias

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    by Mark Hebner and IFA Contributors — Tuesday, March 25, 2014

    In a recent article on the concept of advisor's alpha, Vanguard emphasized the importance of advisor’s putting their clients into portfolios that they are unlikely to trade under varying market conditions. One of the important factors affecting client’s tendencies to ...Read More

  • Confessions of an Active Manager

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    by Mark Hebner and IFA Contributors — Monday, March 24, 2014

    Recently, one of our fans in India sent us a fascinating article by his fellow countryman, Mehrab Irani who has had the responsibility of managing active mutual funds for a large fund family. As we have noted in prior articles, indexing in India is still in an emerging stage, ...Read More

  • How Smart is Your Beta?

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    by Mark Hebner and IFA Contributors — Sunday, March 23, 2014

    At Index Fund Advisors, we are always keeping an ear out for new terminology that appears in the investment marketplace. Recently, there has been a lot of talk about “smart beta”. Recall that beta, in its strictest sense, refers to the degree of market exposure or ...Read More

  • A New Low for CNBC

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    by IFA Contributors — Friday, March 21, 2014

    With nothing better to do the other night, I decided to try out CNBC’s new series, Money Talks, a reality show that follows the antics of one Steve Stevens and his company VIP Sports of Las Vegas which describes itself as a consulting firm to sports bettors. A ...Read More

  • Consumer Price Index and Consumption

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    by Mark Hebner and IFA Contributors — Tuesday, March 18, 2014

    Economists discuss the choices people make with their income as some allocation of consumption and savings. They remind us that we apply our human capital (our skills and time) to earn financial capital (our income or wages) and that we then need to divide that money up into ...Read More

  • The Continuing Wisdom of the Oracle of Omaha

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    by Mark Hebner and IFA Contributors — Monday, March 17, 2014

    “Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” ...Read More

  • Capturing Portfolio Returns: Simple but not Easy

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    by Mark Hebner and IFA Contributors — Friday, March 14, 2014

    Throughout the IFA Website, you will find long-term historical returns of the IFA Index Portfolios and the asset classes that make up those portfolios. One example is the table of Simulated Passive Investor Experiences shown below for Index Portfolio 60. The highlighted line on ...Read More

  • Pension-Gate Continues: North Carolina is on Notice

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    by Mark Hebner and IFA Contributors — Thursday, March 13, 2014

    Those of you who are long-time followers of ifa.com are probably aware of the attention we have given to the very large problem of mismanagement of public pension plan funds. Thanks to diligent research that has produced reports such as this one from the Maryland Public Policy ...Read More

  • Advisor Alpha: Vanguard Estimates 3% Excess Return from Passive Advisors

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    by Mark Hebner and IFA Contributors — Wednesday, March 12, 2014

    A little more than a month ago, we published this article that introduced the concept of advisor’s alpha as the value added by passive advisors who adhere to the principles of controlling costs, maintaining discipline, and tax awareness. We also noted that Vanguard’s ...Read More

  • The Big Tease Continues

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    by Mark Hebner and IFA Contributors — Tuesday, March 11, 2014

    Take a walk past the financial section of your local newsstand, and you are likely to be greeted with headlines like “Ten Hot Stock Picks for 2014!” or “The Top Ten Mutual Funds to Buy Today!” or getting more directly to the point, “Make Money ...Read More

  • A Brief History of the Efficient Markets Hypothesis

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    by Mark Hebner and IFA Contributors — Monday, March 10, 2014

    In 2008, Nobel laureate Eugene Fama delivered a brief lecture to the American Finance Association. The entire 30-minute video is included above, and it is well worth an investment of your time. Fama was introduced by his son-in-law and colleague, John Cochrane, who explained ...Read More

  • When It Pays to Be Patient

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    by Mark Hebner and IFA Contributors — Tuesday, February 25, 2014

    One of the reasons that Index Fund Advisors advises the use of Dimensional funds is their patient and opportunistic approach to trading which differentiates them from traditional index fund providers. All too often, managers of traditional index funds require immediacy in their ...Read More

  • The Gambler's Fallacy and the Misuse of the Law of Large Numbers

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    by Mark Hebner and IFA Contributors — Friday, February 21, 2014

    If you have ever spent any time in a casino, it is likely that you have seen supposedly random events that appeared to be non-random. Perhaps the roulette wheel came up red seven times in a row, for example. If your reaction was to place a large bet on ...Read More

  • The Tax Treatment of Investment Management Fees

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    by Mark Hebner and IFA Contributors — Thursday, February 20, 2014

    Around this time of the year, we are frequently asked about the tax deductibility of investment management fees. The answer, like most things related to the tax code, is not a simple one. In general, when paid out of a taxable account, investment management fees are a ...Read More

  • The SAC Insider Trading Scandal—Yet Another Domino Falls

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    by Mark Hebner and IFA Contributors — Thursday, February 6, 2014

    Mathew Martoma, a former SAC Capital Advisors portfolio manager, was convicted today of helping his company earn more than a quarter billion dollars illegally through trades based on material, non-public information about the testing of a potentially promising drug for ...Read More

  • The Golden Ticket Trap

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    by Jim Parker — Thursday, February 6, 2014

    In a popular children’s story, the young hero pins all his hopes on finding one of a handful of “golden tickets” hidden among millions of candy bars. It seems many people approach investing the same way. The notion that the path to long-term wealth lies in ...Read More

  • Are Investors Irrational When It Comes to American Funds?

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    by Mark Hebner and IFA Contributors — Monday, February 3, 2014

    A recent edition of the Rekenthaler Report from Morningstar would have us believe that American Funds have suffered investor withdrawals due to a guilt-by-association with active management which has increasingly come under fire from both academia and from key players in the ...Read More

  • 2013: A Record Year for Indexing

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    by Mark Hebner and IFA Contributors — Friday, January 31, 2014

    At Index Fund Advisors, we are always delighted to see articles such as this one from Bloomberg.com which shows the unabated march of indexing across the investment universe. For 2013, investors poured in a record $115 billion into index mutual funds, almost double the previous ...Read More

  • Q4/2013: Quarterly Market Review Summary

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    by Mark Hebner and IFA Contributors — Thursday, January 30, 2014

    Overall, it was a very good quarter for equities, the one exception being real estate investment trusts (REITs) which were down 1%. U.S. bonds were down slightly, but Global bonds showed a gain of 0.44%.   The quarter began with the shutdown of the U.S. government which ...Read More

  • The Alleged Inefficiency of Emerging Markets and Other Baloney

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    by Mark Hebner and IFA Contributors — Wednesday, January 29, 2014

    At Index Fund Advisors, we often hear from people all over the world who express an interest in the investment principles that we espouse. This pleases us greatly, as we have always felt that the benefits of index investing should not be limited to American investors. Recently, ...Read More

  • SEC Issues Risk Alert on Alternative Investments

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    by Mark Hebner and IFA Contributors — Tuesday, January 28, 2014

    At Index Fund Advisors, we have never advised our clients to engage with alternative investments such as hedge funds, private equity funds, or funds of private funds. A recent alert from the Securities and Exchange Commission (SEC) reinforces our stance. The alert addresses the ...Read More

  • Advisor Alpha: The View from Vanguard

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    by Mark Hebner and IFA Contributors — Monday, January 27, 2014

    At Index Fund Advisors, we have repeatedly cautioned investors to avoid getting ensnared in the never-ending pursuit of alpha by either picking stocks or hiring an active manager to pick stocks on their behalf. Nevertheless, by engaging in a few prudent practices such as ...Read More

  • Morningstar's Fund Managers of the Year

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    by Mark Hebner and IFA Contributors — Wednesday, January 22, 2014

    Can you hear it? That is the sound of millions of index fund investors yawning in response to Morningstar’s announcement of its Fund Managers of the Year for 2013. That recent performance weighs very heavily in the awarding of this distinction is evidenced by the fact that ...Read More

  • Comments on Barron's Dimensional Fund Advisors Profile [VIDEO]

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    by Mary Brunson and Mark Hebner — Friday, January 17, 2014

    "Active management is a zero-sum game, and that's before costs. That's not opinion, that's math." --Eugene Fama, 2013 Nobel Prize in Economics, Professor of Finance, Chicago Booth, as quoted in Barron's, "A New Dimension", January 4, 2014   Market Dimensions Eugene ...Read More

  • A Fascinating PBS Frontline Documentary

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    by Mark Hebner and IFA Contributors — Thursday, January 16, 2014

    For the past year, we have been following the story of billionaire Steven Cohen’s SAC Capital, particularly its unprecedented indictment followed by a guilty plea and a record $1.8 billion ...Read More

  • 2013: Another Dismal Year for Hedge Funds

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    by Mark Hebner and IFA Contributors — Saturday, January 11, 2014

    “We active folks have done a horrible job of beating the benchmarks.” So says Bob Doll of Nuveen Investments who was recently interviewed by Jeff Macke of Yahoo! Finance’s Breakout. For 2013, there is one group of active managers for whom this was especially ...Read More

  • Asset Location

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    by Mark Hebner — Friday, January 10, 2014

    An additional way that a passive advisor can add value is not just asset allocation but asset location. Specifically, for a client that has a mixture of taxable accounts, traditional IRAs, and Roth IRAs, it is often helpful to construct a single portfolio consisting of multiple ...Read More

  • Liquidity: Is It a Risk Factor?

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    by Mark Hebner and IFA Contributors — Thursday, January 9, 2014

    According to Investopedia, liquidity is defined as the degree to which an asset can be bought or sold in the market without affecting the asset’s price. If you have ever attempted to sell a large block of a thinly traded stock, then you know what liquidity (or rather ...Read More

  • Surprise! No Selloff in 2013

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    by Weston Wellington — Wednesday, January 8, 2014

    The unusually strong performance of US stocks in 2013 was a welcome surprise for investors who are following a simple buy-and-hold strategy and a source of exasperation for many professionals caught flatfooted by the steady rise in share prices. It was the best year for the ...Read More

  • Barron's Article on Dimensional Fund Advisors

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    by Mark Hebner and IFA Contributors — Monday, January 6, 2014

    Beverly Goodman of Barron’s was accorded the high honor of being the first reporter to attend one of DFA’s Financial Advisor Colleges. The article that she wrote about her experience, A Different Dimension, shows that it was time well spent. Having the opportunity to ...Read More

  • The 2013 4th Quarter and Year-End Review

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    by Mark Hebner and IFA Contributors — Thursday, January 2, 2014

    In the fourth quarter of 2013, risk was rewarded for all classes of equities except REITs, and fixed income remained essentially flat. Once again, there was a lot of discussion surrounding future Fed policy, particularly as it relates to the eventual tapering down of the ...Read More

  • Mark Hebner

    Selecting Investments Part 1

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    by Mark Hebner — Thursday, January 2, 2014

    As a fiduciary for its clients, IFA only receives compensation from its clients and is therefore unbiased in its choice of ...Read More

  • Selecting Investments Part 2

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    by Mark Hebner — Thursday, January 2, 2014

    IFA has known the DFA leadership since 1999 and they have remained committed to fostering a culture of learning, teamwork, innovation, and dedication to always doing what’s right for ...Read More

  • Probability In Motion

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    by Mark Hebner — Wednesday, January 1, 2014

    "The probable is what usually happens." - Aristotle Say "HELLO" to Francis, IFA’s newest probability machine, named after Francis Galton, an English mathematician who was an expert in many scientific fields. (Click here to play the video of Francis in action) ...Read More