Dimensional Fund Advisors was founded in 1981 to apply academic research to the practical world of investing. Board Members and consultants include some of the nation’s most distinguished academic theorists, including Eugene Fama, Ken French, Roger Ibbotson and Nobel Laureates Merton Miller and Myron Scholes. In addition to theory and research, DFA has assembled a trading floor second to none in the industry and staffed by highly experienced trading professionals.

Ashford Investment Advisors has been evaluating fund and portfolio managers for over thirty years, and DFA is the best we have ever seen. They understand what works in investing and have the resources and personnel to achieve outstanding results.

Early DFA research showed that Small Cap stocks were superior performers in the capital markets. The firm then developed and enhanced their portfolio models by increasing allocation to both size and value, offering a higher expected return while increasing volatility by a smaller increment and thereby counteracting the higher volatility of Small Cap allocation. The result is a portfolio design that increases performance at a rate higher than the corresponding increase in risk.

A few simple graphs track the interesting process of developing these portfolio models.

Basic 60/40 Balanced Strategy vs. Company Plans Results of 192 Corporate Pension Funds Annual: 1988-2005
	Companies (in alphabetical order) Anheuser-Busch Cos., Inc. Avista Corp. Cooper Industries, Inc. Delta Air Lines, Inc. Edison International FirstEnergy Corp. Goodyear Tire & Rubber Co. Ingersoll-Rand Co. Ltd. IBM Corporation Jefferson-Pilot Corp. Lincoln National Corp. Sherwin-Williams Co. Sunoco, Inc. SunTrust Banks, Inc. UAL Corp. Union Pacific Corp. Verizon Communications, Inc. VF Corp. West Pharmaceutical Svcs., Inc. Williams Cos., Inc. Wolverine World Wide, Inc.
Basic 60/40 is 60% S&P 500 Index, 40% Lehman Brothers US Government/Credit Bond Index Intermediate, rebalanced monthly. Source: FutureMetrics (December 2006); all companies with fiscal year ending December, with complete return data from 1988-2005. The S&P data are provided by Standard & Poor’s Index Services Group. Lehman Brothers data provided by Lehman Brothers, Inc.
The “Basic 60/40 Balanced Strategy” graph features historical performance of a hypothetical Balanced strategy which holds 60% US Large-Cap stocks from the S&P 500 Index and 40% Intermediate US Government and Corporate Bonds from the Lehman Intermediate Government.Credit Bond Index. This strategy is compared to a study of 192 corporate pension plans from 1988 to 2005. The plans were ranked from highest to lowest by performance, based on average annual return for that period. Every tenth company was included in the sample, and those companies are listed alphabetically at the right. Most of the managers of these pension plans are sophisticated professionals who follow active investment strategies in security selection and market timing to beat the market; yet the return of the 60/40 strategy falls in the highest one-third of the performance rankings.

The Basic Institutional Portfolio
Quarterly: 1973-2007
Model Portfolio 1

Lehman Brothers data provided by Lehman Brothers, Inc. The S&P data are provided by Standard & Poor’s Index Services Group.

Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.

The “Basic Institutional Portfolio Model 1” graph shows the basic allocation of a two-component portfolio which is invested in the S&P 500 and the Lehman Brothers US Government.Credit Bond Index. Between 1973 and 2007 this model produced an annualized compound return of 10.20% with annualized standard deviation of 10.80%.

Evaluating the Maturity Risk/Return Tradeoff
Quarterly: 1964-2007

Not all investors define risk as standard deviation. Some investors may seek to hedge long-term liabilities using long-term bonds.
Historically, longer-maturity instruments have higher standard deviations and have not provided consistently greater returns.

Source: One-Month US Treasury Bills, Five-Year US Treasury Notes, and Twenty-Year (Long-Term) US Government Bonds provided by Ibbotson Associates. Six-Month US Treasury Bills provided by CRSP (1964-1977) and Merrill Lynch (1978-present). One-Year US Treasury Notes provided by CRSP (1964-May 1991) and Merrill Lynch (June 1991-present). Ibbotson data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). CRSP data provided by the Center for Research in Security Prices, University of Chicago. The Merrill Lynch Indices are used with permission; copyright 2008 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved.

Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio.

Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an ivestor may lose money. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. In general, fixed income securities with longer maturities are more sensitive to these price changes and may experience greater fluctuation in returns.

The role of Fixed-Income in a balanced portfolio is to dampen the volatility of the Equity portion of the portfolio. Long-term Government bonds can offer a higher expected return which compensate investors for the greater uncertainty associated with a longer maturity. However, bonds with maturities longer than five years do not appear to offer returns commensurate with the greater volatility. Investors seeking to minimize volatility should consider instruments with short-term maturity and high credit quality.

Substituting Short-Term for Long-Term Fixed Income
Quarterly: 1973-2007
Model Portfolio 2

Lehman Brothers data provided by Lehman Brothers, Inc. The S&P data are provided by Standard & Poor’s Index Services Group.

Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

The “Model Portfolio 2” graph shows a move from long-term to short-term Fixed-Income of higher quality, reducing volatility and enabling the portfolio to pursue higher expected returns in Equities. This reallocation to the one-year Treasury note can help advance the overall strategy by reducing annualized compound return and annualized standard deviation during this time period.

Size and Value Effects in the US
Annual: 1927-2007

Fama/French data provided by Fama/French. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

Small company risk: Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. See cover page for additional information.

The “Size and Value Effects in the US” graph demonstrates that since 1927 Value stocks have outperformed Growth stocks among both Large Caps and Small Caps. Higher risk factors accompanied the higher performance.

Diversifying a Portfolio into US Small Cap Stocks
Quarterly: 1973-2007
Model Portfolio 3

Lehman Brothers data provided by Lehman Brothers, Inc. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; ©copyright 2007 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP 6-10 Index data provided by the Center for Research in Security Prices, University of Chicago.

Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

“Model Portfolio 3” reduces the S&P 500 component from 60% to 30% of the portfolio, and commits the difference to US Small Cap Equities. This movement from Large to Small Cap US stocks can raise expected annual returns, although it results in higher standard deviation (risk) in the portfolio.

Diversifying a Portfolio into US Value Stocks
Quarterly: 1973-2007
Model Portfolio 4

Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

“Model Portfolio 4” shows the benefit of reducing the S&P 500 and US Small Cap components from 30% each to 15% each and adding Value stocks in both Small and Large Cap to the portfolio allocations. The portfolio now has equal exposures to size and Value, which offers a higher expected return while increasing volatility by a smaller increment: The more from Small Cap to Large Value counteracts the higher volatility of Small Value.

When compared to the original 60/40 Balanced strategy in Model Portfolio 1, Model Portfolio 4 offers increased annualized compound return but requires acceptance of higher annualized standard deviation.

A Fully Diversified Portfolio
Quarterly: 1973-2007
Model Portfolio 5

Lehman Brothers data provided by Lehman Brothers, Inc. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2007 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP 6-10 Index data provided by the Center for Research in Security Prices, University of Chicago. US Small Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French (January 1975-December 2004) and MSCI EAFE Index (net dividends, January 1973-December 1974). MSCI data copyright MSCI 2007, all rights reserved; see MSCI disclosure page for additional information. International Small Cap Index: 1970-June 1981: 50% UK small cap stocks provided by Hoare Govett and 50% Japan small cap stocks provided by Nomura Securities; July 1981-present: compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries, market-capitalization weighted, each country capped at 50%; rebalanced semiannually.
Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

The “Model Portfolio 5” graph shows a portfolio diversified by reducing all four US asset classes by half and reallocating the funds to International Small and Value stocks. The 60% Equity allocation is evenly split between US and International. Model Portfolio 5 produces the highest annualized compound return of all the portfolios, and with lower volatility. It offers higher annualized return than the original 60/40 balanced strategy, without a proportional rise in volatility.