My Two Cents

Indexing All the Time

Chris Farrell Mar 27, 2007

Dimensional Fund Advisors (DFA) is hardly a household name, Which isn’t surprising since until recently it focused on institutional investors (like pension funds) and not individual investors. That is changing, although you and I can’t buy a DFA fund on our own. We have to go through a financial advisor. Still, it is good that DFA is branching out, since its top flight outfit offering a variety of broad-based index funds. The firm is best known for its small cap indexes (indexes based on smaller publicly traded companies). Bloomberg has a good story on DFA.

Now, I am a big believer in indexing, but I don’t like the drinking-the-Kool-Aid aspect of DFA’s approach. From the story:

“Once they’ve survived the hazing, the financial advisors are policed by other advisors to ensure they don’t dabble in active investing. DFA converts keep tabs on other advisors to make sure they toe the line.

‘Eyes and ears are out there,’ Wheeler says. [Wheeler is a DFA vice president] ‘We’ll give that advisor a call and say, ‘You can’t do that.’

What is this? The Politburo School of Investing?

You can’t beat indexing as an overall investment approach. Broadbased equity and bond index funds should make up the core of any long-term portfolio. But that insight doesn’t mean there still isn’t a role for active investing.

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