• Dimensional
• Philosophy
• Application
• Strategies
• Service
• Library

• Markets Work
• Dimensions
• Diversification
• Structure
• History

Search

For Professionals

Institutional investors and Financial Advisors worldwide have access to Dimensional editorials, materials, and analytical tools:

Secure Site Login

Find an Advisor

Use our online form to find an advisor near you with access to Dimensional funds.

Library

FAQs

If academic research demonstrates that value stocks have higher returns than growth stocks or market portfolios over time, why not put 100% of the equity allocation in value stocks?

Dimensions

Print this

E-mail this

Evidence from practicing investors and academics alike points to an undeniable conclusion: Returns come from risk. Gain is rarely accomplished without taking a chance, but not all risks carry a reliable reward. Financial science over the last fifty years has brought us to a powerful understanding of the risks that are worth taking and the risks that are not.

Three Equity Factors

Everything we have learned about expected returns in the equity markets can be summarized in three dimensions. The first is that stocks are riskier than bonds and have greater expected returns. Relative performance among stocks is largely driven by the two other dimensions: small/large and value/growth. Many economists believe small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.

Size and Value Matter

In US dollars. Developed markets value and growth index data provided by Fama/French (ex utilities). The S&P data are provided by Standard & Poor's Index Services Group. US Small Cap Index is the CRSP 6-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Small Cap index data: 1970-June 1981, 50% UK small cap stocks provided by the London Business School and 50% Japan small cap stocks provided by Nomura Securities; July 1981-present: simulated by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE Index countries, market-capitalization weighted, each country capped at 50%. MSCI data copyright MSCI 2008, all rights reserved. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Compound returns have an assumed rate of return, are hypothetical, and are not representative of any specific type of investment. Standard deviation is one method of measuring risk and performance, and is presented as an approximation.

Two Fixed Income Factors

As with equities, the risk and expected return of fixed income securities are related. Understanding this relationship enables investors to plan the total risk/return profile of their portfolios. Investors seeking the greater expected returns of stocks may choose to focus on equities and keep their bond portfolio short and high in quality. Investors who prefer the lower risk of fixed income may still increase expected returns by holding bonds with slightly longer maturities and slightly lower credit quality.