The Art and Science of Portfolios

behaviorClient portfolio construction is part art and part science. Often the concepts of diversification and asset allocation are intermixed … they are actually two different things.

The science looks at what makes two, or more, investments different from each other. And then combines those with common characteristics into one bundle (an index mutual fund). The result is impersonal and unspecific to you.

The art is then combining the different bundles to better reflect what you, the investor, feels is your overall risk and return combination. This isn’t your neighbor’s or co-worker’s combination … because, they have a very different feeling about risk than you do (even if it seems you are using the same words). The resulting allocation IS specific to you.

I use funds sub-managed by DFA for many of the reasons described in Deconstructing DFA’s Secret Sauce. by Gil Weinreich at ThinkAdvisor. As you read the article, I would point out some additional thoughts:

  • Trying to beat anything usually results in you being the one beat … in other words, the real goal is really about you retiring or some other goal. If you’re depending on the market solely for that, you’re probably on slippery sand.*
  • The concept of passive investing may be expanded upon in this blog.
  • All advisers who use DFA do so based on empirical research … they tend not to rely on trying to predict anything. In other words, who can predict future random and unknown events? AND, with enough certainty to stake your life’s savings on that prediction?
  • I’m more about really helping you get the most of out achieving your goal with your money … that means having money when you need it and measuring what is a prudent and sustainable amount you can spend at any given time during retirement.

Once you have a sensible portfolio constructed based on sound art and science, live life and minimize attention to the minute by minute distractions of market noise.

*How could anybody retire one day when the markets are good, and then have to UN-retire the next because markets are bad? Structure your affairs more sensibly and have decision rules in place about realistic actions you may take during retirement.

**More on DFA specifically, by another adviser … please read the link in my comment below.


In the interest of disclosure: I do use DFA sub-managed SA Funds with most clients (not a fund requirement, but a business decision I’ve made for clients). This blog is not a solicitation; simply an explanation.

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One Response to The Art and Science of Portfolios

  1. Larry Frank, Sr. March 26, 2014 at 7:53 am #

    “Why Our Firm Uses DFA Funds” By Dougal Williams, CFA February 25, 2014

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