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The Power of Economic Science

The table below illustrates the performance of a fully diversified portfolio (Model Portfolio 5) compared to less diversified portfolios over a 39 year period. It is one of the most powerful pieces of information on this website as it illustrates the difference that a scientific approach to portfolio management can make.

Notice Model Portfolio 5's superior performance and lower standard deviation of returns compared to less diversified portfolios.

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In the Strike Zone

The graphic below shows the regression results for the portfolios of a large group of skilled financial advisors. It indicates that most advisors have correctly tilted their portfolios toward the factors that drive returns.

The regression results create a strike zone of sorts (where 95% of managers plotted)

emphasizing a small-cap and value tilt that increases both risk and potential reward compared to the broad market.

Outside the Strike Zone

Sophisticated Investor Mistakes

The graphic below shows how the typical "sophisticated" investor's portfolio misses the strike zone (see the red triangle below) of optimal returns.

Moreover, this investor's holdings also happen to cost nearly four times as much as the hypothetical Dimensional funds portfolio (Option 1) with an average expense ratio of 0.98% versus 0.27% for the DFA portfolio.

Most investors maintain sub-optimal exposure to the dimensions of risk that drive expected returns and performance needlessly suffers because of it.

Ensuring you maintain proper exposure to the dimensions of expected returns is one of the most powerful ways we promote your financial health and well-being.

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