Wealth Compass Financial’s investment philosophy is directly tied to the philosophy of our partner, Dimensional Funds. Founded by David Booth out of the University of Chicago, Dimensional Funds is the biggest mutual fund company you’ve never heard of. The firm employs the academic research of the finance and economics department findings of some of the top finance minds in Academia.
Dimensional Funds’ Philosophy
Dimensional Funds was built off of the principles established by Nobel prize recipients and leaders in academic finance. Their research, data, and findings show that there is no statistically significant sign that picking stocks is a successful strategy. As a matter of fact, diversifying across all investment classes performs better and allows investors to participate in overall market returns. This is becoming more accepted as investors are embracing index funds and investing passively. Although the data agrees with this diagnosis, the treatment plan of index funds falls short. Historical data shows that certain types of stocks have historically outperformed others. Dimensional has identified these differences and calls them dimensions or premiums.
Passive vs Active
Conventional Manager’s View
Performance comes from identifying “mispriced” stocks or other securities or accurately predicting economic and market conditions.
Index Fund’s View
Commercial indices attempt to represent aggregate asset class returns. Index funds follow the portfolio construction and rebalancing of the index as closely as possible.
The market drives returns, and investments are accurately priced as a whole. Portfolio structure, implementation, and cost management drive increased investment performance.
There are 4 types of equity premiums.
Data shows that stocks outperform bonds over time.
Small Cap Premium
Data shows that smaller company stocks outperform large company stocks over time
Data shows that stocks selling at a discount outperform expensive stocks over time
Data shows that companies with high profits stocks outperform other over time
Fixed Income Premiums
There are 2 types of Fixed Income Premiums
Data shows that longer term bonds outperform shorter term bonds over time
Data shows that lower credit quality bonds outperform higher quality bonds over time