Our Investment Approach
If you prefer to watch a video instead of reading, click here. This video does a great job of summarizing the Epple Financial Advisors (EFA) approach to investment management.
There is a science to investing. The body of knowledge for this science is often grouped under the heading Modern Portfolio Theory or MPT and it all began in 1959 with the publication of Harry Markowitz's classic book "Portfolio Selection." Markowitz would go on to win the Nobel Prize in Economics for his groundbreaking insights. This work was expanded upon by Stanford's William Sharpe (another Nobel winner), Eugene Fama, Merton Miller, and many others. While markets are complex adaptive systems too chaotic to allow for perfect prediction or control, we have learned much about how to control risk and capture returns.
Unfortunately, much of what passes for investment activity has little connection to this science. Too many offerings are built on hope and fantasy and lack the theoretical foundations and necessary rigor for consistent results. It sometimes seems that this world of smoke and mirrors holds center stage in the media. To some degree, this comes from the natural human desire to "beat the system," to gain some special advantage, to find the secret shortcut. Many advisors trade on these impulses and offer investment strategies that are long on hope and short on science.
Our policy, when it comes to investing, is simple: no baby talk. If we don't believe a particular approach adds value, we won't offer or accommodate it. When we make recommendations it's because we believe there's a sound theoretical and practical foundation for success.
At the end of the day, success in investing is more about discipline than it is about beating the system by picking hot stocks or timing the market. We believe that markets work, so there's really nothing to "beat." Markets exist to set securities prices such that the subsequent returns will be commensurate for the risks taken. Over time, and in the aggregate, markets do an excellent job of this. There's a collective wisdom that emerges from the buying and selling activities of all the market's participants that no single individual, no matter how intelligent or well educated, is likely to improve upon. The question of whether or not individuals can consistently outperform the market has been addressed systematically again and again and the same answer is always returned: They cannot do so. And why would we ever think they could? The market, after all, represents the aggregation of each participant's insights and knowledge and is truly an example of two heads (or two million) being better than one.
All of this is not to say that there aren't ways to add value short of active stock picking. There are unique sources of risk and return that can be identified and harnessed. There are disciplined approaches to rebalancing and cost control that can add value as well.
In the end, successful investing comes from knowing why you want to invest, accepting that there are no shortcuts, and engaging in a long-term, disciplined process that is guided by empirically validated knowledge. This is our definition of "grounded wisdom" and this is what we offer.
Dimensional Fund Advisors
Dimensional Fund Advisors (DFA) was founded in 1981 by David Booth and Rex Sinquefield to apply academic research on capital market behavior to the practical world of managing investment portfolios. The firm maintains close links with the University of Chicago and other research centers for financial economics. Board members and consultants include some of the nation’s most distinguished academic theorists, including Eugene Fama, Kenneth French, Roger Ibbotson, Donald Keim, Nobel laureate Merton Miller, and Myron Scholes.
Dimensional manages $145 billion in assets and serves more than 200 corporate, government, college endowment, charitable, and Taft-Hartley clients. Beginning in 1989, the firm began offering its low-cost institutional mutual funds to individual investors through a network of selected investment advisory firms. As one of these advisors, Epple Financial Advisors plays a key role in educating clients about asset class investing, developing portfolio allocations to meet specific objectives, and helping them maintain the necessary discipline to ensure long-term success. Dimensional does not distribute its funds through direct marketing or conventional broker/dealer firms.
Dimensional Fund Advisors’ Investment Philosophy
Dimensional’s approach is firmly rooted in the belief that markets are efficient and that investors’ returns are determined principally by asset allocation decisions, not market timing or stock picking. All portfolios employ a passive strategy designed to capture the return behavior of an entire asset class. The firm has no economists forecasting business cycles or interest rates, no investment strategists shifting allocations between stocks and bonds, and no analysts searching out "undiscovered" stocks.
While conventional index managers also employ this passive approach, DFA differs in several key respects. Dimensional funds do not necessarily track popular market benchmarks, but rather, they are designed to capture separate dimensions of worldwide returns which are accompanied by independent sources of risk. These dimensions are identified by rigorous academic research, often conducted by one or more of the leading financial economists with which the firm maintains a relationship.
The firm also places great emphasis on minimizing trading costs. Unlike conventional passive managers who replicate an index in mechanical fashion, Dimensional employs a sophisticated equity block trading strategy that allows for slight variations in day-to-day portfolio balance versus a market index, in return for substantial cost reductions and, hence, improved total return. The firm claims to achieve negative trading costs in illiquid market sectors such as U.S. small company stocks.
In its ongoing effort to maintain the low expense characteristic of institutional mutual funds, Dimensional requires us to place client trades through one of several firms (e.g. TD Ameritrade Institutional, Schwab Institutional) who maintain an "omnibus" account relationship with Dimensional and aggregate buy and sell orders on a daily basis. By adhering to this approach, we are able to purchase fund shares in amounts as small as $2,500, versus DFA’s published minimum of $2,000,000.
Dimensional Mutual Funds
All funds are "no-load," although certain international equity portfolios levy a reimbursement fee of 0.5% to 1% on purchases. This fee is payable to the portfolio, not Dimensional, and is intended to spread the burden of transaction costs in illiquid markets in the most equitable manner. In the absence of this fee, long-term shareholders would suffer diminished returns due to trading activity of investors moving money in and out of a portfolio.
The firm focuses only on market dimensions where research documents a reward for risk taken. As a consequence, DFA offers no strategies for investing in long-term bonds, non-investment grade debt, or "growth" companies, since research has failed to identify attractive risk/return characteristics for these asset classes.
For more information, go to the Dimensional Fund Advisors website at http://www.dfaus.com