Ditch these funds or no? including DFA

[gap55u]

I just got rid of my financial planner/advisor.  I was leaning there, even before finding WCI.

I know there's different schools of thought on the DFA family.  I have DFA funds, can't buy more, and no longer have the drag on returns of a 0.9% AUM.  So, sell, or not?

DFA large cap value seems like a keeper, for now. We also have some DFA Micro Cap, DFA Small Value, DFA Int'l Value - seem worth keeping until I decide to simplify - based on "I can't buy it back if I want it later"

Less sure: keep or sell DFA Investment Grade Portfolio.  Seems like moving it to a total bond market is just as easy and not substantially different.

 

Some areas I'm inclined to dump: they seem, in retrospect, like funds designed to sound cool and add more colors to my pie chart of holdings.  Luckily these are all small portions of overall portfolio.

AQMIX: AQR managed futures strategies.

AQR Small Momentum

Gateway Fund: wow, why ask. Dump.  The fund invests in a broadly diversified portfolio of common stocks, while also selling index call options and purchasing index put options.  All for 0.77% expense ratio and pretty crummy performance.

RWX: SPDR Dow Jones International Real Estate - seems unimpressive.

 

Thanks for any thoughts.  I figure I will gradually migrate to a 3-4 fund strategy.  I also have 60 days of my "with advisor" fee structure, so if I find there's a big cost to selling any of my holdings after that 60 days, sounds like I should simplify sooner.

 

 

[Peds]

Some ppl love DFA. Up to you. I would go the cheapest fund that suits your needs.

[VagabondMD]

I would keep the DFA funds, and that is what I did when I left an advisor. I have been gradually paring down some of the positions, in favor of plain vanilla index funds, but I believe in factor tilting and the process at DFA. The Tax-Advantaged U.S. Core II fund (DFTCX) is my largest holding. 

The Managed Futures fund is unnecessary, complicated, and out-of-favor. Like all out-of-favor investments or strategies, if you do not understand it, you will not hold it through thick and thin and will likely jettison it after a period of underperforming or just negative returns. I do not think such a fund should be in most portfolios.

[cgossage]

People tend to either love DFA or never use them. I think they are a fine shop and it's really just personal preference if you want to keep them.

I like Managed Futures and AQR is a solid manager. I wouldn't have a large allocation to them but they are a nice diversifier. I wouldn't expect them to be correlated to your stock portfolio which is but they like hedge funds and long/short managers have all lagged in this latest bull market. If you are looking for something to further diversify your stock and bond portfolio they are worth keeping. If that's not a priority, feel free to drop them.

[The White Coat Investor]

I don't have a problem with DFA funds, but if you keep them they gradually become a smaller and smaller part of your portfolio while, if they're in a taxable account, they become harder and harder to sell as they appreciate over the years. Selling them might simplify things, but there's probably only a rush if this is a taxable account.

Do you believe in the DFA methods? (Remember one of the DFA methods is that everyone should have an advisor.)

[uptoolate]

I would have DFA funds if not for the requirement to have an advisor.  So if I were in your situation I would probably keep them at least for some period of time.  Certainly wouldn't be in a rush to get rid of them.  I am a similar to Vagabond, vanilla indexer with VTI as largest holding.

[Hatton]

I would keep them.  I have never owned DFA funds.  I hear they are good.

[gap55u]

An update: I've taken some baby steps to simplifying my portfolio.  I got rid of the Gateway & Managed Futures funds.

I am considering selling the AQR Small Momentum Style fund. It's about 5% of portfolio (part of the small cap portion).  It seems like selling this as I simplify nto a 3 fund portfolio (or 4 fund, adding REIT) makes sense.

I have decided to keep the DFA funds, though WCI and others have pointed out that these will become smaller portions.  For holdings in taxable accounts, I may start using them for charitable giving (I have been giving my last 2 high cap gains individual stocks, IBM & BRKB)

Thoughts?

PS: you may be amused to read that one reason I'm taking my time simplifying the portfolio is that life is busy: we don't have my wife's online login info,  and we haven't found time to call during business hours to reset.

[AdamMGrossman]

MANAGED FUTURES: I agree with your decision to sell this.  Managed futures funds promote the fact that they have low correlation with the stock market.  Very frequently, they will point to 2008, when the S&P 500 was down 37 percent, and many managed futures funds were positive.  However, it doesn't always work out that way.  Whenever you see a situation like this, check the correlation for yourself.  (If you don't have access to correlation data yourself, just ask the person trying to sell you the fund to provide it.)  In this case, the AQR fund is a pretty good one, with negative correlation to the S&P 500 over most historical time periods. However, you can get a similar level of negative correlation in a much cheaper, more straightforward package: bonds. Just a simple, inexpensive total market bond fund.  (In Boston, where I live, the guy who bought the Red Sox for $700 million made his money in managed futures.  Clearly a smart investor, but he subsequently went out of business when managed futures hit a rough patch.  The lesson: it's a volatile kind of investment, and I think you're better off with simpler, more understandable things in your portfolio.)

DFA FUNDS: The key thing to understand about DFA is that there really isn't any secret sauce.  What they do, for the most part, is to start with a set of well-understood facts about market performance -- for example, that small cap and value stocks have outperformed over time -- and then build portfolios that are "tilted" toward those kinds of securities. On the bond side, they do the same thing, favoring lower-rated bonds for their historical outperformance.  DFA calls these "factors" and they were one of the first firms to really promote this idea in a retail format.  (They now have a lot of imitators, looking to build portfolios around one or more factors. They dress up their strategies as "smart beta".)  I do buy some DFA funds for clients, but not a lot because I believe there are less expensive ways to buy stocks and bonds with these factors.  Most DFA funds are around 0.4% - 0.5%, while simple index funds might cost a tenth of that  That said, I agree that you shouldn't sell your DFA funds out of your taxable account.  Let them naturally shrink as a percentage of your portfolio or use them for gifting, or both.

IN GENERAL: It's important to recognize that different parts of the market will outperform at different times.  Sometimes it's growth, sometimes it's value, sometimes it's energy stocks or tech stocks, etc.  Fund marketers use these periods of outperformance to lure investors into specialized funds which are concentrated into those market segments with recent outperformance.  In my view, you want to avoid funds like this.  You do, however, want to incorporate the factors I mentioned above -- small cap and value -- because their outperformance over time has been well documented, and there are logical reasons to think that outperformance might continue.  Overall, though, I agree with your decision to hold a small set of inexpensive funds and take a buy-and-hold approach.

[AdamMGrossman]

As a follow-up to my last post on this topic, WCI actually just wrote a book review in which he goes into more depth on the topic of factors and DFA.  Great introduction to the topic: https://www.whitecoatinvestor.com/factor-investing-review-of-your-complete-guide-to-factor-based-investing/

[TheCHFinancialAdvisor]

A key factor for long term success is your ability to stick with your plan.

It is often mentioned that being able to stick with your plan is more important than the plan itself.  ( I believe this statement has limits, but brings to the forefront the issue that investing is more than just the right plan).  This is one of the reasons many like to stick with simpler portfolios.

One of the posters above mention that DFA wants to have you affiliated with a good advisor.  To me, this is DFA's way of acknowledging the non-investment Alpha component to long term success.  It is a win-win.  They get investors in their funds that get counsel to help make it through the rough patches.  This helps them keep turnover within the fund low, and helps the investor adopt winning behaviors.

KJF

[gap55u]

I also have a position in PFF - Ishares Preferred Stock.  Seems I should liquidate this to simplify.

CSJ - ishares 1-3yr credit bond - why not just move this to a bond fund?

 

The financial advisor had small amounts of S&P 500 across multiple IRA's and therefore small amounts of small cap or small cap value across more than one fund.  Is there any real benefit to having duplicate tickers in my retirement account vs. my wife's retirement account?  (This presumes we stay married, which is a good presumption).

 

I think it may be part of the general "complexity proves our value"