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In 2002, after years of observing the hit-and-miss track records of mutual fund managers who supposedly ‘picked only the best stocks,’ studying Morningstar fund evaluations and Value Line Investment Survey reports, TAAG began investing our clients’ portfolios using the Dimensional Funds.

At the time, mutual funds labeled ‘passive’ were not mainstream investments by any stretch of the imagination.  Only 6 years ago I gave a presentation to the Cincinnati Estate Planning Council entitled, Everything They’ve Told You About Investing is Wrong.  In it, we outlined the investment industry practices of trying to predict the future, shifting around investments, and creating bundled products like Collateralized Mortgage Obligations, and how these practices were failing investors.  Let’s just say it was not well received.

My, how things have changed.

Last week, the Wall Street Journal ran a series of articles about the rise of passive investing, entitled The Passivists.  One of the articles began, “By almost any measure – performance, inflows and certainly bang for the buck – passive funds for years have trounced active managers.”

Actively managed mutual funds keep cash available to meet redemption requests, leaving less invested in the market.  They have higher trading costs, higher salaries, research and other expenses that reduce investment returns. Passive investing has the advantage of lower trading costs, lower tax costs, and full investment in the financial markets.

Passive investing has been a successful strategy, but labeling the Dimensional Funds (DFA) and TAAG’s investment management methods as purely ‘passive’ oversimplifies what we do, and underestimates the results we can achieve.

DFA was founded by two University of Chicago business school graduates, who decided to use their academic research and apply it to the real world. Focusing on the risks they had observed to reward long-term investors, they built index investment funds designed to benefit from these risk dimensions:

  • Small companies outperformed large companies over time, but they were more expensive to trade than large companies, making them less profitable. So they designed small company index funds that followed patient trading strategies, lowering their costs.
  • They also observed, like Warren Buffet and Benjamin Graham before them, that stocks with lower relative prices outperformed other stocks over time, so they added value screens to their stock portfolios.
  • Later, they noted that highly profitable companies maintained a higher stock price for longer periods, and another adjustment was made to their funds.

The Wall Street Journal recently outlined the success these strategies have had for both DFA and the investors in its funds in an article last Friday, entitled The Active-Passive Powerhouse.  DFA has culture of constant academic challenge and improvement.  They conduct on-going research and analysis focused on testing new theories and applying them when they’re confident it can improve investor returns.

TAAG’s investment philosophy begins with DFA funds that give our clients low-cost access to the financial markets, but it doesn’t end there.

A true ‘passive’ investor buys indexes and holds on to them, regardless of what happens.  TAAG believes it’s important to maintain an investment mix that strikes a balance between what you need to hold for your specific financial needs, and what you can maintain in both good and bad financial markets.

This can be difficult at times, which is why we test our clients before we invest for them, design a financial plan together, and review it for reality checks as things change in our clients’ lives and the world at large.

At an investment conference in 2005, I attended a research presentation by a Ph.D. who believed he’d found the optimal combination of timing and targets for rebalancing investment portfolios.  When I returned to the office, we redesigned our software to allow us to rebalance our client’s portfolios using these parameters.

A few weeks ago, I attended another investment conference, where all the different parameters for rebalancing client portfolios and their return outcomes were presented.  After ten years of study, the parameters we had applied in 2005 were shown to add an annual return improvement of .40% per year to investment portfolios, the best outcome of all the combinations studied.  It was great affirmation of our work.

Consumers are beginning to see that actively managed funds, and other investment products delivered as one-size-fits-all solutions, do little to improve their net worth.

The Department of Labor is requiring companies that manage retirement plans to work with their clients as fiduciaries, to put their clients’ interests first at all times – the way TAAG has served clients for years.

Investment management delivered with on-going financial planning advice and council, with our clients’ interests placed ahead of our own – what’s old to TAAG is new again.