Supercharged, again: a (briefer) interview with Paul Merriman

 Supercharged, Again: Briefly Talking Millions With Paul Merriman

If you like this and want more detail,
be sure to read the full interview here!

Today, we have a special treat: an interview with Paul A. Merriman, founder of the Merriman Financial Education Foundation and also a wealth management firm that still bears his name!

In November of 2020, he and his co-author Richard Buck released their latest book, We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.

The interview, briefer edition:

Paul – your Ultimate Buy-and-Hold Portfolio gives equal weighting to several different types of funds—both U.S. and international—as well as a small allocation to real estate. How did you arrive at these figures, and why did you choose equal allocations?

Paul: If an investor was aiming for the best return, they would likely put all their investments into small-cap value. But the idea for this portfolio is to earn a higher return than the S&P or Total Market Index with little to no extra risk.

History shows that all ten equity asset classes in the Ultimate Buy and Hold have made more than the S&P over many market periods. That’s why we made the decision to give each winner an equal position. The bottom line was to create a portfolio that was diversified at every level.

Rather than being an all-U.S. portfolio with equal diversification among asset classes, total market funds heavily favor large cap growth.

These days, Paul, you’ve spent quite a bit of time and effort advocating the Two Funds for Life portfolio. This amounts to a target-date fund, plus a dose of small-cap value stocks for added growth.

In We’re Talking Millions, you suggest either 90% in the target-date fund and 10% in the small cap fund, or 80% in the target-date fund and 20% in the small-cap fund for additional growth. What is the advantage of using a target-date fund?

Paul: The target date fund gives an investor almost all the management they need to invest over a lifetime. The managers decide the best balance of stocks and bonds, the best balance of U.S. and international stocks and bonds and how to reduce risk as the investor get closer to retirement. All the investor has to do is pick the retirement date!

To maximize returns, wouldn’t it be better to go with an S&P 500 fund, or better yet, a total-market index fund like VTSAX or FZROX, instead of a target-date fund? And then convert a small portion over to bonds once you’re in your 50s?

Paul: That’s very tricky. To maximize returns, investors should maintain an all-equity portfolio for the rest of their life. If you are not going to use a professionally managed glide path inside the target date fund, you are going to have to create one yourself. If you are going to do that, you can build an all-equity portfolio that includes big, small, growth and value stocks from around the world. Our recommendation is still to diversify away from an all-U.S. large cap growth portfolio.

It seems to me that your Two-Fund portfolio, as well as the Simple Path, are pretty U.S.-centric.

Paul: No, the target date fund has 70% of the equities in U.S. funds and 30% in international funds.

Jim Collins, author of The Simple Path to Wealth and blogger at jlcollinsnh.com, has written that people sometimes ask him why he recommends only U.S.-based index funds (namely, VTSAX). His answer is that many U.S.-based companies, like McDonald’s, Apple, and Coca-Cola, don’t just do business in North America; they have significant overseas sales as well.

Paul: He is partly right. But what he’ll be missing is the international large cap value, small cap blend, and small cap value. All of these have historical periods where they’ve done better than the S&P 500.

But part of what has powered historical returns for U.S. stocks is economic growth.

Some would argue that an economy can only grow so far, even the mighty U.S. economy. Though naturally nobody knows what the future holds, macroeconomic indicators like national-debt-to-GDP-ratio suggest that our market data from the 20th century may not be a good guide to the future returns we should expect.

What would you say to someone who is concerned about the future returns on U.S.-based companies?

Paul: It is one of the reasons our recommended portfolios almost always include an international group of funds.

Why have you pivoted over the years from the Ultimate Buy-and-Hold Portfolio to this Two Funds for Life Portfolio? Have you abandoned the Ultimate portfolio, or are you simply responding to consumer demand for simplicity?

Paul: I use the Ultimate Buy and Hold Portfolio in my own portfolio so it works for me. The problem is most investors don’t want to manage all those moving parts. The Two Funds for Life, as well as some of the other 3- and 4-fund portfolios, are much easier to manage.

Plus, the Ultimate Buy and Hold doesn’t have a built-in glide path like the target date fund. Behavioral finance research shows that the fewer things you have to leave to the investor, the better off they are.

We’ve discussed three different portfolios at length:

1. Jim Collins’ Simple Path to Wealth; 80% VTSAX / 20% VBTLX

2. Paul Merriman and Richard Buck’s Ultimate Buy-and-Hold Portfolio; various holdings

3. Paul Merriman, Richard Buck, Daryl Bahls, and Chris Pedersen’s Two Funds for Life portfolio; 80% in a target-date fund (for example, VFORX, Vanguard’s Target Retirement 2040 fund) and 20% in a small-cap value index fund (such as VSIAX or its ETF equivalent, VBR)
   
   

4. Since the Froogal Stoodent is never, ever satisfied, he can’t resist the urge to tinker. So, as though he actually has a clue what he’s doing, he’s gone and proposed a five-fund portfolio, called the Couch Potato portfolio: 50% VTSAX, 10% VSIAX, 10% VEMAX, 10% VGSLX, and 20% VBTLX. Kind of a hybrid of the Simple Path and the Ultimate Buy-and-Hold.

Thoughts on which is best for an early-career investor whose main goal is to maximize returns? Ahem. Asking for a friend…

Paul: I don’t give personal advice; you just don’t know the particulars of everyone’s situation. But I would note that a young person could move their bonds into the best performing asset class in the bunch—the small-cap value index fund, VSIAX. Over a very long time frame, that should increase your return by at least 1% to 1.5% a year.

Do you see We’re Talking Millions! as complementary to your other books, like the How to Invest series, or do you think that your latest book is comprehensive enough to replace those earlier works?

Paul: We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement makes the case for how 12 easy steps can each add a million dollars to your retirement. It makes the process much easier than in my earlier books. You don’t necessarily need the other books, but what you do need to do is use all of our free tables at paulmerriman.com. I think those tables will help you identify your risk tolerance and the dozens of distribution tables when you are ready to retire.

For those who like to get down-and-dirty with the data, do you know of a good data source for various types of investments? For example, a DIY fan might like to compare the long-term returns of REITs, small-cap value stocks, large-cap value stocks, emerging market stocks, etc. Is there anywhere people can go to get information that’s fine-grained enough to evaluate these different asset classes?

Paul: The best source for the public to do backtesting is portfoliovisualizer.com. [Froogal Stoodent note: I can second that recommendation!] Another amazing source of past data is IFA.com. We also have a number of tables on our website; visit this link for a list of tables, articles, and podcasts on the subject.

Any other points or comments you’d like to make?

Paul: I think the most important step to future investment success is finding and trusting the right source of advice.

Lots of young investors trust Wall Street. Wrong!

An equally large percentage put their trust in friends or family members they think understand the process. Wrong!

The only source I have found that continually offers advice that’s in an investor’s best interest is the academic community. That’s the source that is behind 99% of what I encourage investors to do. I hope it works well for you and your followers.

Thank you so much for sharing your time and expertise on this humble blog! And remember, dear readers, that We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement is available now.