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Fourth Quarter 2004 Client Letter
Dear Client: New Year: In 2004 mutual finds gave us ample reason to celebrate! Our Dimensional Fund (DFA) mutual fund model portfolio (all equity with real estate and a value tilt) was up 23.7 % for the year. This is compared to the Dow Jones Industrial Average (DJIA) being up only 3.1% for the year. Two factors contributed to this success: the high quality of Dimensional Funds and a portfolio built on several asset classes using Modern Portfolio Theory. Long
Term: Many investors exited the market
in the down years of 2000 to 2002 only to miss the following
recovery. This illustrates
one of the most beneficial
services we offer to our clients:
the “Investment Plan”. As
you know from your experience, a well executed plan is one of the most
important activities for
success. We develop this plan
in the form of an Investment Policy
Statement after reviewing our clients investment needs, risk
tolerance, portfolio earnings requirements, as well as many other
factors. After we get to know
our clients situation, we develop the plan in partnership with our
client.
Next, the plan is implemented. Performance is reviewed
periodically against the plan, changes are made in the plan, and the
portfolio is rebalanced as needed to keep to the plan. We have found that many investors
do not have a plan for their investments.
As a result, they tend to miss out on long term rewards that accrue
to those who follow a good portfolio plan. Like the fable about “The Tortoise
& The Hare”, those that stay the course win in the long
term. Best
of the best: We keep asking ourselves “What
mutual funds are the best at building a successful investment
portfolio?” Eric E. Haas, in
a research paper published in the September 2004 issue of Journal of
Financial Planning said that “investors are often involuntarily restricted
to relatively high-fee mutual funds with which to implement some of their
asset allocation desires”.
Haas found a high correlation between high expense ratios and poor
performance of actively managed mutual funds. Others such as Carhart (1997) and
Malkiel (1995) found much the same thing. Conclusion: Haas says that investors are
increasingly turning to index mutual funds to implement their asset
allocation plans. In his
study comparing low-cost Vanguard to Dimensional, Haas concludes “It does
indeed seem worth it to switch to the DFA funds.” DFA funds are so much better than
Vanguard that “it is still worth it to pay the financial advisor 1.285
percentage of assets managed annually” to provide the investor with access
to DFA funds.
Additional
research: Dalbar Research has surveyed from
1,100 to 2,000 investment advisors three times since 1997. In each of these three independent
studies, these professionals rated Dimensional Fund Advisors (DFA) as the
best overall mutual fund company. Sample performance:
Following is a representative sample, as of
Notes:
Returns for more than one year are annualized. “N/A” appears where returns
data did not exist for the entire period. We hope you will find the above
information of interest, and that you will use it in the spirit it is
provided. While not meant to serve as a basis for your portfolio
assessment, results from one year or less are useful as a tool to better
understand how frequently such short-term market fluctuations occur, and
yet how unpredictable they are. Likewise, three- and five-year returns
demonstrate that different asset classes can be in or out of favor for
longer periods, but again without a reliable basis for prediction. This in
turn provides further evidence that clients should build entire portfolios
and focus on their portfolio’s total return rather than on individual
asset classes. For
a copy of the Eric Haas article, just contact your investment
advisor. Best
wishes for the New Year, Coston
and McIsaac Investment Advisors, LLC |
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