This article by Jake DeKinder, a friend of mine that works at Dimensional Funds, is an easy to understand article that dives into 3 concepts that are deeply embedded into the portfolios we manage. These beliefs are important to understand if you ever want to look under the hood to better understand what the research says about investing along with how we and our partners implement the ideas that come from academia. Below are 3 ideas that are prevalent in the models we manage and the advice we give our clients about investing. Enjoy:
- Prices contain relevant information in them that can be used in prudent portfolio construction.
- Active management (money managers that try to outguess other managers through stock picking and security selection) rarely win in the long run, and this strategy is a classic bad bet. What is a bad bet? it is where a few win a little and most lose a lot.
- Indexing, while good (because it is low cost and we are huge proponent of low cost funds), is not good enough because index funds are rigid tools and do not have the flexibility to be optimal when compared with asset class funds. Index funds are a good tool, but not the best.