June 23, 2016


Recently, I was invited by the Washington Society of Certified Public Accountants to record a video for CPAs nationwide, for which they’ll receive Continuing Professional Education (CPE) credits: Financial Fitness Forever – Five Steps to More Money, Less Risk and More Peace of Mind. I’ve negotiated with the society to make this 2.5 hour professionally produced video available to our readers and listeners for just $10. The Merriman Financial Education Foundation will receive approximately $3 per purchase to apply to our ongoing educational projects.

The early feedback from CPAs has been very favorable. Here are three short comments: “Loved it!” It is great information” and  “Very timely as I have many clients who are investing in managed accounts and do not understand what’s going on.

I hope that you will go here, purchase access, watch the video and share the link with your family members. They will need your email and password created for online access.

The following is taken from the CPA introduction to the video:

Join Paul and learn 5 simple steps that can easily double or triple what you and your clients will have to spend in retirement or leave to children and charities.  Paul identifies the most profitable equity asset classes, helps determine how much of a portfolio should be in bonds, how to select the very best performing mutual funds and figure out how to maximize income in retirement while protecting your nest egg.  Paul will show parents and grandparents how to turn $1 a day into a $10 to $50 million retirement for their children and/or grandchildren. For target date fund investors, he will show how to double long term returns with one simple move. Paul’s goal is to help you improve your 401k choices so that you can build a more secure retirement.

I would appreciate your feedback on the video. I want to do another for first-time investors. What you liked and what needs to be improved will be valuable information as we work on the next video. Please email your comments to: info@PROTECTED

Raising Financially Fit Kids by Joline Godfrey

At the end of my podcast, 12 lessons we must teach first time investors,

I reference Joline’s book, Raising Financially Fit Kids, a terrific guide for parents. The description at Amazon: “This combination parenting and personal finance book helps parents teach their children key money skills – such as saving, spending, budgeting, investing, building credit, and donating – that they’ll need to become financially secure adults. And who doesn’t want that for our children?

Below please find this edition’s Q&As, all of which are archived here.

To your success,


Q: I’ve downloaded the three PDFs of your How To Invest” books, which I am beginning to dig into, but are there other books you would recommend that help beginning investors like myself understand the world of investing? I’m a 22-year-old recent college graduate who’s landed a full time job making $53,000 a year. I want to start investing according to your advice but there are many things I don’t understand, mainly terms and how they interact with one another. So when you talk about how ‘small cap outperforms large cap in the long term,’ I have a vague idea of what that means (not to mention the difference between blend vs. value stocks).

A: I suggest you start with “Mutual Funds for Dummies” and the other books recommended at my website. To understand ETFs, try this link. If you are investing outside your company’s 401(k), I suggest using a Roth IRA. As you probably know I have recommendations for commission free ETFsat Vanguard, Fidelity, Schwab and TD Ameritrade.  Any of these providers will make it possible to start with a small amount of money. I hope, by the time you finish  “First Time Investor: Grow and Protect Your Money” and “101 Investment Decisions Guaranteed to Change Your Financial Future,” you will feel ready to take on your financial future.

Q: My company just added DFA Small Company (DFSTX) to our 401(k)… I am taking full advantage of the new offering. However, most small-cap funds follow the Russell 2000. Is this index of stocks small enough to be considered small cap?

A: The average size company in DFSTX is almost the same as the Vanguard Russell 2000 Index (VTWO).  Plus, they both have about the same average size company and about the same Price to Book ratio. What is interesting is that DFSTX compounded at 10.6% for the last 5 years vs. 9.1% for VTWO.  DFSTX earned a higher return even though VTWO has a lower expense ratio, .15% vs. .37%. How can the DFA fund produce a better return than the Vanguard fund since they represent the same index and the Vanguard has lower a lower expense ratio?

One of the many advantages DFA has over Vanguard is lower turnover. Vanguard index funds are based on tracking specific indexes, which, in the case of VTWO means owning the same companies as the Russell 2000.  When the list of Russell 2000 stocks changes, so does the Vanguard Russell 2000 ETF. That means some stocks are sold while others are purchased. The process of selling some and buying others has a cost. This is called the ‘cost of reconstitution’. The reconstitution costs of small cap stocks are much higher than large cap stocks, as the small cap stocks are less liquid. When a lot of money is chasing a small company, the stock can rise quickly. When a lot of shares of small stocks are being sold, the price drops quickly. To know more about the Russell 2000 index,click here.

DFA does not attempt to follow the index, stock for stock, but rather focuses on owning a broadly diversified portfolio of the asset class. They may buy and sell some of the same stocks but are not obligated to do it while everyone else is. This allows DFA funds to experience much lower turnover costs and, in most periods, the lower costs lead to higher returns. Without the obligation to look like the exact index allows DFA to save a lot of money for their shareholders. If you compare the top 25 holdings of each fund you will see how different two funds in the same asset class can be.

Q: When do I rebalance?  Monthly is one thing you recommend. What about percentage of change from the goals? When stock funds get to 53 or 55%, or bonds get to 43%?

A: For the period from 1970 through 2015, rebalancing monthly led to lower returns than rebalancing annually. The reason rebalancing less often is more profitable is due to having more exposure to the riskier asset classes. If you rebalance monthly, you immediately take the excess profits of the more profitable asset classes and move them to the less volatile and less profitable asset classes. If you do a search for “How often should I rebalance my portfolio?” you will find dozens of strategies. Try that search atInvestopedia and you have a couple hours of reading material, including information about rebalancing taxable, tax deferred and target date funds.

Q: What is the best source for determining mutual fund asset mix? We are trying to get our house in order with the funds available at TIAA CREF. We notice they have different views on what is small/medium/large or value/blend/growth than some of the other mutual fund groups. What’s the best source of information on all these different asset classes?
A:  I think the best resource for almost all the numbers you need to know is Morningstar. The Morningstar style boxes give a general idea of size and value/growth exposure, but if you go to the “Portfolio” page for each fund, you can get the average size company, price to book ratio, and a host of other important statistics. I plan do a podcast on the topic before the summer is over.

Q: Which article or podcast makes the recommendation not to use REIT in recommended portfolio for a taxable account? I want to use your recommended Schwab ETF portfolio for a taxable account. I thought I read on your website that I should exclude the Schwab US REIT (SCHH) for a taxable account. Love your work. I have convinced a few friends to implement your recommended portfolios for their retirement accounts. Thank you so much.

A:   I suggest you read this article: http://paulmerriman.com/reits-belong-retirement-portfolio/  Thanks for sharing our work with your friends! I hope you will tell them about my new 2-1/2-hour video. I hope you will go here, purchase access to this video ($10) created professionally for CPAs and their clients, watch the video and share the link with your family members, along with your email and password created for online access.

Q: Is there anyone who provides free market timing advice? You recommend the use of mechanical systems. I know you offer your buy and hold recommendations at no cost, but is anyone offering free marketing timing advice?

A:  You are in luck. There is a fellow I’ve known for many years who provides free timing signals. In fact, he even provides a free email alert service when there is a buy or sell signal. Bill Lussenheide is a savvy timer who, as most timers, is a real believer in trend following market timing. Check out his site along with the long-term results of his free timing system.

Q: Funds versus ETFs? Advantages/disadvantages of ETFs?

A: Here is a simple comparison of advantages and disadvantages from Vanguard. Another advantage is a $1,000 account can give an investor access to the asset classes that would take about $35,000 with mutual funds. The biggest disadvantage in using ETFs is rebalancing is less efficient than with mutual funds.

Q: Does any one have an ETF of Israeli companies? A recent Forbes issue has an interesting article on Israel’s super secret unit 822 and all the start up firms its alumni have started.

A: Check out this list of 3 Israel ETFs.

Q: Would it make sense to follow your Fidelity ETF recommendations in a Fidelity IRA, if I decided to convert my Fidelity 403b to a Fidelity IRA? I am a 59-year-old retired former school district employee and had a 403b plan with Fidelity while I was working. I have been advised to convert the 403b plan to a regular IRA, which seems like a good idea. Do you think I should do this with Fidelity or transfer to a Vanguard IRA to reduce fees? I have been following yourUltimate Buy and Hold strategy for years. I see that you have recommendations for ETF’s. I have both a Roth IRA account and a regular account with Vanguard.

A: Several years ago I would have suggested you move to Vanguard, but today Fidelity’s ETFs are competitive with Vanguard index ETFs. It is actually possible there would be a very small advantage for Fidelity due to slightly better access to small cap asset classes.

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