Needs vs. Desires
One reason people continue to play a game they have already won is that they convert what were once desires (things nice to have, but not necessary to enjoy life) into needs. That calculus increases the need to take risk. That, in turn, causes an increase in the required equity allocation. And, that can lead to problems when risks show up, as they did in 1973-1974, 2000-2002 and again in 2007-2008.
Moral of the Tale
Failing to consider the need to take risk is a mistake common to many wealthy people, especially those who became wealthy by taking large risks. However, the mistake of taking more risk than necessary is not limited to the very wealthy. Ask yourself how much money buys happiness. Most people would be surprised to find that the figure they come up with is a lot less than they thought. For example, psychologists have found that once you have enough money to meet basic needs like food, shelter and health care, incremental increases have little effect on your happiness. Once you have met those requirements, the good things in life (the really important things) are either free or cheap. For instance, taking a walk in a park with your significant other, riding a bike, reading a book, playing bridge with friends or playing with your children/grandchildren does not cost very much if anything. And switching from a $20 bottle of wine to a $100 bottle of wine, or from eating in a restaurant that costs $50 for dinner for two to one that costs $500, likely won’t really make you any happier. Moreover, even a $50 dinner every evening likely does not yield a whole lot more happiness than a $50 dinner every other evening.
When developing your investment policy statement, make sure you have differentiated between needs and desires, and then carefully consider your marginal utility of incremental wealth so you can determine if those desires are worth the incremental risks that you will have to accept. Knowing when you have enough is one of the keys to playing the winner’s game in both life and investing.
Appendix F: Implementation (Mutual Funds and ETFs)
The following list of funds has been approved by the investment policy committee at Buckingham Strategic Wealth.1 Thus, these are the products we believe you should consider first when constructing your portfolio. Where more than one share class for a mutual fund is available, the lowest-cost version is shown. That fund version may not be available to all investors because minimums may be required. AQR, Bridgeway and DFA funds are available through approved financial advisors and in retirement and 529 plans. (Note that for some AQR funds, lower-cost R Share versions may be available to some investors.) Considerations for selecting a fund should include how much exposure it provides to each desired/targeted factor, its expense ratio, and the amount of diversification it offers (that is, the number of securities held and their weightings). For ETFs, the liquidity of the fund is an added consideration. Our recommendation is that the ETFs you consider have more than $100 million in assets and an average daily trading volume in excess of $5 million.
Single-Style Funds
Market Beta
Domestic
Fidelity Spartan Total Market Index (FSTVX)
Schwab U.S. Broad Market (SCHB)
Vanguard Total Stock Market Index (VTI/VTSAX)
iShares Core S&P Total US Market (ITOT)
International Developed Markets
Fidelity Spartan International Index (FSIIX)
Vanguard FTSE All-World ex-US (VEU/VFWAX)
Vanguard Total International Stock (VXUS/VTIAX)
Schwab International Equity (SCHF)
iShares Core MSCI EAFE (IEFA)
Emerging Markets
DFA Emerging Markets (DFEMX)
Schwab Emerging Markets (SCHE)
Vanguard FTSE Emerging Markets (VWO/VEMAX)
Small
Domestic
Bridgeway Ultra-Small Company Market (BRSIX)
DFA US Micro Cap (DFSCX)
DFA US Small Cap (DFSTX)
iShares Russell Microcap (IWC)
Vanguard Small Cap Index Fund (VB/VSMAX)
Schwab U.S. Small Cap (SCHA)
iShares Core S&P Small-Cap (IJR)
International Developed Markets
DFA International Small Company (DFISX)
SPDR S&P International Small Cap ETF (GWX)
Vanguard FTSE All-World ex-US SmallCap (VSS/VFSVX)
Schwab International Small-Cap Equity (SCHC)
Emerging Markets
DFA Emerging Markets Small (DEMSX)
SPDR S&P Emerging Markets Small Cap (EWX)
Large and Value
Domestic
DFA US Large Cap Value III (DFUVX)
DFA Tax-Managed US Marketwide Value II (DFMVX)
Schwab US Large-Cap Value (SCHV)
Vanguard Value Index (VTV/VVIAX)
International Developed Markets
DFA International Value III (DFVIX)
DFA Tax-Managed International Value (DTMIX)
iShares MSCI EAFE Value (EFV)
Emerging Markets
DFA Emerging Markets Value (DFEVX)
Small and Value
Domestic
Bridgeway Omni Small Cap Value (BOSVX)
Bridgeway Omni Tax-Managed Small-Cap Value (BOTSX)
DFA US Small Cap Value (DFSVX)
DFA Tax-Managed US Targeted Value (DTMVX)
iShares S&P Small-Cap 600 Value (IJS)
SPDR S&P 600 Small Cap Value ETF (SLYV)
Vanguard Small Cap Value (VBR/VSIAX)
International Developed Markets
DFA Int’l Small Cap Value (DISVX)
DFA World ex US Targeted Value (DWUSX)
Momentum
Domestic
AQR Momentum (AMOMX)
iShares MSCI USA Momentum Factor (MTUM)
International Developed Markets
AQR International Momentum (AIMOX)
Profitability/Quality
Domestic
iShares MSCI USA Quality Factor ETF (QUAL)
International Developed Markets
iShares MSCI International Developed Quality Factor ETF (IQLT)
Term
DFA Five-Year Global Fixed Income (DFGBX)
iShares Barclays 7-10 Year Treasury (IEF)
iShares US Treasury Bond ETF (GOVT)
Vanguard Intermediate-Term Treasury (VGIT/VFIUX)
Carry
PowerShares DB G10 Currency Harvest ETF (DBV)
Multi-Style Funds
Small + Value + Profitability/Quality
Domestic
DFA US Core Equity 2 (DFQTX)
DFA TA US Core Equity 2 (DFTCX)
International
DFA Int’l Core Equity (DFIEX)
DFA TA World ex US Core Equity (DFTWX)
Value + Momentum + Profitability/Quality
Domestic
AQR Large Cap Multi-Style (QCELX)
iShares Edge MSCI Multifactor USA ETF (LRGF)
International
AQR International Multi-Style (QICLX)
Small + Value + Momentum + Profitability/Quality
AQR Small Cap Multi-Style (QSMLX)
Value + Momentum + Quality + Defensive (Stocks, Bonds, Currencies and Commodities)
AQR Style Premia (QSPIX)
Trend-Following (Stocks, Bonds, Currencies and Commodities)
AQR Managed Futures (AQMIX)
Alternative Funds
Alternative Lending
Stone Ridge Alternative Lending Risk Premium Interval Fund (LENDX)
Reinsurance
Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX)
Variance Risk Premium
Stone Ridge All Asset Variance Risk Premium Interval Fund (AVRPX)
1 Provided for informational purposes only and is not intended to serve as specific investment or financial advice. This list of funds does not constitute a recommendation to purchase a single specific security and it should not be assumed that the securities referenced herein were or will prove to be profitable. Prior to making any investment, an investor should c
arefully consider the fund’s risks and investment objectives and evaluate all offering materials and other documents associated with the investment.
Sources of Data
S&P Dow Jones Indices for data on the S&P 500 Index and the S&P GSCI. Used with permission.
Kenneth R. French, the Center for Research in Security Prices (CRSP) at the University of Chicago and Fama/French Data Library for data on the various Fama-French series. Used with permission.
Morgan Stanley for data on the MSCI indices (www.msci.com). Used with permission. The MSCI data contained herein is the property of MSCI Inc. (MSCI). MSCI, its affiliates and its information providers make no warranties with respect to any such data. The MSCI data contained herein is used under license and may not be further used, distributed or disseminated without the express written consent of MSCI.
Morningstar for data on five-year Treasury notes. Used with permission. © 2017 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) does not constitute investment advice offered by Morningstar; and (4) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Use of information from Morningstar does not necessarily constitute agreement by Morningstar, Inc. of any investment philosophy or strategy presented in this publication.
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