June 25, 2015


 Dear Friends,

Summer is upon us and I hope you’re enjoying the pleasures of the season and peace of mind in your investments, which is at the core of my work. In addition to the Q&A’s below, I am sharing a couple of articles I think are important to your financial decisions.

We all look for people and information we can trust. To trust a mutual fund return I need a strict set of requirements regarding the reporting of their results, as well as being able to check with independent sources like Morningstar.com. In this article on the dangers of listening to financial pundits, we are reminded that most have no track record yet leverage their entertainment value on TV or other media outlets. I don’t want to stop good entertainers from entertaining, but I want to ensure their audience is smart about evaluating the truth of their information and message. (Read article).

Who gets the leftovers? Your kids? Grandkids? Favorite charity? The Government? I thought you might find what others are doing of interest. “Do you think you’re in the will? Well, guess again” discusses what others are planning and doing with their estates.

The following 10 questions are my answers to questions regarding the Ultimate Equity Portfolio. In the next newsletter I will focus on the questions from the 2015 Fine Tuning Table. These two articles represent the best work I do in educating investors on asset class selection and asset allocation.

To your success,



Should younger investors consider all 10 asset classes?

Q: For those of us with 30+ years until retirement, does it make sense to build a portfolio containing all 10 asset classes now, or to build up the pieces one at a time give such a long time horizon?

A: Check out my Vanguard, Schwab, Fidelity and T Rowe Price recommendations at paulmerriman.com. If you are starting from scratch you can begin the portfolio at Schwab using their commission-free ETFs. Due to low minimums ($1,000) you can access all the asset classes at one time.

Can the 10 asset class allocations be simplified?


Q: I find this Ultimate Portfolio to be a little too complex for the average investor. I think that all 10 asset classes described can easily be owned in a few inexpensive indexed funds, and rebalanced annually. Segmenting each class into a separate item may or may not yield a better return over time, but is guaranteed to require more time, more attention, and be vulnerable to more mistakes. Is it really worth all the work?


A: I think your point is valid. Most people do not want to manage a portfolio of 10-plus mutual funds (including fixed income), even if there is a big payoff. In a previous article I recommended a 2-fund solution that could be very important to young investors. I think it will also work for a lot of older investors. Read here.


My hope is the extra return (could be millions) will motivate investors to take the necessary steps to capture the premium for the effort of tracking 10 funds. And for those working with an advisor, if your advisor isn’t using these asset classes, I don’t think you are getting the best out of them. To learn about working with advisors, get your copy of “Get Smart or Get Screwed“.


How does rebalancing work for young investors?


Q: Great article, Paul. We are building this portfolio through Vanguard for each of my five grandchildren. Three years ago we started with the most aggressive of the indices, due to their young ages (18-23 at the time). My questions are as follows:

1.Did the analysis of the Ultimate Portfolio include any re-balancing?
2. How often would you, or would you, re-balance going forward with a fully constructed Ultimate Portfolio?
3. Doesn’t re-balancing a non-tax-deferred portfolio incur taxes?
4. As you construct the Ultimate Portfolio over time, due to Vanguard’s minimum requirements, how would you, or would you, re-balance a non-tax-deferred account? A tax-deferred account is easy.

A: I think you are giving a wonderful gift to your grandchildren. I hope you are  making these contributions into a Roth IRA since they are old enough to be earning some money. The ultimate portfolio was rebalanced on an annual basis. I will write an article on rebalancing in the coming months but I think, without making a list of secondary rules, that annual rebalancing is fine. Yes, rebalancing in a taxable account will create taxable events. If you are adding money to the account, I suggest using the new money to do the rebalancing. By the way, you may find the use of Vanguard ETFs a simple way to access all of the asset classes immediately. I am pleased my information has been useful for you and your family. Before the end of 2015, I hope to do a series of podcasts for young investors. I hope you will share them with your grandchildren.


Why not just invest in total stock market funds?


Q: Can’t you just buy a total U.S. stock market and a total international stock market fund and be done with it? That’s essentially what this “ultimate” portfolio is. Personally, I believe in following the old Wall Street axiom: “dividends don’t lie.” In my humble opinion, investing in solid companies at a fair price that are continuously rising and paying dividends is the surest path to wealth in the stock market. Academic research has shown that the majority of stock market returns over the long term come from dividends, not capital gains. While this approach is not for everyone, or even most, it is a recipe that has served my family and me well for many, many years and I suspect that it will continue to do so.


A: The Ultimate Equity Portfolio is very different from the two total stock market indexes. The main difference is my portfolio has more small cap blend, small cap value, large cap value, REITs, international small cap blend, international small cap value and international large cap value. The return could easily be an extra 1% a year. I think your “dividends don’t lie” portfolio is likely to do fine. In fact, its return will likely be similar to U.S. large cap value long term. By the way, my portfolios are loaded with the very same dividend stocks you own.


Why put part of your money in non-US equity?


Q: Other markets mostly just drift in the currents produced by U.S. Markets, so why put part of your money in non-US equity?


A: In the 45 year Ultimate Equity Portfolio study, the addition of international equity asset classes increased the total return by 45%. I would agree with your conclusion over a short period of time but the study was over 45 years. Looking at short-term performance can be a big mistake.


Q: How can I construct the ultimate strategy using Vanguard funds instead of DFA funds?


A: My portfolios can be found at paulmerriman.comunder the recommendations link. My recommendations include all equity portfolios at Vanguard, Fidelity and T Rowe Price as well as commission free ETFs at Vanguard, Fidelity and Schwab. You will probably note that the portfolios don’t match up exactly to my Ultimate Equity Portfolio.  That’s because many fund families don’t offer all the asset classes.  By the way, DFA funds do give access to all the asset classes.  That’s one of the reasons I favor DFA funds.


What are the risks of index funds?


Q: I enjoy reading your articles Paul, but don’t use your strategies. However, a few elements of mine seem to mimic yours. My core strategies are balanced/allocation funds (T. Rowe Price Capital Appreciation, Vanguard Wellington, First Eagle Global). Then to fill in the gaps I have separate small value, small blend, emerging markets, healthcare, and international small cap funds. This process has served me well for nearly 20 years and I see no reason to change it (I’m in my mid-40’s). I don’t think enough is said about balanced/allocation funds in the investing world, along with risks of investing solely in index funds. What are the risks of index funds?


A: I am a fan of balanced funds and, as you will see next week, I recommend investing in equity and fixed income funds to create a custom balanced portfolio. My own buy and hold portfolio is a balance of 50% bond funds and 50% equity funds. The reason I don’t use balanced funds is that I can’t get the balance of equity asset and bond funds I want in one fund. I am trying to make the last .5%. I understand most investors aren’t willing to fight hard for the last .5%, probably because they don’t need it.

I think the only risk of index funds is thinking one particular index is all you need, In the late ’90s lots of investors decided the S&P 500 was the only index fund they needed. For the next 10 years a balanced portfolio of 10 indexes made about 7% more per year than the S&P 500.


What the best way to use market timing?


Q: I know the idea here is to maintain a static, reliable portfolio of asset classes among equities to control beta. I was wondering what macro-economic variables you might use to make changes to the proportion of asset classes in a more dynamic portfolio?  I’m well-settled into the approach you use for a set it and forget it portfolio and now am seeking information on using ETFs to represent asset classes from a tactical perspective.


A: I am pleased to learn you have used my information in building your portfolio. Of course, it is not my work but the work of some of the smartest academics I know. I will be writing about tactical asset allocation (market timing) in the coming weeks. I think it’s important to understand the performance aspects of active strategies. I hope it’s helpful. For most investors, any attempt to add timing is likely to be a loser, even when it feels like the right thing to do.


Should my child’s portfolio have an aggressive allocation?


Q: I appreciate your insight and the simple approach to investors. I am quite a seasoned investor and have learned a bit from your articles. However, I have one question: does such a large portfolio offer a total return advantage over a simple equity-heavy portfolio over the very long-term?


I have set up a portfolio for my young son, who is a long way from retirement. It is heavily weighted on the S&P 500, small cap value and European stocks, all via low-expense ETFs. The only fixed income in the portfolio is a TIPS ETF, because TIPS are awfully unloved nowadays and I see inflation as a serious problem at some point in his life (if we don’t have inflation at some point, won’t we see equities offer meager returns as well?) My thoughts are that his portfolio will do well on autopilot over the decades, if I were to suddenly fall over dead.

Am I doing my son a disservice by giving his portfolio an aggressive allocation? Its not like he is concerned with volatility, since he doesn’t yet really understand what all this means at his young age.

A: I think you are doing exactly what should be done. I think young investors who are investing for the long term should be over weighted to small cap and value, including emerging markets. Sure, a bear market could be painful but if new money continues to be added the sell off is good for your son. I don’t know how old your son is but I hope you will share my free eBooks with him when they are appropriate. My favorite for young people is “101 investment decisions guaranteed to change your financial future.”

Will your concepts be valid years from now?


Q: I understand your concept of diversification and its effect on growth, which is true from a historical perspective. Market conditions have evolved. Do you think that concepts are valid for someone investing now for the next 10, 20, 30 or more years?


A: I suggest you take a look at the tables in the following article:  http://paulmerriman.com/4-fund-combo-wallops-sp-500-index/ My conclusion is the future will look similar to the past. Stocks will outperform bonds, small cap will outperform large and value will out perform growth. But with all the confidence I have in these asset classes I still like a balance of some bonds, growth and large company stocks.


Do you still prefer Dimension Funds?

Q: When I started reading your advice many years ago, you were recommending Dimension Funds, and very proud of them (they were only offered through advisors). I see no such reference in the article. Does that mean you have no preference?

A: I personally have my buy-and-hold portfolio in DFA funds but, for do-it-yourself investors I recommendETFs and mutual funds at Vanguard, Fidelity and T. Rowe Price. I will dedicate a performance article comparing Vanguard and DFA funds in the coming weeks.

How this buy-and-hold investor times the market
After you choose the best possible asset classes for your portfolio, one big question remains: When do you get into the market, and when do you get out? More
How much of your retirement portfolio belongs in bonds?
Bonds aren’t particularly sexy investments, and many people shun them because of the fear of rising interest rates. More



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