Markets reflect the vast, complex network of information, expectations, and human behavior. These forces drive prices to fair value. This simple yet powerful view of market equilibrium has profound investment implications.
Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk.
Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong stocks at the wrong time. Meanwhile, capital economies thrive--not because markets fail but because they succeed.
The futility of speculation is good news for the investor. It means that prices for public securities are fair and that persistent differences in average portfolio returns are explained by differences in average risk. It is certainly possible to outperform markets, but not without accepting increased risk.
Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong stocks at the wrong time. Meanwhile, capital economies thrive--not because markets fail but because they succeed.
A Picture of Growth
Growth of $1€1£1$1
Growth of $1€1£1$1
Regional view 
World
Europe
UK
US
For the fifty-five years from 1956 to 2010, the compound annual growth rate of return was 16.0% for the Value Index, 15.9% for the Small Cap Index, 12.1% for the Large Cap Index, 7.5% for T-Bills, and 5.6% for Inflation (RPI). Value Index data provided by the London Business School and simulated by Dimensional from StyleResearch data. Small Cap Index: 1956–June 1981 provided by London Business School and ABN AMRO; July 1981–present simulated by Dimensional from StyleResearch securities data. Large Cap Index is the FTSE All-Share Index published with the permission of FTSE. T-Bills: 1955–1974, UK Three-Month T-Bills provided by the London Share Price Database; 1975–present, UK One-Month T-Bills provided by the Financial Times. Inflation is the UK Retail Price Index provided by the Office for National Statistics.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
For the eighty-five years from 1926 to 2010, the compound annual growth rate of return was 11.5% for the Small Cap Index, 9.9% for the Large Cap Index, 5.5% for the Long-Term Government Bonds Index, 3.6% for Treasury Bills, and 3.0% for Inflation (CPI). Small Cap Index is the CRSP 6-10 Index; Large Cap Index is the S&P 500 Index®; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury Bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. The S&P data are provided by Standard & Poor's Index Services Group. Bonds, T-bills, and inflation data ©Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
For the thirty-six years from 1975 to 2010, the compound annual growth rate of return was 14.2% for the Global Large Value Index, 15.9% for the Global Small Cap Index, 11.2% for the Global Large Cap Index, 5.5% for One-Month US Treasury Bills, and 4.1% for US Inflation (CPI).
Dimensional Global Large Value Index: 1994–present: simulated by Dimensional from Bloomberg securities data. 1975–1993: data provided by Fama/French. Dimensional Global Small Cap Index: 1994–present: simulated by Dimensional from Bloomberg securities data. July 1981–December 1983: Dimensional US Small Cap Index and Dimensional International Small Cap Index combined using StyleResearch Small Portfolio Weights. 1970–June1980: 50% Dimensional US Small Cap Index, 50% Dimensional International Small Cap Index.
Global Large Cap Index is the MSCI World Index.,MSCI data © MSCI 2010, all rights reserved. One-Month US Treasury-bills, and US inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Dimensional Global Large Value Index: 1994–present: simulated by Dimensional from Bloomberg securities data. 1975–1993: data provided by Fama/French. Dimensional Global Small Cap Index: 1994–present: simulated by Dimensional from Bloomberg securities data. July 1981–December 1983: Dimensional US Small Cap Index and Dimensional International Small Cap Index combined using StyleResearch Small Portfolio Weights. 1970–June1980: 50% Dimensional US Small Cap Index, 50% Dimensional International Small Cap Index.
Global Large Cap Index is the MSCI World Index.,MSCI data © MSCI 2010, all rights reserved. One-Month US Treasury-bills, and US inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
For the twenty-nine years from 1982 to 2010, the compound annual growth rate of return was 13.3% for the Europe Large Value Index, 11.6% for the Europe Small Cap Index, 10.4% for the Europe Large Cap Index, 4.8% for German T-Bills and 1.9% for German Inflation (CPI).
MSCI data © MSCI 2010, all rights reserved. Dimensional Europe Large Value Index: 1994–present: simulated by Dimensional from Bloomberg securities data. 1975–1993: data provided by Fama/French.
Dimensional Europe Small Cap Index: 1994–present: simulated by Dimensional from Bloomberg securities data. July 1981–December 1983: Dimensional Europe ex UK Small Cap Index and Dimensional UK Small Cap Index combined using StyleResearch Small Portfolio Weights.Europe Large Cap Index is the MSCI Europe Index, MSCI data © MSCI 2010, all rights reserved. German T-Bills are the German 3 Month Money Market Rate, data provided by Deutsche Bundesbank. Inflation is the German Consumer Price Index, data provided by the Deutsche Bundesbank.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
MSCI data © MSCI 2010, all rights reserved. Dimensional Europe Large Value Index: 1994–present: simulated by Dimensional from Bloomberg securities data. 1975–1993: data provided by Fama/French.
Dimensional Europe Small Cap Index: 1994–present: simulated by Dimensional from Bloomberg securities data. July 1981–December 1983: Dimensional Europe ex UK Small Cap Index and Dimensional UK Small Cap Index combined using StyleResearch Small Portfolio Weights.Europe Large Cap Index is the MSCI Europe Index, MSCI data © MSCI 2010, all rights reserved. German T-Bills are the German 3 Month Money Market Rate, data provided by Deutsche Bundesbank. Inflation is the German Consumer Price Index, data provided by the Deutsche Bundesbank.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Dimensional Fund Advisors Ltd. is authorised and regulated in the United Kingdom by the Financial Services Authority (FRN: 150100). You should obtain relevant and specific professional advice before making any investment decision. Past performance is not an indication of future performance. Please read the Important Information.
Next /
Risk Means Opportunity