How Flexible Estate Planning Can Improve Your Retirement

Episode: 52
Originally Aired: May 4, 2011
Topic: How Flexible Estate Planning Can Improve Your Retirement

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
Listen to every episode at our radio show archives page.

Please note: *This podcast episode aired in the past and some of the information contained within may be out of date and no longer accurate. All podcast episodes are intended to be used and must be used for informational purposes only. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment strategy or plan will be successful. Investment advisory services offered by Lange Financial Group, LLC.


Click to hear MP3 of this show


  1. Introduction of P.J. DiNuzzo of Dimensional Fund Advisors
  2. Passive Investment Is Rooted in the Efficiency of the Market
  3. Active Investment Tries to Outperform the Market
  4. 60 to 70 Percent of Active Managers Have Underperformed S&P 500
  5. Most S&P 500 Portfolios Are Not Well-Diversified
  6. Chasing Performance Is a Common Mistake by Active-Investors
  7. Taking on More Risk Can Beat the Market ‒ At Least Initially
  8. DFA Funds Are Only Available to Institutional Money Managers
  9. First, Make Sure That Your Risk Capacity Is Taken Care Of

Retire Secure! BookAVAILABLE NOW!
Retire Secure!

A Guide to Getting the Most out of What You've Got

Join our mailing list to receive updates, news and get FREE bonuses.

Sign Up Today and Get your FREE Bonus!

Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Introduction of P.J. DiNuzzo of Dimensional Fund Investors

Nicole DeMartino:  Hello and welcome to The Lange Money Hour.  We are talking smart money tonight with retirement and estate planning expert Jim Lange, who’s also the author of two editions of Retire Secure! and The Roth Revolution.  Tonight, he is joined by a very special guest in the studio, P.J. DiNuzzo, president of DiNuzzo Investment Advisors.  P.J. is a five-star advisor, which means he is in the top 1 percent of all advisors in the country.  He is a nationally recognized expert in investment management.  P.J., thanks for joining us tonight.

P.J. DiNuzzo:  Thank you very much.

Nicole DeMartino:  Sure!  Tonight, Jim and P.J. are going to be covering index investing, a very interesting topic, but before I turn it over to Jim, tonight’s show is live, so please feel free to call into the studio.  That number is (412) 333-9385.  Hi, Jim.

Jim Lange:  Hello there.  I’d like to get right into it because P.J., there’s a lot of disagreement on whether people should be looking for active money managers and passive money managers, and by passive, I guess I’m really referring to index investing.  Can you tell us a little bit about the history of index investing, how this got started, and who began this index investing idea?

2. Passive Investment is Rooted in the Efficiency of the Market

P.J. DiNuzzo:  Yeah, Jim, the indexing idea basically started really in the 1950s when diversification, when the research came onto the scene with Harry Markowitz, the diversification could help in a portfolio on a risk-adjust basis, not to put all your eggs in one basket, as everyone knows today.  Then, following that, in the 1960s, Professor Fama at the University of Chicago wrote the seminal paper on efficient market theory and really shook up the whole world.  He was sort of in a distinct minority at that time, because what everybody takes for granted now, everyone thinks that index funds have been around for a hundred years, and really, in 1960, they were just a twinkle in Professor Fama’s eyes, so to speak.  A couple of his students, David Booth and Rex Sinquefield, later founded Dimensional Fund Advisors — DFA — which we’ll talk about.  In the early 1970s, Rex Sinquefield built the first S&P 500 fund.  He had been sitting in Professor Fama’s classes at the University of Chicago Graduate School, he and David Booth working on their MBA and Ph.D. collectively, and said, “Hey, you know what?  Everything that Professor Fama says makes all the sense in the world to me.  I think the stock market’s highly efficient.”  So, he was a senior trust officer at a large bank in Chicago, and he and Mr. McCown from Wells Fargo in San Francisco and Rex basically are credited with building the first S&P 500 funds in the United States.

Jim Lange:  OK.  Going back for a minute, you mentioned the efficient frontier.  When I think of the efficient frontier, I think in terms of asset allocation between different types of asset classes, whether it be large cap or small cap or value or growth, et cetera, and is that a different issue than indexing?

P.J. DiNuzzo:  Yes, that would be a different issue.  The frontier would relate to building portfolios.  The efficient market theory relates to that it’s next to impossible to outperform other individuals in the stock market because information is disseminated so widely and so rapidly on a risk-adjusted basis that the market itself is going to outperform the majority of people who are participating in the market.

3. Active Investment Tries to Outperform the Market

Jim Lange:  All right.  So, basically, what you’re saying is an active manager, if you will, is somebody who thinks that they can predict how a particular stock or a particular fund is going to do in the future, whether it will outperform the rest of the market or underperform, in which case, they would sell it, or if they thought it was going to outperform, they would buy it.  Is that the essence of what you would consider active management?  That is, people who all have, presumably, the same information, making different assessments and different judgements as to what’s going to happen to a particular stock, and therefore making recommendations on purchasing stocks or purchasing mutual funds and hoping to outperform the market.  Is that what you would consider active investing?

P.J. DiNuzzo:  Yes, that would be considered active investing.

Jim Lange:  All right, and can you contrast that and maybe define what passive or index investing is?

P.J. DiNuzzo:  Passive or index investing’s going to say that after all fees and expenses, the average active manager … I mean, the numbers have now been developed that, over a reasonable period of time, two out of three, even three out of four active managers are going to underperform their respective index.  Now, if someone is — and some of the areas we’ll talk about in a little bit — a small-cap manager of value, they’ve got a little bit extra wind in their sail for performance.  But really, it’s sort of counterintuitive.  One reason why a lot of people have difficulty with it is that it’s sort of counterintuitive to the American way.  In America, you work a little bit harder, you put in 60 or 70 hours a week, you’ve been burning the midnight oil, you went to a better university, you got a better education, and you’re going to outsmart people, where it just doesn’t work in a capital market.  The financial markets, there’s millions and millions and millions of very, very intelligent investors.  This information gets disseminated so quickly, and the results basically show up, in the last 10 years, there’s been basically over a thousand active managers who have closed their mutual funds every year for the last decade.

Jim Lange:  All right, well, how did these early guys do?  You’re saying some of these guys started their own funds, and presumably, they’re competing against active managers.  What were some of the early results, and what are some of the maybe even more current results in terms of … you know, I think there’s probably reasonable arguments for both active management and passive management.  So, who has won the quantitative game, at least some of the numbers that you’re following?

P.J. DiNuzzo:  Yeah, well, that’s a very good point, Jim.  What we do is, if you want to go back to the inception, so to speak, again, Rex Sinquefield built arguably the first S&P 500 fund in the early 1970s, New York Bell put the first institutional dollars in in the mid-1970s.  Jack Bogle from Vanguard had seen the research that came out of the University of Chicago built on Professor Fama’s work, et cetera, and Jack Bogle, the founder of Vanguard, basically built what’s today arguably the largest and most successful mutual fund company off of that strategy.  So, you’re looking at the early ’70s to mid-’70s, I guess one of the ways to look at it is the largest, smartest portfolios on earth are the institutions.  They have the most money that’s invested.  They’ve gone from those first dollars invested by New York Bell in approximately 1975 to literally trillions of dollars in indexes.  There has been more money in institutional portfolios that have gone from the active side that’s been converted to indexing and passive pretty much every year since 1975.

Jim Lange:  All right, so you’re saying that this is the growing trend.  This isn’t something that is historical and active managers are passing it up.  It’s actually going the other way.  Is that right?

P.J. DiNuzzo:  Yeah, passive is growing every year.  It’s a growing trend that has the effect of maybe a tsunami, so to speak.  It’s been overwhelming the amount of money that’s been moved into it.

Jim Lange:  What is passive investing, and what is index investing?  I mean, does that mean that somebody just sits around and does nothing?  What does it mean?


4. 60 to 70 Percent of Active Managers Have Underperformed S&P 500

P.J. DiNuzzo:  And that’s what’s interesting.  The first S&P 500, the real breakthrough, and Rex Sinquefield, the co-founder of DFA, is prone to, not really hyperbole, but he almost has a religious passion for efficient market theory, and the real breakthrough was when the University of Chicago had gathered all data in the stock market every day going back to 1926.  They were then able to take that data … it’s one thing to say, you know, “Jim, I outperformed you,” but you go back and look at the data and say, “No, you outperformed me,” so now you’ve got the raw data to go back and they sliced it and diced it.  They said, “You know, the largest 20 percent of the market was approximately 500 stocks.”  So, therefore, the genesis of the S&P 500.  Jack Bogle fell in love with it because, I mean, God bless him, but he’s arguably the most frugal individual in the United States.  He said, “This is great.  I don’t have to pay a money manager.  I’m just going to buy the 500 largest stocks and rebalance my portfolio once a year and I’m going to be in great shape.”  It’s really not just about that.  There are a lot of dimensions in the market, but at the end of the day, approximately 60 percent to 70 percent of all active managers are underperforming the S&P 500 over time.

Jim Lange:  All right.  So, the S&P 500, that’s probably the classic benchmark.  Is that fair enough?

P.J. DiNuzzo:  That has now turned into the Dow 30, which was the classic benchmark for decades, and now the S&P over the last couple of decades has taken over.  It’s a better representation, arguably the largest 500 stocks in the market instead of the largest 30 stocks in the market.

Jim Lange:  Yeah, a lot of times, people say, “Well, how have they done,” or “What do you think is going to happen in the next five or ten years?”  And I usually just try to say, “Well, I think rather than just”… well, they did 2 percent or they did 28 percent or they did any particular number, I think probably what’s more important is how they did relative to a benchmark.  So, in other words, if the S&P lost 25 percent, if you lost 10 percent, that’s actually a heck of a good year, and people say, “Well, what do you mean?  You lost 10 percent.”  So, that tends to be the benchmark, whether it be the S&P 500.  Is it fair to say that the Vanguard 500 is pretty similar to the S&P 500?

P.J. DiNuzzo:  Yeah, the Vanguard S&P 500 tracks the Standard & Poor’s 500 index.

Jim Lange:  All right, so if somebody was interested in a pure index, the Vanguard S&P 500 index would be one way that they could participate in the index.  Is that right?

P.J. DiNuzzo:  Yes.  For retail investors, our recommendation is the Vanguard family.

Jim Lange:  OK.  Now, somebody shouldn’t put all their money in the S&P … let’s assume that we have some listeners and they drink the Kool Aid and they say, “OK, let’s keep expenses down.  Nobody can predict which stock is going to go up more than which other ones are.  I’m going to keep my expenses down.  I’m going to go with the odds.  I’m going to become an index investor.”  Now, they’re not going to put 100 percent of their money in the, whether it’s the Vanguard or any other basically S&P 500-type fund, are they?

P.J. DiNuzzo:  No, you would not want to do that.

Jim Lange:  All right, and is that because of the efficient frontier and because of asset allocation diversification?

P.J. DiNuzzo:  That would be because of diversification.  Even the S&P 500, although itself is a large cap representation, the market will do well.  There’s a lot of years when small stocks will do better, real estate, international large, international small, et cetera.

Jim Lange:  All right.  And the way I always think of it is since we don’t know which one’s going to do better, whether it’s large cap or small cap or mid-cap, and then the different styles in terms of growth and value, et cetera, is that the safest  thing to do is to own all of them.  Is that a fair statement?

P.J. DiNuzzo:  Yes.  We would make the case where, as DFA and the University of Chicago would identify that there’s identifiable premiums in the market: the market premium, value premium and small cap premium.  We say one thing about indexing, I think there was a company years ago that had basically a NASCAR index.  Just because you index something doesn’t mean that you can outperform, you can buy the automakers and the oil companies and the tire companies, et cetera.  So, just indexing itself, there are areas in the market that provide premiums, the market itself, value tilt in a portfolio, and then small cap.  Small stocks have done much better than large stocks if you have a reasonable holding time.

Jim Lange:  OK, yeah, particularly since 1975, as I understand it, that small caps have significantly outperformed.  What are some of the other popular indexes besides the S&P?  And do you ever use, in effect, your performance versus theirs as a benchmark, if you will?

P.J. DiNuzzo:  Yes, some of the other popular indexes that we would use, we would recommend … I can just use as an example.  In our portfolios, we would have a large value index, small value, small cap — as we’ve already discussed — real estate, international large value, international small and small value and emerging markets, small as well as emerging markets value.

Jim Lange:  All right, so you’re literally getting representation in just about every one of the major asset categories.


5. Most S&P 500 Portfolios Are Not Well-Diversified

P.J. DiNuzzo:  Yes, all of the errors that you would want to be, and one thing that you see a lot, and I know you’ve seen it, Jim, a lot over the years is overlap.  We’ve literally had prospective clients come to us and they’ve had two or three or four S&P 500 index funds with two or three or four different mutual fund families.  So, you want to stay away from having that overlap in your portfolio.  Most individuals’ portfolios are very underdiversified.

Jim Lange:  Well, that’s actually a great point because I’ve seen that myself where somebody might have a Vanguard S&P and they might have a Fidelity investment that, in effect, is large cap, and then they might have a PIMCO or a number of mutual funds, and then if you actually open the hood and see what’s there, you’ll find that there’s a huge amount of overlap, and sometimes, what happens is people go by the name of a fund, and the name of the fund doesn’t necessarily represent what’s in it.  So, something might be billed as a mid-cap fund, but if the mid-cap fund is extremely successful and the companies grow, then, in effect, you end up with a large cap fund, even though it still carries the name mid-cap.  So, I think that that would be important.  Well, how important is diversification in money management?  Because now, we’ll probably switch topics a little bit.  So, let’s say, I’m one of the listeners here, and I’m thinking, “Well, you know, maybe indexing is pretty good, and I like the idea of asset allocation and diversification.  Maybe I can just get on to and take a look at that.”  But how important is diversification in your practice as a money manager?

P.J. DiNuzzo:  Diversification is extraordinarily important and that’s really what is going to provide, when we manage our clients’ portfolios, is the risk-adjusted rate of return.  We’re certainly in the return, in the total return of the portfolio, but also what’s the level of risk we’re taking on.  So, by adding these other asset classes — small, small value, real estate, international that we discussed earlier — we’re able to develop a portfolio that may just have 60 percent in stocks, where we would have a market expected rate of return, or maybe a market of plus 1 or maybe even plus-2 percent, with approximately in some cases half of the risk of the stock market.

Jim Lange:  Yeah, you’ve used the word “risk-adjusted” a number of times, and I think we’re going to get to that topic of risk-adjusted after the break.  Nicole is desperately breaking her hands.

Nicole DeMartino:  I’m giving him the look!  We do need to take a break.  We’ll be right back.  We’re with Jim Lange and P.J. DiNuzzo.  You’re listening to The Lange Money Hour.


Nicole DeMartino:  Welcome back to The Lange Money Hour.  We are here this evening with Jim Lange and P.J. DiNuzzo, president of DiNuzzo Investment Advisors.  Before we get back into it, I wanted to give you guys a question I received today from one of our listeners, and the question is this: They were asking if there are enough indexes that you can have a well-diversified portfolio?  Are there enough of them?

P.J. DiNuzzo:  There are enough.  Vanguard’s expanded to the point that they don’t have as many in the areas that we would argue that DFA does, but they do have enough.  I guess the result of that would be that almost never do you see someone utilizing all the indexes that they could utilize in a proper manner, and, more importantly, holding on to those indexes, even at Vanguard.

Jim Lange:  Well, I’ll go back later to the risk adjusted because I want to go back to that.  But that actually brings up a really interesting point because, as you probably know, I have quite a few quantitative types and engineers as clients, and people who frankly are a little bit, let’s call it, “fee averse,” they don’t like to pay fees.  So, let’s say that I’m one of those guys, or ladies — I don’t mean to discriminate.  Let’s say that I am someone who does believe in indexing, and let’s say that I like, whether I use Vanguard or a different set of index funds, that I become familiar with them, and certainly that has happened.  There are a lot of people who have basically created their own portfolios using an index-type approach with Vanguard or other companies.  How have they done against the indexes themselves?  So, basically, I’d like you to ask is there any information on how people who use indexes in the real world versus indexes as if somebody just did indexing and asset allocation and rebalancing?  Basically, what I’m saying is, are there any kind of behavioral traits that people have in their investment styles that might enhance performance or actually detract from it?

P.J. DiNuzzo:  Yeah, Jim, the best way that I could answer that would be a two-part question.  The indexes that are available, I’ve been in this business since 1989, and I would say, easily, less than 1 percent of all prospective clients that I’ve talked to who have been tuned into efficient market theory, indexing, et cetera, even a lot of highly quantitative individuals, I mean, I say, “Hey, you got a lot higher IQ than I’ve got,” but, like I said, really managing a portfolio and structuring it is a different story.  So, let’s say one out of a hundred has access to all of the premiums that are available in the market, but more importantly, to answer your question, DALBAR has really been the seminal research on the behavioral science side exactly to your question that the average universe of active managers, the average individual is achieving on average over a market cycle about 40 percent of the rate of return of that active manager.  Vanguard, I tell you, Jack Bogle has done a phenomenal job, and really through client education, Vanguard, the indexing world, the epicenter really is Vanguard, which is the lion’s share for retail investors, have achieved about 75 percent to 80 percent of the return over a market cycle in the specific indexes that they’d been invested in.  So, the index investors basically centered at Vanguard have achieved a higher rate of return of the index, about 75 percent to 80 percent.  So, that index, the 10 percent a year over a five-year period of time, they’ve achieved about 7½ percent to 8 percent and they’ve lost 2 percent or 2½ percent because of the behavioral science aspect that you mentioned earlier.

Jim Lange:  All right, so basically, you’re saying even if somebody is a do-it-yourselfer and they go to Vanguard that they end up doing a lot worse than Vanguard, even though they’re investing in Vanguard.

6. Chasing Performance Is a Common Mistake by Active Investors

P.J. DiNuzzo:  Yes, and that’s even especially acute with active managers, active investors, but even at Vanguard, still the siren songs of the market, individuals come late to the party, they leave the party early, they come late to the party, they leave the party early, that’s why they’re underperforming.  They’re not holding even the indexes through a full market cycle.  You see a tremendous amount of performance chasing.  Hey, emerging markets were up 52 percent last year.  There’s a ton of money next year that goes in emerging markets.  What happens a lot of times, the next year, it’s down 20 percent and a lot of people are bailing.  So, that’s where that behavioral science, a lot of our value that we provide as a firm is on emotions management.  It’s very critical.

Jim Lange:  Yeah, I know, for example, it’s just very natural, you know, in 2008, people were losing their shirts and they’re getting shy and they’re getting nervous and they start getting out of the market when the market’s at an all-time low, and then they miss the run up.  Now, the market’s doing better, or maybe even in 2009, 2010, the market’s doing better, and they come in at a high point, and then sometimes, hopefully we’re not going to have another dip, but that is possible.  We’ve had a good year this year and we had a great year last year.  So, is that the kind of thing that people are feeling uneasy when the market’s down and they get out, basically selling low and they feel great when the market’s up and they go in basically buying high.

P.J. DiNuzzo:  Yeah.  I mean, I know it sounds like the risk of overstating the obvious, but the average retail investor wants to be all in stocks when the market’s going up and it’s on a bull run, and they want to be all in bonds when we’re in a bear market and the market’s going down.  Of course, everybody, if you’re just sitting across the table having a cup of coffee with someone, says, “Yeah, I know I can’t time them.  I can’t do that.”  But still, those are those siren songs we talked about that are pulling you towards thinking that, “Hey, I’ve got an idea.”  I know when to allocate more money into the market.  This’ll be called tactical asset allocation, which is the exact opposite of what we do, but that’s really what happens in the market, these ebbs and flows of money that comes in.  The better the market does, the more money that comes into the market.  Just like I said, individual investors come to the party late and they leave the party early with alarming regularity.

Jim Lange:  Yeah, I have found that in practice, and the other thing is, I know Jonathan Clements always used to say, “It’s better to figure out a certain asset allocation strategy and stick to it,” and the idea of sticking to the strategy is sometimes more important than what strategy do you pick.  So, in other words, it might be more important for somebody to say, “Well, I want to be 60 percent stock and 40 percent bonds and more or less stick to that through rebalancing,” or if they say, “Well, I want to be 60 percent bonds or 40 percent stocks,” if they stick to either one of them, that they will do better than if they switch midstream when the market might be higher or lower.

P.J. DiNuzzo:  Yes, exactly.

Jim Lange:  All right.  By the way, that probably can’t be overstated enough because I have a lot of do-it-yourself clients, and not only do they spend a lot of time and aggravation doing this, but they actually don’t do better.  In fact, they do worse, even after … in fact, the numbers that you just stated are well more than most any reasonable money manager’s fees.  So, in a way, you could say even if the money manager did nothing other than keep you in the market, that they would pay for themselves many times over just by, let’s say, changing the behavior of people.  I know that Nick Murray was a big advocate of that, and he said, “Hey, you know, one of the things that we do, we don’t necessarily have to beat the market.  We just have to keep people on the straight and narrow.”  So, let’s go back to risk-adjusted for a moment, because you used risk-adjusted about maybe, I don’t know, five or six times in this conversation, “risk-adjusted return.”  What do you mean by that, and how does that relate to people right now?  And I think people are, frankly, even though the market’s up, kind of nervous, and particularly with what’s going on in the world with terrorism and Japan and global warming and three wars and everything else.  People are a little nervous right now.  So, what do you mean when you say “better risk-adjusted returns?”

7. Taking on More Risk Can Beat the Market – At Least Initially

P.J. DiNuzzo:  You know, risk-adjusted, we’ll look at the amount of risk the standard deviation, and really just how much that portfolio fluctuates up and down.  Let’s say, for example, the market does 10 percent in one year and an active manager’s total return was 11 percent, but if the active manager’s risk, the volatility in the portfolio, was twice as much as the market, on a risk-adjusted basis, they would have underperformed.  They put a few more pounds, or five more pounds, on the risk side of the scale for that small sliver of return that they brought in.  So, what you see over time is the only people who are able to outperform the market generally on average are taking on more risk in a portfolio, and that’s going to catch up with you sooner rather than later.

Jim Lange:  And whether it does or not, if it catches up to a certain number of people, and you’re one of those people, then you’re not going to be too happy.  Well, let me ask you this.  You mentioned retail funds and if you’re a retail investor.  Retail, I take it, you mean kind of like the do-it-yourselfer who goes to Vanguard?

P.J. DiNuzzo:  Mm-hmm.

Jim Lange:  All right, and then you mentioned Dimensional Funds a couple of times, and then you also mentioned Roger Ibbotson in the story.  Could you tell us a little bit about Roger Ibbotson, his history and his relationship with Dimensional Funds and what Dimensional Funds really is?

P.J. DiNuzzo:  One of the very unique aspects regarding DFA is that …

Jim Lange:  By the way, DFA, that’s the short term for Dimensional Fund Advisors.

P.J. DiNuzzo:  Yes, Dimensional Fund Advisors.

Jim Lange:  I’m sorry, but some of our listeners out there …

P.J. DiNuzzo:  Yeah, and it’s funny, it’s like a commercial on TV which they spend zero dollars in marketing that they’re the largest money manager you’ve never heard of, and as Jim was asking, they’re an institutional manager.  They don’t spend a penny of money on advertising, TV, radio, Money magazine or anything.

Jim Lange:  A lot like … I’d better watch myself.  I’m going to get in trouble, like you see now commercials for TIAA-CREF.

P.J. DiNuzzo:  Yes, yes, but DFA is grounded 100 percent out of academia based out of the University of Chicago.  Rex Sinquefield and Roger both copyrighted and basically patented the data going back to 1926.  So, one of the bibles on everyone’s desk in the institutional world is the Stocks, Bonds, Bills and Inflation, the SBBI book, which is published every year.  Out of that grew DFA, Dimensional Fund Advisors …

Jim Lange:  Now, by the way, that’s the group that comes out with that chart that shows how well the stock’s done, large cap stocks and small cap stocks and inflation and government bonds.  That’s on my desk.  That’s probably on everyone’s desk.

P.J. DiNuzzo:  Yeah, it’s Ibbotson & Associates, and it was Ibbotson & Sinquefield for Rex and, as we know, human nature, individuals, you know, Rex was getting very popular with some other things, so Roger says, “Oh, I’m going to make it Ibbotson & Associates instead of Ibbotson & Sinquefield.”  But yeah, that’s Roger and Rex, even though Roger Ibbotson has been on the board of directors of DFA since Day 1.  It’s really funny.  It’s a small group.  The University of Chicago and various universities have various specialties, but I think there’s been approximately 49 Nobel prizes awarded in finance investments, economics, et cetera, and 22 to 23 I believe of those 49 Nobel prize winners have either taught at or graduated from the University of Chicago Graduate School.  Literally, the official stock prices, every day, the CRSP, the Center for Research and Security Pricing, you say, like a trivia question I guess on a game show on TV, who keeps track of this stuff?  I mean, the University of Chicago is who keeps track of it.  So, that’s really what they do.  That’s their specialty.  They’re the stock market number geeks, and they really have done extraordinarily well.  I mean, the numbers speak for themselves.

Jim Lange:  All right.  So, basically, the Dimensional Funds came out of the University of Chicago.  Now, if I’m one of our listeners, can I just go out and buy some Dimensional Funds tomorrow?

P.J. DiNuzzo:  No. That would be due to the fact that they’re institutional funds.

Jim Lange:  All right.  Could you tell us the difference between institutional funds and retail funds?

8. DFA Funds Are Only Available to Institutional Money Managers

P.J. DiNuzzo:  Yes.  Institutional would be … the best example I can give is, let’s say, somebody looks up and says, “Hey, I looked in MorningStar and DFA is showing up all over the place.”  DFA small value’s one of the top funds for the last 20 years, what have you, and somebody says, “Hey, I’d like to go and see you walk into a local Charles Schwab office, TD Ameritrade and Fidelity, and say, ‘Hey, I’d like to buy some of those DFA funds.’”  They’d say, “I’m sorry, Mr. Jones or Mrs. Smith, they’re unavailable.  These are institutional funds.  They’re available only to institutional money managers.”

Jim Lange:  All right, so that means our listeners can’t go out and directly buy them.

P.J. DiNuzzo:  No, they would have to go through an institutional money manager.

Jim Lange:  OK.  I am getting that look again from Nicole.

Nicole DeMartino:  I’m getting a bad rap today!

Jim Lange:  Yeah, I’m making her the meanie because P.J. and I are having fun and she’s making us stop!

Nicole DeMartino:  They are having fun and I’m tapping my watch here.  We do need to take a break.  We’ll be right back with more of The Lange Money Hour.


Nicole DeMartino:  All righty, welcome back to The Lange Money Hour.  We are here this evening with Jim Lange and P.J. DiNuzzo.  He’s the president of DiNuzzo Investment Advisors, and I always want to make mention, I want to remind you out there that we are now on every Sunday at 9 a.m. on KQV.  So, if you do miss our show, you can always listen every Sunday morning, and then, if you miss that too, we have all of the shows archived on our website,, so you can always go there.  The audio tracks are there, and there’s also written transcripts by Scot Harvey, who’s done a tremendous job in transcribing the shows, if you prefer to read.  Before we go on, I do want to mention, for full disclosure, that in our office at the Lange Financial Group, we do legal services.  Jim is an attorney.  He’s also a CPA, so we do a lot of tax planning and preparation, but we also do money management and P.J. is one of the people, he is one of our options that we can go to when someone comes into the firm and they’re looking for some ideas and options for money management.  We have several money managers to choose from based on your risk tolerance and the things that you’re looking for.  So, we’re happy, we’re very proud to have P.J. as one of the people that we work with.

Jim Lange:  And also, to be fair, and to maybe distinguish P.J. from some of the other managers, the other managers are basically active managers.

Nicole DeMartino:  Right, they are.

Jim Lange:  So, they might not be agreeing with everything that’s being said today, and some people basically genuinely believe, and frankly, they have track records to prove that, no, they’ve done very well.  This is, in effect, giving people a choice.

Nicole DeMartino:  Absolutely.

Jim Lange:  And that way, they are getting our advice regarding Roth IRA conversions, they’re getting our advice regarding estate planning, they’re getting our advice regarding which dollars they should spend first, whether they should start a gifting plan, whether they should do college education for their grandchildren, and that type of advice that we tend to give, and frankly, that I’ve been doing for close to 30 … actually, over 30 years now, and then they work with one of the money managers and they ultimately pay the same fee that they would just to a money manager, and then the money managers and I have a deal where we essentially split fees.  So, it is fair to say that I do have an interest and I’m not completely independent with P.J.  So, we should make that clear to the audience.

Nicole DeMartino:  OK, yes.

Jim Lange:  All right, so you were talking about access to Dimensional Funds, because it sounds like, and maybe we’ll get more into some of the specifics of Dimensional Funds, but it sounds like you’re obviously a Dimensional Funds guy.  How does somebody, let’s say, in the Pittsburgh area, who is interested in index investing, they’re interested in Dimensional Funds, what relationship do you have with Dimensional Funds and how does that work in your particular practice?

P.J. DiNuzzo:  Yes, Jim, we were actually one of the first 100 advisors in the United States approved by DFA.  I was actually building portfolios with Vanguard because I believed the market was efficient years ago, and DFA finally made the funds available to advisors around early 1994 or so.  But they had been exclusively managing money for, for example, AT&T, Boeing, the state of California, the CalPERS plan, Arizona teachers, et cetera.  So, they made these, what we are referring to, institutional funds available to retailers but only through a select group of advisors, because it really again is counter-intuitive.  They don’t want people hopping in and out of the market.  They don’t want people chasing performance.  So, they want advisors who are living and breathing the same exact concept, who truly believe that the market’s efficient and believe in indexing.

Jim Lange:  By the way, that’s very true because I know for a fact that … and I’m in different groups where many of them are money managers, let’s say that you think, “Well, I have an active money management approach, and I want to offer clients a passive one through DFA,” the DFA will not accept you as one of their advisors.  I kind of slipped in through the back door because I don’t manage the money directly, but that I work with individuals such as yourself who have access to DFA.  Well, DFA, and what you have told me before, is … and then I might say, “Well, OK, you know, you told us already some of the advantages of having money managed in terms of behavior, in terms of emotional stability, in terms of keeping in the market when it’s low and maybe getting out when it’s high, and you used the term ‘enhanced index investing.’  So, so far, you’ve kind of made a good case, I think, for index investing.  What is enhanced index investing, and what’s the difference between, let’s say, a DFA index and a Vanguard index?

P.J. DiNuzzo:  Yes, there is a material difference.  DFA only really has one pure index that’s just like an off-the-shelf following just a regular index, and that would be the S&P 500.  Everything else that they had would be referred to, the best definition would be that it’s an enhanced index, and the other way to look at that would be, Jim, that we get asked quite often how’s DFA doing better?  What is this small value?  What are they doing in this index that they’re doing better than, let’s say, the small cap than the Russell 2000 small cap?  What are the reasons?  So, DFA does a number of things to enhance the indexes, and I say, you got to think, these are the folks that thought this up.  I mean, the soil that this grew out of was through Professor Fama, who’s been on the board since Day 1.  They identified this, they’ve been at the leading edge consistently, they have the purest asset class indexes, I would argue, again, and the numbers prove it, of any indexing firm that’s out there.

Jim Lange:  Well, again, you used risk-enhanced.  How many companies would be in a DFA index, for example?

P.J. DiNuzzo:  The unique part about our portfolios, we’re accessing all of the premiums that are available: the market premium, value premium and size, both in the U.S., in all developed countries around the world as well as the emerging markets.  That, at the end of the day, the aggregate holdings in our portfolios are approximately 18,000 stocks in approximately 40 countries.  So, it’s true diversification.

Jim Lange:  All right, so that sounds like it would be much bigger and much better diversification that even, just say, an index that might have 500 stocks, or even if you were going to diversify and use other companies, whether it be international, et cetera, but I don’t think very many portfolios can efficiently have 18,000 stocks in them and use it to their advantage and not to their disadvantage.

P.J. DiNuzzo:  Yes, if they had even probably one-fifth of that amount of stocks in the underlying mutual funds, there would generally be a tremendous amount of overlap in that portfolio.

Jim Lange:  All right.  Can you give us an example of, let’s say, something that you can measure?  You sometimes talk about trading advantages, and you sometimes talk about the difference between having to keep with a particular discipline within the S&P 500.  Basically, if I’m kind of a skeptical listener, I’m saying, “Well, what are some of the ways that they do better?”

P.J. DiNuzzo:  Yeah, I would say that if we get back to the comment I made earlier that Jack Bogle from Vanguard basically was enamored with the indexing strategy because of the low cost and low fees.  Vanguard basically, that’s the fundamental attraction that they have is the low cost and low fees.  What DFA said is there is much more premiums to be able to be had in the market, in the indexing area, and they’ve continued to move forward with the research.  I mean, the initial value was the low cost, but it’s much greater than that.

Jim Lange:  Well, I know one of the things that DFA was in very early on the small cap side.  Is there some special thing with Dimensional Funds and small caps, and is that a way to, using your own words, risk-enhanced and get a better performance?

P.J. DiNuzzo:  Yes, on the small cap, that was actually the first fund that DFA launched back in 1981 on the institutional side, and that was based off of the small-cap premium.  Professor Bonds had written a paper years ago, and that’s what had really launched the strategy.  DFA in a specific area, we would attribute the outperformance to the style purity of the indexes.  For example, Vanguard, a number of years ago, had used a large value index, and they basically took the S&P 500 and said, “What’s the median PE?”  And, well, whatever the average is, the 250 stocks would have a higher price-earnings ratio.  We’re going to say those are all growth stocks, and the 250 who have a lower ratio are going to be value stocks.  Well, out of those 250 that Vanguard identified as value, I think, at the time, DFA had maybe 80 or 90 of those that met the pure definition of value.  They look at it completely differently.  So, what they’re concerned about in the market is the style purity.  If they say that right now, there’s 2,800 stocks that meet the U.S. small value definition, and let’s just say, for example, metaphorically, that those are all oranges.  If there’s 120 more that look like oranges that are oranges in a couple months, they’re buying those 120.  If there’s 300 less, they’re buying 300 less.  They’re keeping those portfolios as pure as possible.  Now, to get back to the small cap, DFA, in the small cap arena, is arguably one of the largest traders in the country.  So, they have a tremendous amount of leverage when the stocks are being bought and sold.  So, you add all these things up, as far as the purity, the trading ability, the structure, the security lending credits that they get that get passed back.  So, at the end of the day, it’s somewhat amazing that you can have an institutional portfolio, and our, for example, total 60/40 portfolio — 60 percent stocks and 40 percent bonds — if the weighted average operating expense ratio, if you average the expense ratios and all the funds that we have, is about a third of a percent.  So, there’s no front-end loads, no back-end loads, no 12B-1 fees, and when you look at the average active mutual fund being close to 1 ½ percent, with these being about 0.3 percent, it’s a very compelling story.

Nicole DeMartino:  We’re going to take one more break, and then we’re going to come back and I think we’re going to talk a little bit more about P.J. and his firm, right?

Jim Lange:  Yes, and I have one or two more questions before we get to that.

Nicole DeMartino:  OK, all right, we’ll cover that as soon as we get back.  You’re listening to The Lange Money Hour, Where Smart Money Talks.


Nicole DeMartino:  Allrighty, welcome back to the last segment of The Lange Money Hour.  We’re here with Jim Lange and P.J. DiNuzzo, and I know Jim has a couple more questions for P.J.  Again, as we said at the last break, we just want to make sure that you do know that we do work with DiNuzzo Investment Advisors.  They are one of our asset managers.  We have several managers, active and passive.  P.J. does represent our passive option there.  So, if you do come in to our firm and you want some advice on your asset management, what you want to do to reach your goals, we definitely have a myriad of options for you to choose from.  That’s the key there: options.

Jim Lange:  Yeah, and I like to think that consumers get the best of both, that is, they get our tax strategies in terms of Roth, estate planning, et cetera, and then also very good money management, excellent, and particularly here with P.J.  One of the things, P.J., that somebody might say is what are some of the very specific ways that Dimensional Funds can, say, outperform an S&P 500?  And one of the things that you have told me about, and that a guy named Rob Bissette and actually some of the materials that I have read talk about the reconstitution effect and how that enhances investment performance.  Can you tell us a little bit about that, and can you give us any idea what the difference is between a money manager who either, let’s say, is on the right or wrong side of the reconstitution effect?

P.J. DiNuzzo:  One area that DFA is able to outperform, for example, the reconstitution effect, Jim, would be, let’s take the Russell 2000 small cap.  Now, we had talked earlier about the S&P 500, that’s large stocks, the Russell 2000 would be 2000 of those smaller stocks in the stock market.  That’s a very rigid index.  They have certain dates that they announced which companies were coming into the index every year, which companies have grown or gone out of business or bankrupt or whatever else have you …

Jim Lange:  Wait, wait, they announce it before they actually buy it or before they sell it?

P.J. DiNuzzo:  There’s a lot of arbitrage that … there’s a lot of very smart people out there, so the hedge funds are able to take a look at it, and they can get that down and say, “Hey, we’re going to buy 15 of these companies,” and probably at least eight or 10 of them are going to get added to the index.  So, what happens is, these prices get bid up, and then when they get added to the Russell 2000, they’re buying them at an inflated price, at a higher price.  Once they come into the index, the prices come back down again.  So, they can cost that index anywhere from half a percent, 1 percent a year in performance.  What DFA says is, we’re not going to buy these stocks on a certain day just because they’re now included in this specific index.  They have their own set of rules.  They’ll say we’ll wait another couple weeks until the price comes down on these.  They have their own unique algorithms as far as when they add stocks to the portfolio.  For small stocks, they’re adding stocks that are going down in value.  They’re becoming smaller companies in a lot of cases, as well as obviously the upstart companies, and as companies grow.  I mean, there was a point in time when Microsoft was in the DFA small cap portfolio.  Obviously, as it grew, there was a point in time when they sold it out of that portfolio.  It no longer met the criteria.  What DFA is very, very good at is, their decisions on when they allow stocks to come into the portfolios and exit the portfolios.

Jim Lange:  All right.  Now, does a traditional index have the same sell announcements, like we’re going to sell certain companies, and then when people hear that, they get out of it, so they end up selling it lower?

P.J. DiNuzzo:  Yeah, on the reconstitution effect, you know, basically, the preannouncements and it being purchased on a specific date, it really costs a lot a drag for the typically structured index.

Jim Lange:  All right, well, why don’t you tell people a little bit about your company and how people might work … let’s say that somebody was to come in to my office and I was to talk about things that I talk about, like Roth IRA conversions and retirement planning and estate planning and something like that, and then I would say, “Well, you know, what you might consider doing is investing at least a part of your money with P.J.”  And let’s say I give you a call and I say, “P.J., there’s somebody who is interested in index investing, and specifically, Dimensional Funds investing.”  What would happen at that point?  What’s the process?  What kind of services do you perform for your clients?

9. First, Make Sure That Your Risk Capacity is Taken Care Of

P.J. DiNuzzo:  Yeah, our process is, and I think one thing that differentiates us from a lot of other, in fact, a lot of other DFA advisors who are just maybe “running the money” or money managers is we do comprehensive planning.  The most important planning on earth basically is for retirement income planning.  So, we’re going to sit down with clients and build a personal balance sheet, a current cash flow statement, and we’re going to extrapolate that and build a retirement cash flow statement.  One thing that’s very, very important, Jim, and that hurt a lot of people in the last meltdown, that always hurts them, is if they have a more aggressive allocation, if they have 60 percent in stocks when they should really only have 40 percent in stocks, these are the folks that will lose their religion whenever you have a meltdown.  So, the first thing we want to identify with clients from a retirement income planning perspective is what is their risk capacity?  So, we want to know that food, clothing, shelter, transportation is taken care of, and it’s different for everyone.  You have a ton of clients who are former professors, et cetera, it depends on do you have a defined benefit pension in addition to your Social Security.  Every single individual investor’s situation is different.  We have to make sure that that risk capacity is taken care of first.  Then we’re able to build a very accurate portfolio based on the risk tolerance.

Jim Lange:  By the way, that’s such a good point, and you point of if somebody has a pension, then they can certainly afford to have a higher percentage of stocks in their portfolio because their base, and I always consider that food on the table, roof over your head and gas in the car, is taken care of.  And the other thing is, I will tell you, I’ve been tremendously impressed by the level of detail that you go into with people’s even personal finances.

P.J. DiNuzzo:  Yeah, I think we’d probably win an award for that.  We’ve heard that from everybody, and the thing is, since we’re basing our recommendation and providing advice for what someone should do for the rest of their life, we take it very seriously, and people really adhere to that because they say, “Hey, I went somewhere else.  The guy told me I could do this or that, but he didn’t ask me these 38 questions that you asked to dig that deep.”  So, we have an initial no-cost consultation.  It could be two meetings or even three meetings.  We don’t have a sales process.  It’s really about getting to know the clients, building a customized solution for them, and providing them with the best advice for them.

Jim Lange:  All right, and I will add, to me, I like the idea of the best of both, which is your processes, Dimensional Funds, low fees, and then, included in that would also be our services where I at least on an annual basis will review issues with clients, make Roth IRA conversion recommendations, make estate planning recommendations, do whatever I can to save taxes.  That’s certainly our big thing, and the combination, I think, is terrific.

Nicole DeMartino:  All righty.  We’re pretty much to the end of our hour.  P.J., thank you so much for joining us.

P.J. DiNuzzo:  Thank you very much.

Jim Lange:  Nicole, can I ask you one quick question before we go on?

Nicole DeMartino:  Yes.

Jim Lange:  If somebody is interested, but they don’t particularly want to go to the workshop, how could they get in touch with our office?

Nicole DeMartino:  Oh well, they can go to the website,  They could call our office at (412) 521-2732.  If you want more information on P.J.,

Jim Lange:  And P.J., what’s your telephone number?

P.J. DiNuzzo:  The telephone number is (724) 728-6564.

Nicole DeMartino:  All righty, well, you could find all of us on the web at or  Thank you very much for listening tonight.  You’ve been listening to The Lange Money Hour, Where Smart Money Talks.