Future Testing


This is a very interesting article on “Perspective” by Jim Parker of DFA.



Much financial news purports to be about the future but is really just an account of the past. As a result, many investors project what has already happened onto an imagined future. There’s another way of framing this problem.


It’s understandable that investors, with the help of a necessarily short-term-focused media, will tend to focus most of their attention on what has happened in financial markets in the past month, week, day, or even hour.


When stocks have fallen heavily in price, for instance, this is routinely reported as, “More bad news for investors today…” In fact, unless you plan to liquidate your portfolio that particular day, it is unlikely to be bad news at all.


The media could just as easily say, “Stocks went on sale today, as falling prices offered investors higher expected returns…” If you are a long-term investor, the key issue is how your portfolio performs from now on, not what happened yesterday.


In this way, investment is about the future, not the past. And because the future is unknown, we should strive to manage the uncertainty by diversifying across stocks, sectors, asset classes, and countries. While diversification does not eliminate the risk of market loss, to do otherwise is to take unnecessary risk.


The second assumption the financial media makes is that the future is the same for everyone. In reality, of course, our futures diverge depending on our age, family circumstances, jobs, incomes, and other factors.


One person may be focused on paying for a college education for their children or caring for aging parents. Another may be looking toward buying a home, saving for a vacation, investing an inheritance, or changing careers.


Everyone’s future is different, which means the investment strategy each of us adopts will vary. Some will want a strategy that delivers regular income; others will be more focused on capital growth. Some will be risk takers, others risk-averse.


From this, it should be evident that if the future looms differently for each of us, risk is not just one thing. It is not just the volatility of the market day to day or a simple statistical metric that can be measured. Risk can be felt differently depending on your age, your dependents, the industry you work in, the country you live in, the currency you consume in, and your accumulated assets and liabilities.


This is why an assessment of the future and the uncertainty surrounding it should not just be approached from the level of the overall market but from the needs of each individual. That is the role of a qualified financial advisor: to help connect each individual’s circumstances and needs to their goals.


None of us can control the future. Risk can be quantified up to a point, but risks can vary greatly depending on the individual. In any case, there are other uncertainties that cannot be analyzed in terms of mathematical probabilities.


One response to future uncertainty is to speculate and try to position one’s portfolio to take advantage of one possible outcome or another. The risk in taking that approach, apart from getting it wrong, is that we can end up acting on stale news or paying a premium to take advantage of news that is already in the price of a given security.


Another response is to stay highly diversified and to use the information in market prices to stay focused on dimensions of expected return.


This latter response doesn’t require speculation, forecasts, or second-guessing the market. It just requires an understanding of what we can and cannot control. So while we can’t control the future, we can control the structure of our portfolios, we can ensure we are broadly diversified, we can manage fees and taxes, and we can regularly rebalance to ensure the risk allocation stays within our chosen parameters.


Yes, the future is unknowable, and how it unfolds has differing implications for each of us, depending on our circumstances and needs.


While we cannot prepare the future for our portfolios, we can still strive to prepare our portfolios for the future.

A Different Dimension (DFA Funds)

This is an excellent article about DFA Funds by Dave Yeske & Elisa Buie. Full Disclosure – I am a fan of these funds!



As you may recall, we wrote last November about University of Chicago economist Gene Fama receiving the Nobel Prize in Economic Sciences for his work on the “empirical analysis of asset prices,” which is another way of saying “for the scientific exploration of what determines stock prices and returns.” At the time, we thought this notable for two reasons: first, the work of Fama on the concept of “market efficiency” and, later, his joint work with Dartmouth economist Ken French to develop a “three-factor model” of stock returns, has deeply influenced our approach to building and managing investment portfolios for over 20 years now. Secondly, Fama’s research has also deeply influenced – and continues to influence – the work of fund company Dimensional Fund Advisors (DFA), which provides many of the investment building blocks we use when assembling client portfolios.

We’re clearly not the only ones making that connection, however, as the latest issue of Barron’s has a cover article by Beverly Goodman devoted to Dimensional Fund Advisors and the ideas that guide it called, “A Different Dimension” (Goodman wrote an article for Barron’s last August that also focused on Dimensional titled “Where the Smart Money is Headed“). Of course, this has not been the first time that DFA and Gene Fama have made it to the cover of a major business publication. As far back as 1998, DFA was the subject of a Fortune Magazine cover story called, “How the Really Smart Money Invests: Nobel Prize winners entrust their next eggs to DFA where investing is a science, not a spectator sport.” The appearance of this month’s Barron’s article, meanwhile, inspired John Rekenthaler, Vice President of Research for Morningstar to offer his own appraisal of the company titled, “The DFA Model.”

The Force Be With You

That certainly seems like a lot of attention to be lavished on a mutual fund company. In her article, Goodman says that “Dimensional Fund Advisors is unusual” and Rekenthaler declares that DFA ”really is different.” Unusual and different in what way, one might rightly ask. And why should anyone care? Goodman explains it this way:

via A Different Dimension | YeBu.com.

Pay Yourself First

Some of the best advice – ever.



One of the first steps to saving is to get yourself on an automatic pay plan. You’re going to learn to pay yourself first. It doesn’t matter if it’s only a minimal amount. What does matter is that you are going to pay yourself first. This concept is found in the book, The Richest Man In Babylon by George S. Classon. Consider yourself the first bill you have to pay.

Here’s how you can apply this to your life:

First, one of the easiest things you can do is take a portion of your paycheck and stick it right in the bank, right away, the day you get paid. One of the best ways I know of to accomplish this is through the genius of direct deposit. If your employer allows it, have your paycheck directly deposited into your bank account each and every payday. Some employers even allow a net direct deposit and a fixed direct deposit. Net direct deposit involves the majority of your paycheck going into your checking or savings account. Fixed direct deposit entails a small portion of the same paycheck going into a different account. You can make this any amount you wish, but for now, I recommend you start small. You can always add more at another time.

via Pay Yourself First – Getting Your Financial Ducks In A Row.

Five Financial Moves You Should Be Making (But Probably Aren’t)

There are some great basic ideas in here.



If you follow the news, you’ve probably read a lot about the state of American finances. Between the 1% getting richer, the cost of college rising over 500% in the past 30 years, and even the tooth fairy leaving more under the pillow, it can feel like everyone must be swimming in cash.

But according to the U.S. Financial Diaries, that isn’t the case. The Diaries—a research project conducted by New York University’s Financial Access Initiative, the Center for Financial Services Innovation and consulting firm Bankable Frontier Associates—tracks low and moderate-income families over the course of a year to get a detailed picture of how they handle their money. The families profiled in the Diaries—from the Bangladeshi immigrants whose impressive education credentials don’t translate to the U.S. to the dual-income foster parents living in Mississippi—are doing the best they can, but there are lessons we can all learn from them about financial basics we could be doing better.

In reading about their experiences, you’ll not only appreciate all you do have but glean tips for ways you could improve your own financial well-being. Read on to find out which steps to financial security these Americans aren’t taking—and many of us may not be, either.

Create (and Stick to) a Budget

via Five Financial Moves You Should Be Making (But Probably Aren’t).

What’s the Best Debt Payoff Strategy for You?

Debt is a problem for many people.  The article below by Abby Hayes gives some excellent ideas for attacking debt!


How to Pick a Debt Payment Strategy You Can Live With

You know the old saying “failing to plan is planning to fail”? That doesn’t just apply to college tests and job applications. It also applies to paying off debt.

So before you start throwing money at your debt haphazardly, see which of these three debt payoff methods will work best for you.

The Debt Snowball

With the debt snowball method, you pay off your debts in order from smallest balance to largest balance, regardless of interest rate or monthly payment.

So you pay the minimum balance on all other debts, but pay whatever extra you can on the smallest debt to get it paid off faster. Then, each time you pay off a debt, you add the payment you were making on it to the monthly payment for the next debt you pay off. Each time you pay off a debt, you’re throwing even more money at the next debt down the line. By the time you get to your largest debt, you’re making very large monthly payments.

via What’s the Best Debt Payoff Strategy for You? | Credit.com Blog.

8 secrets for success from early retirees – Andrea Coombes’ Working Retirement – MarketWatch

Don’t trash your goals because you think they are impossible.



A fair number of people, it seems, believe that “early retirement” is an unachievable financial goal for most Americans, or that it isn’t worth doing because retirement is akin to having no purpose in life.

That was the gist of some emails and comments written by MarketWatch readers in response to my recent column about Mr. Money Mustache, a blogger in Colorado who retired at age 30. (Read: Retire early — 35 years early.)

Mr. Money Mustache is still in the early years of his retirement. But he is by no means alone in his achievement of financial independence via strategic spending and saving.

Meet Billy and Akaisha Kaderli. They’re both 61 years old, and they retired when they were 38 — more than two decades ago. Ever since, they’ve been traveling the world, visiting places as far-flung as Laos, Thailand, Guatemala and Belize.

Yes, they earned above-average incomes before retiring — Billy was a broker and investment manager and Akaisha managed their restaurant in Santa Cruz, Calif. — but a big part of their retirement success revolves around cutting spending, monitoring expenditures, and being smart investors.

via 8 secrets for success from early retirees – Andrea Coombes’ Working Retirement – MarketWatch.

Should you retire to college?

One more creative retirement idea!


Don and Joyce Parker whip out their IDs whenever they want to use Oberlin College’s fitness center or library.

At age 79 and 77, they’re unlikely coeds. But they call Oberlin — more specifically the Kendal retirement community located near the small, private liberal arts Ohio college — home.

The Parkers live in what’s called a “university-based retirement community,” or UBRC. The communities have been around for years, catering to the “Silent Generation.” Now, they’re making a play for boomers, the best-educated group in American history and a natural fit for a quasi-return to campus life.

That’s according to Andrew Carle, the executive-in-residence in the Senior Housing Administration Department at George Mason University, who coined the term “university-based retirement communities.”

via Should you retire to college? – MarketWatch.