Confidence

You've built your wealth through a mix of hard work, talent, and good luck. You may still be working, but you no longer need to, or can see ahead to a time when work will be a choice, not a necessity. You pretty much have in place the resources to live well, to do the things you enjoy and that matter to you.

But you're concerned about handling your wealth well. You want to make sure that it will support you and your family for years to come. What you don't want is for your wealth to be a burden, a source of stress and anxiety.

Working with you, my goal is to help you become genuinely confident about how you're handling your wealth, at ease about it, never anxious, stressed, or burdened. There is a lot that goes in to this, to getting to this goal. An important part is stripping away the bad, unnecessary, and distracting surrounding investing so that we can keep our eyes on the things that count.

Investment Principles

My approach to investing begins in simple observations about what capital markets are and how they work. What are they? They are nothing other than vast pricing mechanisms for stocks and bonds. And how do they work? They bring together thousands upon thousands of highly motivated buyers and sellers who are continually resetting market prices for each and every security.

If you stop and think about just this much, you might begin to wonder about the omnipresent "Wall Street" view of good investing. Does it really make sense to be on the lookout for overpriced and underpriced securities, regularly buying and selling stocks and bonds to try to own the right ones at the right time? Or rather does it make sense to think that there is no better measure of a security's value than its ever-changing market price?

This is a conceptual beginning of a case for passive management over and against active management. This debate has a long history. I come down fully on the side of passive management. As I see it, the arguments of active managers typically boil down to this: "The market is mispricing these securities and it will soon price them correctly as only I – truly insightful active manager unlike all the other active managers who are trying to do the same thing – can see!" I consider those who take the passive approach to be more humble, highly skeptical about being able to identify mispriced securities and certain about being unable to predict the future.

Someone might wonder: if good investing isn't what active management takes it to be, what's left? What does passive management look like? The basic strategy of passive management is to own the market as a whole so as to gain market returns. This is my beginning point in constructing portfolios for my clients. Accepting the market for what it is, letting it work for you rather than fighting it, this in itself can be liberating and transformative for investors.

My Story

I got into the investment business to learn for myself how to be smart with money. Looking back, my grandparents had done very well in the stock market, but my parents struggled as investors. What went wrong? What went right?

Wall Street

After a number of years of teaching and research in the history of political thought, I took the plunge into the world of professional investing, out of curiosity and self-interest. I joined a major Wall Street firm. It was the middle of the late 1990s tech boom. I had some success myself catching the wave, but there was no way I could kid myself into thinking that my success was anything but good luck. And what an eye opener it was to see how the investment business worked at a big Wall Street firm. I was amazed at the recklessness of investment professionals with other people's money, at their willingness to drive people into investments having given shockingly little thought to what good investing might be. It wasn't even a question. It didn't matter what you recommended just so long as you brought in clients and directed at least some of their money to the investment products that were at that moment the firm's priorities.

Naples

I arranged a pretty quick departure. My next stop was a small, independent, very successful estate planning firm in Naples, Florida, which specialized in advanced wealth transfer strategies utilizing life insurance. The partners hired me to build the investment side of their business. They had taken a couple of runs at this, but without great success. When I arrived, they had a relationship in place with a company whose expertise was selecting money managers for various asset classes and constructing broadly diversified, multi-manager portfolios. This company continually monitored these managers, and hired and fired them as its opinions about them changed. As I saw things, this approach was a real step-up in seriousness from the world of my Wall Street firm. And one important element of what I understood to be good investing was part of these managed portfolios: genuinely broad diversification.

The company was scrupulous in showing how its portfolios performed versus the relevant benchmark indexes. But here was one big problem: its portfolios consistently had worse performance than their benchmark indexes. This meant I could construct comparable portfolios using low-cost, broad-based index funds and expect better returns. What seemed to me to be the inescapable conclusion: there was no need to seek out money managers to pick stocks and time the market, the hallmarks of active management, because whatever skill these managers might have had was outweighed by the costs of what they did.

So now I had in front of me the whole story, really, in my view the two important elements of good investing: genuinely broad diversification and passive management.

Finding Dimensional

In the back of my mind was an article I had read a year or two earlier in the University of Chicago Graduate School of Business magazine about an investment company, Dimensional Fund Advisors, started in the early 1980s by two graduates of the business school. It was a unique company, taking as its first principle that markets work, setting prices fairly for all practical purposes. The company's roots, I learned from the article, were in lessons learned about market efficiency in finance courses taught by Chicago's Gene Fama, one of the pathbreaking financial economists of our time.

It was chance that I had come across the article. My father was an early 1950s graduate of the business school and had recently passed away, and I was receiving his copies of the magazine. With my interest in passive investing piqued, I contacted Dimensional – today as then low-key and under-the-radar – and started a several month process of establishing a relationship with them. And, beginning in late 2001, I took the investment side of my estate planning firm in a new direction, recommending broadly diversified asset class portfolios built with Dimensional funds.

Hanover

In 2003, I set out on my own here in Hanover. On the personal side, my wife and I had come to realize that our ideal place for raising a family was much closer to Hanover than to Naples. And on the business side, there were some inherent conflicts of interest at my estate planning firm because it was a hybrid, with commissioned sales of life insurance on one side of the business and fee-only investment advice on my side of it. The short of it: I wanted to be working unambiguously in the best interests of my clients as a fiduciary, the legal standard for fee-only registered investment advisors. And so I set out on my own in 2003, and have continued ever since to recommend broadly diversified portfolios built primarily with Dimensional funds. With great resources behind me, I am able to provide from my spot here in Hanover global investment solutions that I think are without rival.

Why Dimensional?

Dimensional Fund Advisors ("Dimensional") brings together leading financial economists and experienced investment professionals to design and manage state of the art portfolios. I recommend Dimensional funds because I consider them to be superior investment vehicles. What follows is some of the thinking behind my judgment.

Note: The following discussion reflects the opinions of the writer and has not been reviewed by Dimensional. For more information about Dimensional, please visit their public website here.

Markets Work

The first step in moving away from traditional active management is simply observing what markets are, how they work, and that they work. Observing this much, we can become skeptical about the claims of active managers to be able to beat the market. We can find ourselves in the camp of passive management.

The basic strategy of passive management is to own the market as a whole so as to gain market returns. But this is really a beginning point, one that opens the door to new ways of thinking about markets. If we take as our first principle of investing that markets work, setting prices fairly for all practical purposes, are there nevertheless ways to do better as investors?

Risk and Return

Dimensional takes this question as its guiding one, setting it apart from most other fund companies. Some of its important innovations grow out of another simple observation: no one will take more risk rather than less without thinking there is a good reason for doing so.

As investors, this typically means we will own riskier assets only if we expect better returns from them. There is no guarantee we will earn better returns – if there were, we wouldn't really be risking anything. But we expect better returns. So, for example, if we choose to own a 100% stock portfolio rather than a 50% stock, 50% low-risk bond (think Treasury bill) portfolio, we do so expecting better returns over time but knowing that the portfolio is riskier, more volatile, subject to sharper declines and deeper losses.

These observations about risk and return give rise to further questions. For example, are there parts of the stock market that are riskier and have higher expected returns than other parts of the stock market? If so, are there effective ways to design and manage portfolios to target these parts of the market? We can ask similar questions about the bond market.

Dimensional answers these questions "yes," drawing on the extraordinary past 60+ years of capital markets research and on its own extraordinary past 40+ years of designing and managing state of the art asset class portfolios.

Design

Regarding risks worth taking, financial economists at the forefront of capital markets research have observed, confirmed, and reconfirmed in a series of seminal studies five important risk factors that are the sources of higher expected returns.

Equity Risk Factors

Fixed Income Risk Factors

Informed by this research, Dimensional designs its signature stock portfolios to capture in more and less concentrated ways the return premiums associated with small company and value stocks. On the bond side, Dimensional designs portfolios to provide a range of ways to capture the return premiums associated with term and credit risk, with an especially rich variety of funds focused on shorter-term, higher quality bonds.

Management

Dimensional's freedom from the limitations of traditional management is on display in the design of its portfolios, and also in how it manages these portfolios.

One of the firm's first great challenges was to show that it could manage its original fund efficiently despite the high costs of trading the micro cap stocks that it targeted. Its early innovations in this regard set the tone for how it manages its entire range of funds.

Put briefly: don't use commercial benchmarks indexes for your target portfolios; once you design the benchmark targets for your portfolios, don't trade foolishly with a view to tracking precisely these targets; trade instead with an eye above all to capturing the return premiums associated with the targeted asset classes; always trade with a keen eye to costs.

Why Dimensional?

Dimensional offers a broad, seemingly bewildering array of portfolios. Yet in designing and managing them, it follows the principles of design and guidelines for management I have just outlined. The result: the Dimensional family of investments is remarkably coherent, making it possible to structure complete investment strategies with measurable and consistent exposures to the factors that drive returns.

So, why Dimensional? I consider the understanding of risk and return that informs Dimensional's approach to investing to be an excellent framework for structuring investment strategies for my clients. And I consider Dimensional portfolios to be excellent tools for implementing these strategies.

Our Path

When we invest, we are looking to the future. We want and expect our investments to grow in value over time, to be a resource we can rely on. We may plan to use our investments as an important source of income when we're no longer working. We may want to leave a legacy to our children and grandchildren. We may have in mind to give money to charities that are important to us. Whatever the case may be, we are thinking ahead, and the difficulty is we can't know what the future will bring. We can, however, make intelligent estimates, understanding what we can expect from our investments over shorter periods of time – day-to-day, month-to-month, quarter-to-quarter, year-to-year, whatever frame of reference we may find helpful – and at points in the more distant future.

Understanding what we can expect from our investments over shorter periods of time is an essential first step. Thinking this through, imagining how we would feel and react under different political, economic, and market conditions, helps us develop an investment strategy that makes sense for us, one which we can hold fast to in good and bad markets alike. If we don't make an effort in this direction, we leave ourselves open to being buffeted by volatile markets and provoked into harmful investment decisions. “Buying high” when all seems right with the world and “selling low” when all seems wrong are two of the most common and damaging mistakes investors make. If someone repeats these mistakes two or three times, he runs the risk of never being a successful investor.

So step one, find an investment strategy we can live with no matter what markets are doing and invest accordingly. With our investments in place, we can look ahead with our goals in mind. How are we likely to be faring in five years, ten years, twenty years, thirty years, whatever points in time are important for us? What if markets do especially well? What if they do especially poorly over the investment years that matter most to us? How likely are the different results? What kinds of corrections might we have to make along the way? Having thought about these questions, we can take sensible actions now regarding financing our retirement, transferring wealth to loved ones, making charitable gifts, whatever may be our particular wishes, knowing that we may need to make adjustments depending upon what the future holds.

We can summarize simply. Set a sensible course, reconsider regularly, and correct as necessary. Do these things, and we set ourselves up to be among the happy few when it comes to handling our wealth well.

Not all services will be necessary or appropriate for all clients, and the potential value and benefit of the adviser's services will vary based upon a variety of factors, such as the client's investment and financial circumstances and overall objectives. Statements of opinion reflect those of the writer only, as of the date of publication, and are subject to change without notice. The effectiveness and potential success of the adviser's services can depend on a variety of factors, including but not limited to the manner and timing of implementation, the client's tax bracket and financial circumstances, coordination with the client and the client's other engaged professionals, market conditions, and other factors. There can be no assurance that passive management investment strategies will meet or outperform alternative strategies, including active management strategies. Past performance does not guarantee future results. All investing comes with risk, including risk of loss.