The Informed Investor

Episode 9: Enticing pitches for "buffered" strategies promise protection against downside risks in stocks. Are they worth it? Should investors sacrifice some upside for lowering the risks of losing money? So-called "defined outcome strategies" offer a way to hedge downside equity risk in exchange for lower participation during market upswings. There is typically a downside protection amount (the "buffer"), ranging from 10% to 100%, and a capped potential upside over a set period, typically one year. The income potential of these strategies may be attractive for some investors, and softening the blow during equity market downturns is appealing for most investors. But there is more than one way of targeting downside protection. Historically, fixed income investments across a wide range of sectors have had a positive average return when equities have had a negative return. Since 1976, for example, the Bloomberg US Aggregate Bond Index had an average return of 4.53% in years when the S&P 500 Index had a negative return. Some may question the diversification benefit of fixed income based on recent episodes where stocks and bonds moved in the same direction, like 2022. But it's important to remember that volatility reduction in portfolios from an allocation to fixed income has been largely unconnected to whether the returns of stocks and bonds moved in the same or opposite directions. Buffered strategies and traditional equity/fixed income allocations both aim to provide downside protection at the cost of upside participation. The tradeoff between upside participation and downside exposure is comparable whether using defined outcome strategies or a simple mix of stocks and bonds. What's not similar between these two approaches is the overall performance—in the five-year period ending June 30, 2025, a 60% stocks/40% bonds strategy outgained several types of buffered strategies, which typically come with higher fees. In Episode 9 of "The Informed Investor," Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, analyze the allure of buffered strategies as well as the risks and costs of seeking downside protection. LINKS FROM TODAY'S EPISODE: The Informed Investor on YouTube https://www.youtube.com/playlist?list=PLCyJr6FFig- Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/ Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/ Learn more at https://www.dimensional.com/

Episode 8: Is the stock market expensive or a good value? Stock valuation ratios, which measure stock prices against a financial metric like a company's earnings or book value, offer investors some information about the expected returns of the market or individual stocks at any point in time. If a valuation ratio, literally the price divided by the financial metric, is considered elevated relative to a historical average or another comparative number, some investors may worry that stocks are too pricey. Alternatively, if valuation ratios are considered attractive, investors might see stocks as a good buy. However, investors may not realize that aggregate stock market valuation ratios have not been strong predictors of future returns in the broad market. Valuation measures such as the cyclically adjusted price-to-earnings (CAPE) ratio are frequently portrayed as indicators that assess whether the stock market's expected return has increased or decreased. Yet, there isn't much evidence showing that such indicators are useful for investors' asset allocation decisions. Equally noteworthy is that eye-popping returns for the market's most high-flying stocks, the companies that often carry high valuations, typically tend to occur before those companies reach the top of the market. Once there, subsequent returns tend to lag the market. This is a cautionary tale for investors expecting continued outperformance from big-name technology stocks or continued underperformance from so-called value stocks. That may or may not happen—nothing is guaranteed. While ample evidence suggests emphasizing stocks with low price-to-book ratios has been a reliable approach for investors seeking outperformance versus the market over the long haul, we don't know when (or if) that outperformance might occur. What we do know is that, in general, stocks are priced to have a positive expected return. In Episode 8 of The Informed Investor, Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, dive into current debates about market valuations in an attempt to separate the signals from the noise. LINKS FROM TODAY'S EPISODE: The Informed Investor on YouTube https://youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90&si=Luthpbg9WwkhMVbi Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/ Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/ Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/ Learn more at https://www.dimensional.com/

Episode 7: You might say stock market volatility is like a deep-sea fishing trip: Sounds fun until the ride really gets choppy. While the market was relatively calm in recent weeks, that wasn't true in the spring. The S&P 500 Index notched returns of at least +1% or –1% on 12 out of 20 days in March, which was double the frequency of such returns over the past 30 years. Then, in early April, we saw down days of –4.8% and –6.0% followed by an up day of +9.5%. That kind of volatility can leave many investors feeling queasy. Yet you might be surprised to know that it hardly approached the levels of volatility seen in market upheavals during COVID-19 and the Global Financial Crisis. Should investors think about adjusting their asset allocation when the market undergoes big swings? Whether or not they choose to make a move, the data makes clear that volatility has not been a useful signal for future stock market returns. While market volatility is never pleasant, it is a sign that market prices are responding to new information. Put another way, investors should expect volatility when new information is being processed by the market, especially if that information is largely unexpected. Government policy updates, new economic forecasts, geopolitical developments, even headlines about widely followed companies all give markets plenty to absorb—and they all can lead to bouts of volatility. In Episode 7 of The Informed Investor, Dimensional's Mark Gochnour, Wes Crill, and Jake DeKinder explain how to make sense of spikes in volatility and whether it's possible to prepare for big swings in the stock market. LINKS FROM TODAY'S EPISODE: The Informed Investor on YouTube https://www.youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90 Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/ Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/ Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/ Learn more at https://www.dimensional.com/

Episode 6: When the stock market soars to new highs, does that offer a useful signal for where the market is headed? Should you make a move—or stay in your seat? These questions confound many investors, especially those who may worry that the market is due for a big fall. But investors may be surprised to find out that average returns over one, three, and five years after a new market high are similar to those after months that ended at any level. Reaching a new market high doesn't automatically mean the market will then retreat. Research indicates that stocks are priced to deliver a positive expected return every day. Which means that reaching record highs with some regularity should not be unexpected. And that's exactly what the data suggests. Since 1926, the US stock market has ended the week on a new high slightly more than one out of every six weeks. Fluctuations happen, particularly in the short run. Bear markets can be painful. But the evidence shows that stocks have tended to rise in the long run—which has led to new highs. In Episode 6 of "The Informed Investor," Dimensional's Mark Gochnour, Head of Global Client Services, and Jake DeKinder, Head of Client Communications, explore some misconceptions about all-time highs in the stock market and address the importance of having an investment plan that can help prepare you for highs, lows, and everything in between. Learn more at https://www.dimensional.com/

Episode 5: Interest rates tend to have an impact on everyday life, from savings rates and student loans to credit cards, mortgages, and more. For investors, rate cuts (and hikes) by the US Federal Reserve often prompt the question: How do different interest rate environments affect my portfolio? The Federal Open Market Committee (FOMC) cut interest rates on September 18, 2024, the first of three cuts since the hikes began in 2022 to control rising inflation. Today, headlines about the possibility of more interest rate cuts are in the news. As the Fed often signals its agenda in advance, it's likely that market participants are already incorporating this information into market prices. Research also shows that not all interest rates move together or in the same direction—and that it's virtually impossible to accurately predict where rates are headed. This means that the Fed might do one thing while interest rates on Treasuries do another. In Episode 5 of "The Informed Investor," Dimensional's Mark Gochnour, Wes Crill, and Jake DeKinder examine the impact of interest rate changes and assess how those outcomes can help investors prepare for future moves in interest rates. Sources: Federal Reserve Bank of St. Louis; Wes Crill, "Don't Get Fed Up, Part 2," Insights (blog), Dimensional Fund Advisors, August 2, 2004. Learn more at Dimensional.com https://www.dimensional.com/ Fed Forecasting Futility https://www.dimensional.com/us-en/insights/fed-forecasting-futility Don't Get Fed Up: Part 2 https://www.dimensional.com/us-en/insights/dont-get-fed-up-part-2

How do changes in the economy impact stock returns over the short and long term? Whether responding to economic forecasts, consumer price changes, or tariff policy updates, market prices adapt to new information, including changes in gross domestic product (GDP). Luckily for investors, markets are forward-looking and generally react before changes in the economy show up in the macroeconomic data. This also means that, even when the immediate economic outlook is weak, expected stock returns can be positive over the long term—and that a positive surge in the stock market can occur at the same time a bleak economic report emerges in the media. All that said, heightened political uncertainty, trade wars, volatile inflation, and questions on whether the economy will expand or contract may leave investors with concerns about getting into or out of the market or sticking with their plan. Dimensional's Mark Gochnour, Wes Crill, and Jake DeKinder review the performance of the stock market during recent periods of economic turbulence, such as the global financial crisis of 2008–2009 and the COVID-19 pandemic, and discuss sensible ways for investors to think about economic growth in the context of investment decision-making. Learn more at Dimensional.com: Recession and Markets https://www.dimensional.com/us-en/insights/recession-and-markets

US government debt as a percentage of GDP (gross domestic product) reached 121% at the end of 2024. Many investors may have concerns about the impact of this level of debt on the stock market. While government spending associated with debt may provide a stimulatory effect on the economy, the prospect of higher future taxes and long-run impacts on spending and investment introduces many channels through which spending and debt levels might affect expected stock returns. But what investors may not realize is that the historical data show little relation between debt levels and stock returns. There are numerous examples of countries carrying high debt for extended periods while their stock markets posted double-digit annualized returns. One explanation is that stock markets set prices to the point where investors have a positive expected return given current information. Since country debt is a slow-moving variable, it's sensible that current prices reflect expectations about the effect of government debt. Plus, economic theory does not offer a debt threshold beyond which a country is in economic peril. Dimensional's Mark Gochnour, Wes Crill, and Jake DeKinder explore the implications of the rising US federal debt and discuss how investors should respond. Learn more at Dimensional.com: https://www.dimensional.com/us-en/ind... Country Debt and Stock Returns https://www.dimensional.com/us-en/ins... Not News If It's Not New https://www.dimensional.com/us-en/ins... Moody Blues https://www.dimensional.com/us-en/ins...

Investors may be comfortable with stocks from their home country—but there could be missed opportunities by not venturing across borders. It's important to remember than you're investing in companies, not countries. So ask yourself: Do other nations have good ideas, good processes, and good resources? Investors also may not realize that some familiar brands have ownership elsewhere. We're comfortable buying products from outside the US—olive oil and wine are great examples—but may not have the same instincts when it comes to our investment portfolios. Even holding giant "multinational" brands in the US may not be diversifying your returns in the way a portfolio that includes foreign companies might. And if you're emphasizing stocks with higher expected returns, like value stocks and small cap stocks, being diversified globally can broaden the universe of stocks that may outperform, while also potentially offsetting weakness in one area with strength in another. In this episode of "The Informed Investor," Dimensional's Mark Gochnour, Wes Crill, and Jake DeKinder argue for capturing the returns of the market whenever—and wherever—they present themselves.

Many investors may choose dividend-paying stocks with the hopes of earning consistent income through payouts that aren't tied directly to a stock's performance. But what are dividends, exactly? A dividend represents a portion of a company's value being distributed to shareholders. However, some investors may not realize that a company's share price typically declines by the amount of the dividend it pays. Put another way, the dividend doesn't come out of thin air. This is a reminder about the importance of focusing on total return, which incorporates dividends and changes in share prices. For investors seeking stable income or reduced volatility from dividend-paying stocks, keep in mind that a dividend-focused strategy does not necessarily meet those goals because changes in dividend policy are common, especially during times of higher uncertainty, and the data do not suggest that dividend-paying stocks are significantly less volatile than non-dividend-payers. It's also important to note that the percentage of firms paying dividends has declined significantly in the past several decades. That means diversification may be sacrificed when investors focus solely on dividend payers. Dimensional's Mark Gochnour, Wes Crill, and Jake DeKinder discuss the effectiveness of dividend strategies and their potential downsides.