Investors are rewarded in proportion to the risk they take. Framing decisions around compensated risk factors in the equity and bond markets connects investors to the forces that create opportunities to build wealth over time. Financial science offers insight into these risks.
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.
Everything we have learned about expected returns in the equity markets can be summarised 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.
Dimensional approaches fixed interest primarily as a strategy to maximise overall portfolio benefit. Shorter-term, high-quality debt instruments tend to have less risk. Dimensional engineers lower-risk bond strategies so investors can temper their total portfolio volatility or take more risk in equities, where expected returns are greater.
Three Equity Factors
Size and Value Matter
Regional view 
Australia & US
International
Annual Returns are from January to December.
Australian stocks in AUD Dollars; US large, US small, non-US developed, and emerging markets stocks in US Dollars.
Past performance is not a guarantee of future results. US value and growth index data (ex utilities) provided by Fama/French. The S&P data are provided by Standard & Poor's Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Value is: 2008-present, provided by Fama/French from Bloomberg securities data; 1975-2007, provided by Fama/French from MSCI securities data. International Small is: 1994-present, compiled by Dimensional from Bloomberg securities data; July 1981-1993, compiled by Dimensional from StyleResearch securities data; 1970-June 1981, 50% UK small company stocks provided by Hoare Govett and 50% Japanese small company stocks provided by Nomura Securities. MSCI EAFE Index is net of foreign withholding taxes on dividends, copyright MSCI 2011, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted both within each country and across all countries.
Indices 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 is presented as an approximation.
The above data is based on simulated performance data. Simulated performance does not represent actual investments of assets during any period. Note that the performance presented is historical and past performance is not indicative of future performance.
Australian stocks in AUD Dollars; US large, US small, non-US developed, and emerging markets stocks in US Dollars.
Past performance is not a guarantee of future results. US value and growth index data (ex utilities) provided by Fama/French. The S&P data are provided by Standard & Poor's Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Value is: 2008-present, provided by Fama/French from Bloomberg securities data; 1975-2007, provided by Fama/French from MSCI securities data. International Small is: 1994-present, compiled by Dimensional from Bloomberg securities data; July 1981-1993, compiled by Dimensional from StyleResearch securities data; 1970-June 1981, 50% UK small company stocks provided by Hoare Govett and 50% Japanese small company stocks provided by Nomura Securities. MSCI EAFE Index is net of foreign withholding taxes on dividends, copyright MSCI 2011, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted both within each country and across all countries.
Indices 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 is presented as an approximation.
The above data is based on simulated performance data. Simulated performance does not represent actual investments of assets during any period. Note that the performance presented is historical and past performance is not indicative of future performance.
Annual Returns are from January to December.
Australian stocks in AUD Dollars; US large, US small, non-US developed, and emerging markets stocks in US Dollars.
Past performance is not a guarantee of future results. US value and growth index data (ex utilities) provided by Fama/French. The S&P data are provided by Standard & Poor's Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Value is: 2008-present, provided by Fama/French from Bloomberg securities data; 1975-2007, provided by Fama/French from MSCI securities data. International Small is: 1994-present, compiled by Dimensional from Bloomberg securities data; July 1981-1993, compiled by Dimensional from StyleResearch securities data; 1970-June 1981, 50% UK small company stocks provided by Hoare Govett and 50% Japanese small company stocks provided by Nomura Securities. MSCI EAFE Index is net of foreign withholding taxes on dividends, copyright MSCI 2011, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted both within each country and across all countries.
Indices 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 is presented as an approximation.
The above data is based on simulated performance data. Simulated performance does not represent actual investments of assets during any period. Note that the performance presented is historical and past performance is not indicative of future performance.
Australian stocks in AUD Dollars; US large, US small, non-US developed, and emerging markets stocks in US Dollars.
Past performance is not a guarantee of future results. US value and growth index data (ex utilities) provided by Fama/French. The S&P data are provided by Standard & Poor's Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Value is: 2008-present, provided by Fama/French from Bloomberg securities data; 1975-2007, provided by Fama/French from MSCI securities data. International Small is: 1994-present, compiled by Dimensional from Bloomberg securities data; July 1981-1993, compiled by Dimensional from StyleResearch securities data; 1970-June 1981, 50% UK small company stocks provided by Hoare Govett and 50% Japanese small company stocks provided by Nomura Securities. MSCI EAFE Index is net of foreign withholding taxes on dividends, copyright MSCI 2011, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted both within each country and across all countries.
Indices 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 is presented as an approximation.
The above data is based on simulated performance data. Simulated performance does not represent actual investments of assets during any period. Note that the performance presented is historical and past performance is not indicative of future performance.
Two Fixed Interest Factors
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Power in Numbers