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Dimensional has released their Matrix Book for 2023, which you may download here. Please let us know if you would like to receive a hard copy.
The annual survey of investment performance draws on historical data to look beyond short-term market fluctuations and shed light on the dimensions that explain differences in returns. Includes stories from Dimensional employees’ personal experiences that connect life principles to investment principles.
I have recently returned from a trip to the US. I won't go into the details, but I was able to enjoy some great weather while the rain poured down over NZ.
Unlike a lot of people, I don't mind flying. There are very few places where you are expected to do nothing except sit in a chair, watch a few films, maybe read a book, all while your meals are brought to your chair.
On the flight to LAX, I was delighted to find a 2021 documentary about the American author Kurt Vonnegut, called Kurt Vonnegut: Unstuck in Time.
Like many young men, I discovered Kurt Vonnegut's novels when I was in university. I was drawn in by his black humour, unusual writing style (such as spoiling the plot points in his own stories) and sci-fi wanderings.
But for all the bleak scenarios he threw his characters into and satirical observations, Vonnegut maintained a pretty simple view on people and their place in the world. He thought life was pretty tough on people so you've got to be kind to each other and yourself. When he wrote this in God Bless You, Mr. Rosewater he imagined instead an introduction to newborns in a maternity ward.
"Hello, babies. Welcome to Earth. It's hot in the summer and cold in the winter. It's round and wet and crowded. At the outside, babies, you've got about a hundred years here. There's only one rule that I know of, babies — "God damn it, you've got to be kind."
If you are starting to wonder how this ties back into my experience at Strategic Wealth and investing in general, there was another quote of which the documentary reminded me.
“If this isn't nice, I don't know what is. ”
This quote also gave the title of Vonnegut's novel collecting addresses given at college graduations. The short video below tells how it was his uncle who shared the phrase with him, saying people seldomly recognise when they are happy. He believed it was important to recognise when they were and take the time to appreciate it.
This is what reminded me of my own experience with investing. When markets are bad, they seem to dominate headlines, watercooler conversations and people's headspaces. When markets are recovering or breaking new heights, people's minds turn to other things.
Kurt Vonnegut may have had a better description of what behavioural scientists called 'loss aversion', the phenomenon where investors feel the impacts of losses twice as strongly as those of gains. Our strong disliking of falling markets is why they stick in our minds.
Markets are usually going up. Pick any month for the S&P 500 going back to 1926 and there is a two thirds chance it it positive. It is normal to feel uneasy during the bad ones. During the good ones, don't forget to recognise, well, isn't that nice?
After a dreadful 2022 (notably preceded by a fantastic 2021), the S&P 500 is approaching new heights again. Remember, we're in it for the long haul. This won't be the new height reached. That is why we stay invested.
More importantly, having your investments built around your goals with a solid plan means less worrying when things are shaky. Hopefully, this also means being able to enjoy the things you invested your time and money towards enjoying.
When you do, don't forget to say "if this isn't nice, I don't know what is".
I couldn't finish this article without sharing a longer video of the speech mentioned above. For any Kurt Vonnegut fan, it is well worth a watch.
Strategic Wealth has always believed in using academic research to help investors achieve their goals. Thankfully, we have decades of research on which to build investment strategies.
Three research papers, integral to the foundations of our strategy, celebrate their anniversaries this year. The pioneering minds behind these papers are among the many talented academics at Dimensional Fund Advisors.
For those wanting to learn more about the science of investing, we would like to share with you a series of conversations with these academics. Please follow the links below to read more.
The first conversation is with Bob Merton, discussing the Intertemporal Capital Asset Pricing Model (ICAPM) (1973).
The ICAPM opened the door for thinking about dimensions of return. It is a theoretical model which expands on the traditional CAPM model. This paved the way for the factor-based investing strategy used by Dimensional and Strategic Wealth.
Read the full conversation here.
The second conversation is with Eugene Fama and Ken French, discussing their three-factor model (1993).
This revolutionary model identified the small and value premiums, showing a higher long-term return for small companies and those with lower relative prices. These premiums are targeted by Dimensional's strategies to deliver better investment outcomes for clients.
Read the full conversation here.
The last conversation is with Robert Novy-Marx, discussing their profitabilty research (2013).
The addition of the profitability premium, in addition to small and value, rounds out Dimensional's strategy. Novy-Marx provided evidence that the shares of profitable companies outperformed shares of less profitable companies long-term.
Read the full conversation here.