I’ve twice had the pleasure of interviewing David Booth, the Chicago Business School benefactor and co-founder of Dimensional Fund Advisors.
You might think he’d be most keen to talk about the Efficient Market Hypothesis, the small-cap premium or, perhaps, the extraordinary progress Dimensional has made in recent years. But no, what he really welcomed was the opportunity to remind people that successful investing entails not just following the evidence, but having the discipline to stay the course when you might be tempted to abandon it.
In Part 9 of how to Win the Loser’s Game, my 2014 documentary for Sensible Investing TV, he said this:
“In 2008-2009, it was difficult to get people to stay the course. My heart goes out to these people that were invested in equities, lost half their money then got out and missed the rebound. It may take quite a while for them to get back even again.”
Now, in a letter to Dimensional investors, David Booth has revisited the same theme.
He describes, for example, how DFA began in 1981 with a new idea, namely that, over time, small-cap stocks outperform larger stocks. Yet for the first nine years, small caps underperformed the wider market.
“At one point,” he recalls, “the S&P 500 outpaced our portfolio by about 10% annually, so it may have appeared that both we and our clients had a reason to be nervous. But clients were willing to stick with us because we were clear about our objective — providing a diversified portfolio of small cap stocks — and we delivered on it.”
The question Booth addresses in his letter is this: What does it take to stay the course? “While there is no silver bullet,” he says “there are some basic tenets that can help.”
He lists those basic tenets as follows:
- “Developing an understanding of how markets work and trusting markets is a good starting point.
- “Having an asset allocation that aligns with your risk tolerance and investment goals is also valuable. We believe financial advisers can play a critical rôle in this determination.
- “Finally, it’s important that the investment manager can be trusted to execute the desired strategy.”
By historical standards, global stocks have been on a remarkable run. The current bull run is eight years old. It may continue for another eight years, or it may end any day now in an almighty crash. Nobody knows. But, soonest or later, just the issues that David Booth addresses in his letter will come to the fore.
Do yourself a favour. If you haven’t already done done so, check that your asset allocation aligns with your capacity for risk. If in any doubt, ask a financial adviser. Then make sure you understand how markets work and learn to trust them — and, ultimately, your investment manager.
Be prepared, and when, inevitably, the bull run ends, be disciplined. Booth’s right; on its own, following the evidence is not enough.
Letter from DFA Chairman David Booth, May 2017
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
