Bogleheads® on Investing Podcast 018 – Paul Merriman, host Rick Ferri (audio only)
00:00:00.000 | [MUSIC PLAYING]
00:00:10.760 | Welcome to Bogleheads on Investing, episode number 18.
00:00:14.800 | Today, I have a special guest, Paul Merriman.
00:00:19.240 | Paul is an author, speaker, philanthropist,
00:00:22.920 | a 50-year veteran of the investment industry,
00:00:26.120 | and a former guest on Lou Rickhouse's Wall Street Week.
00:00:30.080 | [MUSIC PLAYING]
00:00:38.480 | My name is Rick Ferry, and I'm the host
00:00:40.280 | of Bogleheads on Investing.
00:00:42.760 | This episode, as with all episodes,
00:00:45.060 | is brought to you by the John C. Bogle Center
00:00:47.920 | for Financial Literacy, a 501(c)(3) corporation.
00:00:52.520 | Today, my guest is Paul Merriman. Paul is a Renaissance man.
00:00:58.320 | He started out in the investment industry in the 1960s
00:01:01.960 | as a broker right out of college.
00:01:04.560 | He has run manufacturing plants.
00:01:07.040 | He has been successful in his own investment management firm.
00:01:11.520 | And now, he's a successful philanthropist and educator,
00:01:15.680 | particularly interested in educating young people.
00:01:19.600 | With no further ado, let me introduce Paul Merriman.
00:01:24.120 | Welcome to Bogleheads on Investing, Paul.
00:01:27.160 | Well, it's great to be with you, Rick.
00:01:29.320 | I mean that.
00:01:30.000 | I've been waiting years to have a chance
00:01:32.560 | to talk to the Bogleheads.
00:01:34.760 | When I told the Bogleheads on the bogleheads.org forum
00:01:39.280 | that you were going to be my next guest,
00:01:41.080 | it immediately lit up.
00:01:42.640 | And I got all kinds of questions for you,
00:01:46.280 | most of them investment questions, of course,
00:01:48.680 | strategy questions.
00:01:50.400 | Before we get to that, can you tell us
00:01:52.960 | something about yourself?
00:01:55.120 | Who is Paul Merriman?
00:01:57.880 | Well, Rick, I'm a very old man who
00:02:01.520 | started working when he was very young
00:02:04.800 | and could never stop working.
00:02:07.600 | And it rarely had to do with money,
00:02:10.640 | although if you do good work for people,
00:02:13.520 | you do OK financially, I think.
00:02:15.800 | And so I had the good fortune at age 40
00:02:21.120 | to be able to do what those fire people are working to do,
00:02:26.200 | and that is to retire at a young age.
00:02:29.800 | But retire certainly didn't mean to quit working.
00:02:32.600 | What it really meant was instead of educating and then managing
00:02:37.320 | money, I could just spend all that time educating.
00:02:42.200 | I was in the investment advisory business for 30 years.
00:02:47.120 | During the week when the market was open
00:02:49.840 | and markets were going up and down,
00:02:52.920 | it was always uncomfortable.
00:02:54.840 | I was always at a certain amount of anxiety
00:02:57.840 | because what that market did was going to impact
00:03:00.880 | the people I was working for.
00:03:03.640 | And on weekends, I felt so at ease with the world.
00:03:09.800 | And then I retired in 2012 and started my foundation
00:03:14.040 | and started to educate and write and do videos and podcasts.
00:03:20.640 | And I never had that same sense of responsibility.
00:03:27.240 | So I have a good time seven days a week now rather than two days.
00:03:33.600 | So you are all about education now.
00:03:37.160 | I am dedicated to helping investors, young and old.
00:03:41.360 | I go from high school all the way up to retired people,
00:03:45.320 | figure out how to do better with their investments.
00:03:51.040 | Well, Paul, you and I have a similar background
00:03:54.200 | in many ways.
00:03:54.760 | You actually worked as a broker for a major Wall Street
00:03:58.920 | firm back in the 1960s.
00:04:00.840 | Can you tell us about that experience
00:04:02.360 | and how that shaped you for what you did later on?
00:04:06.600 | Well, I did start young.
00:04:08.400 | In fact, I started in the industry
00:04:10.520 | at a time when they first started hiring young people.
00:04:14.480 | Before then, they wanted people to be in their late 20s
00:04:18.240 | or their 30s.
00:04:19.240 | But they were hiring college graduates
00:04:21.840 | and training them at the New York Institute of Finance.
00:04:25.900 | I don't know if you went there, Rick,
00:04:27.960 | but it was a sales course, basically.
00:04:30.160 | Oh, yeah, no, I went through the broker boot
00:04:32.520 | camp at Kidder Peabody, actually.
00:04:34.400 | Oh, yeah, OK.
00:04:36.200 | I was with Harris Supplem, which became part of Smith Barney.
00:04:40.720 | And I learned quickly that the conflicts of interest
00:04:45.200 | in that industry are so great that I just could not live
00:04:53.040 | with those conflicts of interest.
00:04:54.760 | And so I was a broker for less than three years
00:04:58.840 | and went to do other things because I really
00:05:03.080 | couldn't live with what they were asking me to do.
00:05:05.680 | And I was working for a great firm in many ways.
00:05:09.520 | But I still didn't like that conflict of interest.
00:05:13.200 | And many years later, when I'm 40,
00:05:16.120 | I have a chance to get back into it.
00:05:19.000 | But I love the business.
00:05:20.240 | I love helping people.
00:05:23.440 | It's just nice to be able to recommend a no-load mutual
00:05:27.880 | fund instead of a mutual fund that charges 8 and 1/2%.
00:05:32.600 | It's nice to be able to recommend an index fund instead
00:05:36.960 | of an actively managed fund.
00:05:39.880 | Those kind of things weren't around in the mid '60s,
00:05:42.880 | the index fund and no-load funds like we have today.
00:05:47.240 | A whole different world.
00:05:49.080 | Absolutely, completely agree.
00:05:50.640 | That was just getting started when I went into the industry.
00:05:55.080 | So it has been a real benefit.
00:05:56.640 | And things have really changed quite a bit.
00:05:59.040 | We can talk about how the industry has changed
00:06:00.960 | so much during the 50 years that you've been in it, if you will.
00:06:05.600 | But you actually left the finance industry
00:06:09.240 | and you went into manufacturing.
00:06:10.560 | And you became the president and the chairman
00:06:12.440 | of a manufacturing company up in the Pacific Northwest.
00:06:15.800 | I mean, could you tell us a little bit
00:06:17.480 | about that experience?
00:06:19.200 | Well, it really wasn't about manufacturing for me.
00:06:25.280 | I had guided some people to invest in a company.
00:06:30.560 | I did not much money, but enough that I
00:06:33.000 | felt responsible for them.
00:06:35.480 | And the company was going to go bankrupt.
00:06:38.920 | And I knew nothing about manufacturing,
00:06:41.480 | but I had a good relationship with some people
00:06:45.200 | in the brokerage industry.
00:06:47.560 | So the company invited me.
00:06:50.520 | I offered to do it without any compensation.
00:06:54.080 | Well, Paul, that almost sounds like a Warren Buffett story
00:06:56.720 | in many ways.
00:06:57.400 | You had guided investors to this particular company that
00:07:00.040 | was going bankrupt, and then you stepped in.
00:07:03.720 | Well, I would hesitate to compare
00:07:06.960 | the size of this company with a story about Warren Buffett.
00:07:11.040 | But in a way, yes, I mean, these people were--
00:07:14.240 | many of them were friends.
00:07:15.680 | And as it turned out, the man who
00:07:19.280 | was running the company before I came in to run it
00:07:22.760 | did not have a trusting relationship with the bank.
00:07:26.480 | And the reason I got in was because a friend of mine
00:07:30.040 | from a bank said, this is a guy you can trust.
00:07:32.800 | He doesn't know anything about manufacturing,
00:07:35.200 | but I think he'll tell you the truth.
00:07:37.440 | So I went to the people on the floor of the manufacturing
00:07:41.960 | company.
00:07:42.680 | They knew the solutions.
00:07:44.480 | I didn't.
00:07:45.680 | I didn't have much choice but to listen to them
00:07:48.600 | and keep the creditors at bay long enough
00:07:52.840 | to solve the problem and keep them out of bankruptcy.
00:07:56.880 | And we did.
00:07:58.080 | And it was very rewarding, not financially necessarily,
00:08:02.640 | but it was a great experience for me.
00:08:06.520 | It made me realize I don't want to run a manufacturing
00:08:09.600 | company.
00:08:11.480 | But I also, by the way, Rick, I had a jewelry making equipment
00:08:15.560 | and lapidary equipment supply house
00:08:18.320 | at one point in my career.
00:08:20.680 | I did a lot of things before I was 40
00:08:24.440 | and actually found a 30-year career that was absolutely
00:08:31.280 | the most fun I've ever had.
00:08:33.680 | Well, once you went into the investment industry back
00:08:36.320 | in 1983, I mean, back then there was maybe one index fund
00:08:41.360 | available.
00:08:42.360 | But as you were saying, the no-load funds
00:08:46.240 | started coming out.
00:08:47.080 | T. Rowe Price and a few other companies
00:08:49.080 | were available in no-load.
00:08:50.520 | So what was your strategy back then?
00:08:53.120 | And then how did it change over the years?
00:08:56.480 | Well, you of course know that in 1983,
00:09:00.400 | we had just been through about 17 years of markets
00:09:05.000 | that went up and back down and up and back down and up.
00:09:08.920 | And it kind of went nowhere for a long period of time.
00:09:13.000 | And investors hadn't made much money, if any,
00:09:16.840 | because they had been whipsawed and been disappointed
00:09:21.680 | and concluded, I'll never invest in the market again,
00:09:25.040 | that kind of thing that turns buy-in holders into something
00:09:29.880 | other than a buy-in holder.
00:09:31.680 | And I happened to know something about market timing.
00:09:35.680 | And I thought, well, wait a minute.
00:09:37.520 | If somebody could help these people navigate
00:09:41.080 | these ups and downs in the market,
00:09:44.040 | maybe they could stay the course.
00:09:45.840 | Maybe they would have the trust to wait out the declines,
00:09:49.880 | knowing that they wouldn't get out at the top
00:09:52.160 | and they wouldn't get in right at the bottom.
00:09:54.520 | But if they could get the majority of the move,
00:09:58.240 | that would be of value to them and they might actually
00:10:01.880 | have a good long-term return.
00:10:04.360 | So I became a real expert, I think, on market timing
00:10:09.360 | and developed a pretty good following doing that.
00:10:16.320 | And then in about 1993 or '94, we had a lot of our clients
00:10:21.320 | who had money with us, but had a lot of money,
00:10:26.000 | more money elsewhere, and they were using buy-and-hold.
00:10:29.160 | I think they liked our firm, the way we treated them,
00:10:32.520 | and they asked if we could provide buy-and-hold as well.
00:10:37.520 | And in fact, over the years, Rick, a lot of people
00:10:41.760 | ended up being half in buy-and-hold and half in timing,
00:10:46.560 | as I myself happened to be.
00:10:49.100 | And yet, I know from all of my experience with timing
00:10:55.600 | and buy-and-hold, that probably a good 60% of the folks
00:11:00.960 | out there could learn how to be a good buy-and-holder.
00:11:04.680 | Maybe 2% of the folks out there can learn to be
00:11:09.160 | a good market timer, because there's no question.
00:11:12.440 | Market timing, emotionally, tax-wise,
00:11:17.440 | is the toughest strategy of all,
00:11:21.840 | but particularly emotionally.
00:11:24.080 | - It was a different time.
00:11:26.040 | Like you were saying, I was actually in college
00:11:28.520 | during the 1970s, and I was taking finance courses.
00:11:31.740 | And I remember one college professor,
00:11:33.280 | every time we walked in the room, he said,
00:11:35.040 | "Hey, look at interest rates now, they're at 11%."
00:11:37.720 | And then the next week, "Look at interest rates now,
00:11:39.360 | "they're 12%."
00:11:40.520 | And it was just a completely different time.
00:11:43.040 | Inflation was going out of control in 1980.
00:11:47.080 | There was high unemployment.
00:11:49.400 | And like you were saying, nobody was making any money
00:11:52.920 | in either the stock market or the bond market.
00:11:54.980 | So stocks and bonds were highly correlated,
00:11:57.320 | and they were both bad.
00:11:59.280 | Everything was bad.
00:12:00.560 | And it had been that way for a long time.
00:12:03.060 | And I can understand where you were coming from,
00:12:05.800 | that the only way you could hope to make a rate of return
00:12:08.920 | when everything is going bad,
00:12:10.480 | was to try to get in at a better time,
00:12:14.800 | and try to get out at a better time,
00:12:16.360 | and do some sort of a tactical asset allocation.
00:12:19.160 | And then I can also understand that later on,
00:12:22.320 | by the 1990s, when the market finally bottomed out
00:12:25.920 | and started going up,
00:12:27.200 | that you would also have investors who decided
00:12:31.840 | that they didn't wanna do the tactical asset allocation.
00:12:34.440 | At least part of their money,
00:12:35.400 | they just wanted to do a buy and hold,
00:12:37.440 | which has worked very well also.
00:12:40.320 | So I can see where you're coming from.
00:12:42.720 | But are you still doing that?
00:12:44.080 | I mean, do you still look at the markets
00:12:48.320 | and try to make a determination
00:12:49.960 | whether it's time to get out, it's time to get in?
00:12:53.960 | And if so, what is it that makes you one of the 2%
00:12:58.200 | that's able to do it?
00:13:00.720 | - Well, the old firm that I sold my firm in 2012,
00:13:05.720 | and I did not retain any ownership
00:13:09.040 | because I really did not wanna have any conflict of interest
00:13:13.160 | as I moved into being an educator.
00:13:16.560 | But they still do, both buy and hold and timing.
00:13:21.560 | And by the way, you have a background,
00:13:24.640 | I know, with the dimensional funds.
00:13:27.200 | We certainly never did any timing with dimensional funds
00:13:30.760 | or they would have thrown us out.
00:13:34.360 | So we actually had a good relationship with DFA
00:13:38.280 | even though we also did some timing.
00:13:41.600 | But we use just traditional trend following kinds of timing.
00:13:46.600 | What made us unique in the '80s
00:13:50.120 | is we developed a strategy
00:13:53.520 | that focused on asset allocation plus timing,
00:13:57.880 | just as we did with buy and hold,
00:14:00.880 | except you didn't use the timing.
00:14:02.800 | So we had timing with big and small and value and growth
00:14:06.600 | and US and international and fixed income.
00:14:10.740 | But the fact is that you are wrong so often with timing
00:14:17.640 | that investors just don't get it.
00:14:22.620 | I think as my recent article focused
00:14:27.000 | on this idea of creating better expectations,
00:14:32.000 | that the expectations for timing
00:14:35.280 | are almost always going to be
00:14:38.620 | that the timer is going to get me out at the top
00:14:41.440 | and get me in at the bottom
00:14:43.020 | and I'm gonna make money when the market goes down,
00:14:47.240 | even though it may only be money market returns,
00:14:51.120 | but it's never that easy.
00:14:52.520 | You know that it isn't that easy with buy and hold.
00:14:55.800 | - Well, at least I'm not making any kind of a decision.
00:15:02.200 | I'm not hanging my hat, if you will,
00:15:04.120 | on my ability to get people in and out at various times.
00:15:09.120 | I know how difficult that is
00:15:10.660 | because when I first came in the industry,
00:15:12.640 | I did use active managers who made or break me
00:15:17.640 | on their decisions.
00:15:20.320 | I hung my hat on their ability to outperform
00:15:24.360 | and when they didn't, I lost clients.
00:15:27.160 | And one of the reasons I went to buy, hold,
00:15:29.360 | rebalance of just index funds
00:15:30.920 | is because I didn't wanna lose clients.
00:15:33.840 | I wanted to be able to control what I could control
00:15:36.200 | and I was never good at market timing.
00:15:38.380 | You know, it's so hard.
00:15:41.000 | You might be able to pick it right when to get out,
00:15:43.680 | but now you gotta pick it right when to get back in.
00:15:46.280 | So difficult.
00:15:48.920 | But when it's all automatic, Rick, it isn't difficult.
00:15:53.420 | And when you tell people
00:15:55.400 | that you're gonna probably lose money on half of the trades
00:15:59.720 | and that many times you're going to get back into the market
00:16:02.640 | at a price higher than you last got out,
00:16:05.840 | when they go through that bootcamp,
00:16:08.120 | they come away thinking, oh, this guy is,
00:16:12.320 | he knows what he's doing.
00:16:14.000 | No, no, I've never known the future.
00:16:17.280 | I'm only really good on the past.
00:16:20.080 | And so if you don't live up to their expectations,
00:16:24.480 | it is hard, I think, to keep a client positioned
00:16:29.760 | in a strategy when there's activity
00:16:32.580 | and when you're wrong part of the time.
00:16:35.040 | I have 10% of my own portfolio
00:16:39.080 | in a fund that I started in 1995.
00:16:45.760 | It's a combination of market timing and leverage.
00:16:50.760 | And in the last 10 years, the last decade,
00:16:57.320 | it compounded at a little better than 6%.
00:17:02.600 | Now, how would a person feel
00:17:05.520 | about having spent 10 years at 6%
00:17:09.100 | when the S&P 500 made twice that?
00:17:13.640 | Well, I feel just fine,
00:17:16.160 | partly because, one, I know that 10 years
00:17:19.660 | is not a meaningful period of time.
00:17:22.140 | Well, it is in my life, but not in the life of the market.
00:17:25.980 | But the previous 10 years,
00:17:27.800 | when the S&P 500 lost 1% a year almost,
00:17:32.440 | that fund compounded at over 18% a year.
00:17:37.820 | So the challenge for investors
00:17:42.500 | is to invest in a way, one, that they'll stay the course,
00:17:46.720 | and two, that whatever's being done with their money
00:17:51.520 | fits within whatever their personal bias might be
00:17:55.960 | about the market.
00:17:57.080 | And some people have a bias towards buy and hold.
00:18:01.620 | Other people, when you sit and talk with them,
00:18:04.580 | their bias is really market timing.
00:18:06.760 | They may tell you, "I don't believe in market timing,"
00:18:09.440 | but their bias is to doing something
00:18:12.820 | when things aren't going right.
00:18:14.540 | - As opposed to John Bogle, who says,
00:18:18.240 | "Don't just do something, stand there."
00:18:21.300 | - Yes, and I had 90 minutes with Mr. Bogle
00:18:25.900 | back in June of 2017.
00:18:28.780 | It had a lot of, it had an impact on me.
00:18:31.780 | But I want people to stand in the right place.
00:18:35.980 | That's what I'm trying to get people to do.
00:18:39.200 | And where John Bogle, God bless him.
00:18:42.800 | I mean, I love what he's done for the world
00:18:45.500 | and my friends and all the people
00:18:47.300 | that are paying less in expenses today than they used to.
00:18:50.220 | We had a major difference of opinion
00:18:56.960 | about something that I think is of the greatest import
00:19:00.900 | in terms of how an investor should think about the market.
00:19:05.360 | So yes, I want them to stand there,
00:19:08.580 | but stand in the right place.
00:19:11.260 | - And I want you to elaborate on that a little more
00:19:15.260 | because I find this very interesting.
00:19:16.920 | So if you could dig into that a little more,
00:19:18.840 | what exactly do you mean by stand in the right place?
00:19:22.660 | - Well, here's what John Bogle and his Vanguard,
00:19:27.660 | what they recommend.
00:19:29.020 | And by the way, everything I recommend
00:19:30.740 | can be done within Vanguard.
00:19:32.900 | It just might not, well, it won't be done the same way
00:19:36.640 | that John Bogle and others do it for people.
00:19:40.740 | We don't know the future.
00:19:42.540 | We have faith in the future.
00:19:44.140 | So we're always preaching at some level.
00:19:47.180 | But they tell people that if you put your money
00:19:51.140 | into the total market index,
00:19:54.540 | that you have done the right thing.
00:19:58.020 | Now, I'm not suggesting you've done a bad thing.
00:20:02.160 | I'm not even suggesting that I think that,
00:20:05.500 | or that the way I'd suggest to do it,
00:20:08.620 | we'll do better 'cause we don't know what's gonna happen.
00:20:11.500 | But I do know this,
00:20:13.780 | that when we invest in a target date fund,
00:20:18.780 | I love target date funds.
00:20:20.720 | And what you end up with is a portfolio of equities
00:20:25.720 | that are total market, total market US,
00:20:29.780 | total market international.
00:20:32.500 | And what do we get when we get the S&P 500
00:20:36.300 | and the total market index?
00:20:38.620 | We get a cap weighted portfolio.
00:20:42.460 | That means that almost all of your exposure to risk
00:20:47.460 | is in large cap growth.
00:20:50.340 | I shouldn't say almost all,
00:20:52.380 | but certainly over 50% is in large cap growth.
00:20:59.540 | And that's not necessarily bad,
00:21:02.700 | but when we look at the past
00:21:05.260 | that the academics have recreated going back to the '20s,
00:21:09.740 | what we know is, first thing we know that I wanna clear up,
00:21:14.740 | is the return of the S&P 500 is virtually the same
00:21:21.300 | over the last 90 years.
00:21:25.240 | That the total market index
00:21:27.580 | is not turning out a better rate of return,
00:21:30.640 | or it does not create an expected higher return
00:21:34.020 | than the S&P 500.
00:21:35.460 | Oh, they'll say they've got small cap
00:21:37.500 | and they've got value and stuff,
00:21:39.380 | but it's so little that those big companies
00:21:42.780 | that are in there because it's cap weighted,
00:21:45.740 | they just walk all over the small cap companies
00:21:49.100 | in terms of impact on the return.
00:21:52.900 | So what I advocate for is, in the US market,
00:21:57.900 | is a simple approach where you would spread the money away,
00:22:03.820 | not based on cap weighted,
00:22:06.980 | but based on asset class weighted.
00:22:11.360 | And this is not anything I ever came up with, Rick.
00:22:14.380 | I don't think I've had an original thought in my life,
00:22:18.720 | but I went through the DFA process as you did,
00:22:23.340 | and I think they teach you a lot of really good stuff
00:22:27.540 | about how investing works.
00:22:30.440 | And one way to improve earnings,
00:22:34.220 | at least looking backwards,
00:22:36.460 | is to rebuild the portfolio to have some small
00:22:41.460 | and some value and some large cap in the US.
00:22:48.660 | Now, whether you add internationals or not,
00:22:51.400 | I'd like you to, but you don't have to,
00:22:54.260 | to historically get a decent rate of return.
00:22:57.180 | And what happens is that when you go that route,
00:23:02.060 | if you talk in terms of underperformance,
00:23:07.940 | the large cap driven index funds
00:23:14.740 | have produced lower rates of return over time
00:23:19.740 | than a combination of big, small value growth.
00:23:24.640 | And the risk, if you look at it over time,
00:23:29.480 | it doesn't appear to be any more.
00:23:31.520 | As a matter of fact, I just did some tables
00:23:35.600 | that show the market broken down into decades,
00:23:39.400 | from the '30s, the '40s, all the way to the last 10 years.
00:23:44.080 | And I create a lookalike of big, small value growth
00:23:49.080 | versus the S&P 500.
00:23:51.560 | And there are times the S&P 500 is right at the bottom
00:23:55.300 | or just off the bottom of all the equity asset classes.
00:23:59.600 | But the combination is always just kind of floating
00:24:02.520 | in the middle, never gets to the top.
00:24:05.200 | It can never get to the top
00:24:06.640 | because it's made up of the asset classes
00:24:09.880 | that one of them are gonna make it to the top.
00:24:11.860 | So it never gets to the top,
00:24:14.200 | but it also doesn't get to the bottom.
00:24:17.220 | So my view is one, people will get a better rate of return.
00:24:21.960 | They'll have more peace of mind and they'll retire earlier.
00:24:26.960 | They'll have more to leave to others.
00:24:30.560 | And I'm not recommending they put everything in this,
00:24:33.840 | but to the extent that they want equities,
00:24:37.040 | personally, I'd rather see them have it broadly diversified
00:24:42.040 | in asset classes than have it basically be one asset class.
00:24:47.060 | And I asked John Bogle about that.
00:24:51.820 | And he said, "What I'm wrong is that I don't understand
00:24:56.820 | "the impact on people when they own a portfolio
00:25:02.200 | "that has this small and this growth and this value.
00:25:06.260 | "And those asset classes stink.
00:25:09.220 | "And the S&P 500, where they should have had their money,
00:25:13.260 | "is rolling along.
00:25:15.220 | "And on the other hand, when the S&P 500 doesn't do well,
00:25:20.220 | "nobody ever seems to come to the conclusion
00:25:24.300 | "that the S&P 500's premium is gone,
00:25:27.160 | "that it's never gonna make a good return again
00:25:29.360 | "like it did in the past."
00:25:31.160 | That's because people trust it
00:25:33.160 | and they don't think to throw it out of the house
00:25:38.160 | like you would a kid you didn't like anymore.
00:25:40.460 | It's this emotional attachment people have to that.
00:25:46.140 | Well, people in this country have a bias
00:25:49.100 | towards the S&P 500 because they're companies they trust.
00:25:54.100 | - And what you're really talking about,
00:25:57.440 | or at least what you're saying
00:25:58.800 | that John Bogle was saying here,
00:26:01.120 | is not that maybe the S&P 500 is the ultimate way to invest.
00:26:06.120 | He's not saying that.
00:26:07.260 | What he's saying is that people will tolerate
00:26:11.860 | bad performance by the S&P 500,
00:26:14.780 | but they won't tolerate bad performance
00:26:17.640 | by a slice and dice portfolio
00:26:20.820 | that has these other magnified sectors.
00:26:25.140 | I know you keep calling them asset classes.
00:26:26.940 | I have a real difficult time
00:26:29.060 | calling small value an asset class.
00:26:32.320 | To me, the asset class is U.S. equity,
00:26:34.900 | and that means everything in U.S. equity.
00:26:38.460 | Small value is a style.
00:26:41.180 | Value is a style.
00:26:43.320 | Size, small cap, is a style, if you will.
00:26:46.420 | So I don't consider them separate asset classes,
00:26:50.460 | but that's a different conversation.
00:26:53.540 | But anyway, it sounds to me like what John Bogle's issue was
00:26:56.620 | was that people will accept bad returns
00:26:59.060 | when the market is bad, and probably not jump ship.
00:27:03.580 | But when the slice and dice portfolio is bad,
00:27:07.420 | it's an active type strategy, and people will jump ship.
00:27:11.900 | And so in the aggregate, he doesn't like it.
00:27:14.760 | Staying in the market is really the key,
00:27:19.460 | and the total market fund does that for you,
00:27:23.340 | rather than slice and dice.
00:27:26.120 | Is that what I hear you saying?
00:27:28.100 | - You know something, I love,
00:27:30.020 | no, I understand what you're saying,
00:27:32.940 | but you have said something
00:27:35.420 | that I guess I would disagree with.
00:27:38.180 | I don't call it an active strategy.
00:27:43.180 | I really don't.
00:27:44.220 | I would say that the S&P 500,
00:27:48.540 | it is an index
00:27:53.340 | that represents large-cap blend.
00:27:56.400 | Now, I don't know if you'd agree with that,
00:27:59.200 | but that's how I see it.
00:28:01.200 | - No, I think I agree with that,
00:28:02.560 | that it represents large-cap blend.
00:28:04.720 | Yes, I would agree with that.
00:28:06.160 | - If you agree with that, why couldn't you,
00:28:10.640 | oh, and that blend is made up of growth and value.
00:28:14.400 | Why couldn't you call a portfolio
00:28:18.400 | of all the large value
00:28:21.500 | standing on its own large-cap value?
00:28:26.500 | Why isn't that, doesn't that have the right
00:28:30.380 | to be an asset class,
00:28:32.780 | just like large-cap blend or large-cap growth?
00:28:37.060 | - Well, hold on, Paul.
00:28:39.580 | I mean, I didn't say the S&P 500 was an asset class.
00:28:43.140 | It's an index of large-cap blend,
00:28:45.460 | but I didn't call it an asset class.
00:28:47.780 | To me, the asset class is U.S. stocks, the entire market.
00:28:52.780 | That's the asset class.
00:28:54.380 | Now, within there, you could divide it up into value growth.
00:28:59.380 | You could divide it into industry sectors.
00:29:03.180 | I mean, there's a lot you can do
00:29:04.340 | with the asset class called U.S. stocks.
00:29:07.900 | So my only question was on semantics.
00:29:11.900 | I mean, you're referring to these things as asset classes,
00:29:15.580 | where it's, to me, the asset class is U.S. stocks,
00:29:19.140 | and these are sectors of that.
00:29:21.420 | That was the only difference.
00:29:22.860 | - And the only reason I call them asset classes
00:29:27.480 | is because those people at DFA caught me.
00:29:30.940 | So I really, I see where you're coming from.
00:29:35.260 | And I think the reason that I reject
00:29:39.260 | calling them the U.S. market
00:29:44.860 | is because I think then a lot of people might say,
00:29:49.320 | "I wanna put my money into the U.S. market."
00:29:53.380 | And so what it ends up following
00:29:56.100 | is probably the total market index.
00:29:59.700 | - I'd agree with that.
00:30:00.700 | Yeah, that's about right. - And so I think
00:30:02.220 | it's leading them down a path that is going to hurt them.
00:30:07.220 | And when I say hurt them, I don't mean it's gonna,
00:30:10.300 | they aren't even gonna know they've been hurt, Rick,
00:30:12.660 | because most people I talk to,
00:30:15.340 | they don't know what return they've had.
00:30:18.740 | They know they've done fine.
00:30:20.200 | They've done just fine, they've made good money.
00:30:22.980 | They may be 2% or 3% a year below the S&P 500,
00:30:26.900 | doesn't matter to them, they're doing fine.
00:30:30.060 | So I think a lot of people that are attracted,
00:30:34.060 | and by the way, the number of people
00:30:35.500 | who are attracted to my website,
00:30:37.980 | it's in this whole scheme of things,
00:30:40.380 | it's a very small group of people.
00:30:43.420 | But these are folks, many cases, engineers,
00:30:46.460 | or you've seen that in the Bogleheads.
00:30:49.300 | I'm sure half of 'em are engineers.
00:30:51.540 | - Seems that way. - I don't know that.
00:30:52.860 | (laughing)
00:30:54.200 | But I do believe, let me just give you one more example
00:30:59.200 | with Mr. Bogle, and he was so kind to me, oh my God.
00:31:04.220 | He was supposed to give me 60 minutes, and he gave me 90,
00:31:07.420 | and he answered every question I had,
00:31:09.540 | and he gave me advice on how to do a better job for people.
00:31:14.540 | But I asked him about why would a 21-year-old
00:31:19.860 | have 10% of their portfolio in a target date fund
00:31:25.120 | in fixed income?
00:31:27.900 | What I have learned is that when you have 10%
00:31:32.460 | of your portfolio in fixed income,
00:31:35.620 | based on market returns over the last 90-plus years,
00:31:40.620 | it will cost you 1/2 of 1% a year.
00:31:45.780 | Okay, I don't like that, because 1/2 a percent
00:31:49.740 | is life-changing over a lifetime.
00:31:53.840 | So they're sitting with 10% in bonds,
00:31:57.820 | and I'm thinking, wait a minute.
00:31:59.640 | I want young people, when the market is in decline,
00:32:03.820 | to have all of their money buying lower-priced securities,
00:32:07.380 | not less, and 10%, what is 10%?
00:32:12.380 | It's not gonna turn a bear market into something
00:32:17.460 | that is much better than what 90%, I mean 100% would be.
00:32:22.780 | It's almost meaningless, but here was his response,
00:32:27.180 | and it's a good one.
00:32:29.140 | What we're trying to do is train them to understand
00:32:33.380 | there's a process that includes, over your lifetime,
00:32:37.940 | a gentle increase in the exposure to fixed income.
00:32:42.020 | And so they are showing them how that works,
00:32:46.900 | and I'm thinking to myself, okay, that's great,
00:32:51.500 | but what would an education do for these people?
00:32:55.020 | What if they understood that they aren't gonna protect
00:32:58.220 | themselves very much, but it's gonna cost them
00:33:01.940 | buying lots of good stuff when the market's down and dirty,
00:33:05.940 | and et cetera.
00:33:06.780 | I mean, you know the rest of that story,
00:33:09.340 | and yet they do that to make that fund
00:33:13.300 | something people can last a lifetime with,
00:33:16.060 | and I don't argue that they may get there,
00:33:18.920 | but I think with some small changes,
00:33:22.940 | it could make a huge difference in what somebody has
00:33:28.260 | when they retire, how much they live on in retirement,
00:33:33.260 | and how much they leave to others.
00:33:35.540 | And I'll be dead and buried before I'll know
00:33:38.820 | how it worked out.
00:33:40.180 | I'm just hoping somebody will come to my grave
00:33:43.180 | and put a little something, I don't know.
00:33:46.860 | - Well, okay, so the big difference, it appears,
00:33:51.860 | between a three-fund bogelhead portfolio,
00:33:57.660 | which is the total, just buy and hold,
00:34:00.220 | the US total stock market, the international total market,
00:34:05.220 | and the total bond fund, or just do any bond index fund
00:34:10.220 | or a CD ladder for that matter.
00:34:12.060 | I mean, it's just a three-fund portfolio,
00:34:14.340 | and what you advocate is twofold, it appears.
00:34:19.340 | Number one, you treat the various styles
00:34:25.180 | of large, small value, and small cap value
00:34:30.180 | as different asset classes, and to have an allocation
00:34:37.340 | to basically those asset classes.
00:34:42.220 | And the second thing is that you also advocate
00:34:46.140 | an element of market timing to this.
00:34:53.900 | And by the way, I'm going to jump a little bit around here.
00:34:56.660 | I'm gonna jump to the bogelhead questions,
00:34:58.580 | because when I announced to the bogelheads
00:35:03.140 | that you were going to be my next guest,
00:35:05.540 | like I said, it lit up and I had all kinds of questions.
00:35:07.980 | So, I mean, one of them asks very specifically
00:35:12.180 | about market timing, and this is what he asks,
00:35:16.900 | is what do you expect the benefit
00:35:22.380 | of your portfolio market timing would be
00:35:25.420 | compared to buy, hold, and rebalance?
00:35:28.980 | And then another person asked very similarly,
00:35:32.300 | what is the exact buy and sell signals
00:35:34.780 | that somebody would use for your market timing portion?
00:35:38.020 | So, I want to get into this idea
00:35:39.620 | that you brought up earlier about being in the right track
00:35:42.380 | and about people who may believe, as you said,
00:35:45.500 | when you sit down and you actually talk with them,
00:35:47.980 | they believe there is some way
00:35:49.660 | in which they could benefit.
00:35:52.460 | - Well, to begin with, what I believe
00:35:55.980 | starts with my fear of the market.
00:36:01.860 | I believe that it's highly likely
00:36:06.620 | that in my lifetime, which isn't all that much longer,
00:36:11.620 | that I will live through a catastrophic event.
00:36:15.460 | Now, when I was young, that didn't matter.
00:36:18.820 | I didn't have anything, but now I do.
00:36:22.700 | And I have always, in fact,
00:36:26.540 | it's hurt me financially by a lot.
00:36:29.780 | I've always been too conservative
00:36:32.060 | because I've been afraid of a market collapse
00:36:35.660 | like we had in '29 to the late '30s.
00:36:40.660 | And so, with that in mind,
00:36:44.060 | I'm uncomfortable having too much inequities
00:36:48.780 | without some sort of an exit strategy.
00:36:51.700 | And it's just that simple.
00:36:54.580 | I'm afraid.
00:36:56.220 | Now, in my buy and hold portion,
00:36:58.020 | and that's half of my portfolio,
00:37:00.580 | I'm half in stocks, half in bonds.
00:37:05.060 | I'm half in U.S., in the half that's stocks.
00:37:09.220 | I'm half in international.
00:37:11.860 | I'm half in small.
00:37:13.220 | I'm half in large.
00:37:14.420 | I'm basically a little more than half in value
00:37:16.900 | and a little less than half in growth.
00:37:19.460 | It's like I don't believe in anything,
00:37:24.780 | but in essence, I believe in everything.
00:37:27.620 | I'm trying to get the exposure to the market
00:37:32.500 | where I've got massive diversification.
00:37:35.900 | And by the way, investors, if they don't know it,
00:37:38.900 | should know it according to the academic studies,
00:37:42.020 | the more diversified we are,
00:37:44.300 | the likelihood is we'll get a higher return,
00:37:46.900 | not a lower return.
00:37:49.900 | You ask about in the timing portion of my portfolio,
00:37:54.300 | I'm not 50/50 stocks and bonds.
00:37:57.420 | I'm 70% stocks and 30% bonds.
00:38:01.700 | Why more stocks there?
00:38:04.100 | Because when you use timing
00:38:06.780 | and you sit out part of the time in money market funds,
00:38:11.860 | you have at that point, when you're sitting in cash,
00:38:14.420 | you have less volatility
00:38:16.780 | than a person who buys and holds equities.
00:38:20.380 | So in 1987, and everybody in this industry
00:38:24.420 | goes back to some time when they looked really good,
00:38:27.300 | but in 1987, we had all of our clients' money
00:38:31.060 | out of the market about a month
00:38:33.700 | before the market crashed in October.
00:38:36.420 | And it made me, for them, I was a hero.
00:38:41.460 | - You're famous.
00:38:42.780 | - And I got on Wall Street Week.
00:38:44.420 | - I bet you did.
00:38:45.620 | (laughing)
00:38:47.220 | - And you know something?
00:38:48.700 | Everybody wanted to make a big deal out of it.
00:38:51.100 | And I said, wait a minute, I didn't call the market.
00:38:54.660 | I happened to be out of the market when it collapsed.
00:38:57.700 | There is a difference.
00:38:59.980 | But people always looking for gurus.
00:39:03.460 | There are no gurus, but the trend following systems,
00:39:08.620 | you could use a 100-day moving average.
00:39:12.260 | You could use a 150-day moving average.
00:39:16.540 | Then it doesn't have to be something complex.
00:39:20.140 | You just need something that forces you to get in
00:39:23.180 | and to get out.
00:39:24.500 | And yes, you'll go through whipsaws, et cetera.
00:39:27.460 | But here's the part I think is fascinating.
00:39:29.820 | The standard deviation of a 70/30 with market timing,
00:39:35.740 | 70 equities, 30% fixed income,
00:39:39.700 | is virtually the same as a 50/50 buy and hold.
00:39:44.700 | Almost exactly the same standard deviation.
00:39:49.440 | And the returns are very similar as well.
00:39:53.100 | Now, do they go up and down together?
00:39:55.700 | No, in 2008, an all-equity portfolio
00:40:00.700 | with these simple trend-following systems
00:40:03.620 | that the company used, after fees,
00:40:06.820 | they lost 18% or 15%.
00:40:09.940 | It was a relatively small amount.
00:40:12.000 | And in 1987, I had accounts,
00:40:15.980 | actual accounts that were up over 50%.
00:40:19.220 | That's the good news.
00:40:22.940 | And then everybody rushed.
00:40:24.380 | In fact, after that weekend, I was on Wall Street Week,
00:40:28.320 | or that weekend, actually,
00:40:30.200 | we got 400 phone calls at my office.
00:40:33.700 | Looking for, theoretically, our help.
00:40:37.700 | I mean, we were not prepared.
00:40:39.820 | But the fact is, the following year,
00:40:43.100 | our returns were mediocre.
00:40:45.920 | And by the way, you and I know something
00:40:49.240 | a lot of other people may not know,
00:40:51.440 | and that is a portfolio from '95 to '99,
00:40:55.940 | properly diversified, big-small value growth,
00:40:58.860 | U.S. International, compounded at 11%,
00:41:02.580 | while the S&P 500 compounded at over 28%.
00:41:07.100 | That's the way it is.
00:41:10.020 | - Well, it's also the way
00:41:11.020 | that it occurred in the last five years,
00:41:13.260 | if you look just back to 2014, going forward 'til today.
00:41:18.260 | So, the market timing strategy that you employ
00:41:22.860 | is relatively simple.
00:41:24.220 | It's a moving average, 100 to 150 days, something.
00:41:28.940 | - Yeah. - What you're saying.
00:41:29.940 | Now, I wanna go back to one point
00:41:31.460 | before I get off the market timing,
00:41:33.180 | and that is that you earlier talked about
00:41:35.660 | young people should have almost 100%
00:41:37.420 | of their money in the market.
00:41:39.420 | But, so when it comes to market timing there,
00:41:41.980 | you mentioned that young people,
00:41:43.900 | when the market goes down,
00:41:44.980 | they should just work and put more money in the market.
00:41:47.780 | So, when you're talking about market timing,
00:41:49.620 | are you speaking about everybody, or you're--
00:41:52.260 | - Old.
00:41:53.100 | - Go ahead. - Old people.
00:41:55.260 | - Old people, okay, that's what I was getting at.
00:41:56.900 | - Yes. - Old people, like me and you.
00:41:58.580 | Well, you're older than me, but yeah.
00:41:59.780 | - (laughs) Yeah, by a lot.
00:42:02.140 | Yes, it is for people where preservation is important.
00:42:07.140 | But, having said that, as critical as I was
00:42:12.020 | of the Target Date Fund at age 20,
00:42:16.020 | sitting on 10% in fixed income,
00:42:19.820 | I've met lots of 20-year-olds and 25-year-olds
00:42:25.860 | who have all of their money in fixed income
00:42:29.940 | because they are afraid of stocks.
00:42:34.300 | And I'm begging them, just put 20, 30% in equities.
00:42:38.220 | Let me show you, I've got my favorite table.
00:42:41.820 | It's called Fine-Tuning Your Asset Allocation,
00:42:44.300 | and it shows these different combinations
00:42:46.540 | of stocks and bonds over the last 50 years.
00:42:49.500 | And what you see is, if you just have 20% in equities,
00:42:55.740 | it'll kick your return up by about 1.5% a year.
00:42:59.900 | If you can get up to 30%,
00:43:01.980 | you might even kick your return up, I'm sorry.
00:43:04.620 | It raises it about 1% a year.
00:43:06.740 | If you go to 30, it raises it to about 1.5 or so.
00:43:11.140 | It depends on what asset class you use
00:43:13.460 | in the equity portion.
00:43:15.100 | But I want those young people who are scared to death
00:43:17.900 | of the market to just take a little risk.
00:43:21.300 | I don't want them to have as much money
00:43:23.780 | as the target date fund represents
00:43:26.260 | 'cause it's gonna end up scaring 'em out.
00:43:28.340 | - Okay, let's go ahead and move on
00:43:31.580 | to the second phase of that,
00:43:33.620 | which we've done the market timing thing.
00:43:36.660 | You've differentiated how young people
00:43:38.460 | should invest versus old people.
00:43:41.140 | But now we need to look at the other side,
00:43:42.780 | really where I think most of the questions
00:43:45.980 | from the Bogleheads have come in.
00:43:47.580 | And it is with your 10-fund portfolio
00:43:51.100 | and now your new two-fund portfolio.
00:43:55.940 | And so this is actually, if you don't mind me saying,
00:44:00.020 | or using this phrase, the slice and dice
00:44:02.860 | of what you do and what you really believe in.
00:44:05.460 | Number one, could you talk about the 10-fund portfolio
00:44:08.500 | and the complexity of it?
00:44:10.620 | And then move then into the two-fund portfolio
00:44:13.980 | and how that solves the complexity problem.
00:44:16.940 | - You betcha.
00:44:17.780 | So this started maybe 15-plus years ago
00:44:22.500 | that I created something.
00:44:24.180 | I got from DFA, by the way,
00:44:26.940 | what I call the ultimate buy-and-hold strategy.
00:44:29.700 | And I was quick to say that it wasn't
00:44:33.100 | and necessarily anybody else's ultimate buy-and-hold,
00:44:36.700 | but it was the best that I could find
00:44:39.980 | without placing any big bets.
00:44:42.220 | So what I did was starting with a portfolio
00:44:45.820 | that's 100% in the S&P 500.
00:44:48.980 | Then all I do is I take 10% of that money
00:44:52.580 | and I put it into large-cap value.
00:44:55.020 | And what happens is you make a little more money.
00:44:59.620 | And then I go the next route, the next step,
00:45:02.220 | and I put in 10% of small-cap blend.
00:45:06.220 | Make a little more money.
00:45:07.220 | By the way, that little more money
00:45:09.100 | is sometimes only 1 or 2/10 of a percent.
00:45:13.380 | Then I take another step and I take out another 10%
00:45:16.580 | from the S&P 500 and put it in small-cap value.
00:45:20.780 | No big bets, no big bets.
00:45:23.300 | Then I take 10% and I put it in REITs.
00:45:26.780 | Now I have 50% in this combination
00:45:31.140 | of five different equity asset classes,
00:45:33.860 | 50% in the S&P 500.
00:45:36.540 | I think people would be probably just happy as could be
00:45:39.580 | right there if they stopped
00:45:40.940 | because they would have made an appreciable increase
00:45:44.300 | in their return.
00:45:45.980 | And I tell young people,
00:45:47.740 | a half a percent more over your lifetime
00:45:50.540 | is truly a life changer.
00:45:52.660 | So if you just did that,
00:45:55.220 | you'd have made a big difference historically.
00:45:58.420 | Don't know about the future,
00:45:59.660 | but historically you would have, okay.
00:46:02.260 | But I keep going because I do want internationals
00:46:05.660 | in the portfolio.
00:46:06.860 | There obviously are times,
00:46:09.060 | I wish I didn't have internationals in the portfolio,
00:46:12.180 | but I believe that that diversification
00:46:15.820 | is what a person should do
00:46:18.900 | if they really want to diversify properly.
00:46:21.540 | So I take another 10%
00:46:23.620 | and go into large-cap blend internationally
00:46:27.180 | and then 10 in large-cap value
00:46:30.100 | and 10 in small-cap blend and 10 in small-cap value.
00:46:34.260 | And then the last 10 goes into emerging markets.
00:46:38.860 | So I have a lot of really risky investments
00:46:43.380 | in that portfolio.
00:46:44.780 | And that is what my retirement looks like
00:46:47.820 | in terms of equity.
00:46:49.420 | I do exactly that, 10% each in those 10 asset classes.
00:46:54.420 | But the bottom line is,
00:46:58.340 | for people who are really do-it-yourselfers,
00:47:01.900 | trying to rebalance 10 different equity asset classes
00:47:07.300 | can be something they can't figure out.
00:47:09.820 | And when I was a money manager, we had a firm.
00:47:13.500 | That's what we did.
00:47:14.980 | We did it for them.
00:47:16.100 | But Chris Pedersen did this analysis of all the ETFs.
00:47:22.060 | And he came up with the best large-cap blend,
00:47:25.940 | the best large-cap value.
00:47:27.620 | Every one of those 10 equity asset classes,
00:47:30.420 | he made a recommendation.
00:47:32.500 | My belief is, and you probably know this,
00:47:35.180 | but supposedly, Schwab is going to be trading ETFs
00:47:40.180 | with partial shares.
00:47:43.860 | Once Schwab is able to trade partial shares with ETFs,
00:47:48.540 | or their clients are,
00:47:50.380 | then there's no reason why they can't let people
00:47:52.580 | build a portfolio and have them automatically rebalanced.
00:47:56.580 | - Moving along then to the two-fund portfolio,
00:48:01.260 | which I find to be really interesting.
00:48:02.940 | So you solve the problem of complexity
00:48:05.820 | with the two-fund portfolio.
00:48:08.460 | - Well, the challenge, and this was, by the way,
00:48:13.460 | partly motivated by my meeting with John Bogle,
00:48:17.580 | because he basically said, "Paul, you're a nice guy."
00:48:21.780 | He had been on our radio show for years.
00:48:24.340 | So he knew us, and he knew that we were trying
00:48:28.580 | to help people.
00:48:29.540 | He said, "But you've got it wrong.
00:48:32.020 | "What you're doing with 10 funds
00:48:34.820 | "is it's just too complex for people,
00:48:37.140 | "and they aren't going to do it."
00:48:39.180 | And so Chris Patterson, donating his valuable time
00:48:44.180 | as a volunteer to our foundation,
00:48:47.340 | along with Daryl Balls, another systems analyst,
00:48:51.860 | smart guy that really understands computer work,
00:48:55.700 | have put together this strategy.
00:48:58.540 | And what Chris came up with is the key
00:49:02.340 | to treating the extra fund, the second fund,
00:49:05.940 | in a similar fashion as you would with a target date fund.
00:49:10.940 | Because if you put, for example, 20% in a small cap value,
00:49:17.260 | and 80% in a target date fund,
00:49:21.140 | and you don't ever reduce the exposure
00:49:25.420 | in the small cap value fund,
00:49:28.020 | you could end up with 50% of your money
00:49:31.020 | in small cap value at age 65.
00:49:33.700 | - Yeah.
00:49:34.540 | - So what, and we really want young people
00:49:38.140 | to be exposed to small cap value,
00:49:40.820 | and then to reduce that exposure as they get older.
00:49:44.300 | And what Chris came up with is so simple.
00:49:46.860 | You multiply your age of 20, let's say, by 1.5.
00:49:51.860 | Now, you've got 30.
00:49:53.740 | That is the amount that you would put
00:49:56.100 | into the target date fund.
00:49:59.420 | The rest you put into small cap value.
00:50:02.780 | Too aggressive?
00:50:03.700 | Okay, how about large cap value instead?
00:50:07.100 | We could do that as well,
00:50:08.660 | but it would just be less aggressive.
00:50:11.020 | So as you age, once a year, you could do it every two years.
00:50:15.540 | I mean, it doesn't have to be done every year.
00:50:18.300 | But what you're doing, by the time you're 30,
00:50:21.700 | you'd have 45% in the target date fund,
00:50:25.060 | 55 in the small cap value.
00:50:27.380 | At age 40, you got 60 and 40.
00:50:30.980 | At age 60, you are 90% in the target date fund,
00:50:35.420 | and 10% in small cap value.
00:50:37.580 | At age 66, you're zero in small cap value.
00:50:41.940 | - Oh, I see.
00:50:42.780 | Okay, I got it.
00:50:43.620 | - It is so simple.
00:50:44.860 | Now, I know what's gonna happen.
00:50:46.740 | If anybody really thinks this is a good idea,
00:50:50.780 | they're gonna reconfigure it and make it better.
00:50:54.460 | Because the idea now is there.
00:50:57.380 | It's a simple thing to do.
00:50:59.740 | But what formula do you use?
00:51:03.620 | - It sounds like this strategy would work
00:51:07.820 | with a young person who's just getting invested
00:51:09.740 | in a 401(k) plan,
00:51:11.620 | where you've got maybe Vanguard target date funds
00:51:15.180 | or other target date funds that are available to you
00:51:18.100 | and you're 25, or you say you're 30 years old.
00:51:20.820 | You would also need to have in the 401(k)
00:51:23.380 | a small cap value index fund.
00:51:26.380 | If you had those two things available
00:51:29.140 | and you wanted to do something more than just target date,
00:51:31.500 | and you were more sophisticated,
00:51:32.860 | and you really understood what you were doing,
00:51:35.340 | that this would work.
00:51:36.500 | Because by the time you retire at age 66,
00:51:40.420 | you don't have any left in the small cap values,
00:51:42.460 | just all in the target date.
00:51:43.620 | So it does make sense from that perspective.
00:51:47.340 | - And by the way, I work with a lot of people my age
00:51:51.900 | suggesting things for their grandkids.
00:51:54.820 | When there's a new grandchild,
00:51:58.100 | I'm thinking either 100, I'm sorry,
00:52:00.900 | 365 a year for 21 years,
00:52:04.140 | or $3,000 once,
00:52:06.580 | put that in small cap value,
00:52:08.900 | keep it in small cap value.
00:52:10.980 | When they start working and they can do an IRA,
00:52:14.300 | take money out of this account,
00:52:15.820 | put it in the Roth IRA,
00:52:18.100 | and just let it go,
00:52:20.980 | keep contributing until that money is gone.
00:52:23.940 | And literally, literally,
00:52:25.940 | if you took 3% off of the compound rate of return
00:52:30.940 | of the past from small cap value,
00:52:34.620 | you could have created 20 million in retirement income
00:52:39.620 | and 30 million as a gift to the heirs at age 95.
00:52:45.620 | Now, obviously it sounds like something
00:52:50.180 | that you get at a county fair,
00:52:52.540 | but the fact is if you get 12% a year,
00:52:55.780 | and why is 12% unreasonable?
00:52:58.500 | If 10% in the S&P 500 is reasonable,
00:53:03.100 | and it includes the depression,
00:53:05.260 | then why isn't 12% reasonable for small cap value?
00:53:10.260 | It is the premium for taking that risk.
00:53:15.060 | - I have to tell you that one of the Bogleheads
00:53:17.020 | suggested that I get a glass of wine
00:53:19.820 | and I put it in front of me.
00:53:21.340 | And every time you say small cap value,
00:53:24.780 | I have to take a sip.
00:53:26.180 | So that's exactly what I did, okay?
00:53:29.580 | I went and I filled up a glass of wine
00:53:32.820 | with some Cabernet, right?
00:53:34.420 | - Oh, we're friends then now.
00:53:35.940 | - Well, we're getting there.
00:53:37.460 | And I have to tell you, the glass is now empty.
00:53:41.040 | Paul, we've been talking for quite a while.
00:53:44.740 | I wanna get into a few other things before we wrap it up.
00:53:47.780 | And some of the Bogles are curious
00:53:49.580 | about just a little bit more about your life.
00:53:53.180 | One of the Bogleheads asks,
00:53:55.660 | what is the greatest mistake that you made
00:53:58.700 | that you are willing to talk about
00:54:00.740 | that we can all learn from?
00:54:02.100 | - Well, I don't know.
00:54:05.860 | Mistakes I made as an investor, I lost everything.
00:54:09.400 | I was conned.
00:54:12.380 | I shouldn't say I was conned.
00:54:13.940 | I was talked into putting my original investment
00:54:18.260 | of $1,000 into a commodity trade,
00:54:21.440 | which I doubled in a matter of weeks.
00:54:27.440 | And having found out how easy that is,
00:54:30.260 | I took the guy's advice again, and I lost it all.
00:54:34.200 | And so that money, if I hadn't lost it,
00:54:37.220 | if I had put it into small cap value,
00:54:40.460 | ooh, there's another sip.
00:54:41.780 | - Oh, no, the glass is already empty.
00:54:43.380 | You're gonna have to let me go back to the bar.
00:54:45.620 | - But if you had invested it,
00:54:47.380 | rather than having it leak out the bottom
00:54:51.420 | in a rush out the bottom of your bale,
00:54:54.700 | it would have meant something to somebody.
00:54:57.220 | And so I made a lot of mistakes like that
00:55:01.020 | early in my career.
00:55:02.980 | I invested in some small companies
00:55:07.980 | that had products that seemed to have some potential.
00:55:11.200 | Again, I try to talk young people out of doing that.
00:55:14.660 | Their parents say, "Oh, let 'em make mistakes."
00:55:18.060 | I don't wanna let 'em make mistakes.
00:55:20.060 | The cost of those mistakes are way, way more
00:55:23.820 | than people know, and they might even get lucky
00:55:27.140 | and hit a good one and think they know something,
00:55:29.660 | and then it'll even cost 'em more later.
00:55:31.720 | So I did those things.
00:55:34.160 | And I think the other thing is I've never learned a mistake.
00:55:39.540 | I'm still struggling with how do I not work
00:55:43.160 | 60 hours a week?
00:55:45.440 | I love what I'm doing.
00:55:47.280 | Well, I wanna go as long as I can.
00:55:50.120 | That's one of the things that John Bogle did for me.
00:55:53.120 | He inspired me.
00:55:55.120 | And I'll tell you where I feel my work has value.
00:55:59.480 | We are giving advice, very specific advice,
00:56:04.480 | on how to invest if you're conservative,
00:56:07.920 | moderate, aggressive.
00:56:09.080 | I don't mean I talk to you.
00:56:10.500 | I don't mean I review your situation.
00:56:13.100 | I mean we give you, if you wanna learn what we believe,
00:56:16.740 | then we make it possible for you to know what to do
00:56:20.260 | if you believe that.
00:56:21.680 | That's not easy for people to do.
00:56:26.300 | - So Paul, that gives me a great opportunity to ask you,
00:56:29.960 | could you tell us about your website
00:56:31.460 | and tell us about all the things you're doing
00:56:33.100 | and how are you educating people?
00:56:36.020 | - Well, first of all, we got free books.
00:56:39.520 | Probably the best one is entitled
00:56:41.120 | 101 Investment Decisions Guaranteed
00:56:44.360 | to Change Your Financial Future.
00:56:46.960 | By the way, I quickly tell people,
00:56:49.560 | I guarantee it will change.
00:56:50.920 | I don't know if it'll be better or worse,
00:56:53.080 | but I think it'll be better.
00:56:55.000 | But it's nothing more than best practices.
00:56:58.440 | So that was the beginning when we started the foundation.
00:57:02.760 | I have portfolios there on our site
00:57:05.900 | for Vanguard, Fidelity, T. Rowe Price,
00:57:08.900 | and the ETFs, best in class ETFs.
00:57:12.120 | We have over 400 articles and podcasts there.
00:57:17.120 | We have videos that we've made.
00:57:22.080 | We have a new book coming out in a few months.
00:57:28.100 | It is all about $12 million decisions.
00:57:32.800 | Well, actually, half of it is about $12 million decisions.
00:57:37.120 | And the other half is about two funds for life
00:57:40.040 | because I think you can actually do those 12 things
00:57:44.760 | and use the two funds for life
00:57:46.760 | and take advantage of those,
00:57:48.520 | what I call $12 million decisions.
00:57:51.400 | That book will be free to everybody
00:57:54.540 | who is on our email list.
00:57:57.000 | And by the way, if you're not on our email list
00:57:59.880 | and you know the book is out,
00:58:02.420 | you'll be able to get it free.
00:58:04.380 | I want to help as many people as I can.
00:58:08.820 | And I love working for people.
00:58:10.220 | I love helping people's lives get better.
00:58:13.660 | I do a lot of nonprofit work here on Bamber's Island
00:58:17.260 | and getting medical publications,
00:58:21.620 | free medical publications into the hands
00:58:23.980 | of physicians in developing nations
00:58:27.880 | through an organization called Global Help.
00:58:31.580 | So I've got other things I'm working on.
00:58:34.600 | I just can't seem to stop.
00:58:38.880 | - You're doing a great job for a lot of people.
00:58:40.780 | You got tremendous respect by the Bogleheads,
00:58:43.440 | tremendous respect from the investment community
00:58:46.280 | for providing information.
00:58:47.960 | Now, everybody doesn't have to agree with you on everything.
00:58:51.000 | - Oh, I know that they don't.
00:58:52.460 | (laughing)
00:58:54.640 | - Well, Paul, it's been wonderful having you on the show.
00:58:58.040 | And I know that the listeners have all really enjoyed
00:59:00.920 | a lot of the conversation we've had today.
00:59:03.660 | And I'm really looking forward to talking with you again.
00:59:07.160 | The website is paulmerriman.com.
00:59:10.440 | Thank you so much for joining us today.
00:59:13.400 | - It's been my pleasure, Rick.
00:59:14.840 | Thank you and all the best to all those Bogleheads.
00:59:19.360 | - This concludes the 18th episode of Bogleheads on Investing.
00:59:23.920 | I'm your host, Rick Ferry.
00:59:26.120 | Join us each month to hear a new special guest.
00:59:29.460 | In the meantime, visit bogleheads.org
00:59:32.840 | and the Bogleheads Wiki.
00:59:34.580 | Participate in the forum and help others find the forum.
00:59:38.820 | Thanks for listening.
00:59:40.180 | (upbeat music)
00:59:42.760 | (upbeat music)
00:59:45.340 | (upbeat music)