This year, Dimensional is celebrating 30 years of working with financial advisors, a collaboration that has helped change the way the world thinks about investing. To recognize that impact, we have compiled 30 ways that investors can benefit from the industry’s transformation. In this second of a three-part series, we consider 10 ways that capital markets and investment approaches have realigned for the better. —Dave Butler, Co-CEO
(See Part 1, Part 3, and Part 4)
Academic evidence casts light on the challenges with traditional investment approaches, such as security selection and market prediction, and pushes advisors toward more robust, research-informed investment strategies.
Research shows that stocks offering higher expected returns can be identified using company size, relative price, and profitability. For bonds, information in the yield curve and credit spreads reveals higher expected returns.
Each day, the global security markets process billions of dollars in trades between buyers and sellers—and their collective wisdom helps drive securities prices toward fair value.
The rise of electronic trading networks diminishes the influence of large market exchanges, while reduced broker commissions bring lower average trading costs across markets.
Advanced technology, decimalization, and multiple trading venues reduce implicit costs by narrowing bid-ask spreads across trades. Investment strategies that have more trading flexibility can further reduce these spreads.
Advisors once had limited fund choices for building global portfolios. Today, they can work with fund managers that offer diversified, value-added access to US, international, and emerging markets.
The market’s information-processing power works against high-cost mutual fund managers, who struggle to outperform through stock picking and market timing. Investors increasingly favor lower-cost, transparent investment approaches.
Research into the capital markets is publicly available. What matters is how asset managers can effectively implement the ideas in real-world investment strategies.
The best investment managers continually work to incrementally improve returns. One value-added approach is to lend a portfolio’s securities to third parties for a fee.
The investment industry has evolved along with markets. Advisors can now apply strategies and tools that were once available only to large institutional investors.
Diversification does not eliminate the risk of market loss.
Securities lending involves risks. Revenue is not guaranteed and may fluctuate. Lending activities are conducted by the Custodians for the funds.