This is not a favorite time of year for most of us, because wading through all the paperwork needed to prepare our taxes can be a headache. But if you have to gather up all the information anyway, you might as well use it as an opportunity to improve your financial situation. Here are some ideas:
• Mortgage Interest Deduction - Look at the year-end summary report you received from your mortgage company and see what you still owe on your house and your current interest rate. The national average for a 30 year fixed rate is 4.96%, and some banks here in Cincinnati are offering even lower rates. If you have a mortgage over 6% you should seriously consider refinancing and locking in a lower rate while they are still at historical lows.
• Real Estate Tax Deduction - Chris Carleton mentioned it in her March 9th blog, Taking Advantage of a Decline in Your Home’s Value, but it’s worth mentioning again. Even if you have your home paid off, real estate taxes will continue to be a major housing expense for you, so having your house reassessed after the housing downturn might be worth it. You won’t be able to make the March 31st deadline for this year, but we can help you if you’d like to file for a reduction for next year.
• Interest and Dividend Income - Do you receive 1099-INTs from a variety of banks and brokerage companies? Do you have brokerage accounts that you set up with the intention of doing some investing on your own, but haven’t taken the time? You should hold three to six months of living expenses in very liquid investments in case of emergencies, but more than that and you are missing the opportunity to maximize your income. Consider consolidating these accounts to simplify your life and maximize your interest. You’ll thank yourself next year.
• Charitable Contributions – Do you give money to a wide variety of charities each year? Look at your average giving over a period of years, and consider setting up a donor-advised fund for future gifts. The large deduction in the year you set up the fund will have a much greater tax impact; and you can involve your children or grandchildren in your gifting decisions to pass along charitable family values. In Cincinnati, we have great resources such as the Greater Cincinnati Foundation, where you can establish a donor-advised fund with a $25,000 contribution, and the West Chester Community Foundation.
• College Planning with a Deduction – It felt like it took forever to pay off our college loans when we were first married, so my husband and I want to help our grandson with his college expenses. By setting up a 529 account, we can help him and get a deduction up to $2,000 on our Ohio income tax return. If you want to help a young person with college, this is a great way to do it.
We can’t make the work of filing your taxes go away, but we can help implement one of these ideas. If you would like to know more, please give one of us a call.
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
Wednesday, March 30, 2011
Wednesday, March 23, 2011
The Only Question that Matters for Investors
(from Dan Solin's Huffington Post blog, 3/15/2011 - click here for the original post)
The financial media is whipped into a frenzy. There is so much uncertainty. Here's a summary of recent developments:
Money manager Laszlo Birinyi advises"[]These kinds of strong beginnings lead to long and durable bull markets. Hedge fund manager Barton Biggs agrees.
Over at The Wall Street Journal, they're not so sure. Brett Arends listed ten reasons why investors should be worried. His sources are interesting. He relies on an unnamed "European hedge fund manager" who is "worried about China." The source is not buying aggressively, and Arends find that significant. It's quite remarkable what passes for responsible financial journalism at The Wall Street Journal these days.
I get asked for my opinion on many of these issues by readers of my books and blogs, advisory clients and prospective clients. Many can't hide their disappointment when I tell them I have no clue how these events will affect the markets. What's more, neither does anyone else, including those who are so confident of their predictions and who dispense their advice so freely. What's more, I don't care and I don't believe intelligent investors should either. Here's why.
Many studies confirm the relationship between loss of money and suicide. Ask most men what they fear most and they will tell you it is the loss of their money and homelessness. You would think their investing decisions would seek to minimize this possibility. Instead, they are more often focused on the short term consequences of current events. This makes no sense.
The average sixty-year-old will live another twenty years or so. Here's the only question she (and all other investors) should be asking her financial advisor:
Can you financially engineer a portfolio for me, using long term (at least 50 years) data, that will maximize my returns for the amount of risk I will be taking, for the rest of my life, and will minimize the possibility that I will be destitute in my old age?
The good news is that it is very easy to accomplish this goal. We have all the tools and data necessary to do so. The analysis can be based on sound academic, peer-reviewed research, used by savvy pension and trust fund administrators and high net worth individuals. Of course, it's not predictive, but it's far more reliable than relying on financial astrologers. I have rarely met an investor who had such a plan, or who understood that he could get one.
You have a choice. You can listen to the musings of people who believe they can predict the future, or you can plan intelligently for your own future.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
The financial media is whipped into a frenzy. There is so much uncertainty. Here's a summary of recent developments:
- Bill Gross eliminated U.S. government debt from the Pimco's Total Return Fund.
- Nouriel Roubini ("Dr. Doom") predicts $100 billion in municipal bond defaults over five years.
- Ireland, Greece, Portugal and Spain remain in tenuous financial condition.
- The devastating earthquake in Japan has broad economic ramifications.
- Unrest in Libya and in the rest of the Middle East threatens oil prices.
Money manager Laszlo Birinyi advises"[]These kinds of strong beginnings lead to long and durable bull markets. Hedge fund manager Barton Biggs agrees.
Over at The Wall Street Journal, they're not so sure. Brett Arends listed ten reasons why investors should be worried. His sources are interesting. He relies on an unnamed "European hedge fund manager" who is "worried about China." The source is not buying aggressively, and Arends find that significant. It's quite remarkable what passes for responsible financial journalism at The Wall Street Journal these days.
I get asked for my opinion on many of these issues by readers of my books and blogs, advisory clients and prospective clients. Many can't hide their disappointment when I tell them I have no clue how these events will affect the markets. What's more, neither does anyone else, including those who are so confident of their predictions and who dispense their advice so freely. What's more, I don't care and I don't believe intelligent investors should either. Here's why.
Many studies confirm the relationship between loss of money and suicide. Ask most men what they fear most and they will tell you it is the loss of their money and homelessness. You would think their investing decisions would seek to minimize this possibility. Instead, they are more often focused on the short term consequences of current events. This makes no sense.
The average sixty-year-old will live another twenty years or so. Here's the only question she (and all other investors) should be asking her financial advisor:
Can you financially engineer a portfolio for me, using long term (at least 50 years) data, that will maximize my returns for the amount of risk I will be taking, for the rest of my life, and will minimize the possibility that I will be destitute in my old age?
The good news is that it is very easy to accomplish this goal. We have all the tools and data necessary to do so. The analysis can be based on sound academic, peer-reviewed research, used by savvy pension and trust fund administrators and high net worth individuals. Of course, it's not predictive, but it's far more reliable than relying on financial astrologers. I have rarely met an investor who had such a plan, or who understood that he could get one.
You have a choice. You can listen to the musings of people who believe they can predict the future, or you can plan intelligently for your own future.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
Don't Confuse the Urgent with the Important
Carl does a great job in the blog below of reminding us of why those things with low urgency, but a high degree of importance on our to-do list deserve our time and attention before it's too late.
(from Carl Richard's New York Times' Bucks blog, 3/21/2011 - click here for the original post. Carl is a certified financial planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, BehaviorGap.com.)
(from Carl Richard's New York Times' Bucks blog, 3/21/2011 - click here for the original post. Carl is a certified financial planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, BehaviorGap.com.)
Last weekend marked the beginning of spring, and even though there’s still snow on the ground here in Park City, it reminded me that nearly a quarter of the year has come and gone.
Like many of you, I made resolutions in January. There were a lot of important things I wanted to accomplish. And for a few weeks, I did really well. But now it’s March, and part of me is panicked. There’s still so much to be done. But another part of me latched on to the second half of the equation: I still have three quarters of the year to go. What’s the big deal?
The problem results from the distractions that come from things that seem urgent. They cause us to lose our focus on the important issues.
On a day-to-day basis it’s easier to focus on those urgent things that capture your attention. After all, who wouldn’t focus on getting the car fixed over making sure the will is up to date? That seems like a logical decision that trumps the merely important goals you set in January.
Bob Goldman, a financial planner, said that he sees a surge in business around January and February. So at least they’re trying.
But Mr. Goldman added that he often doesn’t see those people again for years. Following through on the big decisions tends to drop down the list quickly when you’re confronted by life’s urgent demands. After all, many of these important goals appear complex, like buying life insurance or setting up college savings accounts. So we often push them aside in favor of the urgent and immediate.
Plus, we enjoy the sense of checking urgent things off a list. The more urgent the task the greater the sense of satisfaction. By comparison, sitting down and working through the details of your personal and financial lives doesn’t offer the same sense of excitement and immediate gratification.
Here’s the danger in all of this though. Once time passes, the important eventually becomes urgent. But by then it may be too late to do much about it.
Think about the stories of friends and colleagues who are dealing with complicated estates because family members let the urgent trump the important. Then there are the parents who didn’t think 18 years would pass so quickly; now they’re unsure whether they can help pay for college.
A friend who is an estate planning attorney noted that people will often come to him in a panic right before taking a trip without their kids. With worst-case scenarios floating through their minds, these couples want their wills done in case the plane goes down or the ship sinks. Since these things take time, it’s often impossible to finish before they leave town. Then, my friend doesn’t hear back from them again until a few days before the next trip.
See a pattern here?!
If there’s one resolution that I hope each of you keeps it’s this: please set aside time each month to tackle these important questions. Yes, you will be tempted to brush them aside until next month because there will be something urgent going on. But you can’t keep making the same resolution every January to deal with your important decisions this year. The tasks will never get smaller if you don’t start dealing with them one by one.
After every financial crisis we often ask, “How did we miss the signs?” Unlike a large-scale crisis that only seems obvious in hindsight, you know that you can prevent a personal financial crisis by tackling the important tasks in your life right now.
Like many of you, I made resolutions in January. There were a lot of important things I wanted to accomplish. And for a few weeks, I did really well. But now it’s March, and part of me is panicked. There’s still so much to be done. But another part of me latched on to the second half of the equation: I still have three quarters of the year to go. What’s the big deal?
The problem results from the distractions that come from things that seem urgent. They cause us to lose our focus on the important issues.
On a day-to-day basis it’s easier to focus on those urgent things that capture your attention. After all, who wouldn’t focus on getting the car fixed over making sure the will is up to date? That seems like a logical decision that trumps the merely important goals you set in January.
Bob Goldman, a financial planner, said that he sees a surge in business around January and February. So at least they’re trying.
But Mr. Goldman added that he often doesn’t see those people again for years. Following through on the big decisions tends to drop down the list quickly when you’re confronted by life’s urgent demands. After all, many of these important goals appear complex, like buying life insurance or setting up college savings accounts. So we often push them aside in favor of the urgent and immediate.
Plus, we enjoy the sense of checking urgent things off a list. The more urgent the task the greater the sense of satisfaction. By comparison, sitting down and working through the details of your personal and financial lives doesn’t offer the same sense of excitement and immediate gratification.
Here’s the danger in all of this though. Once time passes, the important eventually becomes urgent. But by then it may be too late to do much about it.
Think about the stories of friends and colleagues who are dealing with complicated estates because family members let the urgent trump the important. Then there are the parents who didn’t think 18 years would pass so quickly; now they’re unsure whether they can help pay for college.
A friend who is an estate planning attorney noted that people will often come to him in a panic right before taking a trip without their kids. With worst-case scenarios floating through their minds, these couples want their wills done in case the plane goes down or the ship sinks. Since these things take time, it’s often impossible to finish before they leave town. Then, my friend doesn’t hear back from them again until a few days before the next trip.
See a pattern here?!
If there’s one resolution that I hope each of you keeps it’s this: please set aside time each month to tackle these important questions. Yes, you will be tempted to brush them aside until next month because there will be something urgent going on. But you can’t keep making the same resolution every January to deal with your important decisions this year. The tasks will never get smaller if you don’t start dealing with them one by one.
After every financial crisis we often ask, “How did we miss the signs?” Unlike a large-scale crisis that only seems obvious in hindsight, you know that you can prevent a personal financial crisis by tackling the important tasks in your life right now.
Wednesday, March 16, 2011
Resolutions - Part II
In January, we blogged the “10 important investment resolutions for 2011” as listed by Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”
As we mentioned in that post, we’ll visit these resolutions periodically throughout the year and provide some commentary on each.
Resolution #3: I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
TAAG Thoughts: We’ve covered this topic in a variety of ways in this blog, but it’s always a good time to refresh. Uncertainty can have a significant impact on the market and we’re desperate to gain any information we can in advance of others, hoping to gain an edge in our investment portfolio. Many have made fortunes selling their purported ability to forecast uncertainty ahead of others, but to no avail. The truth of the matter remains that the unknown is the unknown. We are all at its mercy. The best defense against the unknown when it comes to investing continues to be a low cost, broadly diversified portfolio which can lessen the blow of uncertainty’s impact in any one area of the market.
Resolution #4: I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
TAAG Thoughts: This is an important one that’s very intuitive, but easy to forget. Often when we meet with clients, especially early on in the relationship, questions surround current political, economic and other issues of the day that are concerning for one reason or another. We’re happy to talk about these issues and they’re often concerning for good reason, but they’re never cause for modifying investment strategy. Average life expectancies continue to climb and, for the majority of our clients, investment horizons can be expected to last 20-30 years or more. Over those many, many years we will have ups and downs of all varieties caused by any number of events.
It is crucial to understand the role of short-term, high quality fixed income investments as a buffer from those short term events and the role of equities to provide that continued growth over the long run. Both work in concert, allocated properly to your risk tolerance and long term goals, to provide a plan that will ensure that your money outlives you and not the other way around.
The consistent theme in many of these resolutions is our behavior surrounding events that might cause us to veer from our financial plan. It’s ok to have these emotions, but we need to recognize that they’re often fleeting and no cause to act. As investment author Nick Murray recently said, “you can act your way to investment success, but you can’t react your way.”
We’ll continue to visit these topics throughout the year, touching on these basic, but crucial pillars of our investment philosophy.
Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/
As we mentioned in that post, we’ll visit these resolutions periodically throughout the year and provide some commentary on each.
Resolution #3: I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
TAAG Thoughts: We’ve covered this topic in a variety of ways in this blog, but it’s always a good time to refresh. Uncertainty can have a significant impact on the market and we’re desperate to gain any information we can in advance of others, hoping to gain an edge in our investment portfolio. Many have made fortunes selling their purported ability to forecast uncertainty ahead of others, but to no avail. The truth of the matter remains that the unknown is the unknown. We are all at its mercy. The best defense against the unknown when it comes to investing continues to be a low cost, broadly diversified portfolio which can lessen the blow of uncertainty’s impact in any one area of the market.
Resolution #4: I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
TAAG Thoughts: This is an important one that’s very intuitive, but easy to forget. Often when we meet with clients, especially early on in the relationship, questions surround current political, economic and other issues of the day that are concerning for one reason or another. We’re happy to talk about these issues and they’re often concerning for good reason, but they’re never cause for modifying investment strategy. Average life expectancies continue to climb and, for the majority of our clients, investment horizons can be expected to last 20-30 years or more. Over those many, many years we will have ups and downs of all varieties caused by any number of events.
It is crucial to understand the role of short-term, high quality fixed income investments as a buffer from those short term events and the role of equities to provide that continued growth over the long run. Both work in concert, allocated properly to your risk tolerance and long term goals, to provide a plan that will ensure that your money outlives you and not the other way around.
The consistent theme in many of these resolutions is our behavior surrounding events that might cause us to veer from our financial plan. It’s ok to have these emotions, but we need to recognize that they’re often fleeting and no cause to act. As investment author Nick Murray recently said, “you can act your way to investment success, but you can’t react your way.”
We’ll continue to visit these topics throughout the year, touching on these basic, but crucial pillars of our investment philosophy.
Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/
Tuesday, March 15, 2011
The Current Market Aftershock
David Booth, Chairman & Co-CEO of Dimensional Fund Advisors, released a timely video this month about shocks and aftershocks in the market. He walks viewers through a timeline of US stock market performance in several periods since World War II. The conclusion is that prevailing market sentiment is often wrong and investors should continue to focus on keeping to their disciplined plan to achieve their long term goals. Click "Watch Now" below to view.
The Asset Advisory Group
http://www.taaginc.com/
These videos contain the opinions of the participants but not necessarily Dimensional Fund Advisors or DFA Securities LLC, and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com.
Mutual funds distributed by DFA Securities LLC
The Asset Advisory Group
http://www.taaginc.com/
These videos contain the opinions of the participants but not necessarily Dimensional Fund Advisors or DFA Securities LLC, and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com.
Mutual funds distributed by DFA Securities LLC
Wednesday, March 9, 2011
Taking Advantage of a Decline in Your Home's Value
Most (if not all) of us have seen our home values fall in the past few years. While Cincinnati did not experience the dramatic decrease seen in many areas of the country, we were not immune from the pain. Hopefully these tips will help reduce the sting.
With a little effort on your part, you may be able to use the decline in your home’s value to save money on your taxes and insurance.
Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/
- Have your house appraised. Every three years Ohio counties will allow you to file a request with their Board of Revision to have the value of your home reassessed. In Hamilton County, you must complete a Complaint Against the Value of Real Property form and submit it with an appraisal of your property. You will find this form on your county auditor’s web page. A real estate appraiser will charge you between $350 and $550 for an appraisal. I did this last year and was able to save 14% on my real estate taxes! But hurry, you only have until March 31st of each year to file.
- Check your homeowner insurance policy. If the cost to rebuild your home is less than the coverage amount of your policy, you could be over-insured. Most policies will automatically inflate your coverage by a certain percent each year, which could now exceed the replacement cost of your home. If this is the case, call your agent to have the value re-assessed.
- Apply for the Homestead Exemption. If you will be 65 or older this year, make sure you file for the Homestead Exemption. This is available through all counties in Ohio and you just need to complete a simple form which you will find on your county auditor’s web site. Here is a link to Hamilton County’s form. When your next property tax bill is prepared, $25,000 will be taken off of your home value prior to calculating the bill.
With a little effort on your part, you may be able to use the decline in your home’s value to save money on your taxes and insurance.
Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/
Wednesday, March 2, 2011
Why DFA?
For those of you who’ve been clients of The Asset Advisory Group since our beginning in 1988, you know we have always followed an investment philosophy of diversification and rebalancing, but the investments we’ve used to implement your plan have changed over time. As an independent company, we can work with anyone, but we believe the best investment solution for meeting your financial goals is Dimensional Fund Advisors, or DFA.
DFA has been very successful, but quiet, since its funds became available to approved registered investment advisory firms in the early 90’s. As of December 31, 2010 they manage $207 billion in assets. Lately, due to the additional attention focused on the company since the publication of The Investment Answer, people are more curious about the company. Here’s a brief summary of why we use them to implement our clients’ investment plans:
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
DFA has been very successful, but quiet, since its funds became available to approved registered investment advisory firms in the early 90’s. As of December 31, 2010 they manage $207 billion in assets. Lately, due to the additional attention focused on the company since the publication of The Investment Answer, people are more curious about the company. Here’s a brief summary of why we use them to implement our clients’ investment plans:
- They use academic research vs. forecasting. No DFA fund holdings are based on an individual or committee’s opinion of what will “outperform” in the coming year. Instead, specific criteria determine what can be held in each fund based on research developed over long periods of time. If you are invested in DFA’s Large Company Fund, you don’t have to worry that your fund manager will someday move everything into oil stocks just because he feels good about that part of the market.
- They don’t blindly follow indexes. DFA is sometimes characterized as an index company, but they really create their own standards for what can be included in each of their funds. These “buy” lists are created using measures such as company size and geographic location, and then screened to exclude companies with issues such as bankruptcy, limited ownership, or other problems.
- They take risk where you CAN be rewarded. Active managers try to obtain gains for their shareholders by concentrating their holdings in a few stocks (and praying those few do well) or shifting in and out of the markets at the “right” time. Ongoing research and internet sites such as CXO Advisors show that those tactics do not work consistently. DFA’s research shows that investors are rewarded for holding stocks, and even more so for holding higher risk stocks characterized as value and small cap. They have designed funds to capture these returns.
- They are low cost. DFA funds have no sales loads, commissions, or trailing fees paid to advisors or custodians. They are pure, no-load funds. They are one of the largest mutual fund managers in the world, but you won’t see them sponsoring a golf tournament or paying $3 million for a 30 second Super Bowl commercial. Instead, they look for ways to reduce their investors’ management expenses. For example, many mutual funds lend out securities to other funds and receive payments to boost their company profits. DFA gives this interest income back to the funds that hold the securities, lowering the annual management expense for the fund’s shareholders vs. keeping it for themselves.
- Their independence keeps them client-focused. The Asset Advisory Group is independent and can focus on client needs vs. selling a product a corporate parent wants us to push. As an independent investment company, DFA is under no quarter-to-quarter pressure to meet earnings per share targets that Wall Street might expect. As a result, they can make decisions that are better for the long-term success of their mutual fund shareholders. Examples include absorbing management fees on new funds and investing in research to determine how they can further improve returns.
- They use trading to their advantage. If you have ever bought or sold a home, you know the person under no time pressure is the one with the bargaining power. If you are in no hurry to buy or sell, you can wait for your price. DFA uses this same strategy to obtain better prices for their funds. Index fund managers must sell when the index they follow changes. DFA can wait.
- They have brain power. Roger Ibbotson of Yale, Robert Merton of MIT, Myron Scholes of Stanford, Eugene Fama of University of Chicago and Kenneth French of Dartmouth are all academic leaders involved in the management of the company, and lend their expertise to its improvement.
- They are “wholesale” vs. retail. DFA funds are not available to the retail public. This protects you in several ways. First, when the media has investors scared and they begin the stampede to the exits of their mutual funds, you will not be trampled. Your DFA manager will not be forced to sell stocks to meet liquidity requirements when prices are down. Alternatively, DFA is not forced to digest hordes of cash when everyone decides that emerging markets is the hot investment for the year. They do not need to spend money attracting investors with full page newspaper ads and commercials. See #4 above.
- They focus on constant improvement. DFA is constantly examining what they do and how they can improve it, using a feedback loop between the academics that sit on their board, investment advisors who use their funds, and the clients of those advisors. This continuous sharing of information has brought about many changes to the company over the years. For example, beginning in June 2010, the DFA Micro Cap now excludes the extreme small cap growth stocks that fall into lowest 25% book to market and earnings to price ratios, because academic research has shown that this segment lowers returns.
- They provide access to education. We work to make sure that we stay up-to-date on tax, financial planning and investment issues by attending conferences and continuing education programs within our industry. DFA provides excellent educational opportunities for us by hosting conferences attended by some of the brain power mentioned earlier. We have to pay all of our own expenses to attend (see #4 again!) but we are more than happy to do so, because the education we receive makes us better advisors for you.
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
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