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Dimensional versus Vanguard ... Again

This past weekend, The New York Times published an article, "Challenging Management (but Not the Market)." In addition to comparing proxy voting records (a subject we won't address here), it revisits a familiar debate. Which should a passive investor prefer: Dimensional Fund Advisors evidence-based funds or Vanguard index-based funds?

The "Dimensional vs. Vanguard" Debate

In comparing the two fund managers, the author concludes that Vanguard’s low-cost funds are even lower-cost than Dimensional’s. He also states: “Investors in Vanguard stock mutual funds have had higher actual returns than investors in Dimensional funds. On an asset-weighted basis in the 10 years through Jan. 31, the return received by Vanguard investors was 6.614 percent, annualized, compared with 5.05 percent for Dimensional funds, Morningstar calculates.”

We welcome your calls or e-mails if we can discuss this article with you in greater detail, especially in relation to your own portfolio. But here’s our bottom line:

We continue to recommend Dimensional funds for the core of most of our clients’ portfolios.

Let’s step back from the heat of the debate and consider things in context.

Putting the Discussion in Context of Your Goals

As a Northstar client, you know that our investment strategy focuses on achieving your personal long-term financial goals rather than chasing the latest highest returns. As such, we have long espoused constructing and maintaining portfolios that:

(1)   Reflect your customized plans, based on your unique goals and risk tolerances. This means participating in market growth as needed, while tolerating the risk that goes hand-in-hand with any higher expected returns

(2)   Ensure ample global diversification, to help further dampen unnecessary market risk.

(3)   Minimize costs, especially those that detract from your end returns.

It is true that most of Dimensional fund expense ratios are slightly higher than Vanguard’s comparable funds (when comparable funds exist). This is why, when cost concerns override other advantages, we’ll typically give Vanguard the nod. We have and probably will continue to turn to Vanguard index funds for a variety of discrete purposes as circumstances warrant. But on the other two, equally critical points, we continue to believe that Dimensional’s solutions typically do a better job for us – justifying the modest additional cost.

The Dimensional Edge

Without going into excruciating detail, Dimensional has long harnessed distinct tactics such as:

  • Freeing itself from tracking popular indexes (which otherwise can force undesirable trades at inopportune times)
  • More aggressively pursuing targeted risk factors; for example, its small-cap value fund holds smaller and more value-tilted holdings than Vanguard’s comparable fund
  • Being patient with its trading strategies and flexing its volume purchase muscles to achieve better pricing
  • Collaborating closely with leading financial economists, to continually improve its understanding of the relationships between market risk and return; applying the evidence to its fund constructions

All these qualities and more support our expectation that, over time and properly applied, Dimensional funds will do a better job of helping you participate in globally diversified market growth according to your individual goals.

Compared to What?

In terms of the article’s broad-stroke comparison of Vanguard vs. Dimensional returns, we are perplexed. The information is scant on how the comparison was formed. As financial author and CBS MoneyWatch columnist Larry Swedroe likes to say, “There is no one right portfolio [for everyone], but there is one that is right for you.” Because there are nearly endless combinations of appropriate asset allocations you can use to build your own “right portfolio,” comparing your experience to a broad average of any sort seems a statistic devoid of meaning.

To help quantify that void, Dimensional reported its 10-year annualized returns for each of its equity funds through January 31, 2013. The returns have ranged from 7.9% to 20%, with 25 out of 31 funds ahead of their benchmarks after fees.

The article also states: “While Vanguard sells its funds directly to shareholders, Dimensional relies on intermediaries like financial advisers, who often charge additional fees, reducing investor returns further.”

Again, we revisit the steps described above as key to the success of your long-term investment activities. Most investors either cannot or do not want to take the time to plan, build and maintain a well-constructed globally diversified portfolio through thick and thin. Those who do try on their own usually earn considerably lower returns than the securities in which they invest, due to ill-timed, emotionally based trades. For those who feel they can succeed as “Do It Yourself” investors, we wish them all the best. For those who would prefer professional advice, we are confident in our ability to help you invest more efficiently and effectively; we feel our fully transparent fees are more than fairly priced for the value we add on those counts.


In many respects, when asking, “Dimensional or Vanguard,” the answer is: “Yes.” Both are preferred to a high-cost, actively managed fund that relies on timing the markets or attempting to pick winning stocks and avoid losing ones. But, after weighing available current evidence, we remain convinced that passively minded investors still stand the best chance to achieve their long-term wealth goals by working in alliance with a knowledgeable advisor to help them build and maintain a custom, well-diversified portfolio with Dimensional funds at its core.

For existing clients, we are happy to provide and walk you through meaningful performance comparisons at any time. For your friends and family who are not yet clients, we offer a complimentary “second opinion” portfolio analysis, to compare their existing portfolio to a strategy we might recommend for them. For any investor, we applaud and support their efforts to adopt a passive investment strategy, be it with Vanguard, Dimensional or other similar passively managed fund families.

If you have any questions, or would simply like to discuss this topic further, feel free to reach me at 603.458.2776.

Written by Robin Young, CFP.

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