FundAdvice.com - How to manage a $1 million portfolio for maximum growth & income

When you invest your money, you are putting your faith in the future. And of course all of us would like to know what that future has in store. In order to look forward to the future, we have to look backward, into the past. Of course we know the future will not look exactly like the past. But I would like to talk with you about four principles of investing that are based on more than 70 years of market history. These four principles can improve your investment performance and reduce your risk at the same time. And I have solid statistical evidence to back up that statement.

I’m sure you are already familiar with these four principles. But you may not know them or may have forgotten them. So here they are:

The first principle is asset allocation. It is the most important investment decision you will make. In fact, most of what I’m going to share with you involves this principle.
Second, all investing involves taking a risk. When you do it right, that is, when you take a prudent risk, you should expect a higher return, or a premium, as your reward.
The third principle is that if you combine your investments carefully, you can raise your return while you reduce your risk. And I think that should be a basic goal for every investor.
And the fourth principle that you need to know is that if you carefully combine bonds with your stock investments, you can build a portfolio to achieve the return you need while you stay within your risk tolerance. It’s not hard to do that, but there’s a trick to getting the most benefit from it…and I’ll tell you exactly how to do that.

I suspect that our clients are much like most of you. They cover a wide range of ages, professions, investment experience and knowledge of the theories of investments. Some are conservative, others are risk-takers. Some are do-it-yourselfers and others want a professional to take over for them. But they have some things in common.

When our advisors and I talk to people about what they want from their investments, it almost always boils down to one of three major objectives.

Many people have a burning desire to do better than the overall market. They’re happy if they can beat the Standard & Poor’s 500 Index. As you will see, the ultimate buy-and-hold strategy has a history of doing that.
Other investors want the highest return they can get while they stay within their own risk tolerance. The ultimate buy-and-hold strategy can be designed to do that.
Still others look at investing in a slightly different way – a more conservative way. They want the lowest-risk strategy that will meet their long-term financial needs. The ultimate buy-and-hold strategy can be used to achieve that goal as well.

So, whether you want to beat the market, or figure out how to get a return of 10 to 12 percent without risking everything...or if you simply want the lowest-risk way to get a 10 percent return, I believe you can find what you need in this strategy.

Now let’s look at those four investment principles in more detail. Number one, asset allocation, as I said before, is the most important investment decision you will make. Study after study shows that the type and amount of each asset you choose will determine from 90 to 99 percent of your long-term returns. In other words, how much of your portfolio you commit to stocks or bonds will have much more impact on your long term returns than which stocks or which bonds you invest in.

Principle number two simply says that the more risk you take…and I’m talking about prudent risk here, not speculating or gambling…the more risk you take, the higher the return or premium you ought to receive. This is something you already know intuitively. If you take money out of a bank account and put it into a money-market fund, you’ll get a higher return. Your return will be even higher if you move from a money fund into an intermediate-term bond fund. And in the long run, you’ll get a significantly higher return or premium for risk if you move out of bonds and into stocks. But of course each one of those steps involves taking a higher level of risk.

Let’s take a moment to look at some financial history. I’m sure you are familiar with the concept, but these figures are impressive, and you should be aware of them. Since 1926, one dollar invested in government bonds has grown to be worth $66. The same dollar invested in an index of stocks of large, relatively mature companies has grown to be worth $2,533. And one dollar invested in an index of stocks of smaller public companies has grown to be worth $12,968. Think about that a second: $66 versus $2,533 versus $12,968. That’s an amazing difference.

I think there is an obvious lesson here that is important to you. If you want high investment returns, and if history is any indication of the future, you should have some of your money in a broadly diversified portfolio of small company stocks.

Over the years, small U.S. companies have achieved a higher rate of return than large ones. And the exact same thing is true for international stocks – small companies outperformed large ones. This probably is no surprise to you if you think about it. But what you may not realize is that if you combine small-cap stocks and large-cap stocks, you can capture some of the benefit of these higher returns while you reduce your risk at the same time.

You’ll find the details of what I’m talking about in the following table.

Now let’s talk about the concept of standard deviation, a measurement of the predictability of a series of numbers. As you may know, an investment that has a low standard deviation is more predictable and more consistent than an investment with a high standard deviation. And of course, when you can find an investment that is more predictable and more consistent while it meets your goals, that’s what you want!

You will see standard deviations listed among the measures of risk in the table. But, to many investors, standard deviation doesn’t really seem like the real world. You may find it easier to simply think about the worst performance you might expect from an investment strategy during some time frame…and this information is also included in the table.

Here’s a snapshot of some of the most important information in this table. Over the past 35 years, U.S. large companies had a compound annual return of 11.2 percent…while U.S. small companies returned 13.0 percent. Investors did receive some premium in small companies, but at a much higher standard deviation…26.5 percent…vs. 17.4 percent for large companies. And the small-company stocks had greater losses during the worst of times. The worst single month for large-company stocks was bad enough: a loss of 21.5 percent. But small-company stocks had a worst single month loss of 29.2 percent. And certainly the worst five-year period would have been much more difficult to accept with small companies – a loss of 59.1 percent, versus a loss of 18 percent for large companies.

So obviously the additional risk of investing in small U.S. companies is not worth taking if you do not get the extra return. But we believe that most of you should have some of your portfolios invested in small-company stocks. If you look at the returns over 50 to 70 years, those small-company stocks outperformed large-company stocks by about 2 percentage points a year on average. However, because small-cap stocks are also riskier, we don’t think it’s prudent for anybody to invest most or all of a portfolio in small-cap stocks.

The picture for small-cap investing is more encouraging when you go beyond the borders of the USA and consider international stocks. As you’ll see in the table, international small companies produced a 6.1-percentage-point advantage over international large companies from 1970 through 2004. The international small companies had a compound annual return of 16.5 percent, vs. 10.4 percent for international large companies.

So my first example of this principle of higher return for higher risk is by investing in small companies, both U.S. and international.

And that leads to something else that you should know about if you want to be a more successful investor: the benefits of global investing. This is a second example of how you get higher expected returns when you take higher prudent risks.

As you can tell from the returns I’ve talked about, international stocks have given investors significantly higher returns than U.S. stocks…an average 35-year return of 13.5 percent for large and small international indexes vs. only 12.1 percent for large and small U.S. companies. Obviously, international stocks are subject to more risk factors, including political and currency risks in addition to the variables that affect all stocks.

But if you study the numbers, you’ll see something very interesting: in some ways international stocks were less risky than domestic stocks. For instance, the worst 60 months for international large and small stocks combined produced a loss of 23.9 percent vs. 38.55 percent for large and small domestic stocks combined. Those numbers are for total returns, not annual returns, and that’s obviously not very impressive for a five-year investment. But remember, that’s the worst five-year period you would have experienced. So international stocks may be perceived to be more risky…but in fact, by some measures, international stocks have actually been considerably less risky.

Now I’d like to share a third important example of higher returns for higher risks: Investors have received a significant premium for owning value stocks over what are commonly known as growth stocks. The difference between these two types of stocks is simple. Value companies are out of favor, for whatever reasons. Growth companies are popular and in high demand. If we were shoppers instead of investors, we might think of value companies as being "on sale."

Some people define value stocks subjectively, seeking overlooked bargains or instances in which the stock-picker believes the market is just wrong. But we believe it’s easier and more reliable to identify value companies mechanically, in terms of their book value. In landmark studies, two prominent finance professors, Dr. Eugene Fama at the University of Chicago and Dr. Kenneth French at Yale University, demonstrated that stocks of companies that have the highest book values compared with their market prices were likely to pay investors much higher returns over time than stocks of companies with low book values relative to their market prices.

You may not wish to know all the details of their research but you should know a few important points. A universe of stocks can be sorted into groups based on their book-to-market ratios. For purposes of this comparison, those with the highest book-to-market ratios are considered value companies, companies with the lowest ratios are defined as growth companies. And according to data going back to 1964, among large U.S. stocks, "value" companies had a compound rate of return of 13.7 percent, vs. only 9.6 percent for large "growth" companies. Among small U.S. companies, the difference was even more striking: a compound return of 17.1 percent for the out of favor value stocks vs. 9.2 percent for the popular growth stocks.

The following table shows the results of the study by Fama and French. In every case, in large companies and small ones, the stocks of value companies produced substantially higher returns than those of the more popular growth companies. And the reason for the additional return is simply because they were riskier companies. Remember: Investors are supposed to receive a premium for taking more risk. And they did!

Here's the big surprise. While stocks of value companies, both large and small, have produced higher returns than growth companies since 1964, they have done so with reduced volatility as measured by standard deviation. For this study, all stocks on the New York Stock Exchange were ranked by size according to market capitalization and sorted into "growth" and "value" categories according to the ratio of their market price to book value.

Most experts in the area of value investing warn against picking only a handful of these risky companies. But if you invest in a broadly diversified portfolio of value stocks…and the only practical way for most individuals to do this is through mutual funds…you should expect higher returns from value companies than from growth companies.

The understanding of these three risk factors represents a major breakthrough in what is called Modern Portfolio Theory. So let’s summarize them again:

First, your portfolio will be impacted by the size of the companies you own. Small-company stocks are riskier than large-company stocks. And to the extent that you put more small companies in your portfolio, you should receive higher returns in the long run.
Second, your portfolio will be impacted by the geographical location of the companies you own. Many believe international stocks are riskier than U.S. stocks. And to the extent that you put more international stocks in your portfolio, you should receive higher returns in the long run.
Third, your portfolio will be impacted by the mix of value vs. growth companies that you own. Value stocks are riskier than growth stocks. And to the extent that you put more value stocks in your portfolio, you should receive higher returns in the long run.

Over extended periods of time, investors who have put those facts to work have received significant premiums for accepting those additional risks. Sometimes when I explain this to my clients, they think I’m suggesting that they should pile one high risk on top of another…and then another one on top of that. And initially that makes some clients pretty uncomfortable.

But as ironic as it seems, the truth is just the opposite. This is what I’m calling principle number three: In spite of what you might expect, when you put these risky asset classes together, you can actually reduce the risk in your portfolio while you potentially increase the return. The reason is simple: these different assets don’t all move up and down together. And by thoughtfully combining them, you can reduce your total volatility.

When I’m meeting with my clients, I usually show them a study, which is the table entitled "The Benefits of Diversification." The far right column shows what happened over the past 35 years if you invested equally in the U.S. large, U.S. small, international large and international small stock indexes and if you regularly rebalanced back to 25 percent in each index. The return for large U.S. companies, measured by the Standard & Poor’s 500 Index, was 11.2 percent. Remember, that’s the benchmark that many investors want to beat. And if you had invested in all four asset classes, you would have beat the Standard & Poor’s 500 Index, with a 13.4 percent compound return and almost exactly the same standard deviation as the 10.2 percent return of the S&P 500.

But that’s not all. You would have had smaller losses than the S&P 500 in the worst month, the worst quarter, the worst year, the worst three years and the worst five years. I think that’s pretty impressive, and it illustrates this basic principle of investing. If you put together the proper combination of assets, you can increase your return and decrease your risk at the same time.

Now let’s talk about how you can actually do this with your own portfolios. It’s not as hard or complicated as it might sound. Remember, none of this strategy I’m telling you about…and none of the numbers I’ve shared with you…depends on somebody’s ability to choose the right stocks. The important thing is to choose the right kinds of stocks, whether they are U.S. or international, growth or value, large or small…and to invest in hundreds or even thousands of those stocks. And the only practical way to do that is to use mutual funds.

So when it comes to implementing this, here’s what you really need to know: The best way to create our favorite buy-and-hold strategy is to invest in mutual funds. The best mutual funds are no-load funds…funds that do not charge you any commissions to put your money in or to take it back out. And the best no-load funds for your buy-and-hold portfolio are index funds or asset class funds. It’s as simple as that.

What’s an index fund? It’s one that simply holds virtually all the stocks in a given class. For instance, the most common type of index fund is one that mirrors the Standard & Poor’s 500 Index by investing in the 500 stocks that make up that index. Compare that to actively managed funds in which the managers try to choose the very best undervalued stocks and sell stocks they believe have become over-valued.

What’s an asset class fund? It’s very similar to an index fund. But some types of assets, for example small value companies, are not tracked by any established indexes. So a fund that wants to track that type of stock will create a list of stocks that simulates the whole asset class.

There are four main reasons we recommend index funds and asset-class funds instead of actively managed funds.

First, actively managed funds usually combine several different types of assets. Some of these funds switch back and forth between large and small companies from time to time. And sometimes they take large positions in bonds or cash. But that’s not what you want if you are trying to follow our recommendation to build a portfolio with a careful balance of specific asset classes. Index funds (and here I’ll use that terminology to include asset-class funds as well) are the only funds in which you know you’re getting exactly the kind of asset you want. And that’s very important if you’re building the ultimate buy-and-hold portfolio.
Second, index funds have lower expenses because they don’t have to pay a staff of people to pick and choose stocks to buy and sell. Lower expenses means more money in your pocket.
Third, index funds are more tax-efficient than actively managed funds. Because they aren’t trading securities to generate profits, their shareholders pay less in taxes.
Fourth, and this might be the clincher for many of you…index funds have higher returns than actively managed funds. It is commonly accepted today that only 10 to 20 percent of the actively managed funds are likely to outperform index funds over the next five years. (And unfortunately, the funds that have outperformed an index over the last five years are not likely to be the ones that will outperform in the next five years.)

So it boils down to this: You can invest in actively managed mutual funds, that don’t necessarily give you the assets you desire, that are likely to under perform, that have higher expenses and that are less tax efficient. Or you can invest in index funds. I hope you will agree with me that this is a pretty easy choice.

Now let’s move on to principle number four. Remember I told you that a global balance of U.S. and international companies, both large and small, had a compound rate of return of 13.4 percent. That number will sound enticing to many of you. But when you come face-to-face with the reality of what it takes to get that 13.4 percent return…that is, the real risks involved…not everybody wants to do it.

From my experience, I don’t think many investors are willing to sit back and passively accept the loss of almost 40 percent of their hard-earned money in 12 months…or 30 percent of their money in 36 months. If you are like most investors who experience such losses, at some point you will want to abandon the buy-and-hold approach we’re talking about and move to something that feels safer. In fact, many investors have done this at some point in the past. And if you have done that, you know how discouraging and disheartening it is when you sell something and then watch it go back up again.

So if you really want to be a successful buy-and-hold investor, you have to find a way that you can accept the volatility of your investments, even during periods of decline. How do you do that? That’s the key to principle number four: In a buy-and-hold strategy, you don’t manage risk by bailing out. You do it by stabilizing your portfolio with enough fixed-income securities so that when you run into the worst of times, you are still within your limits of loss. This stabilizing component of your portfolio is extremely important, and it’s easy to accomplish.

When you’re buying bonds in order to stabilize a portfolio, the important decision is to buy short-term bonds, those with maturities of one to five years. Over the past 35 years, those bonds gave you the very best combination of return and stability. So, principle number four says you should invest enough in bonds to reduce the volatility of your portfolio in order to protect you from the worst of the stock market declines. I’d like you to notice that this brings us right back to the importance of having the right asset allocation.

Now that we’ve covered these four principles, let’s talk about how to put them to work. First, I can’t stress enough how important it is to have the right combination of investments. A really good tool that I use with clients is the table entitled "Fine Tuning Your Asset Allocation." My staff and I have used this table to help thousands of investors determine the exact combination of assets that is most likely to help them reach their financial goals while…and this is important...while they stay within their personal tolerance for risk.

The table has 12 columns of numbers, each one representing a different mix of assets. Each column shows the annualized return for one of those combinations as well as information on the worst periods. By the way, those returns (with the exception of the Standard & Poor’s 500 Index) are what you would have received after management fees.

On the far right side of the table are the results of the S&P 500 after reinvesting all dividends. Many people think this index...which is made up exclusively of large U.S. companies…is a great place to invest a majority of their money. Since 1970, this index had a compound rate of return of 11.3 percent, but the worst 12-month period was a loss of almost 39 percent. Not many of our clients are willing to accept a loss of that size in order to get an 11 percent return, and I doubt that you are either.

But if you are willing to accept that much risk, I believe you can make a lot more money. All you have to do is move over one column to the left on that table, and you’ll find the results of an all-equity portfolio made up of indexes and passively managed asset classes, a portfolio that’s half in U.S. stocks and half in international, with a balance of growth and value as well as large and small companies. And it even includes a 10% position in the emerging markets asset class.

By adopting this globally diversified, carefully constructed portfolio, an investor would have improved the return of his or her portfolio dramatically, to 14.2 percent. In five years, that difference of 2.9 percentage points above the return of the Standard & Poor’s 500 Index boosts your profits by about 14.5 percent…and by 29 percent in 10 years. And over 35 years, the length of this study, just that difference leaves you with nearly twice as much money. What’s even more amazing, at least in the past 35 years, this global diversification did not raise your risk…the change actually reduced your risk. The worst-period results at the bottom of the table speak for themselves.

Unfortunately, even this lower level of risk is still too high for most investors. But there is an answer, and it’s one we already talked about: stabilize the volatility of the portfolio with bonds.

On that same table, on the far left is a column entitled, "Fixed Income." This represents a strategy using high-grade corporate and government bonds of one-year to five-year maturities. Notice this produced a 7.5 percent return, after fees, with a worst 12-month loss of 2.8 percent. By the way, that 7.5 percent return is several points higher than you would have received from money-market funds, which never had a losing year.

I think the real value of this table is that somewhere between the global all-equity column on the right and the all-fixed-income column on the far left, there’s a combination of stocks and bonds that should be just right for you. The columns are marked in 10-percent increments of equities and bonds. Right in the middle, the 50/50 combination, half stocks/half bonds, would have given you a 11.1 percent compound rate of return while it exposed you to a worst 12-month loss of only 15.4 percent. That’s almost the same return as the S&P 500…but with less than half the risk.

To my way of thinking, this is how you can put ordinary components together in ways that produce extraordinary results. And it’s not difficult to understand or to accomplish. Using the right combination of assets, without ever having to worry about which particular stock to buy or sell, you would have had virtually the same return as the S&P 500 Index while keeping half of the portfolio in bonds and while experiencing less than half the risk of the S&P 500. If there is any magic in this business of investing, I think it’s right here.

Somewhere in this table you should be able to find just the right combination of stocks and bonds, risk and rewards. That combination doesn’t have to be precisely the same as any one of those columns. It could be 55 percent stocks and 45 percent bonds. The point is that whatever return you want or need, at whatever risk you are willing to accept, I believe you will find it in this table.

As I mentioned earlier, the future will not look just like the past. We don’t have a crystal ball, and we can’t know which asset class will do the best in any specific time period. But with our favorite buy-and-hold strategy, if you run into a period in which growth stocks outperform value stocks, you’ll have some growth stocks in your portfolio. If there’s a time when large companies outperform small ones, you’ll have some of those large companies. And if U.S. companies should outperform international companies, you’ll also have them. And if you run into a severe bear market like that of 1973 and 1974 or 2000 through 2002, the fixed-income component in your portfolio will help stabilize you against those very tough periods.

Although we have covered a lot of information here, I think you’ll agree with me that there’s nothing complex or obscure about the four essential principles we’ve discussed…principles that can make you more successful and less anxious about your investments. But all the research in the world, and all the great theories and studies and analysis…all that is of no value to you unless the you take some action and put it to work.

If you want to adopt the ultimate buy-and-hold strategy, there are two good ways depending on whether you are a do-it-yourself type or somebody who would rather have a professional do it for you.

For do-it-yourselfers, I think your best bet is to use Vanguard’s no-load mutual funds. Vanguard is known for low expenses, and they have funds that are true to many of the asset classes you want in this strategy. Here are some specific recommendations for Vanguard funds.

Do it Yourself with Vanguard

Using seven Vanguard no-load mutual funds, you can create a portfolio that comes reasonably close to the ideal strategy we manage using the institutional index funds of Dimensional Fund Advisors (DFA). Everything will be under your control, and you’ll be able to easily rebalance your portfolio periodically, as we recommend. If you do not qualify to use DFA, this is the most efficient way to implement this strategy. However, because each of these funds has a $3,000 minimum initial investment, you’ll need at least $50,000 to set up the equity part of the program with the percentages we recommend. (For IRAs, the minimum is $1,000 per fund, so you could do this with as little as $10,000 in an IRA.) Here’s what we suggest:

While this plan keeps your investments within a single fund family, Vanguard doesn’t have enough specialized funds to let you duplicate the ultimate buy-and-hold strategy exactly. For example, note that the international side of the portfolio is made up of only three funds instead of five, with no specific allocation to small cap value or small cap companies.

Vanguard has several additional charges including IRA fees, account maintenance fees and initial investment charges on many of their funds. Please call (800) 662-2739 for complete information.

I believe you are likely to be more successful with this strategy if you use a special group of asset class funds from Dimensional Fund Advisors, or DFA. DFA manages a family of institutional funds that are not offered directly to the public, but only through investment advisors approved by DFA. That means you will pay a management fee to us or some other advisor. Most DFA advisors have account minimums of $100,000 to $1,000,000. Each advisor sets its own management fee. Depending on the size of the account, our fees range from 1/4% to 1% per year.

Here’s why we think DFA is worth it: DFA funds give you access to asset classes or indexes that are not available at Vanguard. Here’s an example. In the small cap stock fund at Vanguard, the average company has a total market capitalization of 1.5 billion…but in the DFA small-cap fund, the median market cap is $224 million. That gives DFA investors more of the advantage that makes small-cap investing more profitable over the long term. Similarly, DFA’s value funds have companies with higher book-to-market ratios than you’ll find in the comparable Vanguard funds. DFA also offers international large and small value indexes that Vanguard does not offer.

By the way, my son Jeff, who has worked with me for more than 15 years and is the managing director of our company, has done a study comparing the DFA and Vanguard funds. The study concluded that the indexes or asset classes represented by DFA funds have a 1 to 2 percentage-point advantage in annual returns over comparable Vanguard funds on a long-term basis.

It certainly would be convenient for investors if DFA offered its funds directly to the public. But DFA wants its funds to be owned only by investors who are truly committed to buy-and-hold investing, and who have had professional guidance to select the proper balance of assets. DFA does not want market-timing money and it does not want investors who are in the market only for quick gains. In fact, in one case I know of, DFA turned away a $25 million investment because they did not believe the investor was truly committed to a buy-and-hold approach.

DFA's officers and directors include some of the best-known academics in our industry, and include economists who have won the Nobel Prize. The company manages more than $73 billion in investments, most of it for large institutions and for some of the biggest corporations in the world.

If you would like to embark on this strategy using DFA funds, there are more than 400 advisors across the United States who would be glad to help you put together your own version of the ultimate buy-and-hold portfolio. Each one will do things a little differently, and you should choose carefully and insist on getting top quality service and advice from any advisor you hire.

Here are some guidelines of what you should expect:

Expect the advisor to offer you a free consultation without obligation, either in person or by telephone, at your option.
Expect the advisor to be very interested in you, your goals, your life, your investing history and philosophy.
Expect the advisor to carefully review your existing investments and evaluate how well they are serving you.
Expect to be asked a series of thorough questions that cover your income, your tax situation, your cash reserves, your possible need for cash from your investments and any legal situations that might affect your investments.
Expect a thorough discussion of the risks of investing without an active strategy to get you out of the market during a decline. If the advisor skips over the subject of risk, that should be a red flag. The proper way to control risk in a buy-and-hold portfolio is to include fixed-income funds, and this need should be addressed.
Expect the advisor to handle all the paperwork for you, to give you updates at least quarterly on your investments and to give you an understandable report at the end of each calendar year telling you what, if anything, you need to report on your tax return.

Whether you do it yourself or hire an advisor, whether you do it with all your portfolio or just part of your assets, whether you do it to build assets or gradually liquidate them in retirement, the ultimate buy-and-hold strategy is a superb way to take advantage of a world of investment opportunities with minimum hassle and minimum expense. I hope you’ll use it to help you achieve your long-range goals.

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Sources & Details of Our Data

100% Equity Portfolio:

12.5% US Large Company Stocks, 12.5% US Large Company Value Stocks, 12.5% US Small Company Stocks, 12.5% US Small Company Value Stocks, 10% International Large Company Stocks, 10% International Large Company Value Stocks, 10% International Small Company Stocks, 10% International Small Company Value Stocks, 10% Emerging Market Stocks. All assets are included as of first available data.

US Large Company Stocks 1/70 to 12/90: S&P 500 returns with dividends; 1/91 to Present: DFA US Large Company Portfolio

US Large Company Value Stocks 1/70 to 3/93: Fama-French Large Cap Value Strategy simulates DFA’s hold range and estimated trading costs courtesy Fama-French and CRSP: 1-5 Size, (.7) Book-to-Market; 4/93 to Present: DFA Large Cap Value Portfolio

US Small Company Stocks 1/70 to 12/72: CRSP database, NYSE, and AMEX, rebalanced quarterly; 1/73 to 12/81: CRSP database, NYSE, AMEX, and OTC, rebalanced quarterly; 1/82 to Present: DFA 9-10 Small Company Fund

US Small Company Value Stocks 1/70 to 3/93: Fama-French Small Cap Value Strategy simulates DFA’s hold range and estimated trading costs. Courtesy Fama-French and CRSP: 6-10 Size, (.7) Book-to-Market, rebalanced quarterly; 4/93 to Present: DFA 6-10 Value Portfolio

International Large Company Stocks 1/70 to 7/91: MSCI EAFE, net dividends; 8/91 to Present: DFA Large Cap International Portfolio

International Large Company Value Stocks 1/75 to 3/93: International High Book-to-Market (Value) Value weighted unhedged $ (Top 30% Book-to-Market), simulates DFA strategy, courtesy Fama-French and MSCI includes Japan, Great Britain, France, Germany, Switzerland, Netherlands, Hong Kong, Australia, Italy, Belgium, Spain (rebalanced quarterly); 4/93 to 6/93: EAFE Index (MSCI) substituted temporarily; 7/93 to 2/94: DFA International High Book-to-Market Portfolio; 3/94 to Present: DFA International Value Portfolio

International Small Company Stocks 1/70 to 3/90: 40% DFA Japan, 30% DFA Continental Europe, 20% DFA United Kingdom, 10% DFA Pacific Rim Trust; 4/90 to 12/92: 40% DFA Japan, 35% DFA Continental Europe, 15% DFA United Kingdom, 10% DFA Pacific Rim Trust; 1/93 to 12/94: 35% DFA Japan, 35% DFA Continental Europe, 15% DFA United Kingdom, 15% DFA Pacific Rim Trust; 1/95 to 10/96: 35% DFA Japan, 35% DFA Continental Europe, 15% DFA United Kingdom, 15% DFA Pacific Rim Fund; 10/96 to Present: DFA International Small Company Portfolio

International Small Company Value Stocks 1/95 to present: DFA International Small Value Portfolio

Emerging Market Stocks 1/88 to 2/93: Argentina, Brazil, Indonesia, Malaysia, Mexico, Portugal, Thailand, and Turkey weighted equally and rebalanced monthly; 3/93 to 4/94: DFA Emerging Markets Closed-Ended Portfolio; 5/94 to Present: DFA Emerging Markets Portfolio (open-ended)

Fixed Income Portfolio:

50% US Short Term Bonds, 25% US Intermediate Term Bonds, 25% Global Intermediate Term Bonds. All assets are included as of first available data.

US Short Term Bonds 11/71 to 7/83: Simulation using CD returns; 8/83 to Present: DFA One-Year Fixed Income Portfolio

US Intermediate Term Bonds 1/70 to 5/87: Simulation using US Government Instruments; 6/87 to Present: DFA Five-Year Government Fixed Income Portfolio

Global Intermediate Term Bonds 1/87 to 11/90: Lehman Hedged Country Indices; 12/90 to Present: DFA Global Fixed Income Portfolio

This material is intended for education only. The investment returns cited in these materials include actual managed portfolio results and hypothetical results based on market data and academic research. Past results do not guarantee future performance.