Investing Series — Part 3 of 3
This episode is educational only and isn’t personalized investment advice. Talk to a qualified advisor who knows your specific situation before making changes to your own portfolio.
This closes out our three-part series on how people actually invest. Part one made the case against active management — the data consistently shows it’s a losing game after fees. Part two made the case for passive indexing as a major improvement, while pointing out that “passive” still involves real decisions and some structural downsides, like being forced to buy stocks like Tesla at their most expensive price the moment they join an index. Part three is about the door we actually walk through with our own clients: not purely active, not purely passive, but an evidence-based approach in between.
Mostindex funds are “market-cap weighted” — the more a company is worth, the biggerthe slice of the index (and your portfolio) it takes up. Right now, that meansa handful of mega-cap companies — the so-called Magnificent Seven — make upsomewhere around 35–40% of a fund tracking the S&P 500. As those companiesgrow, your exposure to them grows too, whether or not that’s actually the mixyou’d choose deliberately.
Thestarting belief here is the same one behind indexing itself: markets arelargely efficient, and the collective judgment of every buyer and seller, usingall available information, sets prices close to fair value. From there, it’s ashort step to a second, equally intuitive idea — just as stocks carry more risk(and a higher expected return) than bonds, certain characteristics withinthe universe of stocks carry more risk, and a correspondingly higher expectedreturn, than others. Decades of academic research point to three in particular:
Value — companies trading at a lowerprice relative to their expected future cash flows tend to deliver a higherexpected return than similar companies priced higher for the same cash flows.
Profitability — more profit available toshareholders, for a given price, points to a higher expected return.
Size — smaller companies carry more riskthan large ones, and the market compensates investors for holding that riskwith a higher expected return over time.
Thisis the philosophy behind Dimensional Fund Advisors (DFA), a fund manager that’sbeen building portfolios around exactly these three factors for over 40 years,and crossed $1 trillion in assets under management in early 2026. Dimensional’sresearch team includes several Nobel laureates — Eugene Fama among them — manyof whom were already working with the firm before they won their prizes. Whatstands out isn’t just the research; it’s the consistency. Where active managerscan shift strategy and personnel from year to year, Dimensional’s corephilosophy has held steady for decades, refined with new data rather thanreinvented.
Dimensionalfunds are also only available through an advisor — a deliberate choice. Theidea is that an advisor who genuinely understands the philosophy can pass thatunderstanding on to clients, so that when markets get volatile, clients havethe context to stay invested rather than bail at the worst possible time. Thatdiscipline shows up in the data too: lower turnover, and fewer trading costseating into returns.
Picture astandard market-cap-weighted portfolio as an ice cube tray, full to the top.Tilt the tray slightly, and a little water runs from the largest companiestoward the smaller, more profitable, better-value ones — not draining them outentirely, just shifting a modest amount of weight in that direction. You stillown the Amazons and Nvidias of the world; you’re simply carrying a bit less ofthem and a bit more of the characteristics that have historically paid apremium.
Two things makethis different from simply buying a “value” or “small cap” index fund. First,Dimensional isn’t forced to buy or sell on a fixed date regardless of price,the way an index fund must (recall Tesla’s forced-buying month from part two) —if a stock doesn’t currently meet their criteria, they simply wait, since thereare thousands of other qualifying companies to hold in the meantime. Second,they apply real judgment within each factor: excluding small companies that areunprofitable or growing recklessly, for instance, rather than mechanicallyowning every small company in an index. In one comparison shared at a recentindustry conference, filtering out the weakest slice of unprofitable,recklessly-growing small companies lifted a 10-year annualized return in thatasset class from 13.79% to 14.99% — same broad category, smarter construction.
For what it’sworth: Align Wealth uses fee-based accounts and doesn’t earn any commissionfrom Dimensional. The fees on the Dimensional funds we use run around0.28–0.30%, in the same range as many low-cost index ETFs — the choice comesdown to philosophy and research, not compensation.
These premiums don’t show up on schedule. Value had a genuinely rough stretch from roughly 2017 to 2020, and growth stocks — powered largely by a handful of mega-caps — have dominated more recently. If a strategy worked every single year without exception, it wouldn’t be a premium anymore; it would just be what everyone did, and the edge would disappear.
Looking at rolling 10-year periods over the past 50-plus years tells a more complete story: in US equities, more profitable companies have outperformed less profitable ones in about 90% of 10-year periods; value has outperformed grow thin about 77%; smaller companies have outperformed larger ones in about 68%.Across 607 overlapping 10-year windows spanning five decades, there’s never been a single period where three or four of these return premiums (including the basic premium of stocks over bonds) were negative at the same time. Something is almost always working — which is exactly why the strategy spreads across all of these factors rather than betting heavily on just one.
It’salso worth remembering the actual time horizon involved. Even someone ten yearsfrom retirement isn’t really investing for ten years — they’re investingthrough retirement too, which stretches the real horizon out closer to 40years. A rough decade for one factor is a small piece of that much longerpicture.
If your measure ofsuccess is tracking a specific benchmark closely — the S&P 500, forinstance — this approach will be uncomfortable at times. Deliberately tiltingaway from the largest companies means your returns will diverge from that indexin both directions, and in a year dominated by a handful of mega-caps, thatdivergence can look like underperformance even when the underlying strategy isworking exactly as designed. If comparing your portfolio to what a friend,neighbour, or the market as a whole did in any given year matters more to youthan the long-term evidence, this isn’t the right fit.
This isn’t active management, and it isn’t a pure passive index either — it’s an evidence-based approach that tilts toward what the data shows has historically delivered higher expected returns, applied patiently over decades rather than judged quarter to quarter. The biggest risk isn’t the strategy itself; it’s starting it and abandoning it at the wrong moment, the same way inconsistent follow-through undermines any long-term plan. That’s why the education and the financial planning conversation matter as much as the portfolio construction —understanding why you’re invested the way you are is what makes it possible to stay the course when things get uncomfortable.
This wraps our three-partinvesting series. Have questions about how this philosophy ties into your ownfinancial plan? [Book an introduction call at alignwealth.ca →] Listen toepisode 035 of The Chiro Money Show →
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