Author: Raymund Rasco

My parents moved to the US in 1973, I was born in 1975. For some reason, whether it was by omission or intentional – I didn’t learn English.

Imagine showing up for your first day of school, in the country in which you were born – having (a) avidly watched Sesame Street daily & (b) being fascinated with being an American cowboy , only to be placed in an ESL (English as a Second Language) class.

To be totally honest, I don’t remember what I felt at the time. I really don’t have distinct memories so I don’t think I was traumatized or set back in life anyway. What did happen was something beautiful. And last week, about 40 years later, I was reminded of it:

I was asked to help educate a group of Senior citizens via Zoom on Financial, Tax and Estate planning updates. All. In. Gujarati.

During the meeting, I got to look into the beautiful faces of 150 Indian-American couples who came to this country and raised the kids of my generation.

It was an honor to have spent the time to help those who have helped so many of my peers. The video is available here (https://youtu.be/xHJH7qcBKtI) in case you, or someone you know would like to see/hear it.

And as for the impact of not learning English until I started school? I guess it wasn’t too bad. Pinky and I did the same thing to our kids after all.

I can’t wait to see how they choose to give back when their time comes. Thank you Mom (Anjana) for this amazing gift!

By: Neel Shah 

The danger of self-directed IRA scams heightened during the pandemic, as many investors were at home and online but isolated from in-person interaction, NASAA says.

The number of investigations and enforcement actions by state securities regulators remained largely steady during the COVID-19 pandemic, though the total amounts of restitution and penalties/fines each decreased by about half between 2019 and 2020, according to the North American Securities Administrators Association’s annual enforcement report released this week.

But the number of state enforcement actions focused on self-directed individual retirement accounts (IRAs) more than doubled, from 24 in 2019 to 53 in 2020. Joseph Borg, the director of the Alabama Securities Commission and the co-chair for NASAA’s enforcement section, said the danger of self-directed IRA scams heightened during the pandemic, as many investors were at home and online but isolated from in-person interaction.

Related: New NASAA President to Prioritize Expungements, Digital Assets

“That became the new trust vehicle for con artists to convince folks that ‘you’re not sending the money to me. You have control over it,’” Borg said.

With self-directed IRAs, investors can use tax-deferred retirement funds from traditional IRAs to purchase “alternative” investments that are not typically accessible; some self-directed IRAs allow people to invest in certain digital assets and cryptocurrencies, according to NASAA. But these options are usually directed at investors with particular interests or expertise in unconventional options, not the typical investor. Additionally, custodians for these IRAs do not tend to work like a typical IRA’s custodian, according to the NASAA report.

Related: NASAA: Nearly 60% of State Advisors Lack Procedures Protecting Senior Investors

“Specifically, (self-directed IRA) custodians generally do not have the fiduciary duties associated with investment advisers,” the report read. “This lack of services, and protections, is fertile soil for scammers.”

Once a victim rolls over their 401(k) and IRA savings into the self-directed accounts, the schemer can access them, depriving the investor of their retirement savings, according to NASAA. Borg said self-directed IRAs were enticing tools for scammers because while investors were familiar with IRAs, they wouldn’t necessarily understand the difference between a traditional IRA and a self-directed equivalent.

NASAA conducts an annual survey of all U.S. members (the survey for 2019 found state regulators collected $700 million in total investor relief that year). Last year, states initiated 5,501 investigations and reported 2,202 enforcement actions in total, including 206 criminal actions, according to the report.

According to Joe Rotunda, the enforcement director for the Texas State Securities Board and vice chair for NASAA’s enforcement section, there were an additional 2,572 investigations that carried over from previous years, with 8,073 investigations in total. State regulators initiated 497 against registered parties, including 153 investment advisors, 115 IARs, 110 broker/dealer firms and 119 b/d agents. States also brought 619 total enforcement actions against unregistered parties in 2020, including 20 unregistered financial planners.

In total, $306 million was ordered returned to investors via restitution in 2020, compared with $634 million in the prior year, while there was $42 million in fines or penalties, a drop from $80 million in 2019, according to the report. In mulling the contrast between enforcement action rates and the drop in monetary restitution and penalties, Borg argued that investigations were less likely to be impacted by remote working, as investigations could still be opened and documents received and analyzed when working from home last year.

But Borg believed there would be a lag in criminal proceedings, though he speculated that was more likely to show up in next year’s data. He noted that restitution was often part of the criminal system, and often came near the conclusion of investigations.

“I do think we saw a slowdown on the criminal side,” he said. “But remember, there’s a time lag between opening up an investigation and moving forward on the cases.”

Earlier this week, NASAA announced a new campaign, partnering with the Financial Industry Regulatory Authority and the Securities and Exchange Commission’s Office of Investor Education and Advocacy to urge investors to supply financial firms with a trusted contact. That person could be contacted by the firm in certain circumstances, including if there is suspicious activity in an account or if the investor cannot be contacted.

“All investors can benefit from adding a trusted contact to their account—having one or more trusted contacts provides another layer of security on the account and puts the financial firm in a better position to help keep the account safe,” FINRA President Robert Cook said about the initiative.

By: Patrick Donachie

Sources: https://www.wealthmanagement.com/regulation-compliance/enforcement-against-self-directed-ira-scams-doubled-2020

Investors may wonder whether stock returns will suffer if inflation keeps rising. Here’s some good news: Inflation isn’t necessarily bad news for stocks.

A look at equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns.

Since 1991, one-year returns on US stocks have fluctuated widely. Yet weak returns occurred when inflation was low in some periods, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation. That was the case in the first six months of 2021, too (see Exhibit 1).

Over the period charted, the S&P 500 posted an average annualized return of 8.5% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was 7.3%.

History shows that stocks tend to outpace inflation over the long term—a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their financial goals.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as affecting your financial well-being can evoke strong emotional responses from even the most experienced investors. Headlines from the so-called lost decade– the 2000s, when the S&P 500 ended below where it
began–can help illustrate several periods that may have led market participants to question their approach.

*March 2000:
Nasdaq Stock Exchange Index Reaches an All-Time High of 5048*April 2000:
In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates*October 2002:
Nasdaq Hits a Bear-Market Low of 1114*September 2005:
Home Prices Post Record Gains*September 2008:
Lehman Files for Bankruptcy, Merrill Is Sold

While these events are more than a decade behind us, they can still serve as an important reminder for investors. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. However, if one had hypothetically invested $10,000 in US stocks
in January 2000 and stayed invested, that would be worth approximately $32,400 at the end of 2019.1

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting
a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.

THE VALUE OF A TRUSTED ADVISOR
Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.

However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with
a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage
the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sen se of security they receive from their relationship with a financial advisor, as Exhibit 2 shows.

Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes. For a short video on this topic, please see
us.dimensional.com/perspectives/tuning-out-the-noise.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Value stocks, or those with low relative prices, have outperformed higher-priced growth stocks in the US over the long term. Similarly, the stocks of smaller companies have fared better than the stocks of bigger ones in the US.
But the performance of these stocks has varied at different points in history.

As the global pandemic rocked markets in March 2020, large growth stocks outdid small value stocks by 19.6%, the greatest monthly margin on record. From March through September, the large growth index beat small value by a cumulative 38%.

But history has shown that a disappointing period for a premium can be followed by a quick turnaround, and that’s what happened beginning in October 2020.
Through March 2021, the small value index saw its own
noteworthy outperformance: 63% over that span, among
the best stretches since the 1920s.

History hasn’t presented a reliable way to predict when
small value stocks will outperform. Swings can be swift
and sharp—staying invested is the best way to capture
expected gains over the long term.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

KEY TAKEAWAYS
*Recent Dimensional research suggests that simply staying invested helps outpace inflation over the long term for a wide range of asset classes.

*The protection offered by inflation-indexed securities still appears to be the
most effective for investors who are particularly sensitive to unexpected
inflation.

*Our analysis of data from 1927–2020 covers periods with double-digit US
inflation as well as periods with deflation.

US consumer prices were up by 5.4% for the year ending June 2021, the largest annual increase since August 2008.1 Naturally, inflation is at the center of attention for many US investors.

Our recent paper US Inflation and Global Asset Returns provides some good news for investors looking to outpace inflation over the long term. But it also contains some sobering facts for investors trying to hedge against inflation through alternatives to inflation-indexed securities.

INFLATION OUTPACED
Exhibit 1 shows average real returns (that is, returns net of inflation) to different asset classes in years with high (above-median) inflation from 1927 to 2020. We consider a total of 23 US assets that span bonds, stocks, industries, and equity premiums. Over this period, inflation averaged 5.5% per year in high-inflation years. While average real returns were mostly lower in years with high inflation compared to years with low inflation, the exhibit shows that all assets except one-month T-bills had positive average
real returns in high-inflation years.

The analysis over 1927–2020 is useful because it covers periods with double-digit US inflation (like the 1940s and ’70s) as well as periods with deflation (like the Great Depression, 1929–32). But we find similar results over the most recent 30-year period (1991–2020), when US inflation was relatively mild and stable. Over this period, we also expand our analysis to non-USD bonds, developed- and emerging-market equities, real estate investment trusts (REITs), and commodities. Overall, outpacing inflation over the long term has been the rule rather than the exception among the assets we study.

INFLATION HEDGED
Despite the reassuring findings presented above, emphasizing growth assets that have historically outpaced inflation may not be appropriate for everyone. If you’re highly sensitive to inflation and have a low tolerance for market risk, you’ll likely want some exposure to inflation-indexed securities (such as TIPS and inflation swaps), and with good reason: they are designed to provide inflation protection. While stocks from certain industries, REITs, commodities, and value stocks are sometimes considered “inflationsensitive”
assets, the data provide little support that they are good inflation hedges.

Nominal asset prices already embed the market’s expectation of inflation. So inflation concerns are really about the negative impact of unexpected inflation on the real value of your invested wealth. An asset is therefore most useful as an inflation hedge when its nominal returns move closely with unexpected inflation. In the paper, we find mostly weak correlations between nominal returns and unexpected inflation. For the few exceptions where the correlations are reliable, such as for energy stocks and commodities over 1991–2020, the assets’ nominal returns have been around 20 times as
volatile as inflation, and more than half of their nominal-return variation has been unrelated to inflation. Exhibit 2 illustrates this by showing how the annual nominal returns to energy stocks and commodities differ dramatically from the annual realizations of inflation. If the goal is to reduce the variability of future purchasing power, it is questionable that hedging with something this volatile will effectively achieve that.

INFLATION DEFLATED
What will next month’s inflation reading be? How will it compare to market expectations? Is the rise in inflation temporary or long-lived? Nobody has a crystal ball. Fortunately, we don’t need a crystal ball to address inflation in our portfolios. The data suggest that simply staying invested helps outpace inflation over the long term. And for those of us who are particularly sensitive to unexpected inflation, the protection offered by inflationindexed securities still appears to be the most effective.

DATA APPENDIX
US inflation
The annual rate of change in the Consumer Price Index for All Urban Consumers (CPI-U, not seasonally adjusted) from the Bureau of Labor
Statistics.

US government securities and long-term corporate bonds. The returns to US government securities (one-month T-bills, five-year notes, and long-term bonds) and long-term corporate bonds are from Morningstar (previously from Ibbotson Associates).

US equity portfolios and factors. The US equity market is proxied by the Fama/French Total US Market Research Index. The US industry portfolios are the 12 Fama/French industry portfolios. The US style portfolios (small cap value and growth and large cap value and growth) are from the Fama/French six portfolios sorted on size (market cap) and book-to-market equity. The US size and value premiums are proxied by the Fama/French size and value factors. The returns to all of the above are from Ken French’s data library: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

GLOSSARY
T-bills: Short-term debt issued by the US Treasury Department.

Treasury Inflation-Protected Securities (TIPS): Bonds issued by the US Treasury Department that provide protection against inflation. The
principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures,
the investor is paid the adjusted principal or original principal, whichever is greater.

Inflation swaps: An inflation-swap agreement is a two-sided contract in which one party receives floating payments tied to the actual
inflation rate and pays fixed payments based on expected inflation and the inflation risk premium for a given notional amount and period.

Nominal return: The rate of return on an investment without adjusting for inflation.

Real return: The rate of return on an investment after adjusting for inflation.

By: Wei Dai, PhD -Head of Investment Research and Vice President

Mamdouh Medhat, PhD – Researcher

References:  Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to,
Dimensional Fund Advisors LP.

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information
only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

A year ago, at the end of March 2020, the S&P 500 was down nearly 20%1 and the world was scrambling into lockdown. Many experts wrote articles telling us where we would be in a year. I don’t remember reading any that said the S&P 500 Index would be up 56% over the next 12 months. But that’s what happened.

I didn’t predict any of that. I never do. Last June, I spoke about the Old Normal and how we should be prepared for market downturns once or twice a decade, while accepting we just can’t know when they’ll happen. We can’t predict financial crises, but we should plan for them. That’s why I always recommend having a trusted financial advisor, a fiduciary who puts your interests first, who can help you understand the range of possible outcomes and create a plan tailored to your goals and acceptable levels of risk.

If you stayed in the market, it might be time for a victory lap. Dimensional’s US Core Equity 2 Portfolio, which holds a diversified mix of broad US equities and is Dimensional’s largest core portfolio, returned nearly 72%, as Exhibit 1 shows. Within the US market, small cap value stocks2 were among the hardest hit. Dimensional’s US Small Cap Value Portfolio was down 39% in the first three months of 2020 and subsequently returned a showstopping 112% over the next 12 months.

Sticking to long-term investment plans in the face of such extreme uncertainty wasn’t easy. I have so much appreciation for what the financial advisors we work with went through to keep their clients in the market, and nothing but admiration for what they achieved.

We were all stressed out last March. There was pressure to “do” something, to make changes just for the sake of reacting. People might get out of the market in an effort to reduce uncertainty. But getting out of the market can actually increase uncertainty because it can force investors to make a difficult decision: choosing the best time to get back in.

This highlights something I’ve long believed to be true: while all investments have risk, many people who think they’re investing are actually gambling. It is a really simple distinction for me; if you’re trying to time short-term market movements, you’re gambling.

Staying focused on a long-term strategy during times like the past year is hard work. Short periods like the first quarter of 2020 and the past year are not signals of future performance, but reminders of just how hard being a long-term investor can be. We didn’t know returns like that would come this year, but we knew we needed to be in the market to capture them when they do show up.

As I’ve said before, every crisis is different, but I think the best way to deal with them is always the same. We can’t control crises, but we can control our response to them. You want to be prepared to deal with the unexpected before it happens. Not when you’re stuck in the middle of it.

What is the Next Normal? It’s expecting uncertainty and committing to a plan that addresses it. It’s rising above the temptation to make changes when things get tough. It’s understanding the difference between investing and gambling. And it’s remembering how good it feels when things work out according to plan.

If you don’t already have a plan that includes crises among the range of possible outcomes, it’s never too late to create one. This is not the last crisis any of us are likely to experience. If we make thoughtful planning the New Normal, we’ll all be ready for the Next Normal.

By: David Booth
Executive Chairman and Founder

References: 

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment
objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the
Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors
collect at (512) 306-7400 or at us.dimensional.com. Dimensional funds are distributed by DFA Securities LLC.

Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset
categories. These risks are described in the Principal Risks section of the prospectus.

In 1984, 33-year-old Gary Kusin started an educational software retailer named Babbage’s. Started in Dallas, Texas, Babbage’s quickly expanded from educational software to focusing on Atari and Nintendo video games. Little did Gary know at the time, but his company would one day become a symbol of a market movement and capture the attention of households, Congress and regulators across the United States. But before we get into what Gary Kusin’s small company became, we need to understand a few key terms and mechanics of a stock market.

Stock markets are exchanges, and in their simplest form are simply open-market auctions. Think Sotheby’s or a local estate auction, where potential buyers raise their paddle until only one buyer remains – but at a much larger scale. Thousands of buyers meet thousands of sellers every day through brokers on stock exchanges,⁽²⁾ and the items of interest are shares of a company’s stock. Generally, none of the money in these transactions goes to the company; rather the two parties barter for existing shares of the stock. Most of this activity has moved digitally, but the fundamentals are the same: every transaction has a buyer and a seller, and presumably both sides think they are getting a good deal.

Occasionally an investor may see a stock that they believe is overvalued. In other words, they believe that buyers are willing to pay more for that stock than what it is actually worth. For those brave investors who are so convicted that a stock price is trading higher than its true value, a process exists for them to bet against the company. Through a broker, the investor connects with another investor who owns shares of the stock, borrows the shares and then sells them. This is called shorting the stock. Assuming the price of the stock declines, the investor can buy back the shares at a lower price and return them to the lender, pocketing the difference in price. However, just as a bank may monitor a borrower’s creditworthiness, the lender of the shares needs protection to ensure that the borrower will eventually be able to repay the loan. The broker of the deal monitors how much it would cost for the borrower to purchase the shares compared to how much money the investor has available in their account. If the price of the stock rises too much, the broker can demand the investor either put more cash into their account or return the shares. If the investor is forced to return the shares, they must go back out to the market, find a buyer willing to sell, and repurchase them. This, known as a margin call in financial jargon, essentially just protects the lender against someone taking on a loan they can’t repay.

So, what does all this have to do with a software retailer from the 80s? In 1999, fifteen years after being founded, Barnes & Noble purchased Babbage’s for nearly $200 million.⁽⁴⁾ Three years later, Babbage’s was combined with other similar retailers, and the company went public under a new name, GameStop.⁽⁵⁾ Now, nearly 20 years after going public, GameStop has become a stock market phenomenon with the stock price jumping from $18.84 on December 31, 2020 to $325 at the end of January, a 1,625% jump in a single month.

For those watching the financial media (or social media for the matter), the obvious question is how can this happen? Well, a lot of investors were betting against GameStop at the end of last year – a lot. In fact, every share of GameStop had been borrowed and sold, at least once. In January, more investors started to take interest in buying shares of GameStop, partially spurred by speculative investors in an online forum, and that demand pushed the price of GameStop higher. As the price continued to climb, the investors who had borrowed shares were forced to either put more money into their account or buy shares at a higher price to close their loan. As the price of GameStop’s stock climbed, more investors bought shares to cover their loans, which created more demand for shares of GameStop’s stock, which continued to push the price higher. This phenomenon is called a short squeeze, and the cycle continued throughout January, with the stock hitting a high of $483 on January 28.

What does this all mean for your portfolio? Honestly, not a lot if you are our Investment Management client. You own thousands of stocks to mitigate the risk of any short-term dysfunction of any single name in the markets. Investors who bet against GameStop were wrong, at least for now, and they had to buy a lot of GameStop stock to make up for their error. If margin calls didn’t exist, January may have looked very different for the price of GameStop’s stock. But, margin calls exist to protect lenders and they functioned as expected. Thousands of buyers met thousands of sellers, and they agreed to exchange shares of a stock for an agreed-upon price. And if you are not our client & need to know what it does mean, feel free to contact us.

We know that on any given day, the stock market can look like a casino with random outcomes. But, when viewed over longer horizons, the outcomes are logical. That is why we continue to encourage our clients to look past the daily noise – no matter how entertaining – and keep a long-term focus. And in case you’re wondering, I don’t think that it’s a good time to buy GameStop’s stock.

Sincerely,

Neel Shah

Resources: 

• source: https://news.gamestop.com/about-gamestop#ourhistory)
• Brokers, or more often market makers, would be similar to auctioneers in our example – they are a neutral party that help to facilitate the trade, generally for a small
• This all happens in a very opaque part of the market called the securities lending Shorting a stock is extremely risky, and therefore this generally only happens at an institutional level. This is a vital source of information in an open, free market – this communicates negative sentiment towards a stock and creates a way for insightful investors to profit from companies that are setup to fall in value.
• source: https://www.com/articles/SB939241765778349890
• source: https://www.cnbc.com/2021/01/31/gamestop-craziness-hits-close-to-home-for-ben-kusin-co-founders-son.html
• source: yahoo.com.
• source: https://www.forbes.com/sites/petercohan/2021/01/15/with-138-short-interest-board-change-sends-gamestop-stock- soaring/?sh=45812b3b6da8
• The online forum is the Subreddit, /r/WallStreetBets: https://www.reddit.com/r/wallstreetbets/
• source: yahoo.com

This information is for educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Investing involves risk including loss of principal. Information from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. IRN-21-1776

“Everything you don’t understand about money combined with everything you don’t understand about computers.”—HBO’s Last Week Tonight with John Oliver, March 11, 2018

Bitcoin and related cryptocurrencies (now numbering in the thousands) are the subject of much debate and fascination. Given bitcoin’s dramatic price changes, it is not surprising that many are speculating about its possible role in a portfolio.

In its relatively short existence, bitcoin has proved extraordinarily volatile, sometimes gaining or losing more than 40% in price in a month or two. Any asset subject to such sharp swings may be catnip for traders but of limited value either as a reliable medium of exchange (to replace cash) or as a risk-reducing or inflation-hedging asset in a diversified portfolio (to replace bonds).

Assessing the merits of bitcoin as an investment can be problematic. Adding it to a portfolio could mean paring back the allocation to investments such as stocks, property, or fixed income. The owner of stocks or real estate generally expects to receive future income from dividends or rent, even though the size and timing of the payoff may be uncertain. A bondholder generally expects to receive interest payments as well as the return of principal. In contrast, holding bitcoin is similar to holding gold as an investment. Even if bitcoin or gold are held for decades, the owner may never receive more bitcoin or gold, and unlike stocks and bonds, it is not clear that bitcoin offers investors positive expected returns.

Putting aside squabbles over the future value of bitcoin or other cryptocurrencies, there are other issues investors should consider:

• Bitcoin is not backed by an issuing authority and exists only as computer code,
  generally kept in a so-called “digital wallet,” accessible through a password chosen by the user. Many of us have forgotten or misplaced computer passwords from time to time and have had to contact the sponsor to restore access. No such avenue is available to holders of bitcoin. After a limited number of password attempts, a user can permanently lose access. Since there is no central authority responsible for bitcoin, there is no recourse for the forgetful owner: a recent New York Times article profiled the holder of more than $200 million worth of bitcoin that he can’t retrieve. His anguish
  is apparently not unusual—a prominent cryptocurrency consulting firm estimates that 20% of all outstanding bitcoin represents stranded assets unavailable to their rightful owners.
• Mt. Gox, a Tokyo-based bitcoin exchange launched in 2010, was at one time the world’s largest bitcoin intermediary, handling over one million accounts in 239 countries and more than 90% of global bitcoin transactions in 2013. It suspended trading and filed for bankruptcy in February 2014, announcing that hundreds of thousands of bitcoins had been lost and likely stolen.
• The UK Financial Conduct Authority cited a number of concerns as it prohibited the sale of “cryptoasset” investment products to retail investors last year. Among them were the inherent nature of the underlying assets, which have no reliable basis for valuation; the presence of market abuse and financial crimes in cryptoasset trading; extreme price volatility; an inadequate understanding by retail consumers of crypto assets; and the lack of a clear investment need for investment products referencing them

The financial services industry has a long tradition of innovation, and cryptocurrency and the technology surrounding it may someday prove to be a historic breakthrough. For those who enjoy the thrill of speculation, trading bitcoin may hold appeal. But those in search of a sound investment should consider the concerns of the Financial Conduct Authority above before joining the excitement.

By: Weston Wellington
Vice President

———————————————————————————————–

Resources: The opinions expressed are those of the author and are subject to change. The commentary above pertains to bitcoin cryptocurrency. Certain
bitcoin offerings may be considered a security and may have different attributes than those described in this paper. Dimensional does not offer bitcoin.

This material is not to be construed as investment advice or a recommendation to buy or sell any security or currency. Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information
only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide
a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform
themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this
document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Asset protection, tax planning, or legacy control are just some of the numerous reasons why trusts can be used. However, the most common use for a trust is to avoid probate, therefore allowing for an easier transition of assets. This is most likely accomplished using a revocable living trust.

For some, it may be important or even desirous to avoid or sidestep the use of a trust. This may be because individual circumstances do not allow for planning using the trust due to factors such as cost considerations.

The benefit of a trust is that it allows the creator to establish their own set of rules, rather than rely on those of a beneficiary designation or probate courts. The biggest detriment of trust planning typically is the creation and fermentation of it. If it is not done properly, it could have disastrous impacts, or at a very minimum, be a waste of time and money to create.

Often, folks will resort to using legal strategies or titling strategies to avoid a trust. This might be done by adding beneficiary designations, transferring on death/payable on death titling, or just including family members or other beneficiaries on title during lifetime. But taking a shortcut is not without its unintended consequences. For example, naming someone as a beneficiary means they will get the asset outright. There is no guarantee that the asset will be protected against creditors, lawsuits, divorcing spouses, etc. Additionally, if the beneficiary were to pass away, you can then see the assets making their way to individuals or organizations who may not have been intended contingent beneficiaries. A trust can prevent that. You may also want to avoid having certain classes of beneficiaries receive assets outright, such as feeling members, receiving government benefits, or have special needs or substance abuse issues. In such cases, one should strongly consider using trust planning.

When asset protection is a concern, one should consider trust planning, but they may also consider using certain legal planning strategies. In many states, life insurance proceeds are protected from creditors and lawsuits. In other states, one’s home may be protected from creditors. Individual retirement accounts are treated differently from state to state, while ERISA governed plans such as most 401(k)s and defined-benefit plans have federal asset protection rules built in already.

If you are not sure if a trust is right for you & would like guidance, please feel free to call us at 732-521-9455. 

You only live once! Social media investors have banded together on unconventional platforms to drive up the prices of a handful of “meme stocks,” seemingly without traditional evaluation of investing risks and rewards. They made headlines with their “short squeeze” of GameStop (GME), and, as they garner media attention, their tactics continue. While it’s not the intended victim of the YOLO traders, will the efficient market hypothesis be a casualty of these events? The answer depends a lot on your definition of efficient markets. Perhaps long-term investors would be better served questioning the potential impact on their investment philosophy.

Fama (1970) defines the efficient market hypothesis (EMH) to be the simple statement that prices reflect all available information. The rub is that it doesn’t say how investors should use this information. EMH is silent on the “correct” ways investors should use information and prices should be set. To be testable, EMH needs a companion model: a hypothesis for how markets and investors should behave. This leaves a lot of room for interpretation. Should asset prices be set by rational investors whose only concerns are systematic risk1 and expected returns? It seems implausible to link recent meme-stock
price movements to economic risks. Rather, they seem fueled by investor demand to b part of a social movement, hopes to strike it rich with a lucky stock pick, or plain old schadenfreude.

There is a vast ecosystem of investors, from individuals investing in their own accounts to governments and corporations who invest on behalf of thousands. Ask investors why they invest the way they do, and you’ll likely get a range of goals and approaches just as diverse. It’s this complex system that generates the demand for stocks. Another complex system fuels the supply of stocks. Supply and demand meet at the market price. People may contend that the market is not always efficient, or rational, but the stock market is always in equilibrium. Every trade has two sides, with a seller for every buyer and a profit
for every loss.

There are plenty of well-studied examples that show supply and demand at work. The huge increase in demand for stocks added to a well-tracked index often creates a run-up in the stock price. Some of this price increase can be temporary and reversed once the tremendous liquidity demands at index reconstitution2 are met. Index reconstitution is just one example; instances of liquidity-driven price movements happen all the time. It is well documented that liquidity demands can produce temporary price movements.
Investors may wonder if temporary price dislocations motivated by users of r/
WallStreetBets differ from those caused by changes to an index. Lots of buying puts temporary upward pressure on prices, which later fall back to “fundamental value”–it sounds familiar. The more relevant observation may be that markets are complex systems well adapted to facilitate the supply and demand of numerous market participants.

There are numerous reasons people may be willing to hold different stocks at different expected returns. Can all those differences be explained by risks? Doubtful. To quote Professor Fama, “The point is not that markets are efficient. They’re not. It’s just a model.” EMH can be a very useful model to inform how investors should behave. We believe investing as if markets are efficient is a good philosophy for building long-term wealth. Trying to outguess markets might be a quick way to destroy wealth.

It’s true, you only live once. The good news is that investors can look to market prices, not internet fads, to pursue higher expected returns. Theoretical and empirical research indicate higher expected returns come from lower relative prices and higher future cash flows to investors. Long-run investors can be better served by using markets, rather than chatrooms, for information on expected returns.

– Marlena Lee, PhD
Global Head of Investment Solutions

Resources: The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information
only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong 2 Dimensional Fund Advisors
Please see the end of this document for important disclosures.

Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

Named securities may be held in accounts managed by Dimensional. This information should not be considered a recommendation to buy or sell a particular security. Diversification does not protect against loss in declining markets. There is no guarantee strategies will be successful.

Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to Dimensional Fund Advisors LP.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

It’s easy to view the stories of market speculation that have dominated the news recently as cautionary tales for individual investors. But we can also look at the current moment as an opportunity to welcome a new group of investors to the market: those who have been drawn in by all the high-stakes action, and yet may want a consistent, long-term investment solution that doesn’t keep them up at night. This is probably a good time to mention that investing and gambling are not the same thing.

If you’re not the type of person who feels comfortable betting your life savings on a long shot, the good news is that you don’t have to find the next big stock to win in the stock market. Concentrating your whole investment on one or two companies means the stakes are high enough to expose you to unnecessary risk. Even if you manage to land a few big winners, our research has found that good luck is unlikely to repeat throughout a lifetime of investing. For every individual who got in and out of a hot stock at the right
time, there’s another who bought or sold at the wrong time. If you treat the market like a casino, not only do you have to pick the right stock, but also the right moment.

I’ve always believed you’re better off betting with the whole market than on individual stocks, through a low-cost, highly diversified portfolio. Then let time and compounding do their work. Compounding is the investor’s best friend: if an investment grows at a rate of 10% a year, that means a dollar invested has doubled every seven years.1 As a point of reference, the S&P 500 has grown at rate of 10.26% since 1926, though it’s worth noting that the path is rarely smooth.

With all the options now available to investors, putting together a solid investment plan —one that you can stick with—is key. Markets have never been so accessible, and information has never been so widely available. And despite the fact that stories of stockmarket gambling keep making the news, many investors have managed to enjoy growth in their investments using low-cost, highly diversified strategies like index funds

Indexing has turned out to be a good solution for many people. I was involved in the creation of one of the first index funds early in my career, and I’ve enjoyed watching the positive impact indexing has had on the industry. For those who want more customization and flexibility, there are ways to build on the strengths of indexing while correcting for some of its weaknesses. At Dimensional, we’ve been working on improving upon indexing for the past 40 years.

If you’re looking to become a long-term investor, commit to a long-term strategy that takes your own personal goals, situation, and risk tolerance into account. (A financial advisor can help with this part.) And remember that although the US stock market has returned about 10% a year on average, returns for individual companies and individual years can vary wildly. (We call these uneven distributions “fat tails.”) It’s always important to look at the big picture. A huge win on a stock bet today doesn’t mean much if you lose it tomorrow.

Investing is a lifelong journey. Making money slowly is much better than making—then losing—money quickly.

– David Booth
Executive Chairman and Founder

——————————————————————————————–

Resources: The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information
only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide
a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform
themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this
document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are
Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund
Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong
Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and
does not provide asset management services.

Copyright 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment;
therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

CANADA: These materials have been prepared by Dimensional Fund Advisors Canada ULC. It is provided for educational purposes only,
should not be construed as investment advice or an offer of any security for sale and does not represent a recommendation of any particular
security, strategy or investment product. Commissions, trailing commissions, management fees, and expenses all may be associated with
mutual fund investments. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns,
including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales,
2 Dimensional Fund Advisors
Please see the end of this document for important disclosures.
redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Please read
the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be
repeated.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

The decision as to whether or not to convert from a term policy to a permanent life insurance policy is very fact-specific and dependent upon the family circumstances.

There have been circumstances where term policies were taken for a temporary reason. It may have been because children were younger, or for a business purpose such as a buy/sell policy. However, as the term marches on, or sometimes comes close to expiration, the importance of those temporary reasons varies extremely. For example, if one has a child or spouse who is dependent on the insured and their earning capacity (such as a special needs situation or a nonworking spouse), there might be a need for financial security well after the term would have expired. In this situation, it does make sense to consider a conversion. However, many circumstances must be considered. In addition to the need, the financial means to pay for the insurance is a huge factor. Will the insured or the owner have the capacity to continue paying premiums on a permanent policy, which are generally higher than a term policy. What other insurances are available? What is the health situation of the insured-they qualify for a new policy today?

It is recommended that you do not wait until the end of the term or close to the end of the term to convert a policy if you have already recognized the need for permanent insurance. The insured health circumstance is unpredictable, as it might give rise to an increased premium, or even a lack of insurability, which is a high risk to take. However, if you choose not to convert your policies, you may elect to self-insure. This usually means allocating certain savings for potential future needs. The decision of whether or not to let a term policy expire should be made proactively. It is a factor in one’s financial plan just like any other financial consideration.

Feel free to contact us If you need help deciding whether or not you should convert a term life policy into a whole life, universal life, or other types of life insurance policy”

KEY TAKEAWAYS

• FANMAG returns have been extreme relative to their contemporaries, but not their predecessors—their performance has been in line with the average top performers throughout US stock market history.
• The FANMAGs were the big winners from a broader group of large tech companies, most of whom have lagged the market.
• Following the popularity of the FAANG stocks, FANMAGs are the current fad. But history suggests fad-based investing is no substitute for broad diversification and a consistent approach.

A handful of large technology stocks have garnered attention for outsize returns in recent years. Collectively referred to by the FANMAG acronym, Facebook, Amazon, Netflix, Microsoft, Apple, and Google (now trading as Alphabet) all substantially outperformed the US market1 in the eight calendar years that they have all been public companies (Facebook went public in May 2012).2 Emerging as winners from among a large number of companies that fared less well during 2013–2020,3 these juggernauts bested most of their surviving peers with annualized outperformance versus the US market ranging from 7.31 (Alphabet) to 42.58 percentage points (Netflix), as shown in Exhibit 1.

While this performance dazzled investors and dominated headlines during 2013–2020, a more complete picture emerges when accounting for the many companies whose investors were less fortunate over the period. As shown in Exhibit 2, of the 10 largest US technology stocks as of January 2013, all but Apple, Microsoft, Alphabet, and Amazon underperformed the US market over the same period that elevated their tech peers to financial market stardom.

Exhibit 3 shows the hypothetical growth of wealth for an investor who put $1 in each of the 10 largest technology stocks and the US market in January 2013. While the $1 invested in Amazon and Apple, for example, would have grown to $12.63 and $7.18, respectively, by November 2020, the returns of their non-FANMAG tech contemporaries would have failed to even surpass the US market.

FANMAG returns certainly stand out among those of their contemporaries, but the range of individual stock outcomes has often been immense. A historical look shows that FANMAG performance has been quite ordinary in the context of past top-of-the-market performers. Drawing on stock return data since 1927, Exhibit 4 indicates that historical top performers often experienced larger outperformance relative to the US market than the FANMAG stocks realized during 2013–2020. For example, Apple’s 2013–2020
annualized excess return of 13.00 percentage points places it at the 93.67 return percentile among all US stocks that were trading in January 2013 and survived the eightyear period that followed. However, the average outperformance of stocks at the 93.67 percentile over eight-year rolling periods from 1927 to 2020 was 15.60 percentage points, or about 2.60 percentage points higher. With the exception of Netflix, the same holds for
the other FANMAG stocks, with historical outperformers at the same return percentile outperforming the market by more than the FANMAG stocks did in 2013–2020.

A defining trait of the FANMAG performance is that these outsize returns have come from among the largest companies in the US, implying they were meaningful contributors to the overall US market’s return. However, historical data show that this too is nothing new.
Defining a stock’s return contribution as its total return weighted by its beginning-ofperiod market capitalization weight, we see that Apple’s contribution to the US market for the period 2013–2020 was 19.68%. How does this figure compare to other top return contributors? Exhibit 5 illustrates the top return contribution and the annualized US market return over rolling eight-year periods since 1927, revealing instances of return contributions by the likes of AT&T, General Motors, and General Electric that were
comparable to, or even exceeded, that of Apple in 2013–2020.

FOTW (FLAVOR OF THE WEEK)
If history is any guide, the FANMAG acronym will eventually be replaced by another trendy name. For example, stock market historians will remember the Nifty Fifty in the 1960s and 70s, a set of 50 blue-chip stocks like Coca-Cola and General Electric. The early 2000s witnessed increasing adoption of the acronym BRIC, representing investment opportunities in the fast-growing emerging economies of Brazil, Russia, India, and China. More recently, the WATCH companies—Walmart, Amazon, Target, Costco, and Home Depot—have also gained traction in the market’s lexicon.

While documenting trends in finance is entertaining, there is little evidence that investors can spot these trends in advance in a way that would enable market-beating performance. Moreover, concentrated bets on high-flying stocks can expose investors to idiosyncratic risks and a wider range of possible outcomes. By contrast, a sound investment approach based on financial science emphasizes the importance of broadly diversified portfolios that provide exposure to a vast array of companies and sectors to help manage risks, increase flexibility in implementation, and increase the reliability of outcomes.

–  Kenneth French, PhD
Director and Consultant

_____________________________________________________________________

Resources: The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information
only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein. “Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund
Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services. Named securities may be held in accounts managed by Dimensional. This information should not be considered a recommendation to buy or
sell a particular security.
UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
CANADA: These materials have been prepared by Dimensional Fund Advisors Canada ULC. Commissions, trailing commissions, management
fees, and expenses all may be associated with mutual fund investments. Unless otherwise noted, any indicated total rates of return reflect the
historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
AUSTRALIA and NEW ZEALAND: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material
is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person.

Think back to March when the government shutdowns were starting. Think about the forecasts and predictions being made.

By late March, the S&P 500 had sold off over 30% of its value from its high in the middle of February, and small caps had sold off even more. Looking back on the markets and the dreary expectations, would you have expected global markets to post double-digit returns for the year? Would you have guessed that emerging market stocks would perform in line with the S&P 500 for the year, with both markets up over 18%?(3) What about small caps? Would you have expected U.S. small cap stocks to return 20% for the year when there was so much uncertainty around whether many of these companies could survive the pandemic?

The changing landscape from COVID benefited companies like Amazon and Zoom, so their growth during the year made sense, but would you have expected Tesla to post such extraordinary gains? The stock closed 2019 at less than $84 per share, but by the end of 2020, it was trading over $700 per share.(5) Tesla was added to the S&P 500 in December with a total market value of over $600 billion, making it the largest stock ever added to the index.(6) Looking back, we would like to believe we saw it coming (or at least that the signs were there), but if we are honest – doubling down on Tesla in January 2020 looked like a bet against the ‘smart money.’ At the end of 2019, roughly one out of every five shares of Tesla were betting on the stock price falling, not going up!

When I look at 2020, I am reminded that whether we are talking about industries or individual stocks, predicting the market is extremely difficult. Some people get lucky, but the skill to have repeat performance is rare. A recent study performed by S&P Dow Jones found that the top-performing funds from June 2010 through June 2015 were more likely to liquidate or change their investment style than to continue to outperform over the next five years. And that is the smart money – these are funds managed by professionals that invest millions in trying to be the best and have the “edge”.

Many companies use intangible assets such as patents, licenses, computer software, branding, and reputation to earn revenues. These intangible assets have always been part of the economic landscape. We study the impact of intangibles on our ability to identify differences in expected stock returns and find no tangible performance benefit from adjusting for intangibles.

It is important to begin by distinguishing between two types of intangible assets. Under US generally accepted accounting principles (GAAP), externally acquired intangibles are reported on the balance sheet. They currently represent about a quarter of the reported value of assets for the average US company. These assets are accounted for when computing book equity. Internally developed intangibles, on the other hand, are generally not capitalized on the balance sheet. Instead, they are expensed and thus reflected on the income statement. The difference in accounting treatment is primarily due to the higher uncertainty around the potential of internally developed intangibles to provide future benefits and the difficulty to identify and objectively measure such benefits.1 After all, internally developed intangibles do not go through a market assessment, while externally acquired intangibles get evaluated in the competitive market for mergers and acquisitions, and at that time, they might already be generating tangible benefits for the company that developed them. For example, Disney bought the Star Wars franchise, an externally acquired intangible, in 2012, many years after the franchise began generating economic benefits for Lucasfilm.

Some argue that to more effectively infer differences in expected returns across firms sourcing most of their intangibles externally and firms sourcing them mostly internally, we should capitalize internally developed intangibles. Several academic studies do that by accumulating the historical spending on research and development (to capture the development of “knowledge capital”) and selling, general, and administrative (SG&A) expenses (to capture the development of “organizational capital”). In the present study, we follow the approach suggested by Peters and Taylor (2017)2 and find that while intangible assets comprise more of companies’ assets over time, this stems mainly from growth in externally acquired intangibles. Estimated internally developed intangibles have not meaningfully increased as a proportion of total assets (see Exhibit 1).

Moreover, the estimation approach for internally developed intangibles has several important caveats in addition to the lack of market valuations. First, the estimation of internally developed intangibles assumes that the development of intangible capital can be captured fully through spending reported on the income statement. Second, the approach is critically dependent upon the availability of reliable and comprehensive R&D and SG&A data. However, we observe R&D data for about half of the US market even today. As a result, the estimated knowledge capital is zero for about half of the US market. Thus, we would adjust the value and profitability metrics of half of the market for knowledge capital and leave the rest unadjusted, potentially making firms in the adjusted and unadjusted groups less comparable, not more, after the adjustments. Further, while SG&A data are available for most US companies since the 1960s, the breakdown of operating expenses into cost of goods sold and SG&A varies often across companies and data sources, which might add noise to the estimation of organizational capital. The estimation approach can also produce noisy results because it applies constant amortization rates through time and does not allow for impairments. As a result, a company can be approaching bankruptcy and still appear to have billions of dollars’ worth of internally developed intangibles.

Because of all those different sources of noise, capitalizing estimated internally developed intangibles might not be helpful in identifying differences in expected stock returns. Our empirical research lends support to this expectation. Estimated internally developed intangibles contain little additional information about future firm cash flows beyond what is contained in current firm cash flows. Moreover, we do not find compelling evidence that capitalizing estimated internally developed intangibles yields consistently higher value and profitability premiums.

Given the large challenges with estimating internally developed intangibles, an alternative approach to infer more effectively differences in expected returns among
firms with different sources of intangibles might be to strip out externally acquired intangibles from the balance sheet. Our empirical analysis shows no compelling performance benefit of excluding externally acquired intangibles from fundamentals. Historically, the exclusion of externally acquired intangibles would not have generated higher value or profitability premiums. Therefore, we believe investors are better off continuing to incorporate externally acquired intangibles reported on the balance sheet and not adding noisy estimates of internally developed intangibles to value and profitability metrics.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Investment returns have two parts: the expected return and the unexpected return. The expected return is the best guess of what will happen based on all the information currently available. The unexpected return is the surprise, the difference between what does happen and what was expected. Investors should base their portfolio decisions on expected future returns, not recent realized returns, and the two can differ by a lot.

Look at the returns on the so-called FAANG stocks–Facebook, Amazon, Apple, Netflix, and Google’s parent company, Alphabet. Over the 10 years from September 2010 to August 2020, a portfolio of the five stocks held in proportion to their market caps would have delivered an average annual return of 34.25% per year. That means on average, the value of the portfolio doubled about every 2.5 years.

Given their great returns over the last 10 years, what is our best guess of how the FAANG stocks will do over the next decade? Should we expect an average annual return of almost 35% again? Absolutely not. Who wouldn’t buy these stocks if their expected returns were 35%? But buyers need sellers. The demand driven by such high expected returns would simply push prices up and drive expected returns down to a more
reasonable level. For the same reason, I’m confident that if we could go back to August 2010, we would find few investors predicting the FAANG stocks would do as well as they did from 2010 to 2020.

So what does explain the FAANG stocks’ high realized returns? Their unexpected returns. Things turned out much better for them than investors expected. The companies’ cash flows over the last 10 years were much higher than investors expected 10 years ago, and their prospects looking forward from today are almost certainly better than investors expected they would be 10 years ago.

All this unexpected good news produced high unexpected stock returns over the last decade. It would be wrong, however, to expect high unexpected returns to persist. After all, it doesn’t make sense to count on good luck. The expected value of the unexpected returns must be zero.

In short, the past decade of extraordinary realized returns tells us little about the FAANG stocks’ future expected returns. And unfortunately, this is a general result. For most investments and most investment horizons—a month, a year, five years, even ten years—the realized return is driven far more by the unexpected return than the expected return.

–  Kenneth French, PhD
Director and Consultant

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

The anticipation building up to elections often brings with it questions about how financial markets will respond. But the outcome of an election is only one of many inputs to the market. Our interactive exhibit examines market and economic data for nearly 100 years of US presidential terms and shows a consistent upward march for US equities regardless of the administration in place. This is an important lesson on the benefits of a long-term investment approach.

NOTES AND DATA SOURCES

• This material is in relation to the US market and contains analysis specific to the US.

• In US dollars. Stock returns represented by Fama/French Total US Market Research Index, provided by Ken French and available at http://mba.tuck.dartmouth.edu/ pages/
faculty/ken.french/data_library.html. This value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available
outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return.
Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

• Growth of wealth shows the growth of a hypothetical investment of $100 in the securities in the Fama/French US Total Market Research Index. Growth of wealth for the full
sample from March 4, 1929, through June 30, 2020. Growth of wealth for each presidential term starts on the election day of each president up to but not including the
election day of a successor. For presidents who are not initially elected, the growth of wealth period starts from the day of inauguration up to but not including the successor’s
election day.

• Federal surplus or deficit as a percentage of gross domestic product, inflation, and unemployment data from Federal Reserve Bank of St. Louis (FRED). GDP Growth is annual
real GDP Growth, using constant 2012 dollars, as provided by the US Bureau of Economic Analysis. Unemployment data not reported prior to April 1929. Federal surplus or
deficit as a percentage of gross domestic product data is cumulative.

• US Government Presidential and Congressional data obtained from the History, Art & Archives of the United States House of Representatives. US Senate data is from the
Art & History records of the United States Senate.

• For Herbert Hoover, the federal budget is calculated from 1929 to 1932. Annual real GDP growth is calculated from 1930 to 1932; GDP data not available prior to 1930.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

It’s natural for investors to look for a connection between who
wins the White House and which way stocks will go. But as
nearly a century of returns shows, stocks have trended upward
across administrations from both parties.

• Shareholders are investing in companies, not a political
party. And companies focus on serving their customers
and growing their businesses, regardless of who is in the
White House.

• US presidents may have an impact on market returns,
but so do hundreds, if not thousands, of other factors—the
actions of foreign leaders, a global pandemic, interest rate
changes, rising and falling oil prices, and technological
advances, just to name a few.

Stocks have rewarded disciplined investors for decades,
through Democratic and Republican presidencies.
It’s an important lesson on the benefits of a long-term
investment approach.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Average Annualized Outperformance of Companies Before and After The First Year They Became One Of The 10 Largest In The US
Compared to Fama/French Total US Market Research Index ,1927–2019

As companies grow to become some of the largest firms trading on
the US stock market, the returns that push them there can be impressive.
But not long after joining the Top 10 largest by market cap, these
stocks, on average, lagged the market.

• From 1927 to 2019, the average annualized return for these
stocks over the three years prior to joining the Top 10 was nearly
25% higher than the market. In the three years after, the edge was
less than 1%.

• Five years after joining the Top 10, these stocks were, on average,
underperforming the market—a stark turnaround from their earlier
advantage. The gap was even wider 10 years out.

• Intel is an illustrative example. The technology giant posted average
annualized excess returns of 29% in the 10 years before the year
it ascended to the Top 10 but, in the next decade, underperformed
the broad market by nearly 6% per year. Similarly, the annualized
excess return of Google five years before it hit the Top 10 droppedby about half in the five years after it joined the list.

Expectations about a firm’s prospects are reflected in its
current stock price. Positive news might lead to additional
price appreciation, but those unexpected changes are
not predictable.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.