Below is a diversified portfolio scientifically developed by Index Fund Advisors*. It is recommended for aggressive investors who wish to have 100% of their portfolio invested in stocks.
$10,000 was assumed to be invested in the diversified portfolio on 10/1/2007. $10,000 was also assumed to be invested into Vanguard/s Total Market Fund (VTI) on the same date.
The table below compares the performance of the advisor recommended diversified portfolio against the simple index fund VTI.
The result is that VTI outperformed the diversified portfolio by 24%.
|Total Amt Invested In Each Portfolio||$ 10,000|
|Ticker||Fund Type||Share Price 10/1/2007||Pct Weight||Number of Shares Purchased||Value of Shares 10/1/2007||Share Price 6/30/2013||Share Price 7/22/2016||Value of Shares 7/22/2016|
|VFINX||Large Cap S&P 500||143||12||8.39||$ 1,200||153||200.89||$1,686|
|VIVAX||Large Cap Value||28.53||12||42.06||$ 1,200||27.88||34.29||$1,442|
|NAESX||Small Cap||36.18||20||55.28||$ 2,000||47.17||57.89||$3,200|
|VISVX||Small Cap Value||17.67||20||113.19||$ 2,000||21.04||26.32||$2,979|
|VGSIX||REIT – Real Estate||25.39||5||19.69||$ 500||23.66||30.48||$600|
|VDMIX||Developed Markets||14.55||18||123.71||$ 1,800||10.16||8.99||$1,112|
|VEIEX||Emerging Markets||34.21||13||38.00||$ 1,300||24.15||23.24||$883|
Index Fund Advisors (IFA) is fee-only financial advisor with over 1800 clients and $1.87 billion of assets under management. Their website is second to none (including Google, Amazon, et. al) in that they provide a comprehensive web-based education about how to grow and protect one’s investments through low cost index portfolios. I encourage you to utilize their educational opportunities. Much of what I know about the investing world, I learned on their website.
The folks at IFA create very diversified portfolios that are tuned to their client’s risk capacity which they determine with a 25 question test at the beginning of the association. They are good and they are committed to delivering value. They have one of the lowest fees of any fee-based advisor. Even so, their .09% fee earns them $18 million a year!
They present portfolios that appear to beat the Dow by a considerable amount, especially their 100 percent equity portfolio. The funds they use are not available to the average investor. They are Dimensional Fund Advisors funds. They are only available to those select investment advisors who agree to follow investment policies promoted by Dimensional Fund Advisors.
Vanguard Funds, however closely approximate their DFA counterparts. Here’s a chart from IFA showing how DFA funds outperform their Vanguard counterparts. Note that the DFA funds don’t outperform the Vanguard funds by much.
Now that we know the Vanguard counterparts for the Dimensional Fund Advisors funds, we can construct a portfolio that simulates the Index Fund Advisors 100% equity portfolio. Note that there is not a lot of difference between the performance of each category. If you reduce the performance of the DFA funds by the advisor’s fee,.09 for IFA, they are about the same. Most investment advisors charge 1.5%, in which case the Vanguard funds beat all the DFA funds.
The Acid Test
On October 1, 2007 (just before the shit hit the fan) I created a $10,000 do-it-yourself portfolio using the Vanguard Funds that corresponded to the DFA funds and using the weightings that IFA used in their 100% equity diversified portfolio. Somewhere during the time the market was plunging, I abandoned the effort and lost money.
However, it is possible to see what would have happened to my $10,000 DIY portfolio.
The markets have not been kind my friend. We’re barely back to where we were about six years ago. But, DIA has been kinder than IFA’s diversified portfolio! A 7% gain versus less than 1% for the IFA’s Diversified Portfolio. In subtraction (not in addition) Index Fund Advisors will charge you $90/yr for maintaining this portfolio. Subtract $540 from the value of Shares 6/3/2013 to get the NET value of your diversified portfolio.
Hypothesis Proof Illustrated
The chart below beautifully illustrates my hypothesis – that the performance of the diversified assets spirals around the performance of the Dow and after a period of time, the averaged performance of the diversified portfolio will be no better than that of the Dow. The Dow is the dark blue line in the chart below; third line from the top on the right hand side. In other words, only two of the six diversified funds outperformed the Dow over the same time period.
I rest my case.
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