(audience applauds) You're gonna get Paul Merriman, because Paul Merriman is here, and I'm excited about that. He's a nationally recognized authority on mutual funds, index investing, and asset allocation. He retired in 2012 from Merriman Wealth Management, which he founded in 1983, and basically dedicated himself at that point to just educating as many people as he possibly could for free about financial literacy.

He's the author of eight books. He writes a regular column for MarketWatch, and produces a multi-award-winning weekly podcast, Sound Investing, and he's got over 30,000 subscribers to his twice-monthly newsletter. More recently, he has made a massive donation to boosting financial literacy at a university in his state. So thank you for that, Paul, and congratulations on that.

- I really am excited to be here. This is on my bucket list. Some people want to go to other parts of the world when they retire. I've been waiting to be here for 10 years. So I am, I, yeah. (audience applauds) It's really, it's very exciting, and I am not here, really, to debate Rick Ferry.

I really am here to share some information that I think could help you make more money with your portfolios, nothing more than that. We are simply a nonprofit organization feeding people information that we hope will help them understand ways to combine different kinds of equity asset classes. We are not investment advisors.

We are not financial planners. We are teachers, and that is all we are. So as your teacher for a few minutes here today, I want to make the case for small-cap value as a factor in your portfolio, and I want to make it based on information that I trust, and I mention that because I ran into a gentleman last night, a friend from many, many years ago.

He doesn't believe in small-cap value. It was not Rick. (audience laughs) And I wanted to know why, because there's so much great information. He doesn't trust the path, the returns, or the studies that have been done, and we are in a faith-based industry, like it or not, and since that's the way it is, if he doesn't trust those numbers, then I understand that he shouldn't be using small-cap value.

I use numbers that I'll share with you, many more than many people like, that make me trust it, that come from people that I trust have developed the numbers from the past that I can recommend, in a sense, to other people. So let me talk about the truth of small-cap value, the good, the bad, and the ugly, and let me tell you, the ugly is about as ugly as it can get, and if a person's not ready for that ugliness, then they shouldn't be in it, and by the way, that could be true of the stock market as well.

It all starts with this simple table that shows the long-term return for the four major U.S. equity asset classes. I started making this table in 1995, and every year, we update it, and what it shows is that large-cap blend, or the S&P 500, is compounded at about 9.8%, large-cap value higher, small-cap blend higher, small-cap value at 13.2.

Now, what's fascinating to me is a lot of people don't trust that 13.2, because if you trusted it, wouldn't you wanna have some of it if it didn't take your risk over the top, which, of course, is the big question. So, if we could believe that short-term bonds make less than intermediate bonds, or long-term bonds, or governments make less than corporate, or junk bonds make more than high-grade, if we could believe all of those things, why is this such a big leap of faith?

So, I'm going with what I'm seeing here, and I want some of that 13.2. I want it for my portfolio, and I've got a brand-new granddaughter. We gave her money last November when she was born, half in S&P 500, half in small-cap value for the rest of her life.

And if you wanna know why half in S&P 500, I don't have time. This is one of the greatest teaching tools I've ever seen. Daryl Balls is our director of analytics, total volunteer, as is Chris Patterson, who also works with me on this project. What this shows is the rate of return.

I know it's too small. Many of you don't have your computers, but let me just tell you what it shows. One year at a time since 1928, how did the S&P 500 do? How did small-cap value do? How did large-cap value do? How did all of the major asset classes do?

And he color-coded them for us. So, when you get home and you pull up the PDF on this, you can look at these, and you're gonna be able to look at 90-plus years of returns and see how wild and crazy it is. I mean, there's nothing low-risk about the S&P 500.

It's at the top, it's at the bottom. I mean, it's all over the place. So is small-cap value. And so, one of the things this does, because the green is the S&P 500, by the way, the green is supposed to give us the lowest rate of return. Why? Because it's the highest quality of the four.

But Daryl surprised me. He's always got a surprise in a new table. He threw in the four-fund strategy. What would happen if you put those four asset classes, including the small-cap value, if you put them together in one portfolio, and you rebalanced them every year? How much more risky would that be than the S&P 500?

That is the pink. And where is the pink? The pink is in the middle. Why is it in the middle? Because it picks up some of the value of all four, but it's never the best and it's never the worst. So if you had a portfolio that was 25% small-cap value, that's a lot, and 75% these other three assets, and you were running around the middle all the time, if the rate of return was better than the S&P 500, would it not be a better investment?

Anybody vote for yes? Not enough. So then a couple years later, he does another table, but this time, and I'm just giving you the results, so you'll see why I think this is so powerful. Here, what we have at the top, we have U.S. small-cap value, 13.4% over that whole period of time.

At the bottom, we have the S&P 500. I want you to notice something here. Those two are normally at the top or at the bottom because the other three are combinations of these major asset classes. What I love is the S&P 500 is 10.2. The two-fund strategy that my granddaughter is going to retire on is 12.2.

Every half a percent would mean at least a couple million more dollars to her, that difference. And so I think that's a slam dunk because that too, it doesn't end up at the top, it doesn't end up at the bottom. The two-fund strategy, that's what we're looking for. Less volatility, better returns.

I call that Ben Felix. I think one of the finest educators, could we agree on that? Ben Felix is the finest, one of the finest educators, I'm talking about YouTube pieces, on investing. How many follow Ben out of curiosity? Yes, and I just think he does a marvelous job.

I called Ben, I said, "Ben, I've gotta face Rick. "Give me something I could bring here "that Rick isn't prepared for." And he gave me something that's just marvelous. He gave me a study he was working on that showed, remember the lost decade from 2000 to 2009? That was a big surprise.

That kind of stuff doesn't happen very often. He went back to 1927. He looked at every 120 month consecutively to call those all decades. He found out that there were 145 lost decades for the S&P 500 over that period of time. So lost decades are not uncommon. And by the way, there's a lot of repeats there because you're going one month at a time to start a new period of time.

But here's what I like. Even if small cap value does not make you a lot richer, we do at least know this, that looking backward, if we looked at the 145 lost decades for the S&P 500, how did small cap value do for those same periods? And it turns out in 78, 74%, 108 of the 145, small cap value made money.

And that if you looked at every one of those 145 decades that the S&P 500 on average lost 2.3, small cap value made 6.45. And I'm thinking, I mean, I can't tell you that every little number that was ever added up in all of these studies is exactly right.

I'm a salesperson. We don't focus on details, right? The bottom line is this tells me there is something there worth, oh, and I love this. We have over 200 tables that kind of look like this. So they aren't for today, and I understand that. But I wanted to give you something that where you'd have a piece of paper, you could compare small cap value in the S&P 500.

You could look at it one year at a time. You could look at it all small cap, all S&P, 50, 50, 40, 60, 60, 40, 80, 20, you got it? Every combination here, all those years going from 1970, I'm sorry, yeah, 1970s through 2022, and we can find out how did they each do.

And then we could even pretend we invested in them. And here's what I like. I mean, this really, I think, is mind-bending. By adding 10%, on the far left, we have the S&P 500. You can't see it, it's 10.4%. That was the compound rate of return. The worst 12 months was a loss of 43.3.

The worst drawdown was a loss of 51. If you were adventuresome enough to put 10% into that portfolio, instead of 10.4, you have gotten 10.8. Instead of, oh, well, of course, now you're gonna have bigger losses. Yeah, 6/10 to 1% in both cases. Standard deviation is still the same.

In fact, personally, I don't mind moving further over to the right and saying, look, this is not taking big risk. This is not like cryptocurrency. In fact, what we're doing, if you think about it, if we add it to the S&P 500, we go from having 500 stocks to maybe having 2,000 or 1,500.

And yeah, one by one, they aren't great quality, but not are all the S&P 500 companies. Hey, are you keeping time? By the way, I have no idea. I wanna look at it two ways, 'cause I'm not gonna get through all the slides. By the way, if you do look at the PDF that we provided to the folks here, it not only has these slides, but two nights ago, I made a 45-minute presentation about this to AAII.

All the slides are in the PDF, and there are some killer slides I can't show you today. Here we have the S&P 500 on one side, small-cap value on the other. Same thing, except we put money to work. Starting in 1970, $1,000. This is something your grandkids or your kids need to know about.

And you put away monthly, $83.33, and then every year, you up that by 3% a year so that you were kind of replicating what inflation might have been. And then what happened is you put it into the S&P 500 only. That's the far left-hand column. And at the end of that period, I don't read well, but I think it's around three-plus million dollars.

Well, I do read well, but not from this distance. If I look at the small-cap value, it's a holy moly, it looks like well over 20. - Can you actually read that? - Yes, I can. Of course, I sleep with this, understand? But every time you add a 10% small-cap value, you can see what happens to the bottom line.

It goes up by about $500,000 a year, I mean, per column. That's important, and that's good. But if you think that's good, I wanna talk to any fire movement. Is Brad Barrett here today by chance? And no fire movement people here? Well, let me tell you, they're standing behind you because they're trying to learn how to invest like you're investing, but they're young and they wanna retire at 40, 45, or 50.

This next chart, table I'm gonna show you, instead of being a accumulation table, it's gonna be more aligned to what we might be thinking, and that is distributions in retirement. Now, yes, this is all equity on this page, but please understand that I'm having this replicate the equity portion of your portfolio, okay?

So you may only have 20% in equity, but I want you to see what happens here. And what we have with the S&P 500, starting with a million dollars, taking out $40,000, increasing that by real inflation every year over this period of time, you would have taken out about $8.5 million over that 53-year period, and at the end of that period with the S&P 500, you would have been left with about $9 million.

I do not know anybody I've ever met that would say that was not a good outcome. Now, it's all equity, so I'm not recommending we go put all of our money in equity for retirement, but that shows in the equity part. But I just wanna go one tiny step to the right and add 10% small-cap value.

And when I first saw this, I actually didn't believe it. I said, "Daryl, there's something wrong." And then he went through the whole thing, line item by line item, confirmed everything was right. Instead of $9 million, it's about $25 million. Because that's that impact of that 4/10 of 1%, and I'll tell you what else it is, and this is why I love adding other asset classes to the S&P 500, that when we look at that period, 2000 through 2009, what we know is that was not good for the S&P 500.

And so you actually, over that period of time, you went from about, let's say, $6 million down to about $3.7 million. Over in the, let's take the 50-50, you were at $22 million in the beginning, and you ended at $31. How can the S&P 500 be dropping like a rock?

Oh, I didn't see your fingers. Mike, I've got five. - We're running out of time. - Okay. Look at the table. (audience laughing) And I am out of time, but I want you to see this, and look at the PDF. Here is why people can shy away from small-cap value.

Every time you see a green area, small-cap value's doing well, but every time you see it moving sideways next to the S&P 500, it means it's not doing better than the S&P 500, which means over half of the time, you were not doing any better than the S&P 500.

And if you're an advisor, and you're advising clients, and you're not doing well, and they're looking at that, what's that small-cap value in there for? And it's because they don't wanna hold it for 17 years to get the premium. It is not easy. And then I'm gonna go forward here and just show one more.

And that is, Avantos did this study. We're gonna write it up. I think it's a beautiful study. Show the return of six different small-cap value indexes, six different small-cap growth indexes, six different small-cap blend indexes. And the difference between the best index over 15 years and the worst was about 2 1/2%.

I mean, you could be in growth or small-cap or core, small in an index, and simply be in the wrong index, which it means that we need to understand how indexes are being constructed if we're gonna be an index investor. That's Boot Camp on our website. That's me teaching classes.

These are free books. My time is up. Thank you, Jim, and thank you all. (audience applauding) (upbeat music)