Podcast 110: Evidence-Based Investing, Index Funds & Staying the Course, with Paul Merriman
In this episode of Boldin Your Money, host Steve Chen sits down with legendary investor and educator Paul Merriman to discuss the psychology of investing, the dangers of speculation, index funds, factor investing, long-term wealth building, and why staying the course remains one of the most important principles in personal finance.
Paul shares lessons from nearly six decades in the investing industry, including his early days as a stockbroker in the 1960s, witnessing firsthand how Wall Street incentives shaped investor behavior, and why he ultimately became passionate about financial education and evidence-based investing.
The conversation explores why so many investors struggle emotionally during market downturns, how speculation differs from investing, why low-cost index funds transformed personal finance, and how younger generations are being pulled toward gambling-like investing behavior through apps, crypto, and prediction markets.
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Transcription
Announcer (00:00:00):
This episode is brought to you by the Boldin Financial Planning Platform, formerly New Retirement. Create a financial plan for free at Boldin.com.
Steve Chen (00:00:10):
Hi folks. It’s Steve Chen from Boldin Your Money podcast and today we’re joined by a very special guest, Paul Merriman. He is widely known as one of the most trusted voices in evidence-based investing and he’s got a career that spans six decades. And he started as a stockbroker back in 1966, before I was here on this planet. He built a $1.6 billion RIA and then sold it in 2012. And now he’s focused on education and he runs the Merriman Financial Education Foundation. And he has got a team working there to help people get more financially literate. And he’s a strong voice and definitely I’ve heard of Paul. Paul, I’ve heard of you from friends and other influencers in the space. So it’s great to have you join us.
Thanks for making the time.
Paul Merriman (00:00:56):
It is really great to be here. Thanks, Steve.
Steve Chen (00:00:59):
Obviously you’ve had a very long career and you’ve seen a lot as financial services and investing has evolved. I would love if you could give a quick recap and maybe some of the biggest lessons that you’ve learned over your career.
Paul Merriman (00:01:12):
Well, yes, and I started with a sense of excitement and opportunity. I was about 19 when I decided I wanted to be a stockbroker. And then once I got into the industry at age 22, I quickly learned that at the end of the day, first and foremost, it was about the firm. And it’s not that they didn’t take care of their clients, they did, but it was a matter of doing what the firm wanted to do. And if in fact one believed that you should buy and hold a stock forever. And in fact, in those days, Steve, we used to have to … The client would get the certificate and then we’d take it down to the bank and they’d put it inside of a lockbox. And then when they sold it, they had to retrieve it and come back to the firm. But at the end of the day, the industry doesn’t really want people to buy and hold.
(00:02:15):
They want them to do things that create activity. And it’s only when that activity is going on that they’re making money. And I was told by the old timers, by the way, the old timers were in their 40s or in their 30s, that what this business was really about was to become a friend of the family. A friend that to fire you would be as difficult as kicking a kid out of the house. And also I was kind of shocked to hear that when the market is up and doing well, if you don’t sell and push hard, when the market’s doing well, you’re going to find out you cannot get them to buy anything when the market is low. So you need to make your money at the very time that the investors are probably doing the wrong thing. And so that was very disheartening.
(00:03:14):
And understanding all those conflicts of interest, I got out of the business.
Steve Chen (00:03:19):
Well, it’s good that you saw that. There’s a famous quote, it’s hard to convince a person to do the right thing when their way to make money is essentially counter to that. I’m butchering the quote, but basically that’s the-
Paul Merriman (00:03:35):
But it’s a great business to be in.
Steve Chen (00:03:38):
I
Paul Merriman (00:03:38):
Mean, advisors make … Of course, today advisors are nothing like what we were in 1966. We were just stock jockeys. Nobody knew what a financial planner was. And of course, nobody knew what an index fund was and you didn’t have IRAs. I mean, it was a whole different world then.
Steve Chen (00:03:58):
Yeah. I mean, I think what’s interesting is how much … I mean, it’s basically all incentives. The incentives drive the system. And so back in the day it was like, okay, hey, investing is new. Okay, guess what? We’re going to have retail investors. They can base stocks, but we make money when people trade stocks. And then you used to make a lot of money. And then Schwab came along and it was like, guess what? We’ll be a discount brokerage, but we still make money trading stocks. I worked at Schwab for a while. They tracked darts, daily average retail trades. And that was basically the metric that drove it. And then things shifted. And so got away from those incentives, but the incentives today around a wealth advisor are still making money on your money and that still drives the behavior, which is like, let’s accumulate a lot of money, I’ll babysit your money.
(00:04:51):
I do think that what you said about being the best friend and being hard to fire totally resonates. That is still very true for wealth. I mean, they play an important role, but that’s very true.
Paul Merriman (00:05:02):
And I do think that the reality is this. The educators are trying to get people to buy and hold truly, to create an investment that you can hold for the next 40 to 60 years. At the same time, the way the rest of the industry gets paid is to get you to quit doing what you’re doing and they need to get you to do something different. And so what is a poor investor to believe when a friend at church is saying, “No, no, no, index funds are not a good idea. You need to go where there’s better management.” And all of the tricks of the trade are costing investors and the beauty when you’re a teacher is that you truly as a teacher have to act as a fiduciary because you’re taking the student up to a decision point, stocks versus bonds or no loads versus loads.
(00:06:08):
And you’re going to help them make this what we know is a huge decision and you want them to get that right, but not for the next five minutes. You’re trying to get them to make that right for the rest of their life.
Steve Chen (00:06:22):
Yeah. I think that I remember talking with Jonathan Clements and the biggest lesson I took from … He wrote for The Wall Street Journal for a long time who was the personal finance person. The biggest thing he shared was just like, what most people need to do is they do need to invest. Just if you want to get ahead financially. I mean, saving is great. It’s super important, but inflation is real and we’re all feeling it, especially right now. The purchasing power of your dollars declines over time. So even if you do a great job saving, it’s really hard to stay in step with what prices are doing.
(00:06:59):
The American economy is super vibrant and to get ahead is like, have your dollars work for you. And the best way to have your dollars work for you is to stick them in the US economy, invest in these companies, but it’s hard to get right and there’s a lot of noise. It’s like, “Oh, pick this, pick…” And it’s all full of survivor bias, right? It’s like you meet the person invested in Nvidia or Apple 10 years ago or 30 years ago and they’re like, “Yeah, I’m rich.” There’s a lot of other people that blew up along the way, but if you buy the whole US economy or the whole world economy, which generally goes up into the right, you’ll do better. But most people, they don’t understand that. They need to get into it.
Paul Merriman (00:07:38):
Well, and not only that, and I’m talking to a couple hundred college kids next week, I’m trying to convince them that betting on whether the president will use the word greatest or best or something and they’re betting on a word that a person will say and thinking that that is going to be their path to financial independence is trying to do something that the studies now show that a little tiny percentage … I mean, it’s less than a couple percent of the people are making most of the money in that gambling thing and the people they’re gambling against are people that don’t know anything and don’t know what they know. And as you and I know, sometimes they even know before everybody else knows because they have an inside track and you’re fighting all of these forces including the lottery. And so how do you make the case that the highest probability of success is investing like Warren Buffett has and every famous investor that we know has in terms of accumulating great wealth.
(00:08:58):
And the beauty is, and this is what gives me hope, Steve, is investing has never been more efficient. It has never been less costly. It has never been more diversified. It has never had better tax. I mean, you talk about people being able to do a Roth IRA for the rest of their life or a Roth 401. We’re talking about levels of efficiency at all those points that we want to try to control what we can control. So if we can just get them now to take advantage of all of these efficiencies, but the people who make the big money are hawking the inefficiencies. So this is the battle that’s going on and so we come into their life for an hour or two and in my case as a teacher, it may only be an hour or two and then I’m history and right along with the history of investing that we try to teach.
(00:10:01):
And so how do we hold a place in their mind to do the right thing for the rest of their life?
Steve Chen (00:10:08):
Well, I think the hard part is it’s so interesting. It’s the same stuff, right? We’re all learning the same lessons. It’s like I have young adult kids, college kids, and a high school kid and males and they love risk. It’s hard to fight human nature and people don’t understand the difference between speculation and investing. They see their friends, they love risk. They see their friends getting “rich fast.” They love that Robinhood tapped into this. They basically gamified and turned investing into half gambling, half investing, right? But you can invest there, but you can also essentially speculate there and speculation is a form of gambling. And it’s exciting. These prediction markets, poly marketings are blown up. It’s pretty cool. I mean, it’s fun, but it’s not investing. It’s different. I don’t think people understand that.
Paul Merriman (00:10:58):
It is built just like Las Vegas is to take your money eventually. Do you do it long enough? It is actually built to take your money. On the other hand, with investing in low cost index funds, they are actually built for you to, in essence, take you become the house because you’re not paying the big fees and you’re not counting on one company. As a matter of fact, for those young people, Steve, that think they want risk, how much more risk do you want than a portfolio that from time to time goes down 50%? Because that is what the S&P 500 has done three times in my lifetime and the NASDAQ has gone down 80% once in my lifetime, in fact, almost twice. And I had one day where the portfolio fell by 22%. How much more risk do your kids want?
Steve Chen (00:12:04):
Right. Well, I think it’s hard for them to appreciate it until they live through it. So if you were here in the dotcom glory days and then subsequent crash, and then I had a huge drawdown and then 2008 and then in 2020, COVID, you got tested if you were in the market. Okay. I remember having coffee with a friend of mine and he’s like, “Yeah, we are … ” In 2008, he’s like, “We are losing hundreds of thousands of dollars a day.” And this is like a mid-career person at that point who’s actually a friend of mine, he actually was the first person who mentioned your name to me. He is a long-term index buy and hold investor, but even then it was like, “Oh, it’s so painful. It’s been saving.” It’s like, oh, he probably had low millions and then drawing down and you’re like, “I’m so much pain.” But time goes by and almost 20 years later, now probably tens of millions of dollars.
(00:13:01):
And so back if he looks back, it’s like, who cares? A few hundred thousand dollars. But in the time it’s so painful. And what a lot of people happens is they then freak out and they can’t control their own behavior. They sell
(00:13:12):
At the bottom and then they wait.
Paul Merriman (00:13:15):
And there’s more bad news there, I think, Steve. And that is the early loss, the early mistake that an investor makes, that can color their confidence. At the end of the day, this business is about confidence and faith. I mean, it’s not a religious faith, but it’s a faith in the future of our system. And if you lose that confidence, if the first experience is that you put money into something that you were told by somebody who you thought was smart and that you could trust and then it goes away and you lose everything and that does happen with a lot of investors with those early investments because they don’t invest, they speculate. And if that experience then leads to, “Oh no, no, no, that’s not for me. I’m never putting my money there again, then yeah, good for your friend who got back in and did it again.” But a lot of people decide never doing that again or they sell out in March of 2009 and they’re out of the market for 15 years because they don’t trust the market.
(00:14:28):
And finally they hear it’s okay again and then you know what happens next. They get in closer to the top than the bottom. And so my hope is, well, in fact, I know it’s not just hope we are impacting a small number of people with our work, but I’ll be dead and buried in the next decade, but if I could come back in 50, 60 years, I will bet that only a few of them will have been able to stay the course. And what we would all like to know is what is it about that person that allowed them to stay the course? And I can tell you part of it, I can confirm my experience of all the people that I know stayed the course with index funds, engineers, all the people that I know that stayed the course with those kinds of decisions, they are people who understand evidence, historical evidence, which is key because the historical evidence is very different than the sales pitch of what’s good lately.
(00:15:36):
And that history exposes how far down down is and how far up is and the advantage of buying when it’s down. I mean, that’s good for a young person to have the opportunity to go through a market that I don’t want to happen to me in the last days of my life. And so we can win, but it is a hard fight.
Steve Chen (00:16:02):
Yeah, it’s interesting. I think that part of this is just generational knowledge and having people that have done it before explain it to you. We see a lot of our use … So it’s interesting, your engineering thing, a lot of our users are engineers. They’re quantitative people. I think they do understand the math, they look at the systems, they have systems thinking, but a lot of this stuff also I think runs on families. If you have a financially literate parent, the probability you’re going to have a good outcome is much higher. Well, one, you’re more likely to get money from your parents. That is real. The wealth concentration, what’s happening in this country is real. There are people that get it, they’ve built wealth and some of them are super rich, but there’s more and more of these 401k millionaires that are out there and they’re going to give money to their kids.
(00:16:51):
And then there’s unfortunately still half this country that has no money. But having someone that’s like … I’ve seen this. I remember telling my oldest son, we had this series of conversations when he was in college with his fraternity brothers cornering the market for some crypto coin, literally. He’s like, “Hey, I took 2,000 bucks and now it’s worth 20.” And then two days later he’s like, “It’s worth 40,000 bucks.” He’s like texting us. And then a few days later, he’s like, “It’s 80,000 bucks.” And then he’s like, “It’s 160,000.” And I’m like, dude,
(00:17:24):
I remember buying e-trade and putting 40 grand into it and it went to 400,000. This is during the dotcom thing. And I was like, “That feels like a lot of money.” It was a lot of money, but I had other money and I was like, “Ah, whatever, it’s gone up. I’ll let it ride.” And this whole understanding and seeing this before and then looking back and’s like, “Oh, you know what? The smartest thing you’ve done is diversified and just rebalanced away from that.” I would’ve kept a lot more of that money instead of writing it right back down. I was like, “This is not sustainable and you should think about this,” but of course he didn’t want to do it, rides it right back down. And the other thing he didn’t understand was that he and his fraternity brothers who at one point had $10 million
Paul Merriman (00:18:05):
On
Steve Chen (00:18:05):
Paper of this crypto, they owned the whole thing. They were just selling to each other. I don’t think people understand the depth of the market, the market dynamics, you can own the whole thing and manipulate the market and not realize it and then whatever. It’s all on paper.
Paul Merriman (00:18:23):
Well, the last week of my training at the New York Institute of Finance with the brokerage company that I was working for, they put all of their folks through that process in New York and the last day the fellows said, “Now look, you’re about to go back to your respective offices and you’re going to go out.” And this is 1966 and it was a pretty frothy period in the market and you were going to sell your client stocks. And I’m just going to tell you right now, you are a fool to sell them that stock, but you’re going to do that and they’re going to be a fool to buy it. Now, what you don’t want to do is let them hold that very long because you got to find a bigger fool to sell it to, which by the way is rewarding the house with the commissions that it costs to do that.
(00:19:21):
But what you don’t want your client to end up being is the biggest fool. Well, nobody has ever talked about a legitimate investment like you’re a fool to buy it. You put your money into the S&P 500. Some of those are going to go bankrupt. We know that for a fact because they have in the past and we know that the markets from time to time won’t want to pay much for whatever earnings companies have. I’ve seen a period of time when the public was only willing and the professionals to pay seven or eight times earnings for what were considered to be big growth companies. And so there’s just a lot we don’t know, but we do know that when you invest, you don’t have to think of yourself as being a fool for having done it.
Steve Chen (00:20:17):
I think it’s like 30 times right now is what the average PE ratio is right now.
Paul Merriman (00:20:23):
Yeah, it depends on what group you look at. It can go higher. But when we look back at the top of the market in 99, the PE ratios then when they were out of sight are half of what they were in Japan when Japan hit its peak about a decade earlier. And so what we know is, and anybody who lived through that say, how is it possible that the value of property in Tokyo was equal to the value of the … And I’m trying to remember the numbers here, so I’m going to make it up, but you’re going to get the idea equal to all of the property in the United States, you had a choice. You could have the property in Tokyo or you could have all of the property in the entire United States because property values were just sky high, price earnings ratios were just sky high and yet people there believed it because it was their country doing it.
(00:21:34):
Home bias, home bias is or can be a killer.
Steve Chen (00:21:40):
Yeah, no, for sure. Well, I think one of the things people say is if you end up buying … J. Collins, The Simple Path to Wealth, he talks about the one fund portfolio just by VT. If you’re not sure what to do by VTSAX, which is like the whole … It’s the US stock market, but through that you end up getting some … A lot of those companies do business overseas, you do get some international exposure. So there are definitely simple ways. Well, everybody listening, hopefully you take a minute, watch Wall Street, watch Boiler Room, see similar movies, see how it was to sell what stockbrokers did to sell stocks and how they made money and get smart about how to invest long term. And it’s actually unfortunately pretty boring, but it works. It requires time, but it works. If you look at people around you that end up with money, they’ve kind of mostly either been entrepreneurs, right?
(00:22:36):
They have taken some risk along the way, but they’re also long-term oriented investors typically. Paul, would love to dive into a little bit more about your thesis about working about investing, because I know it’s not just index investing. You also think about factor investing. And I would love to, if you could take people through your thinking and how you arrived at your thesis here.
Paul Merriman (00:23:00):
Well, sure. And the index fund, as far as I’m concerned, is the second greatest mutual fund ever created. And we all are thankful that John Bogle, they were around when he started it, but they weren’t around for the public. He brought it to the public. And the beauty of that index fund is that you now have 500 companies instead of 10 or 20. And when I went through the course back in New York, they taught us you only need 10 or 20 companies in a portfolio to have enough diversification. And along comes Bogle and his idea, it should be the market. And it turned out he had wonderful, good fortune because for the first 25 years, the S&P 500 compounded at about 17% a year. Now, who wouldn’t want to believe that that’s the thing to do? Now the bad news is for the next 10 years it lost money.
(00:24:11):
So it reverted back to the mean, but in the meantime, it did what Bogle said it would do. And what he understood about indexing was that you base your index decisions on the size of the company. And so right now, as we know, there are a handful of companies, and this is not unusual historically, that represent a very large percentage of the index because how large they are and then Nvidia would come to mind and Microsoft would come to mind, but you also, when you get the S&P 500, you get Exxon and you get the drug companies and you get the retail, the Amazons of the world or whatever they are out there that are working hard to build their companies bigger. So in theory, the basic design of that index was based on big market weighted, cap weighted. So along come the academics and I have always had a sense that I trusted the academics more than I trusted Wall Street.
(00:25:26):
Remembering I cut my teeth on a part of Wall Street that I found wasn’t really working for the good of the investors necessarily. And so I liked the work from the academics and what the academics found out, John Bogle didn’t know about this when he started his fund, but they found out was that over a very long period of time that while the market itself, that size orientation is important and it will get you most of the return that you would likely get as an investor, but there are other factors. Size is a factor. Also, the value of a company, the value orientation and what the academics found out was that companies that were out of favor that had relatively low PE ratios or relatively high book value versus the price, those companies actually over time made more money than those hotdog companies that were selling for twice the PE ratio.
(00:26:45):
And of course, didn’t make any sense to a lot of people because how could out of favor or then smaller companies make more money? And the academics say, “Well, if anybody understands, why do stocks make more than CDs or bonds?” It isn’t a secret. They’re less risky. The more risk that you take as an investor, not as a speculator, I mean, you could make an advocacy for lottery tickets because there’s a lot of risk, but the probabilities of success are very, very low. But what these academics determined was that historically, going back to the same period of time that John Bogle was looking back at with the S&P 500, that small paid a premium, that value paid a premium. Now, having said that, nothing works forever. And what they also found out, and it was pretty obvious early on, you can have long periods of time that bonds outperform stocks.
(00:27:54):
You can have long periods of time that small or large outperform small or small outperforms large and the same with value and growth. They kind of come and go. And the part that is so interesting to me is that I can show a table of the returns every year for big and small and value and growth going back to 1928 and I cannot find a pattern. I can’t find a pattern that says, “Well, if you jumped in here and you jumped out there and you got back, you would make more money.” They just seem to randomly be rewarded. Now having said that, having been around this business since 1966, experts can explain everything the year after. They cannot know what’s going to happen, but they’ll say why certain things happened and very often even to this day, there are disagreements of why the depression happened and why the market crashed.
(00:28:56):
So everything is up for debate, but there’s no debate with me that at least in my mind, that we’re looking at a random event, but what does also it’s convinced me looking at the history is that a combination of four different major equity asset classes that the academics have blessed as much as they can about anything. In fact, while they say that small should pay a premium and value should pay a premium over time, they are quick to say, “But we don’t know how much,” because they don’t know how much it’s going to be, but they do believe there will be a premium over time. So here’s what blows my mind. When I put together a portfolio that is 25% in each of those four major equity assets-
Steve Chen (00:29:53):
And what are those four classes?
Paul Merriman (00:29:55):
That’s four classes, large cap blend that by the way, is a combination, S&P is a combination of growth and value. Large cap value without the growth. Small cap blend and small cap value. Those four different equity asset classes have been tracked backed one year at a time to 1928. Here’s what I see when I look back that if you invested in all four of those at the end of each year and you looked at the returns, I can guarantee you you will not be the highest producer. I can guarantee you you will not be the worst performance because you are just like the S&P 500 is 500 different companies. So the odds of competing with the top, it’s impossible. You can’t do that. Anyway, if you go all the way through the last almost a hundred years, the compound rate of return of the four is always kind of right there in the middle.
(00:31:07):
Sometimes I think about 78% of the time it is in the middle in between the two best and the two worst. But they’re flipping back and forth all over the place. In fact, sometimes you’ll have the S&P 500 at the bottom for five or six or seven years. Sometimes you’ll have small cap value at the bottom. But what we do know is that that four fund strategy makes almost 2% more per year than the S&P 500.
Steve Chen (00:31:39):
Over what period of time?
Paul Merriman (00:31:41):
Since 1928.
Steve Chen (00:31:42):
Okay. Since 1928. Okay. Well, that’s a massive … And which is, by the way, I know it’s for a lot of folks listening that we’re like, okay, 2% doesn’t sound like that much, but 2% compound is a massive … Because you consider that a market might be returning 8% or something like that. So if you’re returning 2% more, you’re turning 25% more than you would have gotten in that compound.
Paul Merriman (00:32:02):
By the way, it wasn’t that John Bogle disagreed with all of that, but he’s like a lot of people. He built his reputation on the S&P 500 and he was telling people just like J.L. Collins. I mean, what a wonderful story he tells and what such a gentle, nice man he is. And so I don’t think I’m ever going to convince him to have people put maybe 10% small cap value or 20% small cap value along with that total market index where he would probably get an extra half to 1% a year over time because he’s built his reputation on a strategy, a one fund strategy. What Bogle didn’t want people to do was confuse things because all of a sudden, oh God, Mina, now I have to worry about a small cap fund and a value fund and when to rebalance. Well, as you know, rebalancing right now, if you have a 50 fund portfolio, you can go to, and that could be ETFs, you can go to Fidelity.
(00:33:18):
You can put your money in there and you can set that portfolio up and for $4.99 a month for a year. It could be a $20 million portfolio. If you pay the $4.99, you push a little button and it automatically rebalances everything for you. Every
Steve Chen (00:33:39):
Year. Yeah.
Paul Merriman (00:33:40):
$4 a night. So I can manage a $10 million fund, never have to pay an advisor 1%. By the way, it better be the right funds. I mean, we want it to be the right combination of funds, but whatever you’re going to do as a do-it-yourself investor, there is a ton of money to be saved. And then we have M1 where you don’t have to pay anything, but some people aren’t as relaxed about the future of M1 as they are about Fidelity, just because Fidelity is such a giant.
Steve Chen (00:34:15):
Yeah, 100%. And just to be clear, with your four fund portfolio, 25% in each, you’re rebalancing every year. So you’re keeping it at that 25% level every
Paul Merriman (00:34:27):
Year. That study, that’s true. But do you have to rebalance every year? No. The returns are a little bit better. The further out you go, you do a little bit better. For example, we have one study that shows if you rebalance monthly instead of annually, it reduces the return by about a half a percent.
Steve Chen (00:34:51):
Oh, interesting.
Paul Merriman (00:34:52):
Yeah, that’s a big deal because you’re taking from the rich and giving to the poor. I mean, the better producers are being penalized for being the better producers quickly. So it’s
Steve Chen (00:35:01):
Better to rebalance less frequently.
Paul Merriman (00:35:04):
Yes.
Steve Chen (00:35:05):
And what would you recommend? Would it be annually?
Paul Merriman (00:35:09):
I think annually is fine, but it doesn’t hurt if you go out 18, 24 months.
Steve Chen (00:35:13):
Okay. Are you using Claude?
Paul Merriman (00:35:17):
Do I use Claude? I do not personally use Claude. I use ChatGPT, but then for some things we also run stuff through Claude and Margie, who takes care of our website, if I send her something, she runs it through Claude. It’s amazing. I absolutely am amazed at what people can do. I mean, I don’t know what you’re doing, but can I share what I’m doing? Teach people to depend upon Claude and ChatGPT. We have identified people who we call truth tellers. Anybody who’s been around the teachers in this industry like Mike Piper and Bill Bernstein and Rob Berger and folk Christine Benz and people like that, those are the people that we have identified as truth tellers. So if somebody sends me a question, I’m not a financial planner. I’m just a guy that enjoyed the stock market in my youth and I still do and I love helping people do it.
(00:36:22):
But I tell people to ask their question about where should I take my money first in retirement or what should I do after I’ve done my Roth IRA? I say, go to ChatGPT and say and give ChatGPT or Claude the question and tell them that you want the answer as written about by Bill Bernstein, Mike Piper, Christine Benz, oh, and Larry Swedrow. There is a good one too. Another giant in terms of what I consider to be truth tellers. And then what it will spit back out, it will spit back out their very best work so clearly. And even at the end, go through and suggest if you’re a little more aggressive, you want to lean this way, if you’re a little more conservative. And then what I love about ChatGPT when I’m asking it something after they’ve answered my question, it will say, “Do you think you should know this as well?” And it would tell me something and it’s, “Of course, God, I do need to know that.
(00:37:40):
Yes, I do want that.” I mean, where else can I get? I get up at three o’clock in the morning. Where else can I go and find people who will talk to me at three in the morning?
Steve Chen (00:37:50):
Well, the good news is a lot of those people, I think Rob Berger, Christine Benz, Alan Roth, Bill Bernstein, Larry Swedrow, now you, Jonathan Clements. Oh,
Paul Merriman (00:38:00):
You hit John Bogle. Bogle’s on the list. You can still go get great stuff from his writings.
Steve Chen (00:38:06):
Well, Bogle Heads, I would say is a great resource. It’s not the most accessible, but it’s a giant … Bogleheads.org or basically the giant message board has a bunch of people. Jonathan Clements called it the … I remember I met him, it was next generation personal finance. Anyway, he connected me with all these people and he’s like, “Yeah, these are the good guys.” What you call the truth tellers, he called the good guys. Good
Paul Merriman (00:38:30):
Guys. By the way, you just mentioned another one, Jim Dolly from the white coat investor. I mean, he’s a giant too.
Steve Chen (00:38:37):
Yep, 100%.
Paul Merriman (00:38:38):
And not come through Wall Street.
Steve Chen (00:38:40):
No, these guys are doing it themselves. They’re kind of learning and they’re figuring out what works. Yeah, this is so interesting. Anyway, the reason I was bringing up Claude or Chet, I just think it’d be interesting for you to feed all of your data and you were talking about looking for patterns. We’ve been doing a ton with user data and planning data and what are the patterns that we can … We’ve built this churn prediction tools, stuff like that, stuff for our business. But you could put it all in there, all of your longitudinal studies and then start saying, “Hey, do you see patterns here?” It might be interesting because maybe I will find like, “Oh, is there a better optimization? Can you advance my thinking about the sport fund portfolio and what’s the right rebalance? What would have been the optimal rebalancing rate across the last hundred years?”
Paul Merriman (00:39:28):
Well, and we have run a bunch of portfolios through. We have a two fund, half S&P 500, half small cap value. We have an all value worldwide, beautiful portfolio. I mean, the beauty is this and people can go on our website and see the results, but you can see, for example, the S&P 500 struggled in 70 to 79. It struggled in 2000 to 2009. But if you had a balance of the S&P 500 and the worldwide value during the ’70s, it had a killer return. It was a great return and it did well as well from 2000 to 2009. So in terms of finding some patterns, you can certainly see where these asset classes tend to do the opposite of what another one is doing. You can’t count on it. You cannot count on it. They all went down in 2008. Nothing worked. But in most of the other periods where on major asset class struggled, somebody else came in to save the day.
(00:40:42):
Now, can we count on that? No, but that’s what’s in the past.
Steve Chen (00:40:47):
Yep. Hey, I’m curious about, it does feel like just generally everything’s expensive now. I remember I was looking back, we were talking about this internally, is there a savings glut? Do we just have too much savings that’s like the money doesn’t have a place to go? Because when the market sells off, the money’s going somewhere. If equities sell off, it’s going to fixed income or it’s going to cash and then people are sitting on cash. They’re like, “But I’m not getting return.” And then it comes back in the market. But as people, as we get wealthier and we make more stuff and we have more money, does that just push everything up? And what’s your take on that? Because I know today we’re at kind of like historical highs for PE ratios
Paul Merriman (00:41:29):
And stuff like that. The US, it has the biggest stock market in terms of the public and the world. And we also have programs that are built for people to take care of themselves in almost the only place they can go unless the government can figure out how can we get cryptocurrency in those 401 plans? Wouldn’t that be wonderful if we could just get? And if that goes, why not lottery tickets? I think they’re going to try to get everything into the 401k because there’s money to be made. Look, most of it’s going to go in 401 plans and it’s going to go in with blinders on with the belief, with the belief that if the market does go down, sells off, I’m going to buy more shares at lower prices and that’s good. And maybe that’s one reason that markets don’t go down as far and they recover more quickly.
(00:42:27):
There’s also, as you know, a ton of cash sitting in money market accounts right now waiting to get back into the market if it ever should go down. Here’s the challenge I’m trying to get investors to be very intentional about forks in the road. There are about 12 of them. That’s what my free book we’re talking millions is about 12 simple ways to supercharge your retirement. Every one of those should be a decision you’re making consciously, stocks versus bonds. That one is so easy. There’s about a 5% difference per year and for every half a percent I can get these college kids more equities, it’s going to make about another million and a half dollars over their lifetime. I want them to pick up that 10 times a million and a half. It is legitimately there if the future looks anything like the past. So intentional expenses intentional taxes intentional diversification intentional index versus active intentional.
(00:43:42):
Buy and hold versus market timing. What do you do with that one? Because what you’re talking about, Steve, you’re getting me a little bit nervous about whether I should be in the market. And if I shouldn’t be in the market, where do you want me to go? And you’re not going to tell me gold, but there are people that will say that. You’re not going to tell me cryptocurrency, but there are people who say that, but they’re going to give you something that’s been making money recently. Well, that wouldn’t be cryptocurrency, but maybe amongst those 2,000 cryptocurrencies out there, there’s one that’s been making money and I should be getting on that horse now while I can. Well, we don’t want them to do that. We want them. The probabilities are in their favor if they just keep doing what they’re doing like a mortgage on a house
Steve Chen (00:44:29):
Just relentlessly.
Paul Merriman (00:44:30):
I can get people to look at their 401k like a mortgage and every month I want $500 to go in there to pay off the mortgage. They are going to have one whale of a nice house, financial house when they get to retirement.
Steve Chen (00:44:46):
Well, that’s what we see in our community. We think of our users as kind of like 401k millionaires. They’ve been like working and saving and hopefully they’ve been investing and they kind of get towards retirement with two to $3 million. And so it’s good. I mean, they’re way ahead of most people and most of those folks are so used to saving and investing. They keep doing it and then that money kind of like at some point
Paul Merriman (00:45:08):
You do have to save. I mean, the problem for people and when I talk to these seniors next week at Western, I’m going to be trying to convince them to save and this is why the world will never be on their side because too many people want them to spend and those people are powerful, powerful people. Those people have actually figured out a way to have games on the internet for kids who are eight years old to introduce them, even though there’s no money on the table, to introduce them to what gambling feels like. And we’ll create things that’ll make you feel almost like you won a big half jackpot. No, that’s the last thing we need to do is to teach eight year olds how to gamble. So how do we get people to make the commitment to themselves? And Warren Buffet has said, “Do not save what is left over after spending, but spend what is left over after saving.
(00:46:14):
Pay yourself first.”
Steve Chen (00:46:17):
Pay yourself first.
Paul Merriman (00:46:18):
Damn, the competition is stiff.
Steve Chen (00:46:21):
It is stiff. Yeah. No, it’s tough. I mean, I agree with you. There’s definitely a strong relationship between … People think about they’re spending their money, but they also need to think about spending their time. And we spend our time in crazy ways. Yeah, you can spend your time on Instagram reels flipping through these videos and you’re like, before you know it, you’re like, “I spent an hour doing that.” And they’re designed to addict people. And then we’ve built the same kind of gambling mechanics into investing tools like at Robinhood and stuff like that and polymarket and stuff like that. And yeah, it drives near term returns for Meta and firms like that that do this stuff, but long term it doesn’t create good behaviors that are helpful for our economy. So it’s kind of like we’re trading off some of this stuff.
Paul Merriman (00:47:05):
There is one thing that I cannot find any evidence for. I cannot find going the Robinhood way or others like that way. I cannot find any evidence that you are likely to retire sooner. I’m talking about probability based. I don’t mean that somebody doesn’t win the lottery and you tell somebody who just won the lottery that they shouldn’t buy lottery tickets, they’re going to laugh in your face. But the fact is I’m looking for ways that would lead to people, young people retiring early if they want to. I’m looking for ways that when they do retire, they’re going to have enough money to enjoy life. And I’m looking for ways that when they do retire, if they want to, that they leave something to others. My wife and I are so focused on helping Western Washington University and helping to underwrite their program of financial literacy for all the students there.
(00:48:05):
That is what we’re working hard to do and I feel blessed to even have the right to think about that. It’s because I did save. Yeah.
Steve Chen (00:48:17):
What do you see with the younger people that you’re meeting with and talking to? Do they understand this or are some of them ascribing to this and saying, “Okay, fine. I will save and invest. I will pay myself first.” Or do you find them leaning into and saying, “Well, I really want to do the crypto stuff or I really want to do prediction markets and stuff like that.
Paul Merriman (00:48:36):
” Most of them don’t have a clue Western is a special school. About 30% of their freshmen are first generation college kids. And so in fact, we have a special class other people can attend it, but a special class to make sure they understand budgeting and other things that some people it comes natural. These are kids who don’t have parents who are able to write big checks for them to go to wherever they want to go to school. And so there are a lot of people there that they’ve never thought. In fact, they don’t even think that they have a chance to have the kind of money that I’m trying to convince them if they just are a decent saver they can have. It’s a big jump. On the other hand, last week I was up there teaching a couple classes and I was talking to one kid who’s been investing for years because his parents are behind it.
(00:49:39):
They’re matching. I match for my kids. When I have a new grandchild, my wife and I write a $10,000 check for that to go into an account that is to grow untouched until that child starts working and then it is to be used as long as it lasts to go into a Roth IRA. That is what I’m trying to do and you know what? I know some of the kids will misuse what their grandparents wanted them to do, but when she is, my youngest is 18, she will get a letter, she will get a video. She will see what happened year by year for 18 years before her parents started to make sure where grandma and grandpa wanted that money to go. Can she go blow it? Yep,
Steve Chen (00:50:26):
Hopefully they don’t. Yeah. Well, that’s awesome. And there’s a lot to be said to this. I mean, it’s actually interesting. It’s like back to social security. So social security is an enforced savings mechanism. I mean, maybe not invested optimally, but it does make you … And just like having a mortgage or having a house, it’s an enforced savings mechanism. You’re like saving and paying for this house, which hopefully you paid on your mortgage over time and then you get more home equity and it’s an inflation hedge and social security. It’s like you don’t realize it, but you’re creating your own pension and then boom, you’re at least going to have that. This idea of, I mean, we’re all trying to educate people like understand this, but maybe it should be just like, just do it. Don’t think about it or maybe you’re forced to save.
(00:51:11):
I mean, people hate being forced to do things, but it does work and do it as efficiently as you can.
Paul Merriman (00:51:18):
But what we do have, Steve, that is so unbelievably important is realizing that very few people have pensions anymore, but when you were in a pension, you never worried about the investing. That was all the responsibilities of the trustees who hired people to get it done. And they knew that they had to be able to write checks to these people years in the future. And so they did the right thing. They put lots of equities early on and then there would be fixed income and it would be a balance and they did the right thing. Today, the only thing that does that is a target date fund. And I don’t mean they do it perfectly. As a matter of fact, I would argue for what I have seen that the trustees of pension funds do, they don’t get it perfectly either, but the target date fund is the equivalent of having a pension trustee and there is no finer product.
(00:52:17):
Now having said that, I want it to be in a target date fund that uses index funds not actively managed. And I would like to be in an index target date fund that has little, very little or no equities for the first 20 years.
Steve Chen (00:52:34):
Yep. Well, one of the things you talk about is your two funds for life strategy where it’s like I think it’s basically a target date fund plus a small cap value fund. Can you elaborate on why you talk about that?
Paul Merriman (00:52:48):
Yes. And by the way, Chris Pedersen, who is our head of research volunteer, is the one who developed this and he’d be a great guest sometime I think if he’s a great teacher, fine teacher. All it is is that you’re adding and he shows the impact of adding 10% small cap value along with the target date fund, 20, 30, 40, 50. And with every case, there’s more risk and higher return. And the question is how far you want to push the envelope of risk, but here’s the beauty of basically the target date fund, the equity is large cap blend, which is basically the S&P 500. And we must remember that the S&P 500 has had a higher return than a total market index. And so if you had to choose between total market index and S&P 500, based on the last 100 years, you would go with the S&P 500.
(00:53:54):
But in either case, large cap blend. What we know is that a huge number of the last hundred years, the S&P 500 is at the top and the small cap value at the bottom. So now you’ve got a rebalancing advantage if you believe they’re both going to do well over time, but for what it’s worth, exact opposite. A lot of the time small cap value is at the top and the S&P 500 is at the bottom. So you have these not negatively correlated but relatively non-correlated asset classes that you can, if you do the rebalancing, are going to take advantage of selling some high and buying some low, et cetera. And over a lifetime you could pick depending on whether you take 10 or 20, but with 20% small cap value along with the target date fund, you have a shot at an extra 1%.
(00:55:01):
And remember, every half a percent for these young people is worth over a million and a half dollars.
Steve Chen (00:55:08):
Got to just get them to see it. Yeah, it’s interesting. So it feels like if I’m going to summarize what I’m learning with you, if you diversify a little bit more across these different factors or value classes, you can decrease the volatility because you’re kind of running middle of the pack and so you have lower volatility and not slightly higher returns over a very long period of time and that can make a giant material impact to your outcomes.
Paul Merriman (00:55:37):
And I’ll give you another example of that exact story that people seem to be fine with. According to the Bessembinder report out of the University of Arizona, the S&P 500 over the last almost a hundred years has had a compound rate of return of 10. 96% of those companies had an average return of three, 4% of those companies had an average return of 14. That’s where the 10 came from. It came from a relatively few being responsible for that amazing long term. Well, all we’re suggesting, and by the way, there’s nothing wrong with it, Bogle told me. There’s nothing wrong with it. It’s just that it’s … Well, it’s complicated because it means you’ve got to do a little more work, but it’s getting easier and easier to do
Steve Chen (00:56:34):
That. Well, we’re saying the same thing now with the Mag7. If you look at the S&P, there’s a handful of companies that are really driving those returns, especially in recent history. All right. Well, look, Paul, we’ve covered a lot of stuff. I would love to close on as you look forward, so you’ve got all this history, right? You’ve seen all the different stories and the incentive plans and how the market’s evolved and now you’re seeing what’s happening with AI. If you look forward 10 years or five years, because things are moving fast, how do you think the world will be different in five years around this space?
Paul Merriman (00:57:08):
Around investing? It kind of excites me because I don’t know how they can make it any cheaper. That’s the first thing. And we know that expenses are something you pay forever. And so if we could get lower expenses, wouldn’t that be wonderful? And right now you have Fidelity offering a couple of funds, a handful of funds where there are no expenses. And then you have this thing with the basket portfolios where you can rebalance for $4.99 a month as many times during the month, the year as you want. And we know that there are people on the hunt. I happen to believe that most investors, if they believe in the factor investing that a Larry Swedrow would write about or that we would write about or the small, the value and all of that, that two mutual fund families are on the cutting edge. One is DFA, Dimensional Funds.
(00:58:13):
And they’ve been around since the late ’80s, I think. And the other is Avantus and Avantus people left DFA to create their own family. I would be happy if investors today simply put their money in … By the way, you get the ETFs at Vanguard and Schwab and Fidelity. They’re just regular ETFs, but they’re built to replicate these pieces of the market, not just size although it’s a component of it, but these other variables and they are working every year trying to figure out how to do that better, but they are totally mechanical. I’m a believer in managing money mechanically, automate the process from top to bottom and that’s what they do. And so we name the names of the funds that we think ETFs that people could use at Avantus and DFA, that’s available on our website. I think that more of the industry will be active in that part because it’s possible that returns are going to go down.
(00:59:29):
Remember, the higher the market goes, the lower our future expected returns, and I’m not talking about over a hundred years, but over the relatively near future. If there are ways to squeeze an extra 1% out with additional diversification, that may end up being really, really important, but I don’t see where expenses can be reduced. I do see where they could do more. Oh, I’ll tell you There’ll be more. 10 years ago we took a stand. Target date funds should not have any bonds when you’re in your 20s. Should not have any bonds when you’re in your 30s because those are the years that if the market goes down, you want young people’s money to be going into equities. We’re not talking about encouraging people to buy individual securities, but these index funds. I do believe more target date funds will have an all equity for a longer period of time and give young people a chance to get on that train when they should be on that train.
(01:00:39):
That I think will change.
Steve Chen (01:00:40):
Okay. Awesome. We might get Eduardo. I’ve met Eduardo, Rick Propeto.
Paul Merriman (01:00:45):
Oh, he is.
Steve Chen (01:00:45):
Several times. Yeah, I know he’s the guy he left, started Avantis. And I’ve also met David Booth. I’m sure David Booth doesn’t remember me, but Eduardo knows me. I just saw him at the run conference. Would you like one over the other?
Paul Merriman (01:00:58):
Oh no, they’d both be great. I mean, Eduardo has got the passion because he’s really in the trenches doing it, whereas Booth is now really in upper management if involved hardly at all. But I will tell you that the challenge is going to be the same and that is people are going to have a tendency to want to chase recent performance. That has always happened. And in the back of one of our books, free book, we have three free books people can have. One is we’re talking millions, one is called Two Funds for Life and another is called Spending Your Way to Wealth. And in the back of Spending Your Way to Wealth is a 16-page listing of the 48 biases that Kahneman talks about in his 500-page book, easy versus fast thinking, thinking fast or slow. And anybody wants to know what the hurdles are, like recency bias, like home bias, like optimistic, how optimistic we are.
(01:02:10):
All of these things are truly working against us because they’re driven by a part of our brain that is all about comfort and feeling good and believing we’re great. We’re not nearly that great. We all know it. Well, we know it of others. But I would encourage anybody to get that book, even if you only went to the appendix and read those 16 pages, you’d get an idea. Oh, by the way, the book is about how to keep from doing them, but if you want to know what they are.
Steve Chen (01:02:42):
Yeah, we’ll get the list. Well, no, this is awesome. Yeah. The whole behavioral science side of this thing, we talked to Alan Roth about it. I’ll link to it, but we’ll also link to all the books so people can kind of get these, understand their own biases, think about these 12 lessons that they really need to pay attention to. Look, this is great. I actually have one last question just really quick. What do you think about the secondary markets now? So you see these companies … I was at conference yesterday. We were talking about like the stripes, the Anthropics. These huge companies that are staying private for Databricks for a very long period of time. And there is a lot of alpha in there, or there seems to be a lot of returns, early returns, but they’re not available to the public. Do you have an opinion on if that’s going to continue?
(01:03:26):
It feels like companies don’t need to go public anymore. There’s so much liquidity out there.
Paul Merriman (01:03:29):
Well, let me tell you about DFA for a second to show you what is likely to happen. I think DFA from 1970, they built a small cap value fund and since it started, it has doubled, almost doubled the return of the S&P 500. And the Russell 2000 small cap value index, it’s about an 80% better return than another small cap value index. And we know how they did it. It’s not like there was a black box. They told people what they were doing. Those funds were not available to the public. They were only available through advisors that DFA allowed to sell them. Merrill Lynch couldn’t get them. None of the big houses were allowed to put their money in them. And they did that because they didn’t want money to be coming in and out. They wanted money that came through legitimate advisors. Then Avantus leave, the people leave and they start and what do they do?
(01:04:41):
They bring the work of DFA to the public through their ETFs. And if you look at the returns of Avantus since they’ve opened up in 2019, in most cases, they’ve actually been better than DFA.
Steve Chen (01:04:58):
So they’re getting paid, it’s basically an illiquidity premium by basically having the money be less volatile. The returns are better. Is that what’s happening?
Paul Merriman (01:05:07):
Well, there’s a whole bunch of things that a DFA or Avantus will do. They are not going to tell everybody when they’re buying and when they’re selling like happens in a regular. The reconstitution cost of a small cap value index is high and it’s not free in the S&P 500 either where you have people that know weeks in advance of what’s going to happen the opportunity to front run. And when you want to make a move and get out of an issue, you don’t want to tell people you want to get out. As a matter of fact, when you want to get out, you want everybody to want to get in. And so at DFA and Avantus, they are not in the business of moving with everybody else. They are in the business of buying what percentage of a stock that their system designates it should be and it will not be involved in the size of the company.
Steve Chen (01:06:08):
So it’s like, I think they call it systemic indexing or something.
Paul Merriman (01:06:12):
Well, actually the government calls it non-traditional indexing. They say traditional indexing is like the S&P 500 and non-tradition. It’s on the US government investor site.
Steve Chen (01:06:26):
Okay, got it. Well, we’ll get Eduardo in here and we’ll have a talk with him. I should have had him on with you. We could have gone back and forth on that. That’s great. All right, Paul, I know we’re a little over and so we’ve gone for a while. It’s great. I really appreciate you coming on and we will link to your foundation, the Merriman Foundation and your books. This will go out to a lot of folks. I really appreciate you coming on and sharing your wisdom and time with us.
Paul Merriman (01:06:52):
Thank you. Thank you very much. Good luck to all of your viewers.
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