February 19, 2015


Dear Friends,

Warning: You are about to see a long list of Q & A’s that Paul has chosen to answer from the many questions he has received recently; hundreds each week from his MarketWatch column,website readers and podcastlisteners. He decided that answering 10 questions in this newsletter and the next would help catch up a bit in his responses and, hopefully, some of these will be of interest to each of you.

I have tried to convince Paul that our readers don’t have the time to read pages and pages of questions and answers, but he insists on finding out how you feel about the long string of Q&A’s. Please help me by letting us know your preferences. How many Q&A’s would like to read in each bimonthly newsletter – 1, 2, 3 or as many as 10?  

Email me at info@paulmerriman.com and let me know your thoughts.

If you’re in San Miguel de Allende March 10, you can catch Paul presenting at the SMA Midday Rotary,12:30 p.m., Hotel Mision, Salida a Queretaro 1.

Thank you, and enjoy!

Aysha Griffin
Marketing & Communications Director
The Merriman Financial Education Foundation

How Should I Invest in Vanguard Admiral Funds?

Q:   I am looking at investing in Vanguard Admiral funds for their low expenses. I only have around $25,000 in investments, and the minimum for these funds is $10,000. Would it be better to invest in 2 asset classes of the Admiral funds (to keep expenses down), or invest in the 9 asset class funds that you recommend with a $3,000 minimum (in order to be more diversified)?

A:  There are two possible solutions. One is to purchase the investor shares with the $3000 minimum purchase. That means you will be paying about .1% more in expenses but pick up asset classes that should more than make up for the difference in return. The second is to use the commission-free ETFs where the expenses are similar to the Admiral shares. You will pay a slight premium to access the ETFs but that should be easily made up by the lower fees. When you have enough in the ETFs to reach the Admiral shares, Vanguard allows a cost-free exchange to the Admiral shares.

What’s Your Opinion of Tony Robbins’ new “Money” book


Q: What do you think of Tony Robbins new “Money Master The Game” book?  I was a little surprised his recommendations included gold and commodities.

A: As with most investment books there is a lot to recommend and a lot that will likely get investors in trouble. Without creating long lists of both, I will simply say his motivational info is good but a lot of his investment recommendations are inappropriate. The back testing of his recommended portfolio is a great example of data mining, of which his recommendations of gold and commodities are great examples.

As I have said in recent articles and podcasts, “It’s all about performance.” Of course it’s also “all about risk.”  I don’t think the risk-adjusted return of his recommended portfolio will be as productive in the futureas many other well tested portfolios. Thisarticle/review does a terrific job of analyzing Tony’s recommendations.

Should I Add Energy and Commodity Sectors?

Q: Thank you for your article on the Ultimate Buy and Hold Strategy. I am in my 20’s and trying to develop a solid retirement portfolio. Your thoughts in this article make a lot of sense to me. I am considering investing in the recommended Vanguard ETFs using your “aggressive” approach but am wondering if this portfolio covers energy and commodity sectors. What are your thoughts on adding an energy ETF such as XLE, and possibly a gold ETF such as GTU  to the portfolio?

A:  My recommended portfolio has lots of energy companies in both the U.S. and international asset classes. The ownership of energy companies is one of the reasons for the profitable long-term return. Gold, on the other hand, has not had a good long-term return. If we take money out of other very productive asset classes to put into gold, the portfolio return would likely decline. If you want to add more of something that is likely to add to long term returns, I suggest adding more small cap value.

Why Do You Tweak Your Portfolio Recommendations?
Q: I noticed you tweaked the fund percentages in your portfolio since last year. Why were the percentages changed?

A: The most common reason for tweaking the portfolio is adding of a new asset class. Sometimes those additions are made because a family of funds has added a new fund which represents an asset class I think should be in your portfolio. In other cases a change is made because we have added a new asset class to all the portfolios. For example, when we added international real estate several years ago it required small changes to many of the portfolios.

What Is The Future of Small Cap Value Premiums?


Q:  As more and more investors know the small cap value premium, do you think they will evaporate in the future?

A: In the coming weeks I will share the history of small cap value returns over many different market cycles. Over the last 87 years, small cap value had long periods of great success, often followed by relatively long periods of under performance. To some extent it will be luck which period we personally experience.
15 years ago all professional investors, most academics and lots of amateur investors were well aware of the small cap value premium. For the 50 years through 1995, the small cap value asset class (as defined by the academics who support DFA Funds) compounded at 15.8%, compared to 11.9% for the S&P 500. During the amazing 1995-1999 S&P 500 run, the performance of small cap value under-performed the S&P 500 by almost 10% a year. Many saw that as the beginning of the end of the small cap value premium. Of course, during the following 15 years the small cap value DFA fund compounded at 11.6% (with management fees)vs. 4.2% for the S&P 500 (without fees).

While I think the small cap value asset class will produce a premium, I am less sure how much that premium will be. It could be less than in the past. Stay tuned for my series of articles and podcasts on performance, and I will share the beliefs (absolutely no guarantees suggested) of the smartest academics I know.

What Are Your Thoughts on Momentum Investing?
Q: What are your thoughts on momentum investing?

A: According to Investopedia, momentum investing is a system of buying stocks or other securities that have had high returns over the past three to 12 months, and selling those that have had poor returns over the same period. I use momentum investing as part of my market-timing portfolio. The returns and risk are very similar to a broadly diversified buy-and-hold strategy. The standard deviation is a bit higher than buy and hold, as is the return. All market-timing strategies tend to be less tax-efficient so should be used in tax-deferred accounts.

Should I Diversify Across Many Currencies?   

Q:  As a tax-minded Belgian, I need to invest in European ETF’s or funds. There are many funds available in different currencies but would it really matter as I am a young investor and expect never-ending currency wars between central banks?

A: Your suggestion to sticking with one currency is okay. I would not be adverse to young investors in the U.S. building a portfolio with U.S. asset classes only. There will be times that the diversification of currencies will offer some profitable rebalancing opportunities, but the additional returns will probably not change your lifestyle. Having said that, I use a balance of U.S. and international asset classes because it protects against the catastrophic impact of U.S. politicians doing something really harmful to our dollar. Of course many Americans probably believe that many countries in Europe are doing something really harmful to their economies and don’t want any of their money in those markets.

Should I Follow Your Model Portfolios?

Q: Should I directly follow one of your model portfolios? Or do you have a personalized suggestion for me different from your model portfolios? (This question came with a list of Vanguard funds that were either not on my recommended list or with different percentages than I recommend.)

A:  When I was an investment advisor, I was able to give personal advice based on an investors need for return, risk tolerance and other variables, including their investment biases. I even gave free advice on the portion our firm didn’tmanaged.  Also, I gave advice to the children of my clients on what to do with their 401k(s), without compensation. Since I am no longer a licensed investment advisor I cannot give personal investment advice to anyone but my closest friends. However, I can give general recommendations that are made without the personal information necessary to do the work of an investment advisor.

I find most investors get their investment ideas from dozens of sources and then construct a portfolio based on the best they have learned from all the sources. In essence these investors end up with a portfolio that none of the sources would agree is the best they know. My portfolios are the best I know given that the investor understands the likely risk and return of each combination of asset classes, and I work hard to make the risk and return very clear. In other words, I have given you the best I know without taking the responsibility of being your personal investment advisor.

Can I Beat A Value Index Fund?
Q:  I have a different approach to investing. I value each company and invest only in those trading way below their intrinsic value and have certain characteristics, such as low debt, predictability, constant or growing margins, etc. What’s your view on having a concentrated portfolio of value companies you’ve analyzed and selected as likely to have better than average returns over a value index fund?

A: All the evidence I know suggests that the small cap value index is built for the best long-term returns. Your approach suggests that selecting the best value companies will turn in the best returns. The academics have not been able to find any approach to preselect the value stocks that will outperform other value stocks. Their answer is to own them all. The premium for taking that broadly diversified approach is huge, so why try to pick the best and fail, which you are likely to do?
Speculation – Is It A Thrill Worth Risking? 

Q:  I’ve been speculating in commodities and futures for 10 years. While my track record is terrible (one profitable year out of 10), it has been great fun. Why shouldn’t an investor experience the thrill of a possible home run?

A: They should, if they can afford it, but I must admit I choose not to do it knowing the odds are stacked against me. As a wise man once told me, “Don’t play in a game you don’t have an advantage.” I think it comes down to how much you can afford to lose permanently. It’s one thing to lose half of your money on the S&P 500, but it’s entirely different when you lose half of your money in a strategy that is very unlikely to work over the long run. Of course speculators often think they are going to get it back on the next opportunity.

Editor’s Note: In the last newsletter (Feb. 5, 2015) Paul encouraged all investors to have 10% of their portfolio in REITs. He meant to say 10% of the equity part of your portfolio, not the entire portfolio. We apologize for any confusion that may have caused.

10 things you should know about portfolio performance
Whether you’re evaluating your portfolio or contemplating making an investment, what matters most is performance. More

10 things every investor should know about asset classes
The best single piece of advice I have for investors is deceptively simple: Diversify, diversify, diversify. More



       Like us on Facebook   Follow us on Twitter   View our profile on LinkedIn