Understanding the benefits of a strategic and structured investing approach, the next obvious question is how does one implement such an approach?  We’ve already described the advantages to using mutual funds over stocks and passive index funds over actively managed mutual funds, so the ultimate question is what index funds can be used to implement strategic investing?

The answer is quite simple since there are few choices available to the investor but, those choices are fortunately very good ones.  There are really only two fund families that offer a broad array of index funds so that one can implement the world-wide asset class diversification that is at the core of this investment approach.  These are Vanguard funds and Dimensional Fund Advisors (DFA).*  Both provide funds that meet essential criteria mentioned earlier:  low internal expense ratios, no loads, funds that target the distinct asset classes across the world-wide capital markets (U.S. large cap growth, U.S. small cap value, International large value, Emerging Markets, etc.), and tax-managed funds.

At Compass Investments, we use the DFA funds with a few Vanguard funds where DFA may not have a comparable asset class offering.

* Technically, the DFA funds are more of a hybrid index fund in that they do not follow the strict guidelines set for indexes like the S&P 500 index or the Russell 2000 index.  By creating indexes which vary from these formal indexes, DFA is able to capture distinct trading advantages for their funds which helps keep internal expense ratios low and  maintain purer asset class distinction that can capture the performance benefits of size and style.