Dimensional Fund Advisors (DFA) - Any Opinions Good or Bad?

[oscar1]

Hi, My Financial Advisor is recommending DFA funds. Only negative thing I have heard is that they are only offered through approved brokers meaning broker fees dent your returns. Anyone have any knowledge to share on DFA funds?

 

[capjak]

DFA Funds are very good low cost funds. However, there are a lot of good low cost funds (in fact Fidelity has Zero Cost Funds).

Once you purchase them, if you decide to leave your current advisor you can transfer those in kind. You just can not purchase more.

The restriction, as a do-it-yourself financial advisor (I manage my finances with my spouse), has kept me from using them.

 

[OldShooter]

I like the DFA story and for the past four years have had some money with a DFA advisor as an experiment. The first experiment was 100K vanilla IRA money and the portfolio he chose performed pretty much like a simple two-fund equity portfolio. Nothing exciting. I closed that one out and gave him $300K in a Roth in order to try out a tilt strategy toward small caps and emerging markets. That experiment, after two years has not gone well -- underperformance to everything else I hold. Now two years is really not long enough for a fair evaluation. But I will probably pull the plug on that experiment at the end of 2Q20. Both experiments were done at a negotiated cheap price of 50bps.

So ... I still like the story but it has not done much for me in real experiments using real money.

 

[FlaGator]

I like the DFA story and for the past four years have had some money with a DFA advisor as an experiment. The first experiment was 100K vanilla IRA money and the portfolio he chose performed pretty much like a simple two-fund equity portfolio. Nothing exciting. I closed that one out and gave him $300K in a Roth in order to try out a tilt strategy toward small caps and emerging markets. That experiment, after two years has not gone well -- underperformance to everything else I hold. Now two years is really not long enough for a fair evaluation. But I will probably pull the plug on that experiment at the end of 2Q20. Both experiments were done at a negotiated cheap price of 50bps.

So ... I still like the story but it has not done much for me in real experiments using real money.

+1

I had two rounds with DFA-affiliated advisers, both based on accepting the DFA story. That story (for those unfamiliar) is small cap and value will prevail, hold the global market and their low portfolio turnover will improve returns.

The first was ~$125k in mid-2007. Rode it down through 2008-9 and the bounce back through mid-2013 lagged what I was doing with Vanguard on my own. Also didn't like that firm periodically re-configuring asset class weights in their target portfolio. My results in the Target 90 portfolio always lagged their constantly evolving, backtested Target 90 benchmark.

Still believing the DFA story, I then signed up with a different adviser and pushed the entire portfolio to them as my late wife was ailing. Rode that horse for 6 years until ending that relationship mid-2019.

So, I have 12 consecutive years of DFA investments, and I won't be going back. There are 3 reasons for that.

The fees I paid were well worth it when my wife was ill, I was planning my retirement, relocating, etc. Not so much in the last 2 years with life now stable.

My biggest objection to DFA funds is their fund performance is average at best. When I was evaluating alternative funds, I didn't find a single case where my DFA equity funds were consistently close to their benchmark, or clearly better than something else, whether it was Small, Value or Intl. Occasionally over, but usually under-and by a lot over 10-15 years.

Surprisingly, their government bond and TIPS funds are near the top of the class and I still hold them.

My final objection is the philosophy of "buying the global market", which means international holdings of ~50%. Both advisers pushed the "Nobel Prize winner recommendation" and other platitudes but never showed me hard data that performance would be better. That clearly cost me dearly over the last 5 years. Furthermore, I have yet to find data that shows international holdings at that level adds *anything* to overall portfolio performance over the past 35+ years of my investing. I understand the idea of reducing the volatility of returns with a global portfolio, but in my case it did so at the cost of substantially lower returns (like 3-4% annualized).

My self-managed 529s at Vanguard beat both advisers.

 

[mrfeh]

Do a search over at bogleheads.org.

 

[TNBigfoot]

I had a 7-8 year run with DFA through an advisor. My experience was much like FLAgator in that returns seemed to lag the market. Ended the relationship and sold all except DFREX which I like in my portfolio as a REIT.

 

[Navigator]

I’ve had DFA funds since 2007 and have done fairly well with them. I really like the amount of data DFA puts out on their funds, as it makes retirement planning easier. I also own similar Vanguard index funds. My Vanguard funds have also done well, but are more volatile.

The DFA index funds are not meant to be compared to benchmark indexes, as their composition is different. Rather, the DFA funds are meant to be combined into efficient portfolios that give the best return for a given level of risk. In recent years, large cap growth stocks like Apple have driven the US stock market up. If I compare the S&P 500 to the 100% stock fund recommended by my advisors, I see that they have a similar risk level, but the DFA fund portfolio has outperformed the S&P 500 by a considerable amount since 2008.

To be fair, my portfolio is very different than what was mentioned in other posts, so it may be the quality of the advisor that makes a difference. I also pay very low fees, which has a cumulative effect on performance.

 

[SoReadyToRetire]

To be fair, my portfolio is very different than what was mentioned in other posts, so it may be the quality of the advisor that makes a difference. I also pay very low fees, which has a cumulative effect on performance.

Can you please elaborate on this? In what way(s) was it very different?

 

[Navigator]

Can you please elaborate on this? In what way(s) was it very different?

I have less than 20% international stock, as opposed to 50%.

 

[oscar1]

So, I am the OP. And After reading the replies, I think I agree with @navigator in that the difference might be in the DFA advisors. My DFA authorized advisor has me diversified in 12 DFA funds and 2 Vanguard funds. Overall, I am:
17% fixed
13% large cap US
22% small cap US
13% REIT
15% international
20% Emerging Markets

So, Unlike some of the posters that tried DFA and bailed, I feel like I am hyper diversified providing consistent 9-10% returns annually. Yeah, I missed out on the 30% U.S. market last year but I get a consistent return geographically because at least one market is winning most years. Am I missing something? Btw, I am ER at 57 so I have some runway before SS to gamble. I just see no reason to move to 80/20 or 70/30. Opinions?

 

[FlaGator]

So, I am the OP. And After reading the replies, I think I agree with @navigator in that the difference might be in the DFA advisors. My DFA authorized advisor has me diversified in 12 DFA funds and 2 Vanguard funds. Overall, I am:
17% fixed
13% large cap US
22% small cap US
13% REIT
15% international
20% Emerging Markets

So, Unlike some of the posters that tried DFA and bailed, I feel like I am hyper diversified providing consistent 9-10% returns annually. Yeah, I missed out on the 30% U.S. market last year but I get a consistent return geographically because at least one market is winning most years. Am I missing something? Btw, I am ER at 57 so I have some runway before SS to gamble. I just see no reason to move to 80/20 or 70/30. Opinions?

Since you asked for opinions.....

You and I both left money on the table with DFA last year, and I did for several previous years. In my case the shortfall in 2018-19 alone was enough to cover 2 years of expenses.. Overall, I guesstimate my DFA experience cost me about 4 years of living expenses

Hope that 35% of foreign holdings works out better for you than 50% did for me. 20% in EM looks like a taking a flyer. If you catch the cycle right, it will pay off. If you have my experience in the next 12 years, they won't average to your 9-10% expectation. Which means that other things have to perform spectacularly better given the EM weighting in your portfolio.

After doing fund comparisons across LC Intl, EM and Intl SC, I ditched the EM and went with LC Intl and Intl SC, trimming the total foreign to about 20%. Have to see if that works out any better going forward, but it would have over the past 10+ years. And the performance gap between those 2 asset classes and EM would require outsized returns for EM to be even or better after 20 years. Could happen.

I've a similar US Small/Small Value allocation and am still patiently waiting for the payoff. Guess I still believe in at least one of DFA's core tenants.

Suggest you back-test their recommended allocation with Portfolio Visualizer or similar and see how close historical performance matches up to "expected returns".

I really wanted to believe the DFA story, and would like to even now. However, performance never got "explainably close" to what I was doing on my own. The overall financial guidance I got from the second advisor at a challenging time was very helpful, but I paid a lot for it. Not going to second-guess that decision, but will make a different one next time.

 

[LOL!]

So, Unlike some of the posters that tried DFA and bailed, I feel like I am hyper diversified providing consistent 9-10% returns annually. Yeah, I missed out on the 30% U.S. market last year but I get a consistent return geographically because at least one market is winning most years. Am I missing something? Btw, I am ER at 57 so I have some runway before SS to gamble. I just see no reason to move to 80/20 or 70/30. Opinions?

Yes, you are missing something. DFA and its advisors advocate a small-cap and value-tilted portfolio across US and international funds along with fixed income bond funds of less duration than a Total US Bond Index fund. All those categories have fallen behind a totally diversified portfolio that does not tilt to small-cap and value and does not use moderately shorter durations. That is, the DFA-advised portfolio will track lower than a total market weighted portfolio unless small-caps outperform, unless international outperforms, unless longer bonds suffer, and unless value outperforms.

The advisor has very little to do with the performance of the portfolio. It is mostly luck whether small-caps and value as well as international outperform more broad market indexes. And there hasn't been much luck the past few years.

Bottom line: You are not hyper-diversified at all. Instead, you are tilted towards something that your advisor is making a bet on.

 

[JoeWras]

DFA is a terrible marketing name. Maybe I'm reading reddit too much. But DF has a really bad meaning on the internet. And I don't mean Darling Father.

 

[OldShooter]

I think we are getting mixed up here, partially because of misunderstanding the DFA thinking. I think this is sort of what @LOL! is arguing.

Basically, the Fama/French approach involves two things. First, Fama tells us "we have to hold the market portfolio," IOW everything. Then from the Fama/French two factor model, we are encouraged to tilt towards value and towards small cap. In their minds I think this is a portfolio to be held for decades.

Much of the discussion here is about sector bets that worked out or did not work out over short periods, like a couple of years. That's my situation in my earlier post. So whose fault is that? No one's. I think one of two conclusions can be reached, both really on the investor: (1) it's silly to evaluate sector bets except over a much longer period, or (2) Sector bets are prima facie silly.

International is a type 1 situation. I have held international for decades, benefiting in some cycles and not so much in others. That doesn't bother me. When we get to some of these narrower bets, like emerging markets, I have come to believe that we are looking at a type 2 situation.

I let the DFA FA put me into several narrow sector bets. I guess I thought (silly me) that I might get lucky. But now my 2-year experiment is over (with -10% cum results) and I'm not going to live long enough to benefit from waiting ten years to see how the strategy works out. So I'll probably sell the sector bets and just go back to my boring VTWAX strategy and wish the sector bettors good luck.

 

[kevink]

Lots of great comments here already but thought I'd add a few from my own experience.

If you haven't read Bob Clyatt's "Work Less, Live More" I highly recommend it not only because it's a great book overall but because he offers the clearest, most concise overview of Modern Portfolio Theory and DFA's approach I know of. Check out his web site too for historical performance updated AND how he has long since ditched all the DFA funds in favor of ETFs!

The theory behind the funds is sound and as others have said for long holding periods over many decades you'll probably do just fine. But HOW you access DFA is critically important. If you are paying a percentage of assets instead of a fixed fee, forget it - you're almost certain to underperform just sticking your nest egg in, say, a Vanguard Lifestrategy fund-of-funds appropriate to your risk tolerance. You could probably go all Wellesley or some combination of Wellesley/Wellington and still do far better. The expense drag will eat you alive - especially given the low return environment we're in.

One of the best low-cost ways to access DFA is Evanson Asset Management and their site is a treasure trove of info on the DFA approach and how it differs from plain vanilla index funds like Vanguard's. Here's one especially useful post:

https://www.evansonasset.com/are-dfa-strategies-superior-20.htm

If having an FA keeps you from making even one costly mistake in a market panic it's well worth it but if not I see no reason to pay a premium to own DFA funds.