Did your plan work?

S.F. Ehrlich Associates |
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Investment

You’re probably familiar with the name Dimensional because there are likely one or more Dimensional mutual or exchange-traded funds in your portfolio. We also often cite research from Dimensional in our newsletters and memos we write to our clients.

Dimensional was founded on the philosophy that there are certain financial characteristics, or factors, that can be reliable predictors of future performance. There is no active trading; all decisions are based on exhaustive research. At Dimensional, the research staff are the rock stars, not the fund managers. Their long-term horizon and research-driven philosophy align perfectly with what we think is best for our clients.

Thus, it should come as no surprise that we again cite Dimensional as we work through the latest crisis to face investors: bank failures.

To paraphrase David Booth (Dimensional’s founder), consider December 2019, when “Unemployment, interest rates, and inflation were at historically low levels.”1,2 What would you have done with your portfolio if someone had told you:

  • A global pandemic would hit.
  • FAANG stocks (e.g., Facebook (now Meta), Amazon, Apple, Netflix, and Google) would soar, and then drop.
  • Meme stocks (e.g., AMC and Gamestop) would soar, and then drop.
  • Bitcoin and other cryptocurrencies would soar, and then drop.
  • Inflation would spike to the highest level in decades.
  • Russia would invade Ukraine, causing geopolitical uncertainty.
  • Multiple bank failures would upend the U.S. banking system.

Our hunch is that you would have directed us, as your financial advisors, to sell everything and go to cash. Perhaps you would have just cashed out and shoved dollars under your mattress. In other words, knowing these events ahead of time would have probably caused you to predict that your portfolio would lose a lot of money, thus jeopardizing your future. Fortunately, at least going back 39 months, you would have been wrong.

Look back at the value of your portfolio on December 31, 2019, and compare it to the value on March 31, 2023. Which is higher? To quote Booth: “The conclusion I hope you reach is that it’s unrealistic to think you can outguess markets.”

Statistically speaking, even if you had attempted to tiptoe your way through all the market-rattling events listed above, it’s almost certain you would not have fared nearly as well as you did. (To quote Professor Kenneth French, a director on Dimensional’s board: “When choosing my own investments, I remind myself that most overconfident investors don’t realize they are, and that client (trading) fees pay for most investment manager’s yachts.”)

If you planned to grow your portfolio over the past three-plus years by staying in the markets and periodically rebalancing, then, yes, your plan worked. 

 

 

 

 

1 Booth, David. “This Has Been a Test: Developing a Financial Plan You Can Stick with.” Dimensional, 20 Dec. 2022.
2 French, Kenneth R. “Five things I know about investng. ” Dimensional, 17 Mar. 2022.

 

 

 

 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by S.F. Ehrlich Associates, Inc. (“SFEA”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from SFEA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  SFEA is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of SFEA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a SFEA client, please remember to contact SFEA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing, evaluating, or revising our previous recommendations and/or services.