Episode description

• Does your portfolio own enough of the companies that carry a lot of the growth over extended periods of time? When you buy index funds, you aren't as diversified as you think you are.
• Cap weighted index funds mean you are buying a lot of the companies that are doing really well. But there are two asset classes Paul Merriman is a fan of that he thinks don't get enough attention, small cap and value.
• Although many people claim to believe in a buy and hold strategy with investing, their behavior says otherwise. They like to buy when things are hot because they believe it's going to keep going up.
• If you look back as far as 1928, a lot of the time the S&P 500 is walloping small cap value returns, yet at the end of this 92 year period, small cap value made 24 times the amount of money the S&P 500 did.
• Even though there are long periods of underperformance, when small cap value does take off, there is outstanding performance. Then when it reverts back to the mean, there is a higher compound rate of return.
• Owning a large cap fund means each holding in that portfolio, and how much of the portfolio it represents is based on how large that company is. The big companies represent 80-85% of the corporate public value in our economy.
• However, history shows that the smaller companies and the value companies produce a better rate of return because they are more risky.
• It doesn't have to be a lot to make a big difference. If you were put 10% in a small cap value fund, it would give you a legitimate shot at having 20-30% more money when you retire.
• The top 20 companies probably make up 20-30% of the money you have invested. Investing in an S&P 500 or total stock market fund provides an illusion of diversity. As companies get to be bigger in size, it becomes increasingly more difficult to double or triple in size.
• Companies are valued by the number of shares times the price in the market.
• Large cap index fund companies average a market capitalization value from $50 billion to $150 billion.
• Small cap companies are roughly 1/50th the size of the big companies with values averaging $2 billion. They are legitimate companies, but many of them will fail.
• Since 1928, the S&P 500 or total stock market compound rate of return has averaged 10%. However, research has shown that only 4% of those public companies made virtually all of that 10%, while 96% of companies averaged just 3%.
• As an aggregate, small companies are much more likely to double or triple in size.
• Value companies can be seen as companies that are out of favor and years later, they may still be out of favor. Academics don't advise buying value companies one at a time.
• People come into value companies to make them more meaningful, profitable, and efficient turning those companies around.
• The problem with great companies with a great future is that when something happens to pop the ballon, those companies can fall 25% in a day, similar to what happened with the Dot-com bubble in 2000.
• Telsa, for instance, is a car company on the verge of bankruptcy several years ago and now it's up 400% even though it is barely turning a profit. With a current share price of $800, it's going to take a lot to double your money, yet people still believe in Tesla.
• Paul wants to help people figure out how to invest in an unemotional way and don't get caught up believing in something that isn't likely to happen.
• Last year, growth companies were up 35-40%, however, looking back at 90 years of evidence, growth produced a lower rate of return than value by 2% a year.
• Paul's latest book, We're Talking Millions!, is all about the extra half of 1%. For every half of 1% you can make on your portfolio over a lifetime, you add a million dollars. Finding more of those half of 1% and adding them up is a lot sexier than finding the hottest thing in the market.
• In his book, Paul lays out 12 simple ways to capture those half 1% that the market is ignoring.
• Paul's been hearing complaints for years that his work has been too complex. It's was something his firm did for his clients, but most individuals do not want to make it that complex.
• Someone in their twenties, investing just $5,000 a year for 40 years, can use these strategies to make millions over an investing lifetime.
• It's not all because you took more risk, it's also how you protect your money from others getting their hands on it, like money managers.
• Choosing to save can be a million decision, and choosing to save early can be another million.
• In one mind-blowing statistic, Paul says 25% of millennials will not put money in the stock market.
• The ultimate buy and hold portfolio might be difficult to replicate inside a 401K. To make things more simplified, Chris Pedersen developed a system to implement the philosophy with roughly 98% of the benefits.
• The goal is to keep it as simple as possible so that anyone can do it and won't need to manage it other than for a few minutes a year.
• One way to buy a target date fund. But because they don't have enough value or small cap companies represented, have 90% of contributions go to the target date fund and 10% to a small cap value fund. The target date fund is broadly diversified and automatically adjusts to become more conservative as you age.
• Chris said the problem is young people should have more invested in small cap value and came up with a formula for calculating just how much, which is 1.5 times your age into a target fund and the remainder in small cap value.
• For example, a 30-year-old should multiply 30 years x 1.5 to get 45% in a target date fund and 55% in small cap value.
• Paul and Chris encourage continuing to hold 10% in small cap value at the age of 60 and beyond which is good during the 30 or more years in retirement.
• Not all target date funds are created equal. Look for one that is low cost and contains total stock market funds.
• Jonathan doesn't like having bonds in his portfolio and notes that target date funds have bonds in them. Paul agrees and said he spoke with John Bogle about it once. He was told that bonds are defensive and do good when the rest of the portfolio is down 50%.
• You can reduce your exposure to bonds in target date funds by adding equities to your portfolio.
• With target date funds, the year indicates how aggressive it is.
• As with a traditional portfolio, rebalancing your portfolio is a part of the small cap value strategy. If you want to be true to your strategy, you need to sell some winners and buy some of the losers.
• Jonathan has modeled one of the Ultimate Buy and Hold Portfolio pies Paul has on his website in his taxable brokerage account with M1.
• Paul says it's never been easier or efficient to invest. Even if the market does return as much as in the past, you can probably make the same return because it used to cost so much to do before.
• They are coming out with all new recommendations for best-in-class ETFs. Paul has all his buy and hold funds in DFA dimensional funds and now anyone will be able to buy DFA funds through DFA or Avantis without paying a commission. Since it's an ETF, you can buy commission-free with M1.
• Pauls' book is free for teachers and students, just email Paul at Paul@paulmerriman.com to get the PDF by email. The book is also available on Amazon. If you can't afford the $14.95 price tag, email Paul for the PDF.

• ChooseFI Episode 130 Paul Merriman Introduces the Ultimate Buy and Hold Portfolio
• We're Talking Millions!: 12 Simple Ways to Supercharge Your Retirement by Paul Merriman
• M1 Finance Review – Completely Free Automated Investing!

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