On a wintry February morning in St. Louis, we were honored to spend time with Dave Butler, Co-CEO of Dimensional Fund Advisors. Over breakfast, we were reminded why Dave is the type of leader we’d all work for. That’s saying something, as we’re picky about who we’d follow.

We’ve been collaborating with Dimensional since we launched Hill Investment Group, but this was the first time we heard Dave’s own story about how he discovered his life’s calling there.

Dimensional is now one of the largest mutual fund companies in the world, with 1,300+ employees, 13 global locations, and over $500 billion in global assets. But it was a fraction of its current size when Dave joined them back in 1995. At the time, he was working on the East Coast, and wanted to return to his California roots. He sent his résumé to this nascent fund manager in response to a Wall Street Journal ad he spotted, and beat out over 300 other applicants to get an interview.

Knowing very little about Dimensional, Dave told us he’d contemplated skipping the interview. Fortunately for all of us, the Santa Monica office was on his way to something else, so he showed up for the scheduled meeting after all.

Minutes into the interview, Dave was invited to have lunch with a Nobel Prize laureate who was part of the Dimensional team. His impression of the firm changed quickly that day; he could almost physically feel the team’s enthusiasm for its novel approach to “applying academic research to practical investing.” From that day on, he was hooked.

We are grateful to be surrounded by a similar level of enthusiasm in our own firm and among our key strategic alliances, like Dimensional. They and we are mindful of who we work for – our clients, that is – and how exciting it is to help them put the evidence-based odds of successful investing on their side. We’re also very glad Dave made it to his interview!

It takes only a glance at Dimensional Fund Advisors’ 2018 market summary to recognize global markets didn’t leave anyone applauding in the end. The volatility put the popular press in a tizzy (with no certainty on what lies ahead). Not surprisingly, our response has been to double down on our perspective on how to maintain “unruffled serenity” in volatile markets.

For example, in our fourth quarter client letter, we revisited an important, annually updated Dimensional chart depicting yearly market premiums since 1928. We’ve shared similar charts before, but it remains worth repeating whenever the going gets tough. As we wrote in our letter, “No one complains when they finish the year with stock returns much higher than average, but the typical investor has a hard time handling a big down year.”

We share an excerpt from our client letter today, hoping we can help you, too, Take the Long View®.

January 2019

Unruffled Serenity and Taking the Long View

Why would an investor want to accept wild, short-term swings in the markets? Because investors are paid for enduring those swings. It’s that simple and that hard.

Because stocks ended 2018 with a series of dramatic gyrations, we decided to illustrate just how normal these big market movements really are. The following chart, which shows the annual performance of the U.S. stock market since 1928, illustrates why it’s worth maintaining a long view and disciplined investment strategy.

The blue bars indicate years in which the broad U.S. market delivered an average return above T-bills (i.e., a positive premium). The dark blue bars indicate years when a positive equity premium was within a 2% range of its long-term average (represented by the dotted black line). On the other side, the red bars indicate years in which the market underperformed T-bills (i.e., a negative premium).

The first thing to notice is that on average, the annual market premium has been strongly positive and there have been more years of overperformance than underperformance. But in any given year, the U.S. market premium has varied widely—sometimes producing extreme positive or negative performance relative to T-bills. It’s worth repeating: The premium has been within 2 percentage points of the long-term annual average in only four years since 1928.

As savvy long view investors, we know that if we want a long-term average annual premium from the equity portion of our portfolios we have to expect and endure returns in any given year that are wildly above or below that average. No one complains when they finish the year with stock returns much higher than average, but the typical investor has a hard time handling a big down year. What separates us is knowing that we win over the long run by embracing this volatility. We win because in the boring math of investing, the long-term owner of global capitalism is likely to end up in the top decile of all investors. It’s simple, but it ain’t easy. Maybe we should call it a serenity premium?

We frequently mention the importance of employing global diversification to manage investment risks while pursuing expected returns. The broad concept is simple: Don’t put all your eggs in one basket.

That said, beyond the simple adage, questions may remain. A recent Dimensional Fund Advisors paper addressed one of them: Since U.S. stocks have outperformed international and emerging markets stocks over the last several years, is it still worthwhile to invest worldwide?

If you’d rather skip to the compelling conclusion, the short answer is, yes, global diversification is still worth it. Not only do the last several years tell us nothing about the next several years, they could lull U.S. investors into a false sense of home-biased complacency. To emphasize this point, we need only point to the 2000–2009 “lost decade,” when the S&P 500 took a depressing 10-year dive, while most of the world’s indexes soared.

Bottom line: You never know where your next source of best returns will be found, so it’s best to go global – and stay that way.