Advice from Dimensional’s Apollo Lupescu, PhD

Last month we were honored to host Apollo Lupescu, PhD of Dimensional Fund Advisors (DFA) as a guest speaker at a luncheon. A member of the DFA Investment Strategies Group, Dr. Lupescu’s role is to educate the public on DFA’s academic foundations, investment beliefs and state‐of‐the‐art portfolio design and trading practices. Rather than offer a heavily scripted talk, we were privileged to have Dr. Lupescu answer our questions for more than an hour.dfa-event

Not surprising, many clients had questions about the upcoming U.S. Presidential Election and how to protect portfolios from any spike in volatility. Given that all the noise of the election has served as a huge distraction, Dr. Lupescu encouraged investors to focus not on CNN’s predictions, but on market fundamentals. That required reviewing what it means to buy a stock. He explained, “When you own a stock, you own part of the company and the value of that stock depends on future profits. How much do profits depend on who is serving as President versus the specific strategies used to run the company and how good products are? I’d argue that corporate strategies and products are the main drivers of profits. The election will impact Coca-Cola only a small amount on the margin.”

Dr. Lupescu further noted that while you can argue that a president’s tax policies impact corporate profitability, taxes are a small factor. He explained, “President George W. Bush was a pro-business and investment-friendly president. Cuts to taxes, including capital gains were significant. Yet, over his eight years, the stock market’s return was -2%. We had 9/11, the Financial Crisis, other events that were more meaningful than low taxes. President Obama came in at the very bottom of the market and the market has returned 12 to 15% over 8 years. My point is no president should receive credit or blame because there will be many factors influencing market returns outside of the president’s control.”

When clients wondered about the wisdom of investing today given the potential for some post-election volatility, Dr. Lupescu offered some powerful statistics. He explained, “Equally important to getting the decision of when to get out of the market right, you have to correctly decide when to get back in. Often, and this verified in my own investment experience, you lose more money missing the market’s upside than you save protecting on the downside.”

He continued, “If you look at the S&P 500 on a daily basis, 55% of days are positive and 45% are negative. So, it’s a flip of the coin when to get back in. Extend the timeframe out to a month and we find that 63% of the time performance is positive and 37% of the time the market is down. So if you stay out of the market for a month, the odds are better that you are going to lose money. Extend that by a year and you are in worse shape. Dating back to the 1920s, 70% of the time the S&P 500 posted annual positive returns; over 5 years, the market is up 87% of the time. So, the longer you stay out the market, the greater chance you have of losing out on the upside growth.”

Dr. Lupescu says diversification, between stocks and bonds and domestic and international stocks, affords investors better protection than market timing. And above all he advises working with a trusted advisor, a fiduciary, who can help ensure that you remain committed to your properly allocated investment plan.

Stay tuned as we share more information about Dr. Lupescu’s comments in a future blog.

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