They're Back...

SPEAKER_00 0:05

We're gonna do a really great financial future. Tom and Don are talking real money.

SPEAKER_03 0:12

Welcome to a very, very, very special edition of Talking Real Money. Hi, I'm Tom Cock. Don McDonald's got the day off, and that's great news because I get to bring in one of my favorite guests and a guy that's had untold influence on so many people uh regarding investing retirement, including yourself, because uh he's the guy that drug me back in this business uh going back about 30 years, and I love it, and I love the fact that we're still pals and we used to be partners, and now he's writing, he's recording, he's he's ubiquitous in this business. What a pleasure to welcome Paul Merriman to Talking Real Money. Paul, you know it's always great to get you on the show.

SPEAKER_02 0:55

You know, I am very, very, very happy to be here. I gotta tell you that uh the trip we've been on uh together as we've done our own thing, I just I just think has been marvelous. And uh when they get my diary, they'll know the rest of the story after I pass on.

SPEAKER_03 1:14

I I got my lawyers ready for the editing on that one. So we'll see how it works out uh at many levels. So let's let's let's dive into a couple of things that have been topical here lately. The Standard Poor's uh folks have decided to change their rules a bit. I think they're gonna allow this new IPO uh SpaceX and maybe some of the anthropic and some of these other humongous ones, because I think SpaceX, once the IPO is is uh done, is gonna be like the seventh largest company uh in the index. So they're gonna move it into the index earlier, the changing the rules a little bit to allow that. But you and I have been proponents of index funds or index-like funds for decades. Does that change your opinion of them all? And what's the good news, the bad news, and the ugly news about index funds that people need to know about?

SPEAKER_02 2:06

Well, uh uh looking backwards, we know how we could have made a lot more money on the S P 500. Now, we probably uh could say we know ways that we could have made less, but the fact is they've been changing the rules for decades. Microsoft, a lot of people don't know this. While they came public in 1986, they were not allowed on the SP 500 until 1994. And by the way, it's fascinating. The company they replaced off of the SP 500, uh American Touristur. So what would the value of the SP 500 be today if they had allowed Microsoft early on to be part of that index? It it it theoretically could could be huge. And and uh and even Nvidia, I love the NVIDIA story, believe it or not, it replaced Enron in 2001. So so uh yes, it will change the future of the S ⁇ P 500. And uh I suspect that means more excitement on the upside and more fear on the downside, because the the more aggressive we make this portfolio, the more volatility we're likely to see.

SPEAKER_03 3:32

Yeah, which is something that uh we'll talk about that in a couple minutes here, because I think people have forgotten about the tough times in stocks, the big the big downturns of the 2008s, the 1974s, et cetera. But still, this uh this change, and you make a very good point around the flexibility of the SP. I think people oftentimes think the SP 500 is some sort of golden rule. There's no there's no human aspect to it, and of course there is, but that doesn't change your overall opinion that the still the best way for most people to invest would be using index funds, correct?

SPEAKER_02 4:08

Well, absolutely, Tom, and and the list is long, and I would just tell you that the bottom line is trust. And I have in all my 60 years around this industry seen any product that is more trusted as an investment than the S P 500. And and and the reality is every expert that at least that I know, and you're among them, would say the key is to be invested so you can stay the course, and there's no investment that's ever been built, I think, to support that emotion than the S P 500. Yeah, I think you're right. And indexing. And indexing.

SPEAKER_03 4:51

Indexing in general. So let's just turn that dial just a little bit to um to the folks at Avantis and Dimensional Funds, for example. How do you label these are factor-based, these are not pure indexes, right? They're there's some selection process that is rules-based. But how do you label them versus regular indexing?

SPEAKER_02 5:16

Well, the government actually has labeled them non-traditional index funds, interestingly enough, and and and that would certainly be true because if you compare what Avantis and DFA are doing to build their non-traditional index funds versus what Jack Bogle did to create the S ⁇ P 500. Because remember, the S P 500 is about as simple an investment as you could come up with. Now, he could have also he could have also picked the SP 100. He didn't have to go for five, but for whatever reason, he went for the 500. And what do we know? It is based on one thing, basically, well, two things. One, the committee has to let you into the into the portfolio. That's number one. But secondly, it's only about how big your company is. And so you just you just m mentioned the idea that a company that has absolutely no earnings, which would not have been allowed before, but has no earnings is going to likely hold a very large piece of the day-to-day value of that SP 500. So what we see with the DFAs and the Avantises of the world, people who will look at index it and say, that's perfect. But you know what we don't want to do? We don't want to tell anybody what we're doing because we don't want to be fighting with the public and the institutions getting in and out of the positions we want to be in and out of. And beyond that, there's way more to investing than just the size of a company. There is the the the the quality of its earnings. There there is the the value orientation, growth versus value. All of these things have been in essence discovered since 1976 when Bogle came out. So from my viewpoint, I like the idea that somebody is updating the system, if you will, to manage the money for people and doing it always, I love this about those folks, always in what is the best interest of the investor in the funds. You can't say that about the traditional index funds because they aren't always built in the best interest of the investor.

SPEAKER_03 7:54

Aaron Powell Yeah, you make some really good points there. By the way, for those of you uh who don't recognize that voice, you should. It's Paul Merriman who's joining us here on Talking Real Money, and we really appreciate it. Um okay, so but let's dive into this this this pool of you know non-traditional indexing, if you will, uh just a little deeper. Um that what they're uh are are they I think that it still begs for a simple explanation for most people because this comes up an awful lot. They hear it say, you know, index fund is fine, et cetera. Oh, but you guys, you you you use and you recommend Avantis funds and dimensional funds. How do how do we tell folks, what do you tell folks about why they should use that approach rather than just purely buying the market?

SPEAKER_02 8:45

Well, I I I I think the the number one reason is because they have looked at all of the steps in the process. Uh and it is a complex process as as as we noted, because let me give you an example. Microsoft, well, Nvidia I mentioned, uh I think I mentioned the fact that when it came on the index, uh it came on the SP 500 to replace Enron. Enron had just gone from $90 a share to 25 cents a share, at which point the SP 500 took them off the the the out of the portfolio and replaced it with Nvidia. That was a lucky exchange there. But the bottom line is that the way they rebalance or reconstitute the index is in some cases once a year, quarterly, whatever the index might that you're looking at might be. But the bottom line is that with the DFAs and the Avontas, they don't have to sit there and wait for for the the business to go down to almost nothing to get out. When they see a reason to get out based on their disciplines, they get out regardless of what time of the year it is. And on the upside, when it's time to get out of a company on the upside, because maybe they bought a small company that's a value company and now all of a sudden it's a mid-cap growth company for whatever whatever happened to cause that to be the reality, they still don't immediately sell as long as the momentum of that stock is up. And that's not the way it works with the major traditional indexes. It's it's much more hands-off with the with the traditional, more hands-on with the non-traditional. And I believe from everything I've seen about the past, that that advantage is going to be at least a half a percent a year in in essence, whatever asset class we want to look at.

SPEAKER_03 11:10

Wow, that's uh really well put. Uh, you and and here's the thing about the past uh dimensional issues every year. Some people get excited when the new if you remember the new phone book would come out, right? To see if they're in the phone. That's a bad joke. Uh, but you you get excited about a book called The Matrix, which Dimensional puts out every year, which just came out, which looks back at in a way that only Dimensional could do it. I wonder how many numbers there are in that book. Uh, but they look at basically all the asset classes, they look at all the stuff going back now almost uh is it a hundred years or pretty close to it? But what are some of your big take? Is it a hundred what are some of your big takeaways from the brand new hot off-the-press matrix from Dimensional?

SPEAKER_02 11:53

I I can't even tell you, Tom, when I received my copy, I could not wait to get it open and just dig into those numbers. See, I think there's a fork in the road that that advisors and individual investors uh have to take. They may they may not think about it, but they're gonna do it one way or another, and that is you're either gonna base the the your investments and the future of those investments based on some feeling you have about the future, because you can't know, you can't know one thing about the future, but we can know so much about the past, and I am absolutely committed to the idea that the future will look just like the past, with one exception, with one important exception. I can look, and and and in the Matrix book, they make it so simple to see this. How many years was the market up 10 to 15 percent or 15 to 20, or down 10%, or 20%, or whatever? And you can see just with a quick view of what kinds of returns have been achieved. I believe that the future will look like that. The thing that I can't know is what the sequence of returns is going to be, which then at least tells me and the people who want to follow the work that the stuff we teach, that if there's been a 1929 to 1938, it shouldn't shock us when the same thing basically happened from 2000 to 2009 because we have seen it before. We have seen the bubbles, we have seen the collapses, and my belief is if you're gonna have peace of mind around investing, you have to know what that what that trip's going to be like, and looking at every year's return, going back a hundred years, gives you a sense of investing that I don't think in terms of trust or confidence, whatever it is, you can't do that with making up a story about the future, but you can do that if you look back at what really happened.

SPEAKER_03 14:14

You trust a hundred years of data? Is that enough for you? Is that or are you gonna you're gonna have to wait till two hundred years to really believe it?

SPEAKER_02 14:20

You know, somebody just asked, actually just asked that question. You go back to 1970 with internationals. Well, can you go back a hundred years with internationals like you can the U.S.? Unfortunately not. And I will tell you that truth, that truth about the past did not come out of Wall Street. It came out of the University of Chicago and what we what we call the academic uh community. And again, there again, I have more trust in what I learn from the academic community than what I learn from Wall Street.

SPEAKER_03 14:57

Aaron Ross Powell Yeah, and and and one of the things that comes out of Matrix and one of the, I mean, Dimensional really started this crusade, if you will, back in 1981 when they got in the business of actual uh creation of mutual funds to give you access to stocks that most people really didn't have access, and that is small companies that are value have a value orientation that are beaten down, unloved, whatever for whatever reason are are are smaller than than than what the the people that add up all the value think they are worth, the accountants. So you have been a proponent of this asset class. Somebody just wrote me and said they're trying to figure out their asset allocation, and they said Paul Merriman believes in having 50% of his money in small cap. I went and looked. AVGE, for example, the Vanta's Global Equity Fund has somewhere between 12 and 15. Do you really advocate half of your money being in small cap stocks?

SPEAKER_02 15:54

Well, it isn't about having half of the money in small cap as so much as it is half the money in small and half the money in large, half the money in U.S., half the money international, half the money basically in value, and a little less than half the money in growth. And then being 82 years old, half the money in bonds and half the money in stocks. So I'm not even thinking of it as uh how much I have in that asset class. Uh I am thinking of it as a total portfolio, just the same, Tom. When I think about the S P 500, the smallest company I just noticed was Zion's Bank. Well, okay, I own Zion's Bank. At the other end, I own NVIDIA through the S P 500. So what I get in the S P 500 are the big and the small within the very large companies. On the other hand, all of the evidence points that those value companies and small companies historically not only are they more risky, but they have produced a better return over time. And so I do that, but I also remember at age 82, I am not investing for an 82-year-old guy and and a slightly younger wife. I'm investing for my my program at Western Washington University that'll get a bunch of money after I die. That my children will get a bunch of money after I die. I have not put you on the list.

SPEAKER_03 17:37

Okay, all right. I break even there. I guess I'm okay with that.

SPEAKER_02 17:41

Okay. But but the but the fact is I'm not just investing for us, I'm investing for the people who should have part of their portfolio in small.

SPEAKER_03 17:52

Yeah, that's a really, really good point. One thing that I think is overlooked today, but we've had we had these downturns that we've had in stocks, 2020, the spring of 2020, it was sharp, but it was short. The downturn in 2022, you know, it wasn't horrible. But you go back to 2008, for example, and I can remember because you and I were working together, people calling late at night, and people just it it was panic. It really was. People were very scared. These are people living off of their money, and they're seeing it go down every day, and it was going down a lot in the fall of 2008. And and you and I used to talk about this that uh that I trust the future more than you do in some ways due to our backgrounds. But what should people if you're putting together a portfolio today? I see great overconfidence. I just met with somebody this week, again, similar age to you, you living off the money, that is 87% of their money in stocks. Uh, because the stock market only goes up. Um, folks, it doesn't always just go up. And and you're old enough, Paul, to remember 74, which was another difficult time with stocks. So, what do you tell people when they're trying to figure out their asset allocation and how much risk they should take about these stock markets that will they they will hurt you from time to time?

SPEAKER_02 19:18

Well, I think we had to find out, and this is where I think almost everybody should spend a little time in the trenches with a professional person who understands how these things all work and how you can put them together in your best interest. But what your best interest is is going to be driven by some things that you as an investor believe. And you and I, when we used to do workshops, I don't know if you still include this in your workshop, but there is this difference between the person whose primary goal is to beat the market. Then there's another person whose primary goal is to get the highest return within whatever their risk tolerance is. And then another typical uh strategy is to get the find the lowest risk way to get the rate of return you need. So we got need and we got want and we got want with a uh with a hope of doing something really spectacular. And until we understand that about an investor, it's really difficult to put together the right portfolio. I've got lots of friends who are older than I who are all in equity, and they think I'm crazy for having half of my money in bonds. But it's who I am. I'm always afraid of the of the catastrophic. They aren't. And and and by the way, they have way more money than I do. Be it's it's why I ought to know them. Yeah. But I have felt safe, and I still feel safe that I'm taking an appropriate amount of risk and uh living within the money that my wife and I get every year from our investments. So even there, we have a strategy to create a peace of mind that we don't have to sit around and worry.

SPEAKER_03 21:07

Yeah, I think that uh a piece what did you used to say, peace of mind, piece of the action with peace of mind or something. I think that was pretty liquid. That's working. Before you we let you go, I see you're working hell on the new is I don't think it's new, but how you can help young people more, as you know, we've always advocated 529s and custodial Roth IRAs, and now you can take the 529 and turn it into a Roth, you know, make those Roth contributions for a young person. I think it's wonderful. But um, tell us briefly here. I I think I read something about your $365 a year that could lead to a million dollars for a young person in the long haul. Give us give us a little update on that. Well, let me let me I always have a new idea.

SPEAKER_02 21:49

I know the newest idea, okay is that we want to help uh a young person, a newborn child, let's say, we want to help them have money for their Retirement. Let's just say that's what we want to do. And we want it to be a really nice retirement on top of whatever they've saved. If you would put away that first year three hundred and sixty-five dollars, and you should have a little dash uh for 70 years from whatever that date is, because that three hundred and sixty-five dollars is going to fund a year of retirement in seventy years. And that three hundred and sixty-five, if you can get a twelve percent compound rate of return, and the SP 500 average return over 40 years is over 11%. So we know that it's not impossible, particularly if you happen to have half in small cap value and half in SP 500, but in the next year you put away another $365. It is earmarked for 70 years from that year. So you actually you make 30 different, I mean, I this is a little work, but not much. 30 different accounts all going to be transitioned into Roth IRAs as soon as possible. And each one of them is built to stand alone as the income that a person might have 70 years from now. And okay, so you don't get 12, you get 10, you still got almost a half a million dollars. So so it it is is something that we can do with very little and a very smart long-term perspective.

SPEAKER_03 23:38

Yeah, which is really great, and that's that's a great what message to you know, sort of help help young people too, and hopefully along the way they're learning about how markets work and all that kind of stuff, too, and not being making bad mistakes around picking stocks and all the rest of it. Listen, it's always a it's always a pleasure to uh to have you on talking real money. It's always a pleasure to talk to you anyway. People can learn more by going to paulmerriman.com. That's the best place for all the goodies, write the newsletter, etc., correct?

SPEAKER_02 24:03

You got it, um, and thank you again for this long-term partnership that we've had. Uh, and I still consider you the boss.

SPEAKER_03 24:11

So thanks. Thank you for that. And I I still consider you a great friend, which has been so important to my life, as you know, these last 30 years. So it's been it's been wonderful. Paul Merriman, thank you for being on uh Talking Real Money.

SPEAKER_02 24:25

Thank you, Tom.

SPEAKER_03 24:27

And for all of those you uh you're out there, you want to ask a question, you want to help them some more help, go to talkingrealmoney.com. You can ask a question there, you can meet with an advisor, all those things that we do to try to help you be a better investor, more prepared for whatever's coming, and to get things right as you move into your further down into your life and putting money in its place, that's what I like to say. Because you know we're gonna be here every day talking real money.

SPEAKER_01 24:55

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