Dimensional Fund Advisors DFA is one of the most respected fund managers. They have Nobel laureates on their investment committee board. In this article, we show you how to build the model portfolios by Dimensional Fund Advisors. You will also find a description and performance for the portfolios.
Dimensional Fund Advisors Investment Portfolios, One Flaw in Genius
Dimensional Fund Advisors (DFA) is a hugely successful mutual fund provider ($600 billion AUM). They provide access to their funds only through investment advisors. This means you cannot buy them through your brokerage.
That is not a concern, however, as their model portfolios are easily replicated using iShares ETFs or Vanguard ETFs.
We’ll show you how.
- Dimensional Fund Advisors Investment Portfolios, One Flaw in Genius
- Description for Dimensional Fund Advisors Investment Portfolios
- The model portfolios as a template
- The folly of slicing up your bonds
- Performance for Dimensional Fund Advisors Investment Portfolios
- Building the portfolio(s)
- Asset Allocation for Dimensional Fund Advisors Investment Portfolios
- How we select the right ETFs
- Resources for Dimensional Fund Advisors Investment Portfolios
- Suggestions for your next steps
Description for Dimensional Fund Advisors Investment Portfolios
The Dimensional Fund Advisors methodology is weighted towards value and small-cap. This is no surprise as two of the investment committee members of DFA are Eugene Fama and Kenneth French. They pioneered the model for describing asset class premia. Value and small-cap are among those asset classes that have the highest returns. The impact on investing by Fama cannot be understated and is eloquently detailed in The Myth of the Rational Market by Justin Fox.
DFA is the room filled with the people that invented modern finance.
We regularly see a comparison between DFA and Vanguard. Some are firm believers in DFA funds, while others are fanatically predisposed to Vanguard funds.
The issue stems from the fact that in some years, DFA funds have better returns, while in other years, Vanguard funds have higher returns.
If you want to dive deeper into this issue, see the below articles as a starting point:
DFA funds have higher expense ratios than Vanguard funds – a lot higher.
“The number of managers that can successfully pick stocks are fewer than you’d expect by chance. So, why even play that game? You don’t need to.”
– David Booth, Founder and Executive Chairman, DFA
DFA says that their funds can better capture risk-premia (for example, small-cap and value premia). They have also stated that their trading methodology is different from vanilla index providers in that they will sometimes hold off big block trades until circumstances have become profitable. See Master In Money Podcast With Ritzholz and his interview with David Booth.
This is market timing, of course, on a grand scale, but then again, all investing is a form of market timing. It is only a matter of degree.
See the video below on how DFA turns its market timing strategy into a trading advantage. Marketing at its very best. We remain skeptic.
The model portfolios as a template
The investment portfolios by Dimensional Fund Advisors serve as a starting point for portfolios creation by the advisors that use DFA funds. They are templates.
If you see an advisory firm that uses the DFA funds, there’s an excellent chance that the portfolios used are very similar to the DFA investment portfolios that we display on this page.
In particular, you can spot DFA portfolio inspiration if the portfolios contain the following asset classes:
A dead give away is the inclusion of the following asset classes:
- 2 Year Global Fixed Income
- 5 Year Global Fixed Income
- Emerging Markets Value
- International Small Cap Value
We very rarely see these asset classes apart from DFA inspired portfolios.
The folly of slicing up your bonds
We must admit that we are skeptical about slicing the bond portion of a portfolio into too many asset classes. We have yet to see a portfolio that benefits in a meaningful way of having more than two kinds of bonds in its portfolios. A total bond market portfolio ETF like BND is all you need in most cases.
The slicing of bonds is our view, the only flaw of these portfolios.
If you do decide to slice up your bond portion, then you need to ask yourself the reason why you want to do it.
- Is it to capture more returns?
- Is it to create more stability in your portfolio?
- Is it to diversify more finely?
Bonds are usually part of your portfolio to create a stabilizing force or to provide a vehicle for cash. Only long-term bonds are typically used to actively make a bet on higher returns. The Permanent Portfolio by Harry Browne is the most famous example of this. Ray Dalio and Tony Robbins’ All-Weather portfolios also use long-term bonds to great effect.
Let’s see how the DFA Dimensional Fund Advisors portfolios perform.
Performance for Dimensional Fund Advisors Investment Portfolios
|Name||Asset class count||Year to date||Return in 2019||10 year return||CAGR since 1989 (%)||Risk level||Expense ratio|
|Dimensional Fund Advisors Model Portfolios 0% Stocks Fixed||4||5.74||6.94||2.29%||4.39||1||0.06%|
|Dimensional Fund Advisors Model Portfolios 20% Stocks Conservative||15||2.89||10.41||3.97%||5.7||1||0.08%|
|Dimensional Fund Advisors Model Portfolios 40% Stocks Moderate||15||0.03||13.88||5.59%||6.88||1||0.10%|
|Dimensional Fund Advisors Model Portfolios 60% Stocks Normal||15||-2.82||17.35||7.16%||7.93||2||0.12%|
|Dimensional Fund Advisors Model Portfolios 80% Stocks Agressive||15||-5.68||20.82||8.66%||8.85||3||0.14%|
|Dimensional Fund Advisors Model Portfolios 100% Stocks Equity||11||-8.53||24.29||10.11%||9.62||3||0.16%|
Building the portfolio(s)
Below you can see the asset allocations for the portfolio(s). You can also see if the portfolio(s) has a socially responsible investing (ESG) variant portfolio. You can read more about socially responsible investing (ESG) investment portfolios in this post.
To build the portfolio(s) yourself, go to our best in class ETF page to see which ETF you should choose for a particular asset class. There you can also see which socially responsible investing ESG ETFs you should select.
Asset Allocation for Dimensional Fund Advisors Investment Portfolios
|Name||Large Cap Blend||Large Cap Value||Small Cap Blend||Small Cap Value||International Developed||International Small Cap||International Small Value||International Value||Emerging Markets||Emerging Markets Small Cap||Emerging Markets Value||Inter-term Treasuries||Short Term Bonds||Two Year Global Bonds||Five Year Global Bond|
|Dimensional Fund Advisors Model Portfolios 0% Stocks Fixed||25.00%||25.00%||25.00%||25.00%|
|Dimensional Fund Advisors Model Portfolios 20% Stocks Conservative||4.00%||4.00%||2.00%||2.00%||2.00%||1.00%||1.00%||2.00%||0.60%||0.80%||0.60%||20.00%||20.00%||20.00%||20.00%|
|Dimensional Fund Advisors Model Portfolios 40% Stocks Moderate||8.00%||8.00%||4.00%||4.00%||4.00%||2.00%||2.00%||4.00%||1.20%||1.60%||1.20%||15.00%||15.00%||15.00%||15.00%|
|Dimensional Fund Advisors Model Portfolios 60% Stocks Normal||12.00%||12.00%||6.00%||6.00%||6.00%||3.00%||3.00%||6.00%||1.80%||2.40%||1.80%||10.00%||10.00%||10.00%||10.00%|
|Dimensional Fund Advisors Model Portfolios 80% Stocks Agressive||16.00%||16.00%||8.00%||8.00%||8.00%||4.00%||4.00%||8.00%||2.40%||3.20%||2.40%||5.00%||5.00%||5.00%||5.00%|
In the portfolio, with 0% equities, we see the slicing of the bonds in action. We doubt that it is meaningful. You would do just as well holding a global bond portfolio ETF like BNDW.
How we select the right ETFs
There are a lot of ETFs out there. Most of them can be discarded because:
- They are too expensive
- They hold too few assets and are therefore too illiquid
- They do not meet the criteria for representing the asset class they are supposed to mirror.
We have carefully selected an ETF for each asset class that the portfolios on portfolioeinstein.com use. If you want to read more about our selection process and see what we consider the best ETFs please visit our article What Is The Best ETF?
If you are a European investor you need to buy European ETFs. We list 47 best ETFs in our article What Are The Best ETFs For European Investors? (Here Is 47).
As of 2020 we also track socially responsible investing ESG portfolios. Socially responsible investing (ESG) portfolios prioritize investing that puts an emphasis on environmental, social and corporate governance issues.
You can find the socially responsible investing ESG ETFs in the same article.
Resources for Dimensional Fund Advisors Investment Portfolios
We display a few providers on portfolioeintein.com that uses the template offered by DFA. These include:
- Index Fund Advisors
- FPL Capital
- David Booth Model portfolios (he’s the Chairman of Dimensional Fund Advisors)
- Some of Dan Solin’s portfolios have similar characteristics. Dan Solin worked for Index Fund Advisors in the past.
Learn about DFA here (super intro to what investing is right on the front page)
They also have a youtube channel with okay-ish info. It is updated regularly.
Suggestions for your next steps
Finding the correct portfolio is hard. Maintaining your portfolio is also daunting. If you are still in doubt about which portfolio to choose, we suggest you read our article How To Invest Money: 5 Simple Steps That Work For Anyone
If you have already committed to a portfolio – good for you! If you need help maintaining the portfolio you will find our rebalance worksheet useful. Rebalancing your portfolio lowers your risk and may even provide higher returns in the long run.
You can find the rebalance worksheet in our article Here Is The Most Easy To Use Portfolio Rebalance Tool
Dimensional Fund Advisors Investment Portfolios are high returning portfolios. They are built using proven academic research.
What do you think of them – how do you feel about DFA?
Which do you prefer Vanguard or Dimensional Fund Advisors?