CNBC: Wes Crill on Global Diversification, Market Declines, and Value

Dimensional’s Head of Investment Strategists, Wes Crill, recently appeared on CNBC’s ETF Edge, where he highlighted key themes for investors in 2022. He joined show host Bob Pisani and VettaFi’s Dave Nadig to talk about everything from the single-stock ETF craze and buying dividend stocks to global diversification and long-term investing.

Below are some key takeaways from Crill’s appearance. Watch the full interview here.

We’ve seen a strong value premium year to date.¹ Some may question whether the premium may turn in the future. If I go back historically and rank all of the calendar year observations since 1926, the years following a particularly bad value premium year (in bottom quartile) saw a value premium on average of 4.2% in the next year. If I look in the years following the top quartile observations, it is about 4.7%. The subsequent average for the value premium has been similar no matter what happened in the preceding year.²

Value investing is about identifying the stocks that, relative to their expected future cash flows, have low prices. That’s as evergreen of a concept as you can get in terms of pursuing higher expected returns.

Read more: Value’s Rebound Rewarded Investors Who Stayed in Their Seats 

Dividend-paying stocks are sometimes seen as a ballast that will provide benefit when there is a downturn in the market. But these companies that are paying dividends always have the flexibility to cut their dividends, and that is what we actually see. The revisions in dividend payoff policy coincide a lot of times with economic downturns.³ At Dimensional, we see fixed income as a better way to tailor your overall return volatility because, compared to fixed income, high-dividend stocks still look pretty volatile.

Read more: Should You Chase Dividend Stocks to Combat Inflation and Rate Hikes?

ESG investments can help investors align their portfolios with their values—whether it is sustainability-type considerations or social considerations. When done effectively, with careful implementation, you can reflect these values in a broadly diversified portfolio. 

Single-stock ETFs seem counterproductive for many investors when it comes to preparing for their future. Many of us do not have defined benefit plans anymore to support our retirement. Most of us are on the hook for building out our investment portfolios to support us in retirement, which means we are likely to need more reliable, robust, diversified investment solutions to help us achieve those goals. We don’t need more ways to reduce diversification, to add idiosyncratic risks to the portfolio.

Read more: Single-Stock ETFs: The Worst of Both Worlds?

It’s important to recognize the value that global diversification brings, especially following a period where the S&P 500 has been one of the best-performing asset classes. We are quick to forget the period when the S&P 500 was on the weaker end of the spectrum, from 2000-2009, and US stocks were essentially flat. A globally diversified equity portfolio provided a meaningful return during that same period.⁴ So, that is the case for global diversification. How much you allocate to each country then becomes a function of your circumstances. Market capitalization weights is a great way to start. From there, investors can deviate as they see fit.

We have had 15 bear markets—where there has been a drop of at least 20%—in the US market since 1926. In more than half of those, the drop stopped pretty soon after we crossed that 20% barrier. We never made it to the next threshold, which would be minus 30%. Recoveries were often very swift. Within one year, about 60% of these bear markets were returned to pre-downturn levels. It can happen fast.⁵

Read more: So What’s Your Plan for the Bear Market?

Crill also recently appeared on Yahoo! Finance, where he talked about investment opportunities in uncertain times. Here’s what he had to say:

The bedrock component of Dimensional’s investment approach is broad diversification, which we think is a great risk control in environments like this. We also look for characteristics that have been associated with higher expected returns for stocks historically—smaller caps, lower price-to-book ratio, higher profitability. We want to keep the focus on these drivers of higher expected returns.

The good news for investors is that the profits for these investment styles have not historically correlated with areas of the business cycle—for those concerned about going into a recession, or even market downturns. We see that these premiums have been there, on average, even during these periods of duress.