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📚 Paul Merriman: 12 One-Million Dollar Ideas for Investing Success! 🏆
1.2k Plays3 months ago
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💡 Paul Merriman shares his 12 One-Million Dollar Ideas for achieving financial success, offering practical strategies to help you transform your investment approach. 📈
Paul Merriman highlights the importance of starting early, using low-cost index funds, and diversifying your portfolio, especially by including small-cap value stocks. He breaks down how simple financial decisions made today can lead to significant long-term growth. Paul’s advice will help you steer your financial future in the right direction.
In this episode, we discuss:
1️⃣ Save Early vs. Waiting to Get Started: Discover why saving early, even small amounts, creates massive financial growth through compound interest.
2️⃣ Stocks vs. Bonds: Learn how to balance risk and reward with the right mix of stocks and bonds as part of your asset allocation strategy.
3️⃣ DIY vs. Professional Management: Explore why index funds often outperform actively managed funds, making them a smarter, low-cost choice.
4️⃣ The Power of Diversification: Understand why spreading your investments across small-cap value, large-cap value, and blend stocks strengthens your portfolio.
5️⃣ Market Timing vs. Buy and Hold: Find out why sticking with a buy-and-hold strategy beats trying to time the market.
🔗 Paul Merriman's Links:
🌐 Merriman Financial Education Foundation
📊 Quilt Charts (Referenced in the Episode):
📺 YouTube Video Explaining the Two Charts
Graph 1: 4 US Asset Class Indexes & 4 Fund Combo Relative Return Ranking (1928-2023)
Graph 2: Asset Classes & 4 Fund Combo (1928-2023) - Return Rank Frequency
🔗 David's Links:
🥊 Paul Merriman and JL Collins Debate Wealth Strategies
🍏 Forget About Money on Apple Podcasts
🎧 Forget About Money on Spotify
📜 Paul Merriman Quotes:
💡 "The system is designed to make you spend, not save. You have to arm-wrestle it to build wealth." — Paul Merriman
🛡️ "Diversification is your greatest defense. Don't put all your eggs in one basket." — Paul Merriman
🧠 "Most people will never beat the market. If you can match the market, you’ll likely be in the top 10% of all investors." — Paul Merriman
#financialfreedom #retirementplanning #IndexFunds
🎧 Listen & Subscribe: Don't forget to subscribe to "Forget About Money" for more valuable episodes featuring experts like Paul Merriman. Hit the bell icon 🔔 to stay updated with new insights on building wealth and financial independence!
Disclaimer: The discussion in this episode is for general educational and entertainment purposes only and should not be considered tax, legal, or investment advice specific to any individual.
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Transcript
Introduction to Financial Success Ideas
00:00:00
Speaker
Paul Merriman shares 12 $1 million dollar ideas that you need to understand for financial success. Here we go.
Paul Merriman's Career Journey
00:00:12
Speaker
Welcome to the Forget About Money podcast, where we encourage you to take action today so that you can focus on what matters most to you. Today's guest, Paul Merriman, is a renowned expert in personal finance and investing. He started his financial career in the 1960s as a broker on Wall Street then transitioned to helping small businesses raise venture capital. In the early 1980s, he founded his own advisory firm and became a leading advocate for passive index fund investing, asset allocation, and long-term strategies like buy and hold.
00:00:47
Speaker
In 2012, Paul founded the Merriman Financial Education Foundation, dedicated to providing financial education to help investors make informed decisions for their retirement. He is also the author of several popular books, including Financial Fitness Forever, 101 Investment Decisions Guaranteed to Change Your Financial Future, and Frequently Contributes to MarketWatch. Mr. Paul Merriman, it is always a pleasure to be in your company. Welcome.
00:01:16
Speaker
Hey, David, it's great to be with you and and and your folks. Absolutely.
Impact of $1 Million Dollar Ideas
00:01:21
Speaker
Paul, today we are going to be discussing your 12 $1 million dollars ideas for investing success. These are found in one of your most recent works with Richard Buck. It is a book titled, We're Talking a Millions, 12 Simple Ways to Supercharge Your Retirement. Paul, your work has helped so many people build wealth.
00:01:46
Speaker
Can you give us a brief overview of what inspired you to create this list and why these concepts are so important? Well, the um the the list was created in the hopes that as I am in the process of ending my life, I'm not working on it this week necessarily, but in the coming years, I wanted to leave some work that i believe would have an impact on investors ah in some cases i would like to think for the rest of their lives and ah as you know the work that we do with our non-profit foundation is all about education.
00:02:27
Speaker
And the the bottom line is investing theoretically is very very simple. And what i want to make sure is not only that people understand that it's simple.
00:02:41
Speaker
But that the impact from little steps can absolutely be be huge over a lifetime. And so that was what the book was meant to be able to help people see. And ah then we also, we've offered it free so that people, if they'd like it can turn around and send the PDF to to family members and friends and fellow workers. ah So it's it's it's an attempt to reach as many people as we can and improve their ability to be a better do-it-yourself investor. That's the goal. Paul, thank you so much. and And just in your voice, I can hear the passion that you have for helping others. We will include that link great to how people can get that free book in the show notes.
00:03:33
Speaker
I know one of your goals is to simplify investing for the average person and helping them avoid costly mistakes along the way so that they can build wealth efficiently.
Saving vs. Spending Philosophy
00:03:46
Speaker
And that is and these 12 ideas are the distillation of proven investment principles anyone can follow to achieve financial independence.
00:03:56
Speaker
The very first idea that you have is save versus spend. Save some money instead of spending it all. When it comes to the debate of saving versus spend, how do you advise people to strike the right balance and what impact does consistent saving have on building wealth over time?
00:04:14
Speaker
Well, I think the first thing that we have to understand as a first time a young investor, uh, is that most of the system, the, the, the capitalistic system here is really about how to get you to spend. And so it's not like you've got a big team of people on your side, uh, trying to get you to do the right thing. And, and in fact, if we can just.
00:04:43
Speaker
Arm wrestle those uh, those people who have become so efficient at taking, putting our money to work someplace else. And even if we're not saving, they still want us to go further and use a charge card to spend more. So yeah, it is a, it is a real fight that the individual has. And, and the bottom line is the, the, the, the really wise words of Warren Buffett.
00:05:08
Speaker
About the the the step that should be taken and that is don't say what's left over after spending but spend what's left over after saving. And we know what that's about that's about paying ourselves first and successful investing is almost always going to be about some level of discipline.
00:05:33
Speaker
And I would say the the the most the toughest one of all is is to save, but remembering that saving is really about spending, but doing it later.
00:05:45
Speaker
And, and, and so my sense is, is that if we can just get on an automated course, maybe for example, all you can afford is 3% at this point. Great. Do the 3%, but part of your, your commitment should be raise that to 4% the next year and 5% the year after we want to get you up to 10 to 15%.
00:06:10
Speaker
as As soon as possible but when you think about the goal of making an extra million dollars with these twelve decisions. you know This one is so easy to understand because you don't have a chance if you don't do some saving. And then of course the main point after that really is about making sure that we save it in the right place and really we're talking then about investing.
Financial Planning for Young Adults
00:06:41
Speaker
So with saving, let's say a person is just out of college or just joining the workforce, what can they do to start saving and where do they save? Well, this is, of course, the the big challenge and that is to create a plan.
00:06:58
Speaker
And since my work is not sitting down with people one by one and helping them work through this, uh, the bottom line is, is that they have a lot of things they need to take care of as they, as they start in their career.
00:07:16
Speaker
And of course, they're just sitting there thinking, look, I put up with my lousy parents for 18 years to get out of the house. And then I get out of the house, but I still don't have anything because I got to go to school for four or five years. I have had now 18 plus four years of sacrifice. Now I'm going to finally make some money and now I can start to enjoy that money. And somehow inside of our brain, we have just got to understand That is much fun as it is to enjoy that. That if we don't package a little commitment to that saving that it, it it that the enjoyment can go on forever. And by the way,
00:07:59
Speaker
Most people in this country yeah at age fifty don't have any savings of of significance so it's not like it's a rare case ah where where people aren't saving it's just the opposite. Too many people are saving so what you need to do is to have a budget.
00:08:18
Speaker
And maybe you've already developed that. I know at Western Washington University where we have a course for students there, ah one of the things we want to be able to teach a freshman is about budgeting because budgeting is something that if you want to increase the probability of a student making it through college, they need to make sure they make the money last.
00:08:44
Speaker
So budgeting doesn't have to be a whole new process. They may already have that exposure by the time they they graduate, but it is it's just a matter of controlling your you're you're spending. That's it. and And when I say that's it, I always have to remember that I fought not the saving, the our hurdle in my life, what I thought was the eating hurdle. And in many ways, it's not so different from my struggles with not eating properly because I just love to eat. And it's the same with enjoying that money. It is fun to enjoy that money.
00:09:29
Speaker
And you just got to realize that for later, I mean, the life that I enjoy today comes because I was willing to put money aside early. And, and that's the vision that, that we need people to see. And you do need to, I think David, you do need to see that down the line. And we're going to talk here today, maybe about some decisions that people might make 40, 50 years from now.
00:09:59
Speaker
And yet if you see that as a part of the total plan, you can see how these decisions become million dollar, uh, individual million dollar decisions along the way. I, I hope we'll have the time to do that. And if I don't stop talking, I suspect we won't, but it is finding the discipline to do it.
00:10:22
Speaker
Yeah. And it's tough to find the discipline to do it when there are so many blinking signs that say buy this. I mean, we're right now we're at all time highs for credit card debt yeah as a, I don't know if it's society for sure as a world, maybe I don't know, but I know in America, we're at all time highs for credit card debt.
Dangers of Debt and Controlled Spending
00:10:40
Speaker
And then the next step that next step after that is, which is gaining popularity is the buy now pay later services that are growing in popularity and Many argue that they encourage overspending, which undermines the saving habit. But other people argue like, you know, it's like YOLO, you only live once. And, you know, there's been so many bailouts in the past at the corporate and individual level that, you know, why worry about it? But I'm a big believer in control of things that we can control, which is our spending. And
00:11:12
Speaker
For me, whenever I'm trying to convey saving versus spending to people, the hurdle that I have to get over to help them
Early Savings and Compound Interest
00:11:20
Speaker
understand is the whole delayed gratification piece. And it seems like as time goes by, that's more and more challenging to overcome when trying to convince somebody to save versus spend. Well, and I and i think that the challenge becomes greater because even if they have a sense of needing to save, they don't understand how important building that small foundation is in the whole process.
00:11:52
Speaker
As a matter of fact, one of the other million dollar decisions is to start saving as early. ah Number two, the number two, we're rolling right along as early as possible. This is a relationship. This that you're about to create a business, a partnership.
00:12:11
Speaker
Because as you start putting money away and we're hoping that you're going to put a significant amount of that into the stock market, we'll talk about that and why that's so important. But what we need to understand.
00:12:24
Speaker
Is this fortune that you're about to build? And it literally could be a fortune in terms of the five, 10, $15 million dollars is all easily, easily possible if you get this discipline early, but that the foundation.
00:12:44
Speaker
that you create in this business. You see, you could put away $1,000 the first year, $83.33 a month. At the end of the year, you put away $1,000, and you put it, let's say, you put it into the stock market. And the stock market doesn't have a very good year.
00:13:02
Speaker
And at the end of the year, your portfolio is worth $1,022. In other words, you as the senior partner put in the $1,000 Mr. Or misses market, whatever you want to call it, your partner offered $22 to build this fortune.
00:13:24
Speaker
And it stays like this for the first 10 or 15 years of the of the process. That it is your money that is building this this base that is all important. Then all of a sudden you're going to wake up and you're going to see something marvelous. And that is you're putting in, if you increase how much you put in every year, maybe you're not putting in a thousand, you're putting in 13 or 14 or 1500.
00:13:52
Speaker
But the market is making three, four, five times that. And when you finally get to that point where your commitment to building the foundation is overtaken by the growth of the market, and I can almost guarantee you.
00:14:09
Speaker
that if you do this with modest amounts of money later in your life, you will have years that you make a hundred thousand dollars and more. And it all starts even if it's just $83 and 33 cents a month for that foundation to start being created. And by the way,
00:14:30
Speaker
You don't know those first five or 10 years that you could have just waited. I'll wait till later to start. If instead you do it now, you might have just walked in to one of the greatest five or 10 years in stock market history and you might've missed it. And there's another thing that you might've missed. You might've missed five or 10 years of the worst market in stock market history.
00:14:57
Speaker
And you can't say, well, I wouldn't want to be there in a bad market. Yes, you do want to be there because that means that as the market maybe is struggling and is down, your money is buying more shares than when the market is up. So whether the market goes up or the market goes down those early years, it's beneficial to you for the long term.
00:15:23
Speaker
So your number two is save early versus waiting to get started. And that's to take advantage of compound interest over time. That can result in hundreds of thousand dollars a year, as you said. Can I give you one example? Sure. Because many of the people that we're talking to right now, David, are going to have a family one of these days and they're going to have a choice to make. This is a million dollar choice as a parent.
00:15:51
Speaker
If you put away $365 a year for your child for the first 21 years, and then you let them take over from there and do it until they're 65, that's the family tradition that you're going to establish. If you get a 10% compound rate of return on that, which is a market rate of return, that's not a miracle that that could happen over a long period of time.
00:16:19
Speaker
You could have two plus million dollars in that portfolio by the time the child is sixty five if you wait until they are ten you will have more than a million dollars less.
00:16:34
Speaker
That extra $3,650 in those first 10 years turns out to be worth hundreds and hundreds of thousands of dollars later in that child's life. So whether it's for the newborn that you're getting them started or yourself, you're getting started. Start as early as you can.
00:16:59
Speaker
for most people starting early means once they start making money, probably in their early twenties. And I usually advocate whatever it is you can, like a hundred dollars a month, if you can, something $50 because more importantly than the actual dollar amount, which is not insignificant, even a small amount as we just discussed, but it's the habit and believing that you can grow your wealth. And even if, even if it's a small trend line up into the right over time,
00:17:29
Speaker
just seeing that trend line go up. It does something mentally and and emotionally like knowing like I could be okay. And then you start running different calculators. And you're like, Oh my gosh, if I just update by 5%, holy hell, look what happens in 20 years. So I think it's a huge thing. Just get started no matter how small, but set that reminder six months from now on your on your calendar or your alarm or whatever it is to to ping you to say, hey, go take a look. If you haven't missed the money, up it by a percent or 2% or 3% or whatever it is. And I think it's also important
Stocks vs. Bonds for Growth
00:18:00
Speaker
for us to make a distinction between save and invest. Right now, we're talking about saving and investing. Even though we're talking about save early, we really mean save and invest early. Not just save into a savings account that's good you getting you a partial or a percentage or a percentage return. That's not what we're talking about here. Putting it under your mattress is not going to make you rich. Nope.
00:18:18
Speaker
nope so Don't miss don't misunderstand we're talking about saving and investing and there's a huge fork in the road it's the biggest fork you're gonna face in your lifetime. And that is the decision to either invest. ah For the long term because we are talking long term money not not saving for a vacation next summer.
00:18:42
Speaker
The decision to either put your money into bonds or to put that money into stocks. And this, this is the third. million dollar decision, but it's not just a million dollar decision. It's a millions of dollars decision because let me just give you a couple of historical numbers. We cannot tell you about the future, but we can tell you a lot about the past. And what we know is we have the numbers going back almost a hundred years.
00:19:16
Speaker
that show you what would you have made if you had put your money into bonds understanding. that if you put your money into a bond, you are loaning somebody money. You are giving them under basically a contract. You are giving them money that they are going to pay you interest. And they say, I guarantee to pay you back over five years or 10 years, whatever the, whatever that bond, uh, whatever it set up to work as in terms of how long and how much the interest is,
00:19:52
Speaker
But it's a guarantee. And when you get and then make an investment where somebody says, I guarantee I give you, I will give you money. It's not going to be a big return because there's no risk theoretically. Now I'm not talking about loan and money to one of your kids or a friend. I'm talking about the government or a large risk thing goes way up. yeah That's right. So.
00:20:18
Speaker
What do we know if you had invested in, then there are many kinds of government bonds, but let me, there's, there's one that's a very common bond. It has compounded over the last 96 years at about 5%, sometimes a little more, sometimes a little less, but a hundred dollars invested in 1928. When this study started has grown to a little over $2,000.
00:20:47
Speaker
Now, the problem with that is, is that inflation would have eaten up most if, I mean, virtually almost all or all of what you made. And so you're buying power would virtually be zero. You would just simply be getting your money back. But when when you went to spend it, it didn't buy anything.
00:21:10
Speaker
On the other hand, if you went the path of stocks, where by the way, you don't get a guarantee. You buy a share in a company that you can buy as in fact, you can buy less than one share in that company, but you own ah a percentage of that company. It may be a very small ah percentage of that company, but it's a legitimate ownership. And for the person who has a million dollars in that company, yes, they're going to make more than you will because they own more shares than you do. But the percentage return will be exactly the same.
00:21:48
Speaker
regardless of whether it's for a dollar or a million. The beauty, well, first of all, let me talk what's not beautiful. What's not beautiful is the stock market, unlike the bond market, is not stable. The stock market, in fact, there was one day back in 1987, the stock market went down 22% in one day. During the Depression, it went down 80%, so there'll be times.
00:22:16
Speaker
Not very many of them historically where the market will not perform well. And in fact, you will lose money. If you just looked at the years, about one out of four years, you'll lose money. Three out of four years, you'll make money. But that hundred dollars in the, in an index, a group of stocks that represent the 500 largest public corporations in the U S that a hundred dollar investment.
00:22:46
Speaker
today would be worth almost a million. So you were standing at a fork in the road where if you take the one direction, you will make almost nothing after inflation. If you go the other direction, the history based on it investing almost like any multimillionaire would invest because you can literally is will find out on all mutual funds that own all five hundred companies and you can put fifty dollars in and you're gonna own little pieces of all those companies. It's it's it's an amazing.
00:23:24
Speaker
opportunity to participate in the growth of our country and these corporations. But you give up the one day or the one year stability to know it's always going to be there. You don't want that stability because without accepting that lack of stability short term, you do not get the long term return.
00:23:47
Speaker
But I can tell you this, I can tell you that the worst 40 years that index ever had was a gain of about 9% a year, the worst and the best was 12 and a half. So those are huge multimillion dollar kinds of return.
00:24:10
Speaker
And you don't say that to say that bonds are entirely a bad thing. And if you've gone through the risk reward trade off between the two, but in the context of asset allocation, how do you recommend investors balance stock versus bonds particular as age progresses? Well, I'm almost 81.
00:24:31
Speaker
My wife and I have, we have half of our investments in bonds and we have half of our investments in stocks, the very kinds of things that I talk about in the book and we'll talk about here today. And the reason I'm half in bonds is because because I've now built the pot of gold to retire on. And I want to balance some growth for the future, along with some defense for the present, because we're living off of this to, to, to cover our cost of living.
00:25:05
Speaker
Which is the reason it's so important that we all invest is because this society used to have pensions, not for everybody, but for most people today, very few people have anything more than social security or the money they put aside in an IRA or a 401k or some sort of a formal investment plan for them, uh, for their retirement. So bonds are not for young people.
00:25:35
Speaker
I don't want a 21 or a 25. I don't even want a 35 year old having bonds in their portfolio if they don't have to. And we may talk about some cases where you have to, but if you don't have to, because remember when the market goes down,
00:25:55
Speaker
It's true, the bonds would stabilize the portfolio, but you want the opportunity to buy the cheaper shares and bonds keep you from buying the cheaper shares. So young people in their twenties and thirties, I think basically all equities, plenty of time to get conservative later in your life. And it will be important to do that.
00:26:20
Speaker
Speaking of equities, and you mentioned pensions and 401ks and some of that you get through your employer. And one thing that I've noticed is what's offered to many employees is individual stock purchases of that company's stock over time. So then the individual thinks they're getting a good deal, which they might be getting it at somewhat of a discounted rate as, you know, compared to the masses.
Diversification Through Multiple Stocks
00:26:45
Speaker
But then that gets you into the number four, one stock versus many stocks predicament. yes And we're talking about investing in many stocks instead of only a few or one. If you you really like your company, you just get that new job and they offer a discount on the stock and like, yeah, let me put it all in there. That's a huge no.
00:27:06
Speaker
Why is diversifying across many stocks so important compared to investing in a single stock? And could you share some real world examples of why this strategy? Oh sure. Oh sure. No problem. Uh, the bottom line is this, that when you put your money into the stock market, whether you buy one company or you buy a thousand companies,
00:27:30
Speaker
What the academics tell us is the expected return because we don't know what the return is going to be. Oh, a lot of people, for example, David and where where people just, they lost their life savings. They worked for a company called Enron and they, and the company even encouraged them to put all of their savings in their 401k into that company stock.
00:27:57
Speaker
And they did that. And I grew up ah most of my life in Seattle. And and and in Seattle, we had Washington mutual, their, their, their line was, was friend of the family. Well, it turns out they weren't a friend of the family because they went belly up, but a lot of people who worked at Washington mutual.
00:28:20
Speaker
also went belly up because they were putting their money into this company that was doing so well until it didn't. And it's important to note that over half of the companies that ever were public did not make it over half. So with that in mind,
00:28:41
Speaker
I don't want you to be in one company i want you to treat yourself like a multi millionaire on day one and i want to go back to what those academics tell us. They tell us the expected rate of one stock is the return of the market if the market has a ten percent return the expectation.
00:29:02
Speaker
yeah the The expectation for the individual stock would theoretically be 10%. But in the case of the one stock, it can go belly up, bankrupt, worth nothing. On the other hand, when you own 500 or 1,000 companies, if one goes belly up, it doesn't put you out of business.
00:29:26
Speaker
And so when we look at this return of 10% from the S and&P 500 over almost 100 years, that includes the companies that didn't make it. And so you want to go, as far as I'm concerned, if you're going to get 10% with one company or a thousand.
00:29:48
Speaker
I want you to go there with a thousand because your risk of going out of business is virtually zero. You'd have to have a collapse of the entire economy, virtually zero. So right now we've got the magnificent seven.
00:30:06
Speaker
And we got Tesla and Apple and many others. ah But I'm seeing similar ideas and and trends where people are just putting money into these particular stocks and without maximum maximizing their other broad market index investments first. ah So yeah it's interesting how history might repeat itself here. it's not Maybe not in the too distant future.
00:30:34
Speaker
It, that is the history of investing and I've been around it since 1963 and people chase performance. They'd love to get into things that have been doing well lately. This herd mentality is a bias that costs people tons of money.
00:30:52
Speaker
Just by the way, the same thing those people do when the market goes over the cliff, they jump out together. I mean, they're a herd on the way up and they're a herd on the way down. And there is not one expert that will tell you that the best way to invest is to try to be with the herd because there is a right way to invest based on the past.
00:31:18
Speaker
And it's important for all of us, David and myself and everybody in this industry to be upfront. There is no risk in the past. We always know what worked and what didn't. And so when we come here and say, please don't put your money into lottery tickets.
00:31:37
Speaker
Well, you know, somebody who just won the lottery with, with, would laugh at us. What do you mean? Don't buy a lottery ticket. I would not be worth $500 million dollars today if I hadn't bought that $2 ticket, but we have to make the decisions and do the educating based on what is probably most likely to work for you. And I'm just telling you.
00:31:59
Speaker
Many over a few. And the good news is you don't have to sacrifice the return one bit. So number four was one stock versus many stocks invested as many stocks instead of only a few. And that transitions us kind of nice into number five, which is how do you do that? Many investors wonder whether to pick individual stocks because that's kind of exciting to do. And I agree. It's kind of exciting. Or do you hire a mutual fund manager? What's your take on DIY investing versus professional management poll?
00:32:33
Speaker
Well, if I had any belief that an individual other than simply by a random event would do better than the market, I'd say go to it. If I, if I knew a way, but I don't know a way and, and, and virtually everybody in the industry who, who speaks from a point of view of a fiduciary.
00:32:57
Speaker
well We'll say that, but there is an industry. We talk about the capitalistic system wanting to strip us of our money. Well, in a way, a lot of the people in the business who are advocating their services are advocating services that are proven to cost people. Anybody who is recommending you start trading the market as a way to make a living.
00:33:23
Speaker
These are people who are simply making a living off of convincing people to trade the market so they can get the piece of the action from these people who falsely believe that they are going to beat the market. Virtually everybody of repute will say, if you could just be the market,
00:33:45
Speaker
If you could just do as well as the market you would have a phenomenal return in fact. If you could simply over your lifetime get the market return and no more.
00:34:02
Speaker
You would probably be in the top five or 10% of all investors. Now that seems strange because yeah I'm sure some people are thinking, wait a minute, aren't there smart people that can do better than the market? Yeah, there are smart people who try. There are people who make a half a million a year, a million a year, millions a year. How do they make it? Managing other people's money. Okay.
00:34:31
Speaker
and they get it in the fees and how many of them. Are able to be as good as the market about one out of five or one out of 20 historically, to which you might say fine. Tell me the person who's the one out of five or the one out of 10 and I'll put my money with them. The reality is nobody knows how to choose that individual ahead of time, which of course is going to lead us pretty directly to the kind of mutual fund we should all have.
00:35:05
Speaker
But before we do that, let me ask you about, right now we're talking about individuals who actively manage funds and ourselves. So it's like individuals versus professionals. yeah But now there's this thing called robo advisors and AI. Have you seen anything out there that proves or shows, or we just don't have the data yet to indicate that they can be, beat the market? In a sense.
00:35:31
Speaker
The portfolios that we offer people to do on their own from our website, they are the equivalent of a robo-advisor. It's just that we're not in the business of making money off of people. So what we do is we tell you exactly the kind of portfolio that a robo-advisor would put you into.
00:35:51
Speaker
Okay. Now, i there's that but there's a there's a ah myth in the question that comes out of that question you're asking. Can those robo-advisors or the people who have free portfolios for people to do on their own, can they do better than the S and&P 500? Let's call that the market, the 10% return. Absolutely.
00:36:16
Speaker
and you don't need a robo advisor to get it all you need to do is to put a portfolio together so that it creates it gives you exposure to more than just the large companies because smaller companies make more money value companies make more money.
00:36:40
Speaker
ah There are a number of ways of mutual funds kinds of of of equity asset classes and that's what the robo-advisors are counting on are those very are those very classes but david they're not beating the market they are accessing another part of the market.
00:36:59
Speaker
Paul, I asked you that question very specifically so that we can get some foreshadowing for the some points later in this conversation. I know it's common, you walked right into it. i Couldn't have planned it better. Let's get to number six, actively managed funds versus index funds.
00:37:15
Speaker
choosing index funds instead of actively managed funds. Why the debate between actively managed funds versus index funds is ongoing, especially if you like frequent any of the ah traditional financial websites or or media outlets.
Benefits of Index Funds
00:37:32
Speaker
Why do you believe index funds are better choice for most investors? Well, if we are giving you honest advice and our advice is based on one thing,
00:37:43
Speaker
It is that what is the probability of success? What we know about actively managed funds. It's not a pretty picture. As a matter of fact, it's almost no matter what corner you look in, it's dark. mean For example, actively managed funds, their only reason to be in existence in theory is to do better than the market.
00:38:10
Speaker
Because we know that when you buy an index, invest in an index fund, that you are expecting to get the market return less, some very, very, very low. In fact, in some cases, zero expense. Okay.
00:38:26
Speaker
So, so what are they going to do to try to beat the market? Well, the first thing they do is they're going to jump at some rate in and out of the market. And ah they are going to try to be in the good stocks when they're going up and get out of them and being other good stocks. When those good stocks start going down.
00:38:48
Speaker
Because they are actively trying to do better than the market itself on a pure buy and hold basis. Now, what do we know of that outcome? We know of that outcome that those people on average,
00:39:06
Speaker
make less than the market because there's a cost to trading in and out. And then there's the cost of hiring the people to do the trading in and out. And then there are the extra taxes that need to be paid because the people were buying and selling and then they don't have much diversification. They might have a hundred companies where the index has 500.
00:39:33
Speaker
So you're taking less risk with the index you're paying less in taxes with the index you're paying less in expenses with the index and everything says you are likely probably going to get a better rate of return will somebody beat the market over twenty years yeah about one out of ten or one out of twenty depending on the equity asset class the types of stocks that we're talking about.
00:40:02
Speaker
But does anybody know ahead of time how to pick the ones that do better and the answer is nobody knows. And so if nobody knows, wouldn't you rather just say, Hey, if I could be in the top 10% for the rest of my career, count me in.
00:40:20
Speaker
And of course the industry is gonna say, wait, wait, wait, come here. I think i think we're gonna do better this next 10 years. Yeah, we didn't have a great 10 years, but but we got some new ideas and we think we can make you more money. Don't believe it. And it's a hard thing to say because these are good people just trying to do a day's work and be paid for it. The problem is they're on your payroll and you don't have to pay them 1%.
00:40:48
Speaker
You can pay them one-tenth of 1% or one-twentieth of 1%, or as I said, some cases zero, and it all stays with you and your family. So the pros of index fund investing, I'm going to do a quick list and you can jump in, add or concur or disagree. Lower fees.
00:41:09
Speaker
consistent outperformance of actively managed funds, broad diversification, transparency, and simplicity. Tax efficiency eliminates manager risk because they don't have to figure out what they're going to buy. They just buy the index. Yep.
00:41:25
Speaker
and you don't need to predict market trends. you You don't have to wonder if they're going to jump on the next trend. Better for long-term investors, as history indicates at least, and data-driven results, meaning that history also shows that they outperform 10%, 8%, 10%, 12%, whatever percent it is over the course since 1929.
00:41:44
Speaker
Uh, and then, uh, reduced emotional investing. It's automatic. So you don't have any person saying, I need to buy this and then trading in and out and then adding trading costs. Because even if you're not the one trading it, you end up paying the cost to trade all of those individual stocks. When somebody thinks that's a good idea to buy the next big thing. Agree? And I i agree. I want to add, I want to add one. Okay. It's, it's in there. It's in between the lines.
00:42:10
Speaker
And that is the probability of the investor staying the course. You mentioned the emotional. It's about trust. And if, for example, you go through a period like 2000 through 2009 and the market didn't do well, it lost at a compounded negative 1% a year. Did people panic that were in the S and&P 500? No, they did not.
00:42:38
Speaker
Because they understood it's made up of the five hundred largest companies and they believe that still had a good future on the other hand if an active manager. Had done poorly you're not sure whether when the market turns around and goes back up.
00:42:54
Speaker
that they're going to do well. there And there is, an and I just want to emphasize this potential cost because there's a disaster waiting to happen to some people who use actively managed funds.
00:43:09
Speaker
The people who do the studies of the active managed funds and the indexes, they track the top 25%, the next 25, the third 25, and the fourth 25. So they know that 25% of the active managers Are we down they could be two three percent a year below the index itself so you take the risk with active managers. By chance of ending up right at the bottom of all of the of the funds in the industry and you can say well what are the likelihood of that one let me tell you about bill miller bill miller beat the s and p five hundred for fifteen years in a row.
00:43:55
Speaker
leg Mason value trust 15 years. And what happened to him? The money just rolled in because people thought they had found a magic man for the next 10 years. He was in the lowest 1%.
00:44:11
Speaker
of all advisors that is the risk that you take and you can't know i mean it just like we can't know what the markets gonna do in the future we can't say what the big will be smaller value be growth of us we can't know.
00:44:28
Speaker
But we can take steps to protect ourselves against what I will call the catastrophic and active manager, active active managers have that risk build into the work that they do. One thing that really jumps out and it happened ah about a minute, two minutes ago is.
00:44:48
Speaker
I've been doing this, I think we're, this is probably gonna be like the 37th or 38, you know, episode of this podcast. One of the themes that keeps coming up is this and it came up right now. It's coming up with you before and it's come up with JL Collins.
00:45:03
Speaker
and has come up with Christine Benz and it's come up with Dr. William Bernstein, all amazingly smart, wise people with time in this space and a history of helping people and living through it all. And that theme is the investment strategy that is best for the person is the one that they are going to stick to.
00:45:24
Speaker
Yeah, yeah it's an interesting it's an interesting topic, David. It's complex because because if we go by the people should just um ah do what they'll stay the course with. If they have chosen actively managed funds, let's say they're in an IRA and and and and they can ah ah change without a tax on their profits or whatever.
00:45:50
Speaker
ah If they have ah funds that have high expenses ah if they have funds that are not well diversified. If they have funds that are market timing inside of them, and how can we tell that when they're doing that is because we can track, them they go to cash from time to time. And, and, and so they are not really buy and hold, but there are all these little, little possible things that we could be critical of if we wanted to call it that.
00:46:22
Speaker
The question is for all of us, how far do we go to control the things that are obviously hurting you? Like paying high expenses versus low expenses. If a half a percent translates over a lifetime to an extra million or a million and a half dollars,
00:46:47
Speaker
Then I'm just saying, if you're going to keep doing, particularly for young people, if you're going to keep paying expenses that are high, I just want you to know that your kids are going to have less, your charities are going to have less from everything we know about the past. And so at what point can we say, good enough? You don't need to go any further because I have living 40 feet above me.
00:47:12
Speaker
Uh, and another condo, Bill Bernstein. So here I am, he's a neighbor and he's a great guy and he's a smart guy. sure is Do we agree totally on the, you know, the perfect asset allocation?
00:47:27
Speaker
and ah Not exactly, but either one be okay. I'm sure either one will be okay. But I do have to say that if you listen to Bill Bernstein and Christine Benz and and and and me and JL Collins, you're not going to be in actively managed funds.
00:47:43
Speaker
And how many experts does it need to say to to take that position to have somebody believe, now wait a minute, kind of this guy belonged, who sold me these, belongs to the church. I trust him. And our kids are playing baseball together. And all of these reasons why that's where I should be. I know. And it's funny you say that. I see i hear that all the time.
00:48:04
Speaker
ah Yeah. And our view is that I am investing for my wife and for me. I am investing to help Western Washington University. I just got my first thing. What do they call it when you get, uh, it's, it's, it's the Merriman financial literacy program. Nice. at Western Washington university.
00:48:30
Speaker
Now, is that actually like a yellow or off white or is it filled up with like protein powder drink? Yeah, but this is water. I don't do anything fancy. yeah That would be healthy. yeah but But what I'm saying is I'm dedicated to these people and helping the students at that university. Every one of them is going to be coming through a program where they are going to be exposed.
00:48:53
Speaker
When I die, I want to be able to leave lots of money to that project and to, yeah and to, and to my kids. And, and so why would I want to pay somebody an expense for which they are rewarding their kids that we know is not adding value to the return. Yeah. I'm a, I'm sorry to go off on that, but no it's all good when it's a hard, no, where do you, where do you stop being an evangelist and just say, okay, do what you want.
00:49:24
Speaker
No. Okay. What's the next one? ah That alone, we could have probably gone on on a ramp for like 45 minutes and i'm I'm ready to do it. but But, but that'll be another episode where we just go off the rails. Let's do that. That'll be fun. By the way, you know, I have a book that's entitled, uh, get smart or get screwed, how to select the best to get the most out of your advisor. But you could change that to like dating. Couldn't you?
00:49:54
Speaker
I'll try that for more people to to read it probably, but anyway. So Paul, I think these first six that we talked about, and I'm going to quickly go over the first six, what they were. Uh, number one was save versus spend. Number two was save early versus waiting to get started. Number three was stocks versus bonds. Number four was one stock versus many stocks. Number Five was you select the companies versus hiring a mutual fund. Number six was actively managed funds versus index funds. So I think those first six, like if anybody were to like not even read or explore the next six that we're going to talk about, I think that would actually be about 80% okay. If not better, like I think that's the bulk, but at least the next three,
00:50:44
Speaker
which are, uh, more nuanced. They are adding. Uh, so number seven is going to be adding a large cap value. Number eight is going to be adding small cap blend. yeah yeah And number nine is going to be add small cap value. i I just want the listener to understand that this is like slightly next level stuff. Yeah, you're you're you're right, David. I would say if there was one more,
00:51:14
Speaker
That's really really a big deal and we can come back to to these that are more nuanced and and meaningful. ah The target date fund. That is big. That is big. And we are going to be talking about that at number 11, I think. So we will get to that. Okay. Let's talk about those three. So once the individual has a solid foundation, which we talked about in this first six, then you start looking for minor things that you might want to tweak, which understandably does take very slightly more effort, which you might be able to combat my claim on that a little bit.
00:51:54
Speaker
and And I hope that you do. But number seven is, let me find it in my list, add large cap value. You emphasize the importance of adding large cap value stocks. yeah Why are these stocks crucial for well-diversified portfolio and how does that fit into what we've already talked about? You know what I'd like you to let me do is to talk about seven, I mean the the three of them, those three asset classes. And because I think if I could offer one really simple thing to do that will have a huge impact over a lifetime is to combine those three with the S and&P 500. And there is a, what we call a quilt chart.
00:52:39
Speaker
ah that um ah actually shows the return of the market one year at a time since 1928. And it shows each year how did the S and&P 500, big, mostly growth companies,
00:52:59
Speaker
How did it do compared to large value companies, companies that are out of favor, compared to small growth like companies and small value out of favor companies? So the question is, how did they do each individually and what would happen If you put 25% each into those four different equity asset classes, so basically large growth, large value, small growth, small value, it turns out that the S and&P 500 compounded at 10.
00:53:43
Speaker
over the period 1928 to 2023. That's with dividends reinvested, that's with no taxes, and ah the um large cap value did about 11, and the smaller companies that were growth did about 12, and the smaller companies that were value-oriented, not as not as popular, did about 13. If you took The average of those four, it was 11.8%. Okay. Now I want you to picture the volatility because this is really important. If I could tell you that there was a way that you might get almost 2% more per year in that part of your portfolio for the rest of your life, and that it would be less volatile than the S and P 500, the number one most
00:54:38
Speaker
most revered and that more people own the S and&P 500 or the total market index, which is virtually the same in the return since 1928, one 10th of 1% difference for 96 years. So it's virtually the same. But with less risk. No, no, no, no, not with less risk with virtually and the same risk because it's driven, being driven by large companies, growth companies, both of them are.
00:55:07
Speaker
so So what we what we know is that with the average of the four, you make almost 2% better. But if we look at each year, you will see sometimes the S and&P 500 is at the top, another year they're at the bottom. They're all over the place. You have no idea what you're going to get. You could be the worst, you could be the best. But the average of the four is never the worst and never the best. It has to be that way.
00:55:38
Speaker
So in 78% of the years, it's right in the middle. Now, that doesn't mean that you're always making money. when When all four of them lose money, then you're going to lose money. You're going to lose the average of the four. So you have an investment that is less volatile and produces almost a 2% a year better return. That.
00:56:04
Speaker
is golden and the only reason that it might not happen is because it may be that for the next 96 years, the S and&P 500 will be number one every year. Can I ask for some clarification here? Sure.
00:56:20
Speaker
Are you saying that like if somebody invested the performance of the SMP is for at least as far as long as we have data or implied data if someone was 100% that versus 25% 25% 25% 25% telling 100% of their portfolio being in.
00:56:36
Speaker
um large cap value, large cap growth, small cap value, small cap growth in those percentages. You're saying that the 100% S and&P 500 versus the quarter, quarter, quarter, quarter in the variation. I'm assuming ETFs are mutual funds. That might be a next question. That performance is roughly the same.
00:56:59
Speaker
With less volatility if you go with a four four four four. It's one point eight percent better. It's one point eight percent It's eleven point eight percent versus ten for the S and&P 500 now here's Here's the thing that's interesting is that what you're doing is you're doing the very thing that people are doing with the S and&P 500 there you're building a a diversified portfolio and you have some really risky companies inside of that S and&P 500. But in this case, the diversified portfolio is about four very different equity asset classes. There are years that between the best performance and the worst performance of those four equity asset classes, there is a 30% difference in return. What is the risk profile look like one versus the other?
00:57:52
Speaker
Well, it depends on how do you measure risk. If you measure risk on standard deviation, it's a little more risky than the S and&P 500. If you did it versus ah but based based on just the volatility, remember one investment is is always in the middle. It's never up here, never down there. So it isn't bouncing around as wildly as all of the others.
00:58:18
Speaker
which is what div diverse diversification is about and what the academics tell us. Once you have like the S and&P 500, to add another 100 similar kind of companies, that doesn't change anything. You want to change things? You diversify amongst different equity asset classes. And that's what that large value and small value and small blend is about. But the bottom line is,
00:58:46
Speaker
that there is a higher return, potentially, because we can't put them they all of the weasel weasel language we have to use about the the future the future will be different than the past. We can't guarantee anything. Well, let me tell you what I can guarantee. I can guarantee that the future will look like the past.
00:59:05
Speaker
I absolutely believe the future will look like the past. I have no idea what sequence it will come in. Nobody can know what the sequence will be. But if but but if i can say i can I can say I believe that if there have been bad years in the past, there will be bad years in the future. Most of your viewers do not know the following information, David, and that is from 1939 to 1938, the compound rate of return was better.
00:59:36
Speaker
than the compound rate of return of the s and&p 500 from from 2000 to 2009 and that is before you apply inflation to the to the outcome. You know some people they criticize me for years say why do you go back and show all that stuff from from 1929 then doesn't mean anything those times are never going to happen again they did happen again they will happen again the reasons they happen are different. Today in the market, small cap value off the charts. I mean, it had a great day. What does that mean? Nothing. It doesn't mean anything. A couple of days ago they didn't. Pardon? A couple of days ago they didn't. Exactly. yeah And so and so what what I know is, I know that
01:00:26
Speaker
From 1975 to 2014, the small cap value index compounded at almost 20%. But since then, it's underperformed the S and&P 500 and people say, Oh my God, small cap value is dead. It's never going to do it.
01:00:46
Speaker
That's just the nature of how markets work. And if you don't understand and get to know the history, you start questioning what you believe. And I do know that this, the whole, it's, it's, it's it's also interesting. I can take like a 30,000th of view. This almost, this really almost doesn't matter. And I hate to say that because I know it's such a big point of which you advocate, but like the small cap value portion. And, but if you were to do it to the masses, like ah just get the 80% your solution, your most people are going to be pretty good.
01:01:14
Speaker
but we And these niches, we we talk about small cap value versus not, and then the returns versus of the last 15 years versus before, and why Paul Merriman thinks small cap value is important versus why like carl ah Carson Jeske thinks ah Paul Merriman's wrong and why you should not count on small cap value because of the most recent underperformance as compared to other. So I get it. But, which honestly, like objectively, it's a great position to be in. If you're if you're arguing these little nuanced points, of points We're good. You're golden. If you listen to this and you, and that's where you're at in the weeds with this, your, your, your future financial future is going to be just fine. You're doing great. But you make a good point, David. And that is if you just, we have a table that shows the S and P 500 with 10% in small cap value and 90% in the S and P 500 fine. It adds three tenths of 1% to your return. And you would not even, and we didn't even ever see any difference.
01:02:13
Speaker
and the in the return at the end of the year. And so it's not about turning everything upside down, but maybe it's worth turning a little bit upside down. So Paul, how I see the value of these last three that we just talked about on which we did combine them seven through nine we combined, which was ah seven was. Large cap value. Large cap value. Eight was. Small cap blend. And nine is small cap value. Yes. And the blend, it has some value in it, but it's mostly growth.
01:02:47
Speaker
So if I was going to take this conversation and say the so what was the so what of this conversation, somebody listening to this probably already understands of like the buy and hold VTS EX or whatever the broad market index fund. Let's do that. Maybe they got a bond fund. Maybe they've got some other ah fund that's giving them some kind of Delta, and but.
01:03:06
Speaker
as compared to the, I say vanilla is still pretty rock solid is like the VTSEX or the broad market SP 500 and just buy and hold strategy. So, so what a person listened to this would do is say, they just heard Paul Merriman who is brilliant, has decades of experience and the soul of a person who just wants to help and do good out in the world, wants your best interest, has your best interest at heart.
01:03:31
Speaker
He says this. So if i if I say, okay, I'm on board, what I need to do is go back to my Vanguard or my Fidelity or my 401k and look and to see if there are those other three. We have Vanguard recommendations. Okay. We have ETF recommendations. And for most people, if they can, they're smarter to, it's better to get into the exchange traded funds than the mutual funds. That's what I'm hearing. And we have a gentleman, Chris Pederson,
01:04:01
Speaker
ah who works every two years to update. The ETF recommendations based on what we call best in class, because there are, there are dozens and dozens of small cap value ETFs. Why would one likely be better than most of the other? And so we are working to try to help people make that decision because we don't believe they'll make it on their own, but we have Vanguard, we have fidelity, we have T-roll price, we have Schwab.
01:04:34
Speaker
Free portfolios, you just go to our website, go to portfolios, and and in some cases, David, in order to do this, to add a little, for example, small cap value, they're going to have to do it in an IRA because they don't have it available inside of their 401k. Take a point.
01:04:54
Speaker
So it's, and and and and I must say that we will get back to the target date fund because in many cases, the target date fund is way better than just putting your mother money into the total market index.
01:05:08
Speaker
All right, so in the show notes, we will have the link to ah the information that has the best in class funds for these four funds yeah that we just talked about that represent the large cap value, large cap growth and small cap value and small cap growth. And the quilt charts. And the quilt charts. You'll love those if you haven't seen them.
01:05:29
Speaker
So Paul, so this kind of gets us to the next level of more like psychology and behavioral finance. Number 10, market timing ah versus buy and hold. Market timing versus buy and hold is a topic I would say of much debate of people who like understand a lot of what we just talked about as far as like what history proves that you can't you beat the market and and things like that. And that's kind of an extension of that.
01:05:52
Speaker
ah Why do you advocate for buy and hold over market timing? Because I will say I am even guilty of thinking I can time the market at times. And while it doesn't ah derail my long-term plan,
01:06:06
Speaker
I sure would have much more money if I just didn't try to time the market, admittedly. Right. And can you say that you have stopped doing that? No. See, that's the problem. You know better. This is me with my my dinner. I can't wait for dinner tonight. that And I know I'm going to do things I shouldn't do. so so So let me talk about the problem I have with the market timing and buy and hold.
01:06:34
Speaker
um I'm looking for million dollar decisions and I can tell you that lots of people have left millions of dollars on the table and they don't even know it because like they got out in, in, in, in January, February, March of 2008 or 2009, a lot of people bailed out just couldn't take it anymore. It's what I call the ICSIA timing strategy. I can't stand it anymore.
01:07:04
Speaker
and they jump out and I know some of those people who have not gotten back in. What did that cost them? And ah and now now there are people who will accept one kind of market of of market timing and that's dollar cost averaging because, and we talk about that, that's one of the of the other decisions that so can be made is to just every month by the shares, when the value of the shares are down, you get more shares. When the value of the shares is up, you get fewer shares. And so both that and the timing, it's a little more difficult to make it for sure, a million dollar decision. But I can tell you that million dollar mistakes are made all the time because people
01:07:52
Speaker
Think linearly. We have a free book. The title is um Spending Your Way to Wealth. And in the back of that book is a quick outline of Daniel Kahneman's Thinking Fast and Slow, which is about the biases that hurt us uh, in many cases financially. And one of those biases is we think linearly and when something is going down, our brain says it's going down forever. I'm going broke. These stocks are going to be worth nothing and I got to stop the bleeding right now. And so you lock in your mistake and then you got the problem of when do you get back in?
01:08:37
Speaker
And the reason I don't believe in in market timing is because there is more, there is no more difficult strategy than market timing because it, you have to make the decision to get out. You have to make the decision to get in. You have to be willing to take multiple losing trades of bad trades in a row. If you're going to be a real market timer.
01:09:00
Speaker
And you can't be second guessing the systems. Almost everybody who tries market timing second guesses the system. So I like buying whole because the probabilities of success. If you could just keep your hands off of the investments, by the way, if you've made bad investments, I want you to get rid of them. But if you can keep your hands off of the good investments you've made, I think you'll do better.
01:09:28
Speaker
Yeah, I look back, one of the biggest one and and ah the crazy thing is I was actually really proud of my decision and the 07-08 crash. I actually, no, I didn't have a lot of money back then. I maybe had like $42,000 a month of savings plan and it was in stocks or whatever. And then the February of the year, I moved it over to the G fund, which is the government security zero risk. You can get one to two to maybe even three, I don't think 10%. I was like, yeah. And then I watched the market crash.
01:09:55
Speaker
And with market time, you got to be right twice. I was right once. I was wrong the second time. I waited way too long to get back in. How long? um't Maybe like 18 months, two years. yeah Maybe longer. I can't remember exactly. But it cost me thousands and thousands and thousands of dollars. And the crazy thing is I worked with somebody and she was a civilian and she worked. I don't think I can get arrested for this. I'm retired, all good. But but she asked me because people knew i was like I liked money back then. And I knew And this is like, I think all of us struggle with this. One thing to get on a podcast or a blog and say this, and it's another thing to do it in your own, in your own. So closing that gap over time, as ah as I think is a real skill for people who, who are in it as much as we are, but.
01:10:37
Speaker
Uh, a woman worked with me and she, she showed me her TSP balance and she's like, what do you think I should do? I said, just leave it there. Just leave it there. Where's that? See, it's, and you know, two years later, she thanked me even though I took a hit in my portfolio and she did great. It's easier to be a teacher. And by the way, a few minutes ago, you gave me credit for being brilliant. I am not brilliant. I know how to read what the academics write. You do not have to be brilliant to do that.
01:11:06
Speaker
and all of the work that we are doing is really just trying to take what we know has come from the academic community. And package it in a way that people will learn it. It's like our quilt chart. You will see investing like you've never seen it before. I promise. Doesn't mean that you're going to be any better at it, but it, it is a good way of learning. And that's what we're working on is finding better ways of helping people learn. All right. What do we got next?
01:11:37
Speaker
target date funds. Let's start with just defining what they are, ah how they fit into what we've talked about already. And maybe the bridge between behavioral finance of why this might be the best thing for the masses rather than people who are, you know, like me and you yeah talking about the stuff all the time. Well,
01:11:54
Speaker
and I the title I have when I talk about the the target eight funds is America's number one retirement
Target Date Funds for Retirement
01:12:02
Speaker
investment. There is no question in my mind that this is the greatest investment ever developed.
01:12:08
Speaker
And it's made up of two other, if you do it right of two other great investments. One is the mutual funds. So you get the mutual fund in your portfolio to you get index funds. Not all of the target date funds are based on index funds, but the ones that I want people to look at and put their money into are in index funds. So that underneath the umbrella that is going to be developed for you will be mutual index mutual funds. But.
01:12:38
Speaker
What this fund does that no other fund does is you tell it when you want to retire. So it knows that if you say you want to retire in 2065, you're somebody getting started.
01:12:54
Speaker
uh in in it in whatever every you're you're doing in terms of investing you're a younger person now you could be. A sixty five year old who wanted to have the combination of stocks and bonds in a twenty sixty five portfolio so you can fool the target date fund if you want to but it knows who it's working for and it knows the people in this group. They should be all or almost all inequities.
01:13:22
Speaker
And then as they age, they'll probably stay about the same as a little bit of maybe a little bit of fixed income and mostly equities until about 40. And then they start transitioning slowly. So by the time you're 65 or 70, you're going to be probably 50% in equities and 50% in fixed income, the fixed income there to stabilize, because basically what they're trying to do is when you are young, you have very little financial capital, but you have a ton of personal capital.
01:13:58
Speaker
You are worth a lot because you've got 40 years of hard, smart work ahead of you. Or if you were in the fire movement, 10 or 15, whatever it is, but you have got the personal finance. And so you want to take the risk in the early year.
01:14:16
Speaker
But when you retire, you no longer have, you can't, you can't make any money anymore. Your personal capital is of no value. So now you have to depend on this money that, that you have in that target date fund to live on. Now, the reason I love them is because 90% of the folks out there are not qualified to make a, don't make the right decision.
01:14:40
Speaker
In fact, we have a study, not we, Wharton has a study on the decisions that were made by people who didn't use a target date fund, but could have. The target date fund is doing the very thing that most people want. Please take care of me, know who I am and what I want to achieve and manage my money. And by the way,
01:15:04
Speaker
Manage it for very little, like 800 of one, 800s of 1%, less than one 10th of 1% to have your money managed professionally, truly professionally, conservatively, by the way, too conservative for me personally. And I'll talk about that in a second, but that could be the only decision you ever have to make as an investor. And that decision is.
01:15:32
Speaker
I'm going to invest in my 401k, which is where these target dates are going to be found. We hope. And I am going to continue continue to increase the amount. I'm going to do my part. They're going to do their part. When I get to retirement, they will know that I'm about the retirement age. But I asked the question, will you continue to manage the money for me until I die? And they say, yes, we'll do that.
01:15:56
Speaker
For the same eight, one hundreds of 1%. As a matter of fact, by the time you get there, it'll probably be four, one hundreds of 1% because the prices keep coming down. And so it gives people everything they need. Now, the only problem and but from my view is there's virtually no exposure to small cap value. ah Okay. So what can you do about that?
01:16:23
Speaker
You can put 90% of your money into a target date fund and 10 or 20% into small cap value and a story for the rest of your life. And it will probably give you an extra half to 1% a year for the rest of your life.
01:16:41
Speaker
Oh, the study, the study, it's important. Wharton looked at 1.2 million accounts, 401k accounts through Vanguard. They looked at the people who had no target date funds versus those that were all in target date funds. And the expected difference in return 2.3% a year. Now think about that. You can let somebody else do it. And unless you are are super smart and you know about all this stuff and know how to control your emotions.
01:17:19
Speaker
You were likely to be doing two point three percent i'm looking for a half a percent to add a million two point three percent i'm getting at least four extra half a percent for my what i would likely have gotten if i had done it on my own thinking i was smarter than the market.
01:17:35
Speaker
so do you So if somebody's listening to this, they just heard us talk about the buy and hold. They just heard us talk about the four different funds. And now they're talking hearing us talk about target date funds. How do you balance all that information? does this Is this where the conversation divides into the people who are going to want to actively manage their own? When I say actively manage their own, I don't mean like hire active.
01:17:56
Speaker
funds, but like be, be an active participant in their own yeah portfolio management did it versus those who just want to fire and forget. So in your state, this is where the the the conversation diverges from the do-it-yourselfers who actually so has like an inkling at least to learn about this and has the ability to go in and the wherewithal to go in once or twice a year to re ah rebalance their portfolio in these four funds or one fund or whatever their strategy is. That is, you're, you're exactly right, David. And, and the fact is our work is generally of interest to people, a lot of engineers, a lot of mathematicians. I mean, they like evidence-based decision-making and they know I'm not trying to sell them anything. Uh, and so the, and so the, the bottom line is, yes, it is for the people who want to be do-it-yourself investors.
01:18:49
Speaker
There are a lot of people out there paying somebody 1% to manage their money amongst a bunch of mutual funds. What if you saw all the numbers and you came to the conclusion that if you did sample something so simple simple as the four funds, that you could eliminate that 1% for the rest of your life. It's big money. Now, some people say, oh, but ah that means I have to be responsible.
01:19:15
Speaker
Well, let me tell you how responsible those people who are serving you can be. They can be very irresponsible. You may go in and say, I want to sell everything. And they will tell you, listen, don't worry. It always comes back. I mean, they give you this, stay the course. by the they're They're trying to do the right thing. Stay their course. Yeah, that's exactly right. yeah Their course.
01:19:37
Speaker
and And many times these people are putting people into actively managed funds with high expenses and a load up from, I mean, all these things that are not in the best interest. Do they still have loaded funds? I know that was a huge thing like 20 years ago. is that still a thing worse yeah ah yeah If anybody's listening to this, just run the opposite direction. And if anybody ever says loaded funds, period. But here's the, here's the sales pitch on that. So they'll understand it.
01:20:01
Speaker
You're only paying me five and a half or 5.75% one time. I am helping you invest in this fund. I have found this fund for you and our research department. Thank you so much. and and but But understand what it's really costing you.
01:20:19
Speaker
yeah Instead of $10,000 going to work, it's 9,425, which means that $575 is now going to compound somewhere else at 10% a year.
01:20:33
Speaker
And what that really means is you just locked yourself in to an extra cost of one half of 1% for a lower return of one half of 1% for the rest of your life. It isn't just the $575 it is. What does that five, seven, if you, if you double your money every seven years at 10%, approximately, and you, and you would double that five times.
01:21:00
Speaker
You know, that becomes a bigger and bigger number. and And your kids would prefer that you be smart about that because you're going to leave them more money. Yeah, Paul, I think expenses cannot be understated, cannot be overstated in this in this context. So if somebody's got a 401k and they open up their list of options, they will very likely see many of the types of funds that we talked about. I don't know, honestly, I don't know if any ETFs are offered in 401ks. That's a different conversation. That's starting to happen, I understand. but
01:21:36
Speaker
Okay. And then we've got target date funds. So you'll likely have some target date funds offered in your 401k. And then you'll have some of the, at least some of the other options that we discussed earlier. So take a look at your 401k, see what's offered. If you have no idea, most people, I say most people, I believe most people don't even know what they're invested in in their 401k. So right please go take a look at your 401k, look at Log on, find your login information or contact HR to figure out your log on information, figure out what you're even invested in and come back and re listen to this in the context of knowing what you see is available for you and then make some decisions based on what Paul's talked about ah how you may want to ah reallocate some of your holdings.
01:22:22
Speaker
ah But about expenses, they matter. And how you can tell is that that's the expense ratio. And honestly, that's just like one of, that's like the main expense that I know to look for. But there are some that I don't even know to look for, but you have to look to look on your prospectus and stuff, which is kind of like next level. But if your expense ratio is low, that's probably a good sign that you're going to be doing okay. When I say low, I mean like,
01:22:47
Speaker
VTS AXS 0.04 fidelity has some zero percent and then there's some pros and cons there too from what I understand, but still it seems like it's pretty legit. It's legit. Yeah. And, uh, and the link that we're going to have below is going to link to some best in class ETF. So if you, if you're, if a solo 401k or in your control of your brokerage account or however you want to However you manage your funds or your net worth, take a look at the expense ratios. And I don't know these funds that Paul is going to link to, but take a look. If they're 0.04 or below, they're probably great. like' it's not worth It's not worth saying, oh, this one's 0.02 versus 0.04. That's negligible in my opinion. It's more important about like your overall strategy and and find something that ah works for you.
01:23:37
Speaker
Paul, we're rounding up on the last number 12, I believe. Target date, target date funds, I think was the last thing, right? Yeah. We just talked about target eight funds. That was number 11. And number 12 is invest in a Roth IRA versus traditional
Roth IRAs vs. Traditional IRAs
01:23:53
Speaker
IRA. Yes. Now this is a big thing. Like,
01:23:55
Speaker
yeah So people decide to, when people go into the workforce, they're like 401k or 401k, but what what's what's even crazy for me to understand is people don't know that it can go on their own and then start a separate IRA. And that IRA can be characterized as Roth or traditional. So why would one want to invest in one over the other? And what do they invest in?
01:24:20
Speaker
So, in my own case, almost all of my IRAs are regular. And the reason being is because— I'm sorry, when you say regular, you mean traditional. Traditional. Because the charities are the recipient of all of my IRAs when I die. Most of that going to Western Washington University for their program.
01:24:48
Speaker
um The reason I'm a great advocate for Roth, 401ks or Roth IRAs. is because when you make that investment, you do not get a refund. If you had invested in a regular 401k or a regular IRA, a traditional IRA, you would have gotten a refund and you would have taken that refund and likely spend it on something fun.
01:25:19
Speaker
No i don't know that it will be but i would say that what you should theoretically be doing if you wanted to be roth like if you would reinvest the refund back into the ira but here's the deal with the broth i you are going to grow tax free, not tax deferred. And when you get to retirement, you will take that money out without having to pay any taxes. Now that means a lot to me.
01:25:50
Speaker
because when I came into the industry or when I first started investing, the marginal tax rate for for people's earnings was 90%. I believe on everything over a hundred thousand dollars. Now a hundred thousand dollars was a lot of money, but 90%. And when I started as a stock broker in 1966, it was down to 70%.
01:26:18
Speaker
We have no idea what the tax rates are going to be 20, 30, 40, 50 years from now. There's lots of reasons to believe they could be higher. And and it's not impossible that somebody might not come up with a flat tax that would solve the problem, ah in which case it could be lower. So we don't know for sure what tax rates will be, but I do know this.
01:26:45
Speaker
That when you do the Roth, you get the free, free growth instead of tax deferred growth. And when you take the money out, you don't have to pay any tax. And when your kids inherited, they don't have to pay any tax. They have to take the money out within 10 years, but basically they can take it out without tax and.
01:27:07
Speaker
You don't get a chance to take the refund and go out and have a party. Instead you are buying the right with that money. So you're really in a sense investing more, but part of what you're really investing is that you're, you're you're paying taxes upfront that theoretically you would have 30, 40, 50 years from now.
01:27:28
Speaker
So, um it's always tough when we do things that mean that the payoff doesn't come for a long time. But this is another one of those cases. And also, I would also add, David, to your to your expenses. A lot of people leave out the tax costs of mutual funds. But you can go to Morningstar, and there's a place where you can see what the tax impact is of your fund. And typically, index funds have a cost of about a half of 1% a year in taxable events.
01:28:09
Speaker
uh, actively managed funds of the same kind cost on average about one and a half percent. So there is right there ah to pick up that cost for the rest of your life because you wanted to pay somebody a load.
01:28:25
Speaker
And then you wanted to get a lower rate of return because it was actively managed. I mean, and set yourself up for having to figure out whether to fire the people later. God, the return on an education in this area is so big. Don't miss the chance.
01:28:44
Speaker
return on the education in this area. It's huge. The problem is getting people to want to be educated about it. That's the challenge. Yeah. Yeah, but they have to be able to picture the prize. If I, if, if, when I eat when I shouldn't and eat what I shouldn't,
01:29:03
Speaker
I know what's going on in my brain. I'm picturing how happy I'm going to be. And then I'm going to settle into my my my comfortable chair and watch some talking heads. And it's just going to be relaxing as opposed to doing in something that doesn't include all of that stuff that feels good. And that's what you're asking people to do is to figure out a way to sacrifice for the future. But obviously, a lot of people are doing it. And and one thing we should note is 401k plans.
01:29:36
Speaker
used to make people opt in to start a process. Then they started requiring people to opt out. When they opted in, it was something like 20% of the people or 25% of the people would invest. When they had to opt out, something like 83% of the people invested.
01:29:59
Speaker
Yeah, I was very happy. That is, that is, that is one of the rare cases where a blanket change actually, but you know, was a great thing. Yeah. You think that was true with seat belts?
01:30:14
Speaker
ah Well, well, I know my son puts on a seatbelt every time again without me yelling at him too much. So that's great I'm glad that transition happened. You know, something there, when you think about this list of million dollar decisions, smoking or not smoking, is that a million dollar decision having kids or not? It's a million dollar decision. We make them all the time.
Challenges in Youth Financial Guidance
01:30:38
Speaker
getting couples therapy or not, it's a million dollar decision. And the problem is we don't have somebody to guide us through these, all these little forks in the road because there's not much money to be made out of off of us at the very point that you should be getting the right lessons. How do I make
State Requirements for Financial Education
01:30:56
Speaker
a bunch of money off of a 21 year old kid who can hardly put together a $50 a month And so i gotta figure out something to sell them and i can make a decent return on quickly and then get onto the next client. It's it's too bad but that's the way it is which is why these people have to want to get the education and there are now twenty five states that require high school a six month personal finance course.
01:31:26
Speaker
25 states. That is absolutely huge.
Roth IRA as Emergency Fund
01:31:31
Speaker
ah Paul, I want to jump back really quick and then we're going to wrap this up. I want to jump back to the Roth IRA. and And this is kind of something that I didn't realize earlier. And if I did, I would have definitely In my own experience, I used my Roth as not like a piggy bank, but as a almost like an emergency fund. And 15 years ago or 10 years ago, I would have advocate advocated that for other people because of the um the ability to take money your contributions out without penalty. However, this was the trade-off and now I regret it and I would advise differently for others.
Roth IRA Flexibility in Planning
01:32:05
Speaker
yeah So if someone's listening to this right now, they're very likely gonna be on the up and up. You're you're learning about nuances. ah Honestly, many of what much of what we talked about today was fairly basic, once you get and into this world.
01:32:20
Speaker
but I'm 46. Paul, you're slightly more mature than me, but a lot of people listen to this. Maybe they're way younger and they don't see that when you're 62, 60, 70, and you see that these huge accounts, some are taxable, some are not. Social security comes into play, pensions come into play, and then you're starting to to balance that taxable income versus living expense and how to play that whole game. If you're in that situation, you know, um, the Roth adds an ability to live on expenses and gives you more flexibility when you're playing that taxable game. I don't want to get into that too much right now. That honestly could be a, taxes and retirement should be a huge, that could be a different episode. But what I did not know is, and I didn't think about it. It's not that I couldn't understand it. It's just, I didn't, it didn't click to me and it didn't matter to me at the point at that time.
01:33:13
Speaker
But as I started to close in on those years, I'm like, ah, what if I'd have just done that? so It would have given me a little bit more flexibility going forward. So having that Roth might even cause you to like delay social security a little bit because it might reduce your taxable income because withdrawals from your Roth at that time, especially the contributions and earnings are not taxable.
Finding Affordable Financial Advisors
01:33:34
Speaker
So it opens up more options as you go forward to have a significant balance in your Roth.
01:33:40
Speaker
Yeah. And, and, and I really think, um, one of my responsibilities over the little time that I have left in doing this. It's to try to give people information and there are lots of people who do this.
01:33:54
Speaker
uh, on how to find a good hourly advisor that you can just buy a couple of hours of time. Uh, and you might go in once a year and, and, and do that. You don't have to pay somebody 1% a year to get good professional advice. Uh, but it, it, it isn't something that you can just go to the yellow pages and pick up the phone and call on it. It's, it's, you've got to figure out.
01:34:20
Speaker
I just in my newsletter, uh, when we have a newsletter with about 44,000 people that we go out every, every, uh, every
Ethical Financial Advisory Practices
01:34:31
Speaker
week with something. But today I talked about an advisor back in New York who I just think is, is, is terrific.
01:34:38
Speaker
And he charges a really fair fee and he's really smart and he's really committed to doing good for people he'd make a whale of a lot more money if he got it would charge people on assets under management but instead he wants to do what he thinks is the right thing to do.
01:34:55
Speaker
the the The good news is a hat relative handful of people are going to find him. Uh, and then he'll be, he'll be booked and he'll have his book of business and he won't be able to do stuff like our firm. You know, we just would just add another, uh, add another certified financial planner. Uh, once you get to a certain size and you grow and you grow and uh, but when you're an hourly person, you are choosing to make less money.
01:35:23
Speaker
but to more good, possibly, possibly, uh, for a lot of people who know how to use
Conclusion and Future Collaborations
01:35:30
Speaker
you. Well, Paul, you've done a whole lot of good in your years. Thank you.
01:35:36
Speaker
You know, who knows why paths cross in life, but I'm so fortunate that my path crossed with yours or yours with mine or however it all lines up. And I thank you so much, uh, not only for this conversation sharing your 12, $1 million dollar ideas, uh, but all the wisdom that you've gained throughout your career. And I know this won't be the last time we talk and I've actually had people who listen to this a podcast and watch the YouTube.
01:36:01
Speaker
And they're like, can you just get him back on every quarter? Which is, I just want to hear him, you're all right, but let's get Paul back on. Well, there's a lot of good people you can have on that would be more than happy to come to come work with you. You're doing a terrific job and you make people feel welcome and you give them time to share and, and that's golden. So, uh, let's hope we change some lives and that we will do it again in the future. Okay.
01:36:28
Speaker
Yes, we will. It is truly a pleasure knowing you, and I thank you for your friendship. Betcha. And we'll do it again very, very soon. All right, buddy. Take care. And thank you all for watching and listening.