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- [00:00]
Paul Merriman
This is an iHeart podcast. Guaranteed Human.
- [00:04]
Matt
Is it just me or is it getting really hard to figure out the best way to save for retirement? Well, Fidelity can help you to find clarity so you can save the best way for you. With a free personalized plan, goal tracking and timely insights, you'll be set to take on retirement your way.
- [00:20]
Joel
Get started@fidelity.com future expenses charged by your investments and other costs and fees associated with trading or transacting in your account. Apply Fidelity Brokerage Services member NYSE SIPC
- [00:32]
Matt
okay, Joel, I am excited about this one. Here on the show, we are all about comparing prices to save money on so many things in life. So why wouldn't we compare prices for our next ride share? Taking a few seconds to check Lyft can save you real money on your next ride. I did this last time. I caught a ride home from the airport after some travel and guess who came out on top? It was Lyft. Don't just price check with your flights and phone plans and groceries. Comparing rideshare prices will help you to save money every time you ride. Save money. Check Lyft. Indeed Sponsored jobs get you quality candidates when you need them most. Spend less time searching and more time actually interviewing candidates who check all your boxes. Less stress, less time, more results. When you need the right person to cut through the chaos. This is a job for indeed sponsored jobs.
- [01:19]
Joel
And listeners of this show will get a $75 sponsored job credit to help get get your job the premium status it deserves@ Indeed.com podcast. Terms and conditions apply. Need to hire. This is a job for indeed sponsored jobs. Welcome to how to money. I'm Joel.
- [01:36]
Matt
I'm Matt.
- [01:36]
Joel
And today we're talking Turning Thousands into Millions with Paul Merriman.
- [02:00]
Matt
That's right. Our guest today hails from the beautiful Bainbridge island out there in Washington State, right right across the water there from Seattle. And he is the, I would say the foremost expert when it comes to DIY investing. Paul Merriman. He started Merriman Wealth Management back in the 80s. He did that for about 30 years and then he founded the Merryman Financial Education Foundation a little over a decade ago. Of course, the foundation, it's a nonprofit and it's and this is straight from the website, it's dedicated to providing comprehensive financial education to investors at all stages of life, which we're all about. Paul is the author of eight books. He's got a regular column over at Market Watch. He also has his own podcast, Sound Investing. And we are honored and privileged to have him Here on our podcast today. Paul, thank you for coming on to how to Money.
- [02:49]
Paul Merriman
It is wonderful to be here. It's a kick having a chance to reach out to what I express are a lot of young investors, and that's the best.
- [03:00]
Joel
Yes. Oh, no. We definitely have a bunch of young investors here on the show, and I
- [03:03]
Matt
think we're going to get to why that's the case.
- [03:06]
Joel
We're going to have, hopefully, I think, a lot of wisdom from you, Paul. You've been doing it for so long, but your passion remains, which is something that enthusiasm is contagious. The first question we ask anybody who comes on the podcast, though, is about what they like to splurge on. Matt and I, we splurge on craft beer. It's something that we spend quite a bit of money on. Some people would say too much while we're trying to be w save and invest for our future. So what is that for you? What do you like to splurge on that most people might think, oh, that's like a little abnormal or a little crazy.
- [03:36]
Paul Merriman
Well, I don't know that I'm abnormal or crazy, but there is very little that I need or want or spend on myself. But I have found that if I spend whatever my wife needs or wants, that pays the biggest dividends of all. So, no, I splurge when my wife wants to travel or she wants to. Whatever it is, I'm ready to go. But for myself, I got this. I love what I'm doing in helping people take care of their investments.
- [04:09]
Joel
All right, so you've taken that happy wife, happy life to the extreme.
- [04:13]
Paul Merriman
Yeah, that's right. Like you said, sometimes it is the extreme.
- [04:16]
Joel
Yeah.
- [04:18]
Matt
Hopefully not too often, but like Joel said. Yeah. A fount of wisdom that we're speaking with today. But, Paul, let's dive into your history a little bit. Like, what is it that got you into the work of financial planning? Investing. Yeah. I guess I'm curious why it is that you're so intent on helping specifically, like, the average investors, the everyday kind of folks. So, yeah, can you talk about how you got into it initially and then why it is that you took the approach that you're now taking?
- [04:45]
Paul Merriman
Well, I kind of fell in love with the investment process itself at about age 19, and I had no intentions of teaching anything because I didn't know anything. But I did really appreciate it, and I thought it was very exciting. But it wasn't really until I was. Oh. And I was a stockbroker for a couple of years before I discovered the conflicts of interest that you have there in order to help your clients. It's not an easy trip if you try to do what's in the interest only of your client. But then when I turned 40 and I had enough, I thought, to retire, I decided I wanted to spend the rest of my life teaching people how to invest and to be an investment advisor. And by the way, I was never a financial planner. That's a whole other commitment to helping people. My focus was first and foremost still is on the investment part of that process. And when I started a very small investment advisory firm and we had no money under management in the beginning, took about a year to raise the first million dollars and I would help anybody. If you had $2,000, I was your guy. I would give you advice because I was doing it for fun. And I gave free seminars, workshops, and if you would sit through a free three hour or six hour workshop, I would sit down, take a look at where you were in your life, tell you what you should do on your own. And if you didn't want to do it, felt it was too complex or emotional, we were willing to do it and do it for what we thought was a fair price.
- [06:44]
Joel
And you were kind of like fire before. It was cool then, I guess. Paul, right? Is that.
- [06:47]
Matt
Yeah.
- [06:47]
Joel
At age 40, by the way, I
- [06:50]
Paul Merriman
did not, I did not know the term fire then. Well, you know something that's interesting because when I went into the industry in the mid-60s, there were no financial planners that were on the street like today. There were people in the brokerage industry where they were just really being paid for transactions. And if you really wanted to get financial planning, you had to have a lot of money. And you go to a bank trust department, maybe. But of course, that has all developed today where there's everybody who's in the business is supposed to know taxes and investments and insurance and all of that. So it's a very different world today from when it was then.
- [07:34]
Joel
Yeah. And on that note of just kind of different world. I'm curious, you know, when you started in the industry, like Vanguard Index Fund wasn't really well known or it hadn't even really been invented. Right. I mean, when we're talking about it. So a lot has changed in the accessibility of investing for everyday investors. There used to be kind of this shrouded in secrecy, not to mention just obviously higher fees and all that kind of stuff. But it was almost impossible for the average investor to figure out how to invest for their future. And now, yeah, there's some jargon and lingo and some things that people need to learn, but it's a whole lot easier to self educate.
- [08:15]
Paul Merriman
Well, and I think it's fair to say that compared to the 60s when everything was in favor of the house instead of the gamblers or the speculators or the investors load funds almost exclusively load funds, regulated commissions. Nobody knew what a small cap or. I mean, we didn't think that way. It was the academic community that really forced us into the kind of thinking that we have today. But it has never, ever been as efficient. Today for the first time investor, not even close. Really. Really. You can invest like a millionaire when you've got $100. And that's not just a cheap sales pitch. That's the truth.
- [09:02]
Matt
It's the truth because you're not selling anything, Paul. You're just, you truly are out there to help individuals. And yeah, what you're saying is, but
- [09:10]
Paul Merriman
you still need the products. Yes, and that's the beauty. I mean the no load funds, the index funds, the, the ETFs, all of these things are a pathway to much higher returns. But what we've got to make sure is we don't get caught up in the sales pitch of the insurance industry or the brokerage industry. You really need, if you want to hit the biggest home run, whatever that might be, you need to learn how to do it for yourself. Not because you need to be a genius and but because you don't want to pay the price that the Wall Street's going to charge it. It's yours. You can keep that extra profit and it makes a huge difference.
- [09:55]
Matt
That's right. Yeah. And we are going to talk about how you can turn not just thousands into millions, but even $1,000 a year into millions of dollars in retirement. But it's funny that you mentioned that you are not like a personal finance guy quite as much in your book. We're talking millions. That's the title of it. Your latest book, it is all about becoming a millionaire. But you don't start with investing. Like the first thing you mentioned in chapter one actually is about cutting spending, which is a little more personal financing. Can you just touch quickly on why it is that you started with that?
- [10:27]
Paul Merriman
Well, it's the foundation. If you look at the process of investing, just look at the math. So you start putting away, let's say the first year you put away $1,000. Let's say the market's up 10%. So let's say the thousand is 1100. You, you can be happy that you have 1100, but the 1100 basically came from you. And if you don't build that foundation. Yes, exactly. And that's the way investing works. And after a while, in fact, we have great tables that show how this works. But after a while, all of a sudden, the money that you're putting in is small compared to what the portfolio is. And then you're on, in essence, to the next journey. And that is that leverage of compound return that it just, it really boggles the mind to think that for a dollar a day, over 65 years, that could become worth $2 million a dollar a day from birth. I'm talking now. That I think is amazing. But it has to start with that first $365.
- [11:44]
Joel
So preg. Play this episode on their belly to help their newborns get accustomed to these ideas, these concepts right now. Right.
- [11:51]
Paul Merriman
I always wanted my ideas in the bellies of women. Yes, yes, thank you. Yes.
- [11:56]
Joel
Okay, so I'm curious to hear your thoughts on this, Paul. There was a Yale economist who came out with this term, consumption smoothing, basically saying that, hey, there's no need to start investing super young. We know that. Yes. Compounding returns. The earlier you start, the more that's going to build up, the more your money is going to be working on your behalf. But you're always going to make more money in the future. And you know what? You can increase the amount that you're investing later on in your 40s when you're more secure in your career. And to Matt and I, that feels like a behavioral miss. Maybe in a perfect economic cycle, it. It would work out for people, but it's also not ideal. So talk to me about starting early and whether or not kind of that idea of taking on a little more debt when you're younger and investing less, if that makes sense or not.
- [12:43]
Paul Merriman
Well, it's not what I preach, because my belief is, is that that first five years, assuming that you invested basically the same amount of money over a long period of time, that first five years can be worth 40% of what you have to live on by the time that you are 65 at retirement. And on top of that, when you're very young, you really can afford to take more risk. Smart risk, always smart risk, but more risk than when you get older. And so those early dollars, they are absolutely magic. And what if. What if you're fortunate enough to either have a parent, a grandparent, or a company that will match what you're putting in? And if you do now, you are showing this High responsibility in the eyes of the company or the parent or the grandparent and they're willing to help you along. Boy, if you don't take advantage of that, you are kissing. But this is just talking about bending over and picking up money off the ground. You can't pass it up.
- [13:54]
Matt
Yeah. And the folks who preach the message of that consumption smoothing, they're also counting on the best case scenario happening.
- [14:02]
Joel
You can't always predict that.
- [14:03]
Matt
Yes, that's not always going to happen. As opposed to, and this is why I felt it was worth highlighting the fact that cutting back on your spending and cutting expenses is such a clutch move is because that is something that you actually do have control over. That's something that is within your own sphere of influence as opposed to investing. And there is a certain degree of luck that comes with investing, depending on when it is that you first started investing, what the market's doing then or what the market's doing when you first retire.
- [14:32]
Joel
Yes.
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Matt
Sequence of returns, risk. So you have all of these X factors, but the ability for you to sock money away is something that is completely within your control.
- [14:41]
Paul Merriman
Well, and if you happen to hit the home run like 1995 to 1999 is your first five years, compound rate of return of the S&P 500 over 28% a year. If you started after that and for the next 20 years, the compound rate of return was about 6%. Boy, I mean there's. You don't know the future. And the sequence of returns, as you mentioned, that can be the luck that you need to be able to take advantage of. And I don't, I'm not suggesting, I'm sure you're not suggesting that people not have enjoy their life. But every study shows that most people who pay themselves first have the money go into the savings first, don't even miss it because they don't see it as part of what they have to live on. But of course, the corporations want everybody bit that you get in their pocket, not in yours. So you're fighting an uphill battle to say, no, I want to save for the future.
- [15:43]
Joel
Yeah, that's right. Okay, talk to me about how important fees are. There was a comment in the how to Money Facebook group recently and they said, oh, half a percent on that fund, that's not that big of a deal. Right. But you would beg to differ, Paul. And you would say half a percent is going to radically reduce the amount of money you have to spend in the future.
- [16:02]
Paul Merriman
And let me give you the numbers. Follow the math $6,000 a year for 40 years, $240,000. Then you go into retirement, take money out and then after 30 years you die. Okay, what do you leave and what did you spend? The difference between 8 and 8.5% during the accumulation period and 6 and 6 and a half percent during the distribution period. That's the half a percent you're talking about is $1.5 million.
- [16:33]
Matt
Oh my goodness, that's an entire retirement for somebody else.
- [16:37]
Joel
It seems so small in the moment, right, like the, oh, what's the difference between 0.05 and 0.5? But like that one tenth of a decimal place can be life changing.
- [16:46]
Paul Merriman
Well, and people who are selling load products, they'll say you only have to pay once. I mean this is not like this is going to impact you for a lifetime. That's totally false. A 5.75% commission load on a fund, on an equity fund actually costs you about a half a percent a year in lower expenses over a lifetime. So you know, they're smarter than you are if you don't take the time to find these things out. But once you know them, you're going to be a defender of the family fortune here and just understand those little bits become fortunes later on.
- [17:27]
Matt
And just a second ago you mentioned basically if we are to invest, to save and invest before that money even truly hits our spending accounts or our checking accounts, that you don't really even miss it. Talk to us a little bit about the Roth versus the traditional debate because you talk about the need to reduce and to minimize taxes.
- [17:46]
Paul Merriman
Yes.
- [17:47]
Matt
Just curious to hear your take on. Yeah, the Roth versus traditional, like whether or not you should pay tax now and than enjoy tax free growth or vice versa.
- [17:56]
Paul Merriman
Well, my belief is having started in this industry and marginal tax rates the first year that I got in the industry, 70% the year before, 90%. What we have no idea is what tax rates are going to be 30, 40, 50 years from now. My heart and my gut tell me they're going to be higher. At some point we're going to have to pay the bills that were, that we're accruing. And at that point they were paying the bills that were accruing and people got along just fine. That's the part that's so fascinating to me is while people didn't like it, they were living a pretty doggone good life. And how do we know that while we may have a relatively low tax rate now, that later on if we put away money that cannot be attached by the government and make it tax free. That could be a bonanza. And then it has to do with what you leave others because you can also make that Roth bonanza flow through to your heirs. And so, yes, you don't get the refund. But let me tell you, I've talked to a lot of kids and I've said, hey, what do you do with that refund? Oh, we went on a trip or we went, you know, we did something fun. There's nothing wrong with having fun. But I'm just saying that you just lost that money's tax free growth for the rest of your life. But that's always this thing. We have to decide, what do we give up to have more later. As my friend Paul Hayes, there's a free book that we now offer on our website called Spending youg Way to Wealth. And he reminds us saving is actually spending for later.
- [19:43]
Joel
Yeah, yeah, yep. Deferred consumption. I love what you said too about tax rates. I feel like that's really a really important consideration when we're talking about growing deficit.
- [19:51]
Matt
That's what we think.
- [19:51]
Joel
Yeah. And a growing national debt.
- [19:53]
Matt
I agree with you.
- [19:54]
Joel
It's a really important thing to keep in mind as you know, whether you're putting in traditional versus versus Roth accounts. But we've got more questions we want to get to on you and including. We want to talk about the two Fund for Life strategy. We want to talk about simple ways to grow that wealth for your future. We'll get to some questions with Paul on that right after this.
- [20:16]
Matt
There are plenty of personal finance rules that are really just rules of thumb. So I'm thinking about the 6040 portfolio. Giving away 10% to charity, having 25 times your expenses for retirement. But a non negotiable is having life insurance when there are others depending on your income, like when you have kids. Man, I've got five mouths counting on me. Joel. Not only do I want to provide for my family now, but also if I happen to die sooner than expected. That's when Ethos helps to provide some financial security.
- [20:47]
Joel
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- [21:03]
Matt
Take 10 minutes to get covered today with life insurance through Ethos. Get your free quote@ethos.com howtomoney that's ethos.com howtomoney Application times may vary. Rates may vary. Okay, Joel, I am excited about this one. Here on the show, we are all about comparing prices to save money on so many things in life. So why wouldn't we compare prices for our next ride share? Taking a few seconds to check Lyft can save you real money on your next ride. I did this last time. I caught a ride home from the airport after some travel and guess who came out on top of it was Lyft. Don't just price check with your flights and phone plans and groceries. Comparing rideshare prices will help you to save money every time you ride. Save money.
- [21:45]
Joel
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- [22:07]
Matt
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- [22:25]
Joel
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- [22:55]
Matt
We are back for the break and we are again joined by Paul Merriman. We're discussing how you can turn thousands of dollars into millions of dollars. And Paul, I guess we kind of talk more about the overall sort of philosophy. Different approach. I guess we kind of dove into some of the specifics as well. But we're now going to talk about the actual investments, the actual funds. Like you said earlier, the products.
- [23:16]
Joel
Yeah, you set the table nicely. Now let's dig in. Right.
- [23:19]
Matt
Exactly. The table has been set. You encourage folks to own stocks, but specifically to buy all of them. We see more videos floating around where there are supposed money influencers. They're just saying that only a few stocks make up most of the gains of the overall stock market. So. Which is actually true. So why not just Buy those specific stocks. That's what we should be doing, right? It's that easy, right?
- [23:42]
Paul Merriman
It is that. It is that easy. But the outcome is not that easy because we had, when I was young, we had it in the early 70s, the Nifty 50. And these were the 50 companies that generally were regarded as companies you could put aside and just leave that, those certificates in the locker box, a safety deposit box, and when you were ready to retire, just reach in, take a few shares, you know, and sell them as you go. Well, it turns out that owning all of the companies in The S&P 500 since 1972 produced a higher rate of return. Not because some of these companies weren't good. But believe it or not, when I mean, we look at Eastman Kodak, you look at Polaroid. In fact, ge. GE was considered a darling for a long, long time, wasn't. So what? The academics say that the more stocks you have in your portfolio, the higher the potential return because people aren't very good, even professional money managers aren't very good at picking the best stocks. But I want to hit on one thing and make it very clear because we kind of went right over it and went from bonds to stocks. And there are some, I don't know, 20 to 25% of millennials that do not want to go into the stock market because the stock market is risky. Well, I mentioned that a half a percent equals over a million the difference in the return of bonds over the last 95 years. I'm talking intermediate maturities and the return of the stock market, the S&P 500, 5% for bonds, 10% for the S&P 500, that is 5%, that is 10 1/2 of percents. That means it is legitimately a $10 million decision to go to where you think the safety is. And yet, if you look at the average return of the S&P 500 for all the 40 year periods, the average is 11%. If you looked at the best, it was 12 and a half. If you looked at the worst, it was 8.9. So anybody who thinks that they're going to go into bonds and that's going to be the safe place to be, you are based on all history leaving a bonanza on the table. But what you must do is you must understand the volatility that goes with that. And once you understand it and are willing to live with it, I think you're on your way. But you need to go after that extra $10 million.
- [26:34]
Joel
Yeah, I like that. And one the other thing that people are tempted to do right now is as yields have gone up on cash, people are saying, oh, I might just like stick a little more in the high yield savings account, keep more cash in the bank.
- [26:44]
Paul Merriman
Well, what you're doing, you don't maybe don't even realize you're chasing returns. And one of the biggest mistakes that investors make is chasing what's been doing well lately. As a matter of fact, it's kind of hard for people to believe, but those things that have been doing worse lately are apt to make more over the long term. And so that is a change of thinking. And it is one of the aspects of investing that makes it difficult. And that is that what is counterintuitive is normally the right thing to do. And I'm hoping that people will see a struggling. If we had a struggling stock market, that's not a time to be a concern. We're not talking about now. We're talking about many, many decades from now. Lower prices are good for young investors because you get to buy more shares. And, and that's a point of celebration, not sadness and fear.
- [27:49]
Joel
It's like a favorite pair of shoes being 60% off. You'd rather buy them then than when they're full price.
- [27:53]
Paul Merriman
Exactly.
- [27:53]
Matt
Everyone's going for the doors when they're, when there's a massive sale and we fail to see the opportunity in front of us. So you've advocated actually for something called the ultimate buy and hold strategy, like for decades. But then meeting with Jack Bogle, the founder of Vanguard. Yeah. That caused you to reconsider that a bit. Can you talk to us about the two funds for life strategy?
- [28:15]
Paul Merriman
Sure. And just to fill in the gap there, when I was an investment advisor and in my own personal account with my wife, we have 10 different equity funds. It's hugely diversified, big, small value growth rates, emerging markets, all of that stuff. But when I met with John Bogle, he really gave me a talking to. He believes in all those things too. That's all comes out of the academic community. That part is not a big deal. What he says is a big deal is that you've got to give them an investment strategy that they, if it's for do it yourself words. I'm not trying to help advisors. I'm trying to help people who don't want advisors or they want to be their own advisor. So he really motivated us to look more carefully. How could we produce the same kind of returns at about the same risk but only hold two funds instead of 10? Or in some cases three or four. But the bottom line is to make it simpler. And about a year before my meeting with Bogle, a fellow Chris Pedersen, and we're all volunteers, Chris volunteered to work with our foundation and he came up with this strategy that I think is one of the most clever strategies I've ever seen or portfolios and that is to combine a target Date fund, which is a wonderful way for people who don't want to fool around with their investments, don't want to worry, just want to put the hands the money in the hands of professionals and let them do it the way they think is best forever. Target date funds plus one other fund that has a history of making substantially higher returns with a small part of the portfolio. And those two funds together, they make it possible for somebody truly to be able to hit what I would call a home run in terms of long term return. And that second investment is what's called a small cap value fund. And they've been studied going back to 1928. They make 3, 4% better than the S&P 500 at more risk. I mean this is not a gimme. You're going to be taking more risk with that small part of your portfolio, but it's a very small part of your portfolio.
- [31:05]
Joel
I love the two funds because you're right, it is. It's really simple. It's the kind of behavioral thing that a lot of people can follow through. It's like I just need to buy these two things. Great, let me go on about my day. It's kind of like when Matt and I, when we shop at Aldi and there's not 42 ketchups to choose from. There's one and it just makes it a whole lot easier to, to not waste a whole bunch of time and a whole bunch of money standing there staring at the ketchups, which is the kind of thing I would do at a normal grocery store. Right. So, so behaviorally it makes sense. That's actually kind of what the Target D designed for in and of itself was to be this one stop shop for people. Why is it in your estimation that the target date to fund isn't quite enough, isn't really cutting it for a whole lot of investors, including younger investors. And why is it that they need to add the small cap value exposure?
- [31:50]
Paul Merriman
Well, you used a magic word and it was a magic word to John Bogle isn't quite enough. In fact, Target Date fund by itself, it's probably the best investment product that's ever been created and it will give you enough. The question becomes, is enough going to be enough or should we be trying to get what I would call more than enough? And the reason this is not about greed or wanting to be rich or anything. It's about helping you make a return that might make up for mistakes that happen along the way. Or maybe you don't get the best sequence of returns, you don't have the best luck. I believe that if most of us, our plans could somehow be reconstructed to get a slightly higher rate of return so that if we don't get that return that we want and that will get that return that we need, and if we fire too low, it may be something will happen in your life that will keep you from getting where you want to be. And let me tell you why I do believe a target date fund is enough. There was a study done by Wharton and they did it in cooperation with Vanguard. They looked at 1.2 million accounts retirement accounts at Vanguard. Some of them had no target date funds, some of them had all target date funds. And the studies were done and the result is this. Those people on average who use target date funds were likely to get about 2.3% more return than those people who were doing it themselves. Because there are so many mistakes a well meaning, do it yourself investor can make. And most of those mistakes are driven by our emotions. And so the beauty of that target date fund, it just takes all of those emotions out of that process. But I still, if you have the stomach for it, I still think adding a little bit of small cap value, 10%, 20%, I can make the case for 50%, but you don't have to go to 50. But even 10 or 20%, I think it's going to be a life changer. Keeping in mind that nobody, absolutely nobody knows where this market's going to be 30 or 40 years from now.
- [34:41]
Matt
Exactly. Yeah. Okay, so on that note, what if you're like, okay, I'm a robot, if I think I can handle the volatility? Would somebody who believes that, who feels that way, how comfortable would you be with them going all in on small cap value? And by the way, small cap value, it's more volatile. Historically, it's been more volatile than the S&P 500. And with that volatility, you get higher returns than the S&P 500 as well. But are there folks out there who you think should take this more aggressive
- [35:10]
Joel
strategy if they've got like an iron stomach?
- [35:12]
Paul Merriman
Yeah, you know, I, my wife and I, every time we have a grandchild, they Get a check. And that check is to underwrite their retirement savings for as long as it lasts in terms of going into, either into a Roth IRA or hopefully a Roth 401K. But what we have recommended to our kids to do with that money until it's time that those grandchildren qualify for a retirement account is to split it half in the S&P 500 and half in small cap value.
- [35:50]
Matt
Okay.
- [35:50]
Paul Merriman
Now they're going to leave a lot of money on the table. But here's the problem. People get disappointed way more easily than we imagine. You said be a robot. Well, I do think if you were a robot, I would still probably, I would still probably just defend you emotionally. Suggest half and half. You get about 2% more than just the S&P 500 if you were 50, 50. And by the way, the idea that it's more risky. A guy that I have the highest respect for, a guy named Ben Felix, he has some wonderful educational YouTube pieces. He did a study recently, he went back to 1927 and he looked at all of the 10 year periods every hundred and twenty consecutive months. How many of those hundred and twenty month periods did the S&P 500 lose money? 145 times. That's amazing. I had no idea it was that many times. And the average loss was 2.33%. Now you're not, at first, you're not going to believe what I'm about to tell you, but the academics have gone back and they dug out the returns of small cap value. In 108 of those 145 losing periods for the S&P 500, small cap value made money. And if you look at all 145 of those losing 120 month periods for the S&P 500, the average gain for small cap value was over 6.5%. So it isn't just that small cap value gives a better long term return that we're looking at here, but it's also a hugely historically successful balancing kind of. That's what you're after. I mean, why do you have many stocks in a portfolio? Because you can't trust one. Might you want some small and some value instead of having everything in large and mostly growth? Yes you would. Because it's more diversification. And that's one of the reasons that I'm not worried about the long term.
- [38:10]
Matt
Sure.
- [38:10]
Paul Merriman
I'm worried about the short term, always about the stock market. I'm 80 years old almost, so I don't want any long term bear markets. But again, if I Were a young person, I would just put that worry out of your mind. Do it. 50. 50. And we actually will have tables up on our site within a couple of months looking at every year since 1928.
- [38:36]
Joel
All right, well, talk to me about. You just said about, like you're not worried, right, about small cap value producing outsized returns for people who have more exposure to it over the decades. But I will say there have been a whole lot of hit pieces on small cap value recently in financial publications, in the Wall Street Journal, Market Watch, those kind of places, talking about, oh, small cap value, it's been in a slump. Is it dead? So I guess my question for you is it sounds like you still retain faith that more exposure to value stocks can help people outperform, even though we've had more recent history where small cap value has underperformed. Yeah.
- [39:13]
Paul Merriman
Well, this is another part of the story that I will be telling next week. And it shows there's a table called a telltale chart. The telltale chart compares the relative return to the S&P 500 going back to 1927. When that telltale chart is going down, it means that The S&P 500 was doing better. When it's going up, it means that small cap value is doing better. There were three periods that the small cap value underperformed the S&P 500 of 17 to 19 years. That is the way it is. And so right now we happen to be in one of those periods where small cap value hasn't done as well. The problem is we wait for something to get hot, to get on board.
- [40:17]
Matt
Well, this goes back to what you're saying about chasing returns.
- [40:19]
Paul Merriman
Yeah, exactly. And if I told you there's a possibility that getting in at the peak could mean you wait 17 years to in essence, break even. I don't, by the way. I don't mean that you won't have made money. I'm just saying that you would have been better off in the S&P 500. But here's the end result. The end result over that 95 or so years is that the small cap value was worth 13 times what the S&P 500 was. But you had to have a lot of patience or you needed to have time on your side. And here I am at 80, and I'm saying I'm not sure I have that time. And my wife asked me, wait a minute, is this money for us or is it for our kids? Oh, yeah, she's right. It doesn't matter that it doesn't do what I want it to right now.
- [41:18]
Matt
Doesn't matter for you.
- [41:19]
Paul Merriman
You know, I'm just being emotional.
- [41:21]
Matt
Gosh, this is making me possibly reevaluate what I've got going on, Paul, because I guess I'll be financially naked a little bit here, but all of my money that's invested in the market is. So aside from real estate, it is in the S&P 500. And so if I'm looking ahead, I'm looking decades and decades down the road, if I am interested in incorporating some small cap value, how would I go about that? Would I just start buying up some of that rather than Voo, which is the S&P 500 ETF.
- [41:49]
Paul Merriman
I'm going to make it easier and I'm going to make it better than Vanguard. Now when I say that, obviously I'm not talking about the future, but based on everything we know of what kind of small cap factors give the best return over the long term. It isn't a Vanguard fund, but it's a fund that's available at Vanguard on a commission free basis. And Chris Pedersen every two years updates his list of best in class ETFs and the one that has been at the top of the list, avuv, the Avantis Small Cap Value Fund. And so you can compare it to VBR or VIOV or. Yeah, there's about three of them I believe that are ETFs at Vanguard. Now it's not that it's better because these people are magic. It's better because, for example, VBR, the average size company is $6 billion more than twice the average size company in AVUV. Plus the companies in AVUV are higher quality, better earnings within the small cap value arena. So the question is, are you better than to go ahead and do that right now or do it over time? Well, here's the problem. If you do it over time on a dollar cost average basis, you could take the next 12 or 24 months to do that and everything would be going just fine. And then at the end of 24 months, the VBR turns out to be the big performer for the next 10 years. A year or two years is a random event. This is so hard for people, I think a lot of people to understand. And if you base your decisions on even 10 years performance, what do you do with the S&P 500 after it loses 1% a year for 10 years? Why would you ever invest in that? Well, because over the long run they'll tell you it will do better than that. But it doesn't change the decision. Dollar cost average, go ahead and get it right right now. I would say go ahead and get it right. Or better yet, if you don't really trust that, take half your money and do it that way now. And dollar cost average in the other half. All right.
- [44:30]
Joel
Yeah, I like it.
- [44:31]
Matt
Paul, We've got a few more questions we're going to get to. Actually, I might have a little small one there about kids and investing. We've got a couple other questions to get to. We'll get to all that right after the break. Okay, Joel, I am excited about this one. Here on the show, we are all about comparing prices to save money on so many things in life. So why wouldn't we compare prices for our next ride share? Taking a few seconds to check Lyft can save you real money on your next ride. I did this the last time I caught a ride home from the airport after some travel and guess who came out on top? It was Lyft. Don't just price check with your flights and phone plans and groceries. Comparing rideshare prices will help you to save money every time you ride. Save money. Check Lyft Man.
- [45:18]
Joel
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- [46:23]
Matt
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- [46:38]
Joel
Get started@fidelity.com future expenses charged by your investments and other costs and fees associated with trading or transacting in your account. Apply Fidelity Brokerage Services member NYSE sipc. We're back, still talking with Paul Merryman. We're talking about turning thousands into millions. And I love that we're kind of going into depth on the two funds for life approach. It's, it's so good and I think it's, it's helpful for people because it's, it's simple but it hopefully for most young folks who have a long timeline will accelerate your returns, meaning you've got more money in retirement. But Paul, you're talking about how a lot of the money that you've got invested is for kids, is potentially even for grandkids, which is awesome. A lot of folks who are nearing retirement age, that's money that they need to live on. Right. And so you talk about how the biggest risk in the index fund only strategy is the ability to reduce risk in those later years and that your two fund strategy creates a better glide path that makes it easier to start drawing down on those retirement funds. How, how is that?
- [47:41]
Paul Merriman
Well, what happens in a target date fund is that the people who manage it, they know when you want to retire. If you're sitting in a 2065 target date fund, that's, that's how they work. And so they are going to look not at you personally, but at people like you. And they're going to be conservative. Just got to understand that this is, they're not going to take a lot of extra risk, but they are going to, they're going to manage the money very similar to how a pension fund would manage the money. And as you get closer to retirement because it now instead of needing to produce growth, also needs to produce income, they will be transitioning part of the portfolio to where you might be 40% in bonds or 50% in bonds. And that's what my wife and I, we're 50, 50 stocks and bonds because we don't want to take the risk of an all equity portfolio on the short term. So that's the beauty of a target date fund. Not only can you be 21 years old and start putting your hundred dollars a month into this fund, but you can when you retire, start taking money out of the same fund until you die. It's an amazing thing to be able to have and you never have to make a decision except when you think you're gonna retire.
- [49:02]
Matt
I love it.
- [49:02]
Joel
Okay.
- [49:03]
Matt
So Paul, you mentioned how you've got grandkids and you're basically, I think you said you're underwriting their retirement. Basically it's like seed money, the head start, essentially. Do you often think about that? I guess I find myself wondering if money that is set aside not only for kids, but like you said, grandkids where, man, that is gonna be a substantial amount of money off in the future. Are you ever concerned that that legacy wealth that you're passing down, that it'll undermine kids ambition?
- [49:32]
Paul Merriman
But let me give you a really easy one that is just, it's outrageous. A child is born, you give them the first year $365 and that is invested in small cap value if you wanted to. And in essence that 365 is going to find its way into a Roth IRA as soon as possible. Now if that $365 grows at 12%, the compound rate of return of the average 40 year period for small cap value, 16% going back to 1928, that I don't think is going to happen again. But I will say that I think 12%, if the S&P 500 makes 10, is a legitimate return. If you get 12% and that money sits there for 70 years, don't ever add anything to it, just get it into that Roth ira, it would be worth about a million dollars. And if it had compounded at 10%, it would be worth about 488. Okay, 488,000. Now that's the income for when the child is 70. How about funding 71? Great. At their first birthday you put in another 365, you open a separate account that is meant to be the retirement at age 72. So by the time they're 18 or 21 years old, what you'd explain to the kid is that you've started this for them. This money is your gift to them. And I even recommend that you like for this granddaughter that was just born for us, she is going to get a letter from us, she's going to get a video from us, she's going to get a podcast from us so that when she's 18, because we'll be gone, more than likely that she will know what was the dream that we had for her. This is not a get rich quick scheme, this is a get rich slowly. And if you did that for 18 years, you have in essence help fund ages 70 through 88 in retirement.
- [51:53]
Joel
No, I think that's great because I think what you're speaking to is the fact that not only are you helping with the seed money, but you're offering the education and the reason why you're doing it too, which I think helps complete the picture. And sometimes for some parents it's all about like that concept of generational wealth I think can be a good one, but it can be taken too far. And so you have to, to think about how you're passing on the education that's almost more important than the money. Oh yeah, but if you can pass on, you know, some seed money early on too, that can be, that can be helpful for sure and make a big difference in their, in their long term future. Paul, I'm curious to hear your thoughts about the financial advice industry and like you've worked so hard for so many years to make this sort of investment advice easy for folks to understand and to implement. But you also talked earlier about how financial advisors are expected to do more. They need to have specific, like tax knowledge and they're there for behavioral help as well along the way. Do you feel like the value proposition of financial advisors has gone down in an era of DIY investing that is so cheap and simple to actually pull off?
- [53:03]
Paul Merriman
Well, my belief is that if a person can learn how to do this on their own, it is a 2 to 3 million dollar payoff. So having said that, I have been on a diet since the fifth grade. I have lost thousands and thousands of pounds. I know how to lose weight and yet I am still at almost age 80, 30 pounds overweight. I have four stints, I have high blood pressure, I have high cholesterol, I have diabetes. I have every motivation to do this right. But I just love to eat and to celebrate today. Now I can't. I have never been able to put it on automatic. But I will tell you that to the extent that you can put it on automatic and just let it ride, the payoff is huge. But if you can't, if you're afraid to invest, a good advisor will do that for you. It doesn't mean they know the future any better than you do. They don't, they can't, they don't know anything about the future. They know a lot about the past. You know, we have over 200 tables of numbers that are trying to help people understand the past and, but if you don't get it and you can't take it and it's just too much to ask, then you have somebody else do it. And having said that, my wife and I have an advisor now. Part of it is for the other stuff that Go beyond just the investment part. And I want to make sure that my wife, if I go first, and she's a few years younger and I'm likely to, that she'll be taken care of. But I don't want to even think about my own money. We simply ask for a check the first of each year that is a percentage of the money we have. We typically try to give away 30% of it, and it's real easy to give away 30% because our foundation needs lots of money. And so I write a lot of checks. And by the way, Western Washington University will be announcing a program that we are underwriting that will give financial literacy required about 40 hours of required classes before you can graduate from Western. And I think it is. It's unusual. And we're not there to teach people how to buy stocks. We don't want them to learn how to buy stocks. We want them to be in index funds. We want them to understand budgeting. We want them to understand borrowing money. We want them to understand a 401k plan. We want to make sure they have the language so that they're not going to be emotionally overwrought with having to face stuff they don't understand. They will understand the basics. And so my hope is that we're going to help a lot of young people do this better and that other universities will do what we're doing.
- [56:22]
Joel
That's great.
- [56:23]
Matt
I love it.
- [56:23]
Paul Merriman
Yeah.
- [56:24]
Matt
Whether that's assistance with financial literacy and financial education, or like you were saying, when it comes to advisors, if you are not able to take that initial step to provide some sort of action, because it doesn't matter if you. If your returns are less because you're paying a small fee to an advisor, if the alternative is that you're not going to save and invest at all.
- [56:42]
Joel
Right.
- [56:43]
Matt
So. So you kind of have to look at the whole picture. Paul, Your foundation does an excellent job at doing that, and we really appreciate you.
- [56:50]
Joel
Thank you.
- [56:50]
Matt
You speaking with us today, and for folks who want to learn, I mean, like you said, you have an incredible resource. Being your website, some of the different tables and information that you have up there.
- [57:01]
Paul Merriman
Yeah. And I have to say, that book, we're talking millions, where we have the free PDF. The reason that PDF is free is because that way you can forward it to everybody that you know that might be helped by that book. Sure, it'd be nice to have the royalties at Amazon, but I'd much rather have somebody have that book and be able to share it with others that
- [57:29]
Joel
is impressive and your life's work, it has helped so many people and it's gonna help a lot of people today. So thank you so much for joining us, man. We really appreciate it.
- [57:37]
Paul Merriman
Good luck in your venture. You guys are doing a great job.
- [57:40]
Joel
Thank you.
- [57:40]
Matt
Paul. Joel. You know, like there are multiple folks who say, oh, you guys are doing a great job. But I think when Paul says it, he really means it. And it's because I think we do have such a similar mission in how it is that we're approaching not only personal finance, but in Paul's case, specifically investing. We're just not as smart as Paul. No, no, we're. I was going to say maybe half as smart because we're basically half his age. But I don't even know if that's the case. But, but I mean, I'm going to cut straight to it. I think my big takeaway is that I am going to have to figure out how I'm going to start implementing some small cap into my investment portfolio. I don't know if I'm going to pull the switch and go 5050 like he has for his grandkids right now. Half the s and P500, half small cap. Specifically the one that he mentioned was avuv. That's right. We got to figure out a better one. Avove. I don't know, it doesn't really flow off the tongue like FC rocks or even Voorhees. But yeah, I'm not exactly sure how it is I'm going to start implementing that. But man, I am most definitely going to be taking another look because yeah, nobody knows the future. And if you think, oh well, yeah, small cap value is dead, you're guessing. But what is fact is looking at history, looking at the past and knowing what it is, knowing the performance of something like small cap value versus the S&P over the past 100 years.
- [59:01]
Joel
Basically. I love the two funds approach thing because you and I were all about simple. The reason is, is because a whole lot of people, they start to hear a lot of gobbledygook from so called investment experts and they're recommended to stock their money away in 12, 14, 15 ETFs. And they're like, I don't know what I'm doing, I don't even know what I'm buying.
- [59:19]
Matt
And it just over. It muddies and muddies. The water overcomplicates it.
- [59:23]
Joel
Oftentimes what happens is they walk away from that meeting and they don't do anything. And that is part of our reason
- [59:29]
Matt
and then folks end up turning to advisors and they're paying out the noes. But yes, that is better than, than not investing at all.
- [59:36]
Joel
Sure.
- [59:36]
Matt
But there is a simple pathway, a simple way.
- [59:38]
Joel
And so that's why we, we've always talked about like that simple index fund strategy approach for people in the wealth building phase of their life. And this I feel like this two fund strategy really helps keep it simple for DIY investors while adding some, some potential upside benefit from, from returns right over the years. So I, I love and I think
- [59:55]
Matt
it historically better returns than something like just moving forward with the Total Stock Market Index Fund or even the s and P500.
- [60:02]
Joel
It makes it easier then when you're in the drawdown phase of your life too. Like he talked about towards the end. But I love too what he said about the first five years of investing can be the equivalent of 40% of what you live on in retirement. And so that idea of consumption smoothing, you and I have kind of taken it to task multiple times on the show because we just think it's the antithesis of the right behavioral moves to be making if you want to grow a significant nest egg for your future. And to say I'll get started 10, 15 years from now, but will you? Will you actually? And so I think that knowing that those first five years are so important, that's why I'm so energized when I hear listeners who are in their teens and 20s getting started because I'm saying after it, that head start is going to catapult you above the rest and it's going to make it actually so much easier in future years when your expenses grow and let's say maybe start a family or something like that, Just having done it, being an investor, doing it consistently over a longer period of time is going to be better. You're going to be better off in the long run.
- [61:03]
Matt
Absolutely. Yeah. And I will say I don't have as much wisdom as Paul does. Right. But that being said, every season of life that I've entered into, I am so glad that we saved as much as we did early on.
- [61:15]
Joel
Yes.
- [61:16]
Matt
Every year that passes, I want to spend a little bit more money than I used to. I don't want to reign that spending in necessarily because like you said, we've started a family and there's just other experiences. Even if you don't have kids, do you not now want to in your late 30s start doing a little more traveling with your significant other or your spouse? The ability and the flexibility that you have to live life a little more on your own terms, even. Let's forget travel. Let's just say what you're saying yes to. When it comes to your job or your career, it just opens up so many opportunities to you, and that is so incredibly valuable.
- [61:51]
Joel
Well, and what's the biggest risk? There's the occasional person that's like hardcore in the fire crowd that says, oh, man, I saved too much. That.
- [61:58]
Matt
That is not the majority.
- [61:58]
Joel
That is the rare exception. That is the rare exception. And we don't want you to be that person either, because we want you to be balanced and enjoy spending things on. Enjoy spending money on the things you care about in the here and now
- [62:07]
Matt
also, which is why we quite literally put our money where our mouth is. I almost said that when you said that earlier, and I kept myself from interrupting you because we are drinking a beer during this episode, quite fittingly, actually. We're enjoying a discipline. This is double by Bold Monk. What were your thoughts on this beer?
- [62:26]
Joel
And not a double ipa. Dubel, like in the. The Belgian sense. Right.
- [62:30]
Matt
That's how the Belgian scent, which.
- [62:32]
Joel
Which is kind of like a light brown with some of those Belgian yeasts and spices. I thought this was a.
- [62:36]
Matt
But pretty light on the spices, I would say.
- [62:37]
Joel
But is there's a great representation of a Du Bell. And so if you're, like, trying to. And I don't know, we're double pronouncing them. Right. But yeah, but if you.
- [62:44]
Matt
If you're able to American. Americanize it.
- [62:47]
Joel
Well, doubles, Dubels and. And quads are my favorite styles of Belgian beers that. Well, aside from the spontaneously fermented. But I love a good quad, too. And this is kind of like the lighter version of a quad. It's got some of those notes going on, but it's super accessible for lots of folks. So I really dug this one.
- [63:05]
Matt
Totally. Yeah. Think about Dubel as a European brown ale. Like, in America, we've got browns. If you are looking for an exotic brown, look to the Belgian shelf and pick yourself up a Dubel.
- [63:18]
Joel
Maybe a little more refined, too. I don't know.
- [63:20]
Matt
I don't know. Maybe there's some really good brown. Nice browns out there. That's not a style that a lot of American craft breweries have latched onto, though. Interestingly enough, there's just fewer notes that you can draw out of it.
- [63:33]
Joel
A good brown, though, like, especially like an imperial brown, now in October, is an ideal. Ideal beverage to be consuming.
- [63:40]
Matt
We need to find more of those for the rest of this year, but we will include some of the different resources we mentioned during this episode up in our show notes. And yes, we will link to and post the telltale chart that Paul was referencing during our conversation, but you can find that up on the website@howtomoney.com but buddy, that's going to be it for this one. Until next time, Best Friends Out. Best Friends Out.
- [64:18]
Joel
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Paul Merriman
how do you even find the right buyer?
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Matt
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Joel
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Matt
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Paul Merriman
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Matt
focus on running your business.
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Paul Merriman
Good deals, good people.
- [64:41]
Matt
Visit t world.com okay Joel, I am excited about this one. Here on the show we are all about comparing prices to save money on so many things in life. So why wouldn't we compare prices for our next ride share? Taking a few seconds to check Lyft can save you real money on your next ride. And I did this last time I caught a ride home from the airport after some travel and guess who came out on top? It was Lyft. Don't just price check with your flights and phone plans and groceries. Comparing rideshare prices will help you to save money every time you ride. Save money Check Lyft say you've always
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Joel
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Matt
spontaneously doing something extra for a loved one? Use Empower and get good at money so you can be a little bad. Join their 20 million customers today@empower.com not an empower client, paid or sponsored.
- [65:46]
Paul Merriman
This is an iHeart podcast. Guaranteed Human.