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Balanced Strategies


The balanced stock and bond index strategies described in the following tables offer hypothetical examples of global portfolios with equity exposure based on various size and value risk factors. The addition of small and value premiums, in addition to the equity premium, demonstrates enhanced expected returns.


The portfolio weights (Table 1) were originally suggested by DFA in the mid 1990’s. This table should be read with a variety of caveats. First, with the understanding that the balanced strategies shown here are simply to illustrate diversification in action and second, the asset allocations are not intended to be recommendations, and are in no way “optimized”. No single portfolio is right for every investor. In an efficient capital market all diversified investment strategies offer legitimate risk/return tradeoffs, and each investor must assemble a portfolio that best fits their long-term goals and risk tolerance.


About Table 1: Portfolio Composition


Each strategy benefits from a disciplined asset allocation approach and is diversified across fifteen precisely defined stock and bond asset classes. Each asset class targets specific risk and return characteristics in both US and non-US stock and bond markets. Collectively, each portfolio of asset classes covers over 12,000 securities in more than forty countries, minimizing the effect of any single company or country on investment results.


The percentages of equities versus fixed income are varied across the strategies, but the relative weights of components within the equity portion are constant. The riskier equity portfolio (P6) holds 100% stocks. The least volatile portfolio, fixed income (P1), holds 100% bonds. Between these extremes lay standard conservative, moderate, normal and aggressive stock-bond allocations such as 20-80 (P2), 40-60 (P3), 60-40 (P4) and 80-20 (P5).


By design, the portfolios’ equity asset allocations result in home biases toward US equities (over and above what would be expected from the US market share of the global equity market). This home bias for US investors is designed to reduce the performance drag of withholding taxes when investing in certain non-US markets.


The fixed income components are designed to specifically target their moderate and conservative risk profiles. Underlying fixed income indexes are chosen to complement each portfolio’s equity allocation, helping to optimize the tradeoff between lowering risk and maximizing expected returns.


The fixed income allocations include several different strategies, each designed to meet specific portfolio goals. At the lower end of the risk spectrum, the One-Year Fixed Income Portfolio and the Two-Year Global Fixed Income Portfolio target highly rated short-term debt issuers. The Five-Year Global Fixed Income Portfolio and the Five-Year Government Portfolio increase expected returns by investing in a wider term range.


Table 1

Simulation Weights %

Portfolio Composition

Fixed

Consv

Mod

Norm

Aggr

Eqty

 

P1

P2

P3

P4

P5

P6

Equity

0.0

20

40

60

80

100

US Stocks

0.0

14

28

42

56

70

Large Cap Market

0.0

4.0

8.0

12

16

20

Large Cap Value

0.0

4.0

8.0

12

16

20

Small Cap Market

0.0

2.0

4.0

6.0

8.0

10

Small Cap Value

0.0

2.0

4.0

6.0

8.0

10

Real Estate Securities

0.0

2.0

4.0

6.0

8.0

10

 

 

 

 

 

 

 

International Stocks

0.0

6.0

12

18

24

30

Large Cap Value

0.0

2.0

4.0

6/0

8.0

10

Small Cap Market

0.0

1.0

2.0

3.0

4.0

5.0

Small Cap Value

0.0

1.0

2.0

3.0

4.0

5.0

Emerging Markets Large

0.0

0.6

1.2

1.8

2.4

3.0

Emerging Markets Value

0.0

0.6

1.2

1.8

2.4

3.0

Emerging Markets Small Cap

0.0

0.8

1.6

2.4

3.2

4.0

 

 

 

 

 

 

 

Fixed Income

100

80

60

40

20

0.0

One-Year Fixed Income

25

20

15

10

5.0

0.0

Two Year Global Fixed Income

25

20

15

10

5.0

0.0

Five Year Gov’t Fixed Income

25

20

15

10

5.0

0.0

Five-Year Global Fixed Income

25

20

15

10

5.0

0.0

 


About Table 2: Annualized Returns


Table 2 compares average annualized returns and standard deviations (risk) of the strategies outlined above for different periods between 1973 and 2015 including one, three, five, ten, and twenty years. The underlying indices used in the back-tested returns analysis are not available for direct investment. Therefore, their performance does not reflect expenses associated with the management of an actual portfolio. However, relative to a conventional broad-based equity market benchmark such as the S&P 500, the data illustrates that adding international and emerging market size and value components and real estate securities to a portfolio results in higher annualized returns with substantially lower risk.


Table 2

Balanced Series - Annualized Returns

 

(1/1973-12/2015)

P1

P2

P3

P4

P5

P6

 

 

Fixed

Consv

Mod

Norm

Aggr

Eqty

SP 500

Equity

0

20

40

60

80

100

 

Fixed Income

100

80

60

40

20

0

 

Incept

1973

1973

1973

1973

1973

1970

1926

1 Year

0.70

0.02

-0.72

-1.50

-2.34

-3.22

1.38

3 Years

0.71

2.52

4.31

6.09

7.85

9.59

15.13

5 Years

1.04

2.55

4.01

5.41

6.76

8.05

12.57

10 Years

2.54

3.64

4.59

5.40

6.05

6.54

7.31

20 Years

3.74

5.19

6.53

7.77

8.89

9.89

8.19

01/73 to 12/15

6.33

7.89

9.38

10.78

12.08

13.29

10.13

Std Dev Since Incept

2.44

3.72

6.38

9.30

12.30

15.30

18.85

About Table 3: Best/Worst Returns


Table 3 compares growth of a dollar, and the best and worst case one-year and three-year returns for each strategy compared to the S&P 500. This presentation is meant to help investors visualize the risk-return trade-off and range of potential outcomes based on the riskiness of the strategy. It also provides dramatic evidence of the importance of looking beyond daily, weekly, monthly and annual price fluctuations, of maintaining a high degree of diversification, and staying disciplined. These are key to a good investment experience, no matter how bumpy the ride.


Table 3

Balanced Series: Best/Worst Returns

 

(1/1973-12/2015)

P1

P2

P3

P4

P5

P6

 

 

Fixed

Consv

Mod

Norm

Aggr

Eqty

SP 500

Low One-Year Return

0.29

-9.63

-21.81

-32.74

-42.48

-51.14

-43.32

 

Sep-12

Mar-08

Mar-08

Mar-08

Mar-08

Mar-08

Mar-08

Low Three-Year Return

0.71

0.64

-4.25

-9.10

-13.91

-18.67

-16.09

 

Jan-13

Mar-06

Mar-06

Mar-06

Mar-06

Mar-06

Apr-00

High One-Year  Return

22.60

25.49

33.71

45.87

63.31

82.39

61.01

 

Oct-81

Jul-82

Jul-82

Mar-09

Mar-09

Mar-09

Jul-82

High Three-Year Return

15.69

17.27

21.66

27.04

32.58

38.29

33.41

 

Mar-80

Jul-82

Aug-84

Aug-84

Aug-84

Aug-84

Aug-84

Growth of $1

(1973-2015)

13.98

26.22

47.21

81.51

134.93

213.96

63.38


Notes


As discussed elsewhere on this site investors should be cautious about extrapolating past performance into the future because the equity premium  for owning stocks has swung widely over periods of one, ten, and twenty, and fifty years and the question of what equity premium we can expect is a source of controversy as discussed elsewhere on this site.


Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to indicate historical performance had the index portfolios been available over the relevant period. Series include simulated and live returns. For portfolio construction, simulated data is used prior to the inception of the live portfolios. Simulated data does not reflect deduction of advisory fees, brokerage fees, and other expenses that a client would pay. Simulated returns do not represent results of actual trading.


Sources and descriptions of data, provided by Dimensional Fund Advisors, are available on request, and identify which periods are simulated and which periods contain live data for each data series. Live data does reflect the deduction of advisory fees, brokerage fees, and other expenses incurred by the portfolios and incorporate actual trading results. Both simulated and live data reflect total returns.