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Paul Merriman: 'This Is Not Just a Problem With Retail Amateur Investors'

The author and financial educator discusses his commitment to indexing, why he believes in small-value stocks, and the perils of performance-chasing.

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Our guest on the podcast today is financial educator and author Paul Merriman. He founded Merriman, a fee-only investment advisory firm, in 1983. He retired from Merriman in 2011 and started The Merriman Financial Education Foundation, which is dedicated to providing comprehensive financial education to investors. Merriman has written several books on investing. His latest released in November 2020 and is called We're Talking Millions! 12 Simple Ways To Supercharge Your Retirement. He writes a weekly column on MarketWatch, and he also hosts the weekly Sound Investing podcast.


Financial Education

NGPF Documentary: The Most Important Class You Never Had, by Tim Ranzetta,, March 20, 2020.

"Opinion: My Wild Ride Owning GameStop Stock," by Paul Merriman, MarketWatch, Feb. 12, 2021.


"The Ultimate Buy-and-Hold Strategy," by Paul Merriman, MarketWatch, July 17, 2013.

"30 Reasons to Fall in Love With Index Funds," by Paul Merriman, MarketWatch, June 4, 2014.

"Why REITs Belong in Your Retirement Portfolio," by Paul Merriman, MarketWatch, April 1, 2015.

"Here Are the Two Funds You Need—Before and After Retirement," by Chris Pedersen, MarketWatch, Nov. 30, 2019.

"Target Date Funds and Portfolio Choice in 401(k) Plans," by Olivia S. Mitchell and Stephen P. Utkus, Wharton Pension Research Council, Jan. 9, 2020.

"The Lessons of Vanguard's Jack Bogle Have Helped Countless Investors—but His Picks Could Be Improved," by Paul Merriman, MarketWatch, Feb. 13, 2020.

Telltale Chart,

"Paul Merriman 4 Fund Portfolio Review," OptimizedPortfolio, March 24, 2021.

Retirement Decumulation

"Fine-Turning Retirement Portfolio Allocations," by Paul Merriman, MarketWatch, July 31, 2013.

"Retire With More Money and Less Risk," by Paul Merriman, MarketWatch, April 30, 2014.

"FAQs About the Merriman Target Date Portfolios," by Chris Pedersen,

"How to Double Your Target-Date Retirement Fund's Return in a Single Move," by Paul Merriman, MarketWatch, April 15, 2015.

"Why Target-Date Funds Are the Best Retirement Investment," by Paul Merriman, MarketWatch, Sept. 7, 2019.


Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar.

Ptak: Our guest on the podcast today is financial educator and author Paul Merriman. Paul founded Merriman, a fee-only investment advisory firm in 1983. He retired from Merriman in 2011 and started The Merriman Financial Education Foundation, which is dedicated to providing comprehensive financial education to investors. Paul has written several books on investing. His latest, released in November 2020, is called We're Talking Millions! 12 Simple Ways To Supercharge Your Retirement. He writes a weekly column on MarketWatch, and he also hosts the weekly Sound Investing podcast.

Paul, welcome to The Long View.

Paul Merriman: Thank you, Jeff. It's really an honor to be here. Thank you.

Ptak: Well, we're happy to have you. Thanks again. I wanted to start with your foundation. Through your foundation, you're committed to financial education. So, my first question is, what are the characteristics of financial education that in your opinion really works to improve investor outcomes?

Merriman: Well, to be fair, our focus is, first of all, all stages of life. That's a tall order, except that we're not offering a complete lineup of financial information. We focus on investing. We focus on the selection of the equity asset classes and how much should go in each one. We focus on the funds or ETFs you should consider. We focus on the asset allocation between equity and fixed income. And a couple more--we focus on making the decision about which of these strategies that we recommend they should use for retirement, and finally, distributions. I think that's a huge thing to help people with. But we are not tax people. We're not financial planners. We are purely at the investment end.

Benz: You mentioned that you deliver financial education to people at all life stages. But have you found that people at certain life stages are more receptive to getting educated financially than others?

Merriman: Well, I suspect that would be one way to look at it, because there is a huge difference in what we have to do for high school students. I teach high school classes via Zoom. And then I teach at the university level via Zoom. And then, finally, we get up to where people actually have money committed. And there's so many different levels of education we have to help. There are the sophisticated--if I had to put my finger on a particular group, the STEM group. They love details. They like the evidence. They love Morningstar, by the way, you know that. And I have to do for them way more than I would do for the young first-time investor, who probably should simply be going into a target-date fund. And so it's lots of different kinds of folks. And then, the retirees. We help some retirees that are in their 80s and don't know anything about investing. So, it's a good thing that I'm not being paid, because I've got so many different things that I have to do to help these people. It's many different hats.

Ptak: Maybe we could talk about younger people for a minute. What, based on your experience, have you found is the best way for younger people to get comfortable with investing? We've all been reading the stories about the mania, or what looks like a mania, with GameStop, Robinhood, Bitcoin, and the like. Do you think that sort of experimentation is possibly helpful, or at least not all that hurtful, and that young people can get the urge to trade out of their system when their accounts are still pretty small?

Merriman: Well, I think it's a terrible place to start. I know a lot of folks who teach think it's good to get them involved in something that is exciting and gives them a sense of participating in the process. I think that's the wrong lesson. And I think the other lessons can be taught. God help them if the first trade is successful. And I remember the first time that my son called me and wanted to borrow $1,500. He was at university. And I said, "What for?" He wanted to put the money into a drug company. I said, "Why?" He said, "Because my friend's father works for the company and they got something really exciting coming out." Well, not only--by the way, I did not loan him any money, but he found it--and not only did he buy it, but he leveraged and bought twice as much as he should have. And it took about a week and they lost everything, but not before they had one great first day. And what they did at the end of that day was go out and celebrate the big earnings. They were on their way to realize. Now, I'm glad he failed. I'm glad he lost every penny. But I keep reminding him, it wasn't just that money that you lost, you lost the money that would have been made on that money for the rest of your life.

Benz: One question we wrestle with is, how can people who are interested in financial education and delivering it, like you, better help the people who most need that help? It's a good bet that the people who are listening to us on this podcast or reading your articles on MarketWatch, those aren't the ones who need the help most. So, how do we help marry those things together?

Merriman: Well, that's tough. That's the $64 billion question, or more, because they are the ones. If we're looking for equity in the world, this is one of the things that would move them toward equity, if we could get them financially literate. There is a movement afoot. And one of the star performers, as best I can tell, is a guy named Tim Ranzetta. He runs an organization that provides free curriculum, grades six through 12, for every school in the nation who wants to work with him. And not only do they offer free curriculum, but they offer training classes to train the teachers, because one of the problems is, teachers are not money-oriented people generally, if they were, they probably wouldn't be teachers. So, he is teaching them how to make financial literacy and teaching all of the personal finance topics to make it fun for the students, and what I really like--and he is not alone in this, I don't think--I really like the fact that their goal is to have every high school in the States offer a class in personal finance before they graduate. And if that is done, it is going to, by default, help a lot of kids who are not getting it now. Now, he's not going to make it. I can't believe that he'd be able to get every one of them. But boy, he's knocking them off and he is making those people very effective. There's a movie about the work that they're doing and titled, I think, The Best Class You Never Had. And we didn't have that class. But that class is being taught today. And I think that is the key to getting to these kids that are in great need, but it means they're just being picked up along with everybody else and made better by it.

Ptak: Tim's organization, is it called Next Gen Personal Finance. Is that the one?

Merriman: That's correct. There's something about that organization that I'm just fascinated by. They even encourage homeschoolers to use their material. They are really there to help.

Ptak: Let's shift over to investments. You're a staunch proponent of using index funds, especially ETFs, to build a portfolio. Was that an evolution? Or were you an indexer when you launched Merriman back in the early 1980s?

Merriman: Well, I'm glad you mentioned when I launched Merriman, because when I came into the industry in the mid-60s, obviously 10 years before Bogle came out with the S&P 500 index fund, there was no such thing. There were basically load funds that people paid 8.5% for. And so, it's amazing today how efficient investing is. But when I started Merriman, I started from the active end. And we were in business probably about nine years and we decided to add the passive approach. And so, we were a DFA advisor. And I can tell you, because we had a part of our business that was active, they were almost impossible to get into because they hated active managers. And we made a deal with them and we did it and boy, that was a life-changer, I think, not only for our clients. But I've always taught classes for do-it-yourselfers, and we helped a lot of do-it-yourself investors open up at Vanguard because they couldn't go to DFA and do the same thing as close as possible with the Vanguard index funds.

Benz: That would make you a fairly early adopter of index products. So, what was it that you found so compelling? Was it just the low-cost hypothesis? Or what were the other features of indexing that attracted you to it?

Merriman: Well, I think it's the very thing that my new book talks about. And that is this series of decisions and each one being a million-dollar decision. And yes, expenses are one of those things where we can add a million dollars over our lifetime in returns because we get lower expenses and the lower cost of turnover, which a lot of people aren't even aware of. But that's a setback for you. And also, it was my first introduction in the early '90s to the work of Fama and French, and small cap and value. And, of course, they got me thinking international. And so, everything made sense. And I don't think that's so different than people like us that are out trying to educate folks. I don't think any of us are advocating anything for investors that's going to hurt them. And what I liked about DFA, it seemed like everything they were doing was truly on behalf of the investor, not that they didn't make a good living. But the reality is, we've got Wall Street as a source of information; we've got Main Street as a source of information, the friends and neighbors, but I really believe that the academic community, what I call University Street, is the best source of investment advice.

Ptak: You've long been a proponent of investors adding a significant dose of value to their portfolio. I think you just alluded to some of those elements, especially smaller-cap value. What do you say to investors who might be concerned that the historical outperformance of small-cap value won't be repeated?

Merriman: Well, this is the nature and the problem with investing. We're all facing the unknown. And that's something we don't know what returns are going to be like. But I will say that I am absolutely a believer that stocks will do better than bonds. And I believe that because stocks are more risky. It would be stupid to put money in stocks if you didn't expect that premium. And the same, I think is true of small over large. Again, there's no magic. It's simply a premium for taking another level of risk.

The same thing is true of value versus growth. It's easy to buy growth, because growth represents those things going on, they are cutting edge, they make us feel hip because we're in the right place at the right time. But we also know that while value companies are more risky one at a time, that they too have added a premium. Now, the question then becomes, is there anything right now that would indicate that that premium is no longer something we could count on? Well, I don't think so. And the reason I don't, because when you look back, and if you haven't seen a telltale chart, I'd be happy to send you one. But if you look at a telltale chart going back to 1928, and it compares the return of the S&P 500 to small-cap value, yes, over the 90-plus years, there is a huge premium. But the part that a lot of people don't know is that you spent, out of the 92, 93 years on the chart, 72 years behind. Behind. You would have to wait an average of 14.5 years five times over that 90-some-year period just to get back to where the S&P 500 had gotten you.

So, here, I'm 77. I don't have very long. I know that. Well, at least not compared to my grandkids and my children. What do I know? I know that I might live long enough to see the premium for value in a big way. But the history of it is, it goes long, goes long, boring, boring and a little bit frustrating, and then it shoots off like a rocket for a few years, reaches another level of boredom, shoots off like a rocket. There is no reason to believe that the next rocket launch is no longer there, because what we're seeing is normal. That's the part that investors don't get. This underperformance is the same by the way with stocks versus bonds.

Now, the bonds don't outperform stocks very often. But I can tell you that the last 20 years long-term bonds have done better than stocks, and specifically the S&P 500. And who would have expected that, when in fact, in 1999, people were expecting the next 10 years, in surveys, that the S&P 500 would compound at 20% to 30% a year. And we know what happened. We faced the last decade where it lost money for 10 years. So, I have no reason to change my beliefs. I'm still--in my buy-and-hold part of my portfolio--I'm still half stocks and half bonds; half U.S.; half international; half small; half large; and more value than growth. But let's call it 60/40 value and growth. I'm not without growth. I just don't have the kind of growth that people who buy the total market index are going to have.

Benz: Are you concerned about potential behavioral issues for people employing a value tilt? There was a long recent dry spell for value. Would there be a risk that a value investor during that time might capitulate and swap into the hot growth stocks? How does that figure into your thinking?

Merriman: Well, probably only about a 95% chance they would. There's the problem, Christine. And this is not just a problem with retail amateur investors. I have spoken over the years to a lot of people who service the pension industry or the industry where people hire somebody really smart that looks at the return of all the different managers, builds a portfolio, and pretends that that portfolio should do better in the future. And then, you ask these people, "What are you going to do if one of those managers underperforms?" We'll take care of that, no problem, because that's what Japan is for. And if somebody underperforms for three years, we're on them. We want to know, why did they underperform. They've got to convince us that the future is going to be better.

But what they often do is fire the manager who for three years--we're talking about value underperforming for a long time--if a professional can't wait more than three years, what should we expect out of an amateur investor and therein lies the problem. How can we convince people to put themselves at not doing as well for a long period of time? Well, one answer is to have both. You don't have to be all in small-cap value in order to be successful. In fact, it can take a very small position to make a significant difference in your long-term return. And that's where we have to try to understand the investor. I'm a teacher. I am not an investment advisor. And I am trying to help my students make decisions without sitting down and talking with them. And that's a big responsibility, because I know how complex that conversation can be and what you find out in that conversation when you sit with people, because that's what I went through as an investment advisor. So, it's a challenge. And you got to convince them, I think. You've got to convince them that they will see that premium. But that's not as easy as it sounds.

If I can convince somebody to start investing earlier, five years earlier than somebody else, and I have them put that money away into the S&P 500 and I show them how over a lifetime the $25,000 that they're going to put away $5,000 a year for five years, that is going to be worth as much as $7 million before you die. Now, that $7 million in money that you take out and that you leave to others. At the end of five years, I'm talking with them. And they see that they're $25,000 is now built up to $30,000 plus a few dollars. And they're saying, I don't see how you get from here to $7 million. Well, you get there by continuing to wait and wait and wait and hoping that in fact, the S&P 500 replays what it did in the past, and who knows. But I can tell them that if they're patient, they can take a look at another five years and see where you are and see if you're still on track. But they get disappointed so quickly, because they want what they want when they want it. So, what else is new with young people?

Benz: You've written about what you call a two-fund portfolio for life, and that's a target-date fund and a small-cap value fund. Can you walk us through the thesis behind this portfolio strategy, and how it would work in practice, maybe giving an example based on someone's age?

Merriman: I will. In fact, I'll give you two examples, because there are two distinctly different two fund-for-life strategies in the book. The first strategy is built for people who don't want to be very aggressive, but they think this idea of adding small-cap value might add some extra return over time, and we show them about how much it could return. And the base of this portfolio is what I think is the greatest investment invention of all time. And that's the target-date fund. I love the concept. It is exactly what all those people who have no idea what they're doing, or maybe even those who think they know what they're doing, should be using. And there's a lot of evidence of that. By the way, there's a great study out of Wharton that shows on 1.2 million investors at Vanguard, those that use the target-date funds, this was over about a decade, they made 2.3% more per year than those that didn't use any target-date funds in their portfolio. 2.3% is a ton of extra return. One of the things that I teach is that every extra half a percent you can earn on your investments can lead to an extra $1 million to $1.5 million even if you're investing as little as $5,000 a year over your lifetime. A half a percent is a big deal. And target-date funds give amateurs a chance for a couple of extra percents. That's big money.

But here's the problem with the target-date fund. They don't have enough in small cap, at least not according to the academics. This isn't about Paul Merriman. There's nothing I'm teaching people that originated with me. I am not a certified financial planner. I'm not a Chartered Financial Analyst, but I can read. And so, I have read the studies that show the legitimacy of small and value. And what you get in small and value is you get a teeny-tiny bit of it in most target-date funds. And people say that's enough. If you needed any more, John Bogle would have put it in there for you. Well, no, John Bogle didn't put it in there because he really believes that for most people, especially those who are not well educated on investing, they need to stick with the stuff they know, big companies they know. But in those, for example, total market indexes, there's so little small-cap value in there, it can't move the needle of return. But if you can do 10% or 20%, it starts to move the needle. So, what we recommend, the first strategy for people who just want to try a little bit, put in 10%: 90% in the target-date fund, 10% in the small-cap value, and over time--and leave it alone, don't rebalance, just leave it alone and let it grow. And that will be one way to do it.

But Chris Pedersen--I didn't develop this--Chris Pedersen, who is our director of research at our foundation, he came up with a strategy that says and believes that when people are young, they have the ability to take a lot of risk. So, he developed a formula. And you can adjust the formula if you think it's too aggressive. But I like what he did. He multiplies your age by 1.5. So, if you're 20, that's 30, 30% goes into the target-date fund. Thirty percent in the target-date fund, and 70% in small-cap value. It could be large-cap value. It could be a combination of small- and large-cap value. But for the sake of the study, small-cap value. As you age, if you want to do it annually, you can; if you want to do it every two years, you can. But let's just fast forward to age 30. Now you take 1.5 times 30. Now you've got 45% in the target-date fund and 55% in small-cap value. And if you fast forward to age 60, getting close to retirement, you're now 90% in the target-date fund and 10% in small-cap value. And then, pretty soon at age 66, you're out of the small-cap value business. I'm going to suggest, from my experience, if you learn to live with small-cap value in your life, you're likely to keep a small slice. They're not for you, probably, but for your heirs to let part of that portfolio grow a little faster.

But I like that because it addresses the same thing a target-date fund does. It starts you aggressive. And over the years, it reduces that as you get closer and closer to retirement. And Chris has done tons of studies, turned that inside out going all the way back to the '20s as well as back to 1970. And while his new book that will come out later this year is probably more for engineering type, the STEM people, than for the first timer. But he really is a very smart guy with a drive to help others do this kind of thing. And that's what you got to do. As you guys know, you got to make it simple, or they won't do it.

Ptak: So, in practice, how do you help the investors that you work with determine whether they should opt for an uber-simple mix? So maybe it's just a target-date fund, or maybe a mix between a target-date fund and small value in the way you describe? It seems like for some, having that much in small value, it might be too much for them to handle. So, how do you work that out in practice?

Merriman: Well, it starts at another level. We educate them about the real risk of investing over the long term. And years ago, when I was in the investment advisory business, I developed a series of what we call fine-tuning your asset-allocation tables. And those tables reflect for just the S&P 500. We have a table for the ultimate buy and hold. We also have an ultimate buy and hold--we call it, light. That's just the working name. It's four funds instead of 10. But we show people what are the implications of having all of your money in 100% equities for all these different combinations, and more than I've listed. But what if you add 10% fixed income, what happens? What if you add 20%? And you go in 10% increments all the way down to 100% in bonds. So, on one piece of paper, I can show somebody, what is the annual return of all of these different combinations. And you'll see the losing years you can see them, and you got to face them. Down below, we show the worst 12 months, the worst three months, the worst 36 months, the worst 60 months, and the worst drawdown. There are two things I have been guaranteeing investors for a long, long time. One is, I cannot make you money. As your advisor, I will never make you any money. The market will make you that money, not Paul Merriman. And if you follow my advice, I guarantee you will lose money. So, let's talk about how much you're willing to lose, because every one of those columns, even the bond column, has a losing year, or two or three; not big losses, but losing years. So, they can look and see, hey, this is not a one-way street.

So, we educate them a lot about the realities of investing and ask them to learn how to use those tables. Now, we have a table for all small-cap value. And you can look at all small-cap value and bonds and see what happens when you put together an all small-cap value portfolio along with bonds. Again, you're going to see the losses. And, of course, what you'll find is the losses aren't that much greater. For the small-cap value, than the S&P 500. In fact, if you go back 90-plus years, and look at every losing year, the S&P 500 lost money. The average loss in those same years for the small-cap value is no bigger. Is no bigger. And so, we're working hard to get them to understand that the discussions we have around risk are oftentimes--they don't last long enough, they don't go deep enough. But if you can make people comfortable with the ride, it is-- you guys know--it's a wild ride to be an investor. And at some point, I guarantee in the future, the best I can guarantee anything, you're going to come from a high point in the market and you're going to go down 50% or more. And what are you going to do about it? They'll say I don't want to have that big of a loss. While you're sitting on 100% equity, and Peter Lynch and Warren Buffett said, if you're not willing to lose half your money, you shouldn't be in stocks. You've got to come to grips with the reality of investing and build a portfolio that matches who you are, not who your neighbor is.

Benz: I wanted to ask about a relative of small value, which is real estate investment trusts. You've written favorably about investors, including REIT exposure in their portfolios. Would this work in tandem with small-cap value exposure given that small-cap value indexes typically own some real estate?

Merriman: Well, and of course, that could change from time to time in the small-cap value that certainly there would be value seen there now with the REITs being down. What happens with REITs? In our ultimate buy-and-hold strategy, we start the discussion with an all S&P 500 portfolio, and we start adding 10%--first, large-cap value, then small-cap blend, then small-cap value, then REITs. I think I missed one. I don't know if I went to large. Anyway, but we finally get to REITs. REITs do not add any return. Or if they do, it's a very small amount. REITs do produce historically about the same return as the S&P 500, but they don't correlate very well. So, when you add the REITs, it reduces the standard deviation at the same time as it holds on to the return. But the value returns historically, both large and small, are much higher than REITs. So, that is, in our mind, a different asset class. But it's true, they do oftentimes act like value rather than growth certainly.

So, I hope that answers your question, Christine. We see it, REITs, as a different asset class. We get a lot of questions now, and I don't blame them. Are REITs, have they seen their best days? And now, we have the problem. When do we eliminate an asset class? Just like you asked me, are you going to consider eliminating small-cap value or large-cap value because the premium has gone? Well, it's a lot easier for me to understand why somebody might say with what's going on with the use of office buildings, what do you think about the REIT business? Do you think it has a future? Well, those are all very good questions. And it's tough. When you're a buy-in holder, you are in a position where you're supposed to stick it out unless there is something drastically wrong that should change the face of the economy or of that industry forever. I don't personally think that has happened. But I'm sure there are people who do think it has happened and might take REITs out of their portfolio.

Ptak: What about direct real estate ownership? If someone has significant home equity or rental property, should they back off the real estate exposure?

Merriman: That's totally out of my area of expertise. To begin with, I have never owned a piece of real estate for anything but to enjoy. And so, I've never been an owner of… And, by the way, I don't consider that to be a passive investment if I own a piece of rental property. That sounds a lot like a business to me. And so, I don't really know. I do think, having dealt with thousands of people over the years, that when somebody who has been in the real estate business comes in and says "I want to get out, I want to quit doing this," I ask a lot of questions. Because in so many cases that I've seen people liquidate, they're still out looking for another property, and then they come back and they want their money out to do another real estate deal. In the meantime, the market has gone down. And they're upset with my recommendation, which was not supposed to be something for a year or two or three. But that's when they want it. So, I was always hesitant to try to convince somebody who believes in real estate as a business that they should liquidate and go into the stock market.

Benz: You referenced DFA earlier. Does Dimensional's entrance into the ETF space and the fact that the funds will now be available to retail investors make you inclined to gravitate toward some of those funds in your recommendations?

Merriman: We're ecstatic. When we built these ETF portfolios, not the Vanguard or the Schwab or the Fidelity, but the ETF portfolios where we could get access to asset classes that looked a lot like DFA. My whole goal when we started doing the ETF portfolios was to try to build a portfolio that looked like my own DFA portfolio. And it made me sad that I could not give them a DFA direct. But now--and with the Avantis funds of some old DFA folks there that have started that family--we're going to have access to funds that look a lot like the DFA funds that I've known and loved.

Ptak: For fixed-income exposure, you've generally been a proponent of an all-government bond portfolio, short- and intermediate-term government bonds, as well as TIPS. Can you describe your thinking on that, as well as your view that investors should avoid corporate and longer duration bonds?

Merriman: Well, the reason and what's important here is that the bonds in the portfolio--and this goes back to my days when I was an investment advisor--the gas to run the portfolio for the growth, that's equities, not fixed income. If you're looking for growth, you go to equities. When you need the break, you want bonds, at least that's my belief. And the kinds of bonds that have the best return under the most severe pressure in the market are the government bonds perform much better historically. I mean, 2008 was a great example. You had some high-yield bond funds down 20% to 40%. You had high-grade corporates down 10%. But if you were in governments, and that's what we were using--by the way, had we been using long governments, we would have made a lot more money. But long governments can be fairly volatile as interest rates go up and down. And we're not in the market-timing business here. We're in the build something to make the portfolio more stable in all markets, but in particular, more stable during the worst of times. And I think our portfolios were up 7% to 9%, the bond portfolios, in 2008.

Now, I know that's not much. But when you look at all the other minuses people were facing, that looked pretty doggone good at that point. And by the way, the same thing we would say, although with more volatility, if you look at value, and what happened in the 2000 through 2002 bear market, if you had international and value in your portfolio, you could almost come out of that period breaking even. In fact, if you were partly in bonds and partly in a well-diversified ultimate buy-and-hold strategy, you probably made a little money. Now, that's the good news. And in this business, there's almost always bad news. The bad news is, that very portfolio that made people feel safe during 2000 through 2002 underperformed the S&P 500 between 1995 and 1999. And a lot of clients, they were mad as hell. They weren't going to take it anymore, because the S&P 500 was such a powerhouse. But that's where you try to get people just to buckle down, figure out how much equity, how much fixed income. Hopefully, the fixed income will stabilize during major market declines, at least part of the portfolio, and that the equity portion will give them decent growth over the long term. And hope they'll have the patience to stay the course. A lot of people don't. I've had people give me as long as one month.

Benz: Do you have any concerns that given how low yields are today that bonds won't be the effective diversifiers for stocks that they've been in the past?

Merriman: Well, I do get the question in a slightly different way. And they say, why would I put any money in bonds; you cannot make any money in bonds--look, what they are paying. By the way, they've been telling me that for what 10 or 12 years and bonds have continued over that period to be OK. But they're there to stabilize. That's what they're there for. And the reason that they are short to intermediate is because when we do get an uptick in rates, short to intermediate will not be impacted the way that long-term bonds will be impacted. In those fine-tuning tables I talked about, the all-bond portfolio is short to intermediate and you can see what the worst years looked like. And, by the way, they had some really great years during the period that interest rates were very high. So, it's a nice balance. Remembering, as most everybody says who believes in diversification, the whole idea of diversification is that you hope something is doing OK when other things are falling apart, but you cannot be the best if you're diversified, you just cannot be. But if you're diversified, you are more likely to stay the course for the long term than if you're not.

Ptak: We're going to shift to retirement decumulation. For people who are in retirement, what do you think is a sensible way to extract cash flows from a portfolio, especially given how low yields are today?

Merriman: Well, this is a tough one because what our practice when I was an investment advisor, we always took the money out of the total portfolio. So, if we were 50/50, like in my case, my wife and I are 50/50 stocks and bonds, and in the first week of each year, for emotional reasons, not financial, we take the whole year's income right now. I don't want to be watching the market going up and down and be thinking about, oh, should I wait a couple of weeks to take that money out? No, I don't want to be part of that. So, we take it out right up front, and it goes into a short-term bond fund for the year, giving us our monthly income.

Now, that means that we would, like most would, be taking money out of the asset class that probably did the best the previous year. And so, as you know, that means we've been taking money mostly out of stock funds in the last years rather than out of bond funds, because there have been some pretty decent returns. But when we dip into fixed income, that is a sign more than likely that if we hadn't taken the money out of fixed income, we would have had to transfer in the rebalancing process over into equities. The hardest thing for people to do, take money out of fixed income that's been doing OK and putting it into something that's been losing money. And if it's hard the first year, you could imagine how hard it is the second year, when the advisor says it's time to take money out of the safe part and put it into the risky part. So, I have continued to use the portfolio as a total return portfolio.

Benz: Well, I wanted to ask, Paul, about target-date funds for decumulation. You've talked about how much you like them for people who are saving for retirement. It seems like in decumulation you lose something in that you can't pick and choose where you go for your cash flows on a year-by-year basis in the way that you do with your portfolio. So, do you think target-date funds could be better for people who are in drawdown mode?

Merriman: Well, I suspect that that's a valid point. That is one of the weaknesses about target-date funds. You have no control from day one till age 91. And so, it is part of the process. And the question is, because they are being rebalanced all the time, that's the nature of the way they manage those things, is that the asset classes don't get way out of whack, because they're constantly going back. For example, if I had my money, our money, at Vanguard in a target-date fund, they would be 70/30: 70% fixed income, 30% equity. I'm 50/50 for life. So, target-date funds don't work for me. I'm willing to take more risk than a 70/30. But to the extent that we're going to have to rebalance, the target-date fund is essentially rebalancing the same way that my account would be rebalanced periodically, except it's in essence done on a daily basis.

So, you're right, you do not have tax control. And you can't do clever things for tax reasons. But remember the other thing, more than likely, these are things you don't want to do anyway, which means you got a choice. You can pay Vanguard 14/100th of 1%, to do everything. Or you can pay somebody, let's say, for the sake of discussion, 0.5% to have a portfolio, or 1%, to have a portfolio spread amongst a bunch of different asset classes for which you're paying a price. And I'm not saying it's not worthwhile. But you don't have to pay that price because in essence Vanguard is doing the same thing. It just isn't as fancy.

Ptak: Do you think the financial advice business focuses too much in investments? Granted, it's a very, very important piece of the picture. But given how simple it is to create a sturdy investment plan, and I think that you've talked about some of those virtues of simplicity, if the advice business does focus too much in investments, where do you think financial advisors ought to be spending their time?

Merriman: Well, having been in that business, the fact is that there's no excuse for an advisor not to do the right thing in building a portfolio. Now, I can't expect everybody to agree with me on how much you'd have in small-cap or large-cap value, or U.S. and international. I have been 50/50 U.S. and international since about 1993. So, that is not normal. But it's not bad. Twenty percent international is fine. I just don't happen to think it's enough. But it does not change the fact that those kinds of portfolios are likely going to have very similar returns. So, there is no magic there.

The magic is keeping the people committed to what they said they believed in the day you sat down, or the last annual meeting that you had. Because we know how people feel about losing money. And even when they're not losing money, they see reasons they should be losing money. Last year was a really good example of that, I think. And so, they want somebody to talk them through it. The day that Bill Clinton got elected, one of my clients from Louisville, John, called me and he said, a southern gentleman all the way till his death, he said, Paul, are you happy with the way things are going? And I knew enough about what he was talking about. He said, as long as Bill Clinton is president, I want out, sell everything. Forty-five minutes of talk with John, and I kept him in. And I tell you, it made a difference to his heirs. It didn't change his lifestyle at all, but it may have for his heirs. But that was what I was being paid for.

I said it earlier, I can't make you money. The market makes you money. I can convince you you should have some in the market and show you why I think you should, looking at numbers, not telling you a story. I'm not a storyteller. I don't believe that you make decisions based on stories. And yet almost every salesperson I ever met says that stories are the way we sell. I like numbers. I like evidence. It's the reason why a lot of STEM people like our work because it's all evidence based. And so, there is the problem of keeping people on course. Estate planning--my wife and I over the years have made changes in where we live. And I think on Bainbridge Island, we've had three homes since 2004. And I always sit down and talk to somebody who knows the numbers. I am not a financial planner. I have a financial planner. He’s at the Merriman company taking care of us as a financial planner, and I respect the information they know about taxes. And when we want money out, they determine where the money comes out of the account, so it's tax-efficient. They talk to all the children. They counsel everybody in the family as part of the deal. And as an investment advisor I always told my clients, you got a kid that needs help, come talk to me, I'll help get set up, I'm not going charge him. But that was just part of the service.

Investment advisors will do a lot. They do more, if you ask, I will tell you that. Because sometimes there are clients who never ask. They won't even have an annual consultation with you. And that sounds like good news. Well, it's good news if you have a lot of work to get done. But it's not good news, because sometimes you miss something that's gone on in that family that needs to be discussed. And certainly, at the time you're selling the business or at the time you're retiring--in a couple of weeks, I'll be doing my annual article on distributions in retirement. We show tables 3, 4, 5, 6. We show flexible strategies. We show fixed strategies. Why should you be in one of these strategies? Well, somebody has to help you go through that. Or else you happened to read an AARP article that said, everybody should take out 4%. I'm not taking out 4%. I'd be missing a lot of fun in life if I took out 4%. But that's because I over-save. There's a huge difference in what you can take out if you over-save. You don't have to over-save a lot. And a good advisor knows how to get you there.

Ptak: Well, Paul, this has been a very informative discussion. Thanks so much for sharing your time and insights. We really appreciate it.

Merriman: Jeff, thank you, and Christine, thank you so much.

Benz: Thanks, Paul.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: And at @Christine_Benz.

Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)

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