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Episode Guide

This episode features a return visit from Paul Merriman, who shares insights from his new book, 'We're Talking Millions.' Merriman simplifies investment strategies for financial independence, emphasizing the importance of diversification and the potential benefits of small-cap and value investing. Throughout the conversation, the hosts explore the religious fervor some have for large-cap growth stocks, cautioning against the danger of relying too heavily on these investments based on recent performance. Merriman encourages listeners to adopt a long-term perspective and take small steady risks in their portfolios to achieve better returns. The discussion includes practical advice for beginner investors, suggesting the use of target-date funds while incorporating elements of small-cap value investments to optimize returns. Overall, the episode delivers a clear and approachable guide to better investment practices, aiming to help listeners transform their financial futures.

Episode Timestamps

ChooseFI Podcast Show Notes

Episode Title: Exploring Investment Strategies with Paul Merriman
Guest: Paul Merriman
Hosts: Jonathan Mendonsa, Brad Barrett
Episode Number: [Insert Episode Number Here]
Release Date: [Insert Release Date Here]

Episode Summary:
In this episode, investment expert Paul Merriman discusses his new book, We're Talking Millions, which provides a simplified approach to understanding investment strategies essential for the financial independence community. Paul emphasizes the importance of diversification, focusing on small-cap and value investments, which have shown to outperform large-cap growth over the long term. He debunks misconceptions surrounding index fund investing, specifically regarding the perceived diversification in cap-weighted index funds.

Key Topics & Timestamps:

  • Podcast Intro:

  • Guest Introduction

    • Brad introduces Paul Merriman and his new book, emphasizing its relevance to the FI community.

  • Small Cap and Value-Weighted Investments

    • Discussion on the performance of small-cap and value investments compared to large-cap indices.
    • Importance of diversification across different asset classes.

  • Long-Term Performance Reflection

    • "Reflect on the long-term performance of your investment strategy." - Paul Merriman

  • Staying the Course

    • The critical mindset of investors and the challenge of maintaining a buy-and-hold strategy.

  • Market Movements and Psychology

    • "Market movements are often driven by human psychology." - Paul Merriman

  • Strategies for Dollar-Cost Averaging

    • Implementing dollar-cost averaging to benefit from market fluctuations over time.

  • Small-Cap Value Investing

    • "Adding just 10% in small-cap value can significantly enhance your retirement funds." - Paul Merriman
    • Highlighting the potential increases in retirement funds due to small allocations.

  • Understanding Target Date Funds

    • How target date funds work and their relevance for retirement planning.

  • Simplicity in Investing

    • "Investing has never been easier." - Paul Merriman
    • Discussing the role of technology in simplifying investing.

  • Where to Find Paul’s Book

    • Paul shares how listeners can get a copy of We're Talking Millions.

  • ChooseFI Resources

    • Information about the ChooseFI Financial Independence Challenge.

Actionable Takeaways:

  • Consider incorporating a 10% allocation to small-cap value to potentially enhance retirement savings.
  • Implement dollar-cost averaging strategies to take advantage of market fluctuations over time.
  • Simplify your investment strategy using target date funds to mitigate complexity.

Key Quotes:

  • "Every extra half a percent is an extra million dollars." - Paul Merriman
  • "The ease of investing today can benefit all investors." - Paul Merriman

Discussion Questions:

  • How can small-cap value investments impact your long-term portfolio?
  • What adjustments can you make to your investment strategy as you age?
  • What steps can you take to simplify your investment process?

Additional Resources:

Podcast Extro:
"You've been listening to ChooseFI Podcast, where we help middle-class America build wealth one life hack at a time."

Unlocking Financial Independence: Investment Strategies from Paul Merriman

Investing for financial independence can often seem daunting. However, as discussed by renowned financial educator Paul Merriman in a recent episode of ChooseFI, there are simple yet effective strategies that can dramatically enhance your portfolio and lead you closer to your financial goals. Here's how you can implement his insights for potentially impactful results.

Embrace Small-Cap Value Investing

One of the standout recommendations from Merriman is the inclusion of small-cap value investments in your portfolio. Historically, small-cap value stocks—those of smaller companies that are undervalued by the market—have outperformed larger growth companies over the long term.

The Power of a 10% Allocation

Consider allocating just 10% of your portfolio to small-cap value stocks. Merriman argues that this small allocation can significantly enhance your retirement funds, potentially yielding 20% to 30% more at the time of retirement compared to a strategy focused solely on large-cap stocks. Reflect on this strategy as it not only diversifies your investments but positions you to leverage the long-term growth potential of smaller companies.

Understanding the Importance of Diversification

Diversification is a critical component of any sound investment strategy. Merriman points out that many investors mistakenly believe that holding a cap-weighted index fund, like the S&P 500, offers sufficient diversification. In reality, this type of fund is heavily influenced by a small number of large companies, leading to an "illusion of diversity."

The Case for Broader Asset Classes

To truly diversify your investments, consider incorporating a mixture of asset classes, including:

  • Small-Cap Stocks: These stocks offer growth potential due to their smaller size and market presence.
  • Value Stocks: Companies that are currently out of favor in the market, often presenting opportunities for future growth as they recover.

By spreading your investments across a wider range of asset classes, you reduce risk and increase the likelihood of long-term returns.

Implement Dollar-Cost Averaging

Another tactic advocated by Merriman is dollar-cost averaging. This investment strategy involves consistently investing a fixed amount of money into your chosen investments at regular intervals, irrespective of market conditions.

Benefits of Dollar-Cost Averaging

  • Mitigating Volatility: This approach minimizes the impact of market fluctuations on your overall investment.
  • Building Discipline: Regular investments help cultivate a disciplined saving habit, encouraging you to invest regardless of market highs or lows.

Simplifying Your Investment Process with Target Date Funds

For many investors, the complexities of managing a diverse portfolio can be overwhelming. Merriman introduces target date funds as a straightforward solution. These funds automatically adjust their asset allocation as you near retirement.

Choosing the Right Target Date Fund

  • Look for Low Fees: Keep an eye out for funds with minimal expense ratios, as high fees can eat into your returns.
  • Focus on Index Funds: A target date fund that primarily uses index funds will generally offer better long-term performance than actively managed funds.

If you desire a tailored investment strategy, you might consider adding a 10-20% allocation to small-cap value investments on top of your target date fund investment, taking advantage of potentially higher returns without the need for constant portfolio management.

The Importance of Rebalancing Your Portfolio

As part of your investment strategy, you must consider the practice of rebalancing. Over time, some investments will perform better than others, which can skew your original asset allocation.

Rebalancing Strategies

  • Annual Review: Regularly review your investment mix to maintain your desired risk level. This may involve selling off assets that have appreciated significantly and reallocating those funds to underperformers.
  • Stick to Your Plan: Stay disciplined, even when it feels counterintuitive to sell high-performing investments. This practice ensures you remain aligned with your long-term investment strategy.

Addressing Common Misconceptions about Market Timing

Merriman emphasizes a key psychological aspect of investing: many investors struggle with market timing and often make decisions based on short-term market performance rather than long-term growth.

Focus on Buy-and-Hold Strategies

  • Buy-and-Hold Philosophy: Trust that your diversified portfolio, rebalanced as necessary, will perform well over time. A buy-and-hold strategy reduces the stress of daily market fluctuations and allows compound interest to work in your favor.
  • Educate Yourself: Understanding market cycles can empower you to stay invested, despite downturns.

Conclusion: Putting Strategies into Action

Implementing these strategies may seem simple, yet they require discipline and commitment. Start small, evaluate your current investment strategies, and consider adding small-cap value stocks, utilizing dollar-cost averaging, and simplifying your portfolio with target date funds.

By following the insights shared by Paul Merriman, you can pave a more robust path toward financial independence and retirement success. Remember, every extra half a percent increase in return can result in substantial gains over a lifetime of investing. Start today, and take control of your financial future.

For further insights and resources, consider checking out Merriman's book, "We're Talking Millions," which delves deeper into these investment strategies and more.

Paul Merriman

What You'll Get Out Of Today's Show

  • Does your portfolio own enough of the companies that carry a lot of the growth over extended periods of time? When you buy index funds, you aren't as diversified as you think you are.

  • Cap weighted index funds mean you are buying a lot of the companies that are doing really well. But there are two asset classes Paul Merriman is a fan of that he thinks don't get enough attention, small cap and value.

  • Although many people claim to believe in a buy and hold strategy with investing, their behavior says otherwise. They like to buy when things are hot because they believe it's going to keep going up.

  • If you look back as far as 1928, a lot of the time the S&P 500 is walloping small cap value returns, yet at the end of this 92 year period, small cap value made 24 times the amount of money the S&P 500 did.

  • Even though there are long periods of underperformance, when small cap value does take off, there is outstanding performance. Then when it reverts back to the mean, there is a higher compound rate of return.

  • Owning a large cap fund means each holding in that portfolio, and how much of the portfolio it represents is based on how large that company is. The big companies represent 80-85% of the corporate public value in our economy.

  • However, history shows that the smaller companies and the value companies produce a better rate of return because they are more risky.

  • It doesn't have to be a lot to make a big difference. If you were put 10% in a small cap value fund, it would give you a legitimate shot at having 20-30% more money when you retire.

  • The top 20 companies probably make up 20-30% of the money you have invested. Investing in an S&P 500 or total stock market fund provides an illusion of diversity. As companies get to be bigger in size, it becomes increasingly more difficult to double or triple in size.

  • Companies are valued by the number of shares times the price in the market.

  • Large cap index fund companies average a market capitalization value from $50 billion to $150 billion.

  • Small cap companies are roughly 1/50th the size of the big companies with values averaging $2 billion. They are legitimate companies, but many of them will fail.

  • Since 1928, the S&P 500 or total stock market compound rate of return has averaged 10%. However, research has shown that only 4% of those public companies made virtually all of that 10%, while 96% of companies averaged just 3%.

  • As an aggregate, small companies are much more likely to double or triple in size.

  • Value companies can be seen as companies that are out of favor and years later, they may still be out of favor. Academics don't advise buying value companies one at a time.

  • People come into value companies to make them more meaningful, profitable, and efficient turning those companies around.

  • The problem with great companies with a great future is that when something happens to pop the ballon, those companies can fall 25% in a day, similar to what happened with the Dot-com bubble in 2000.

  • Telsa, for instance, is a car company on the verge of bankruptcy several years ago and now it's up 400% even though it is barely turning a profit. With a current share price of $800, it's going to take a lot to double your money, yet people still believe in Tesla.

  • Paul wants to help people figure out how to invest in an unemotional way and don't get caught up believing in something that isn't likely to happen.

  • Last year, growth companies were up 35-40%, however, looking back at 90 years of evidence, growth produced a lower rate of return than value by 2% a year.

  • Paul's latest book, We're Talking Millions!, is all about the extra half of 1%. For every half of 1% you can make on your portfolio over a lifetime, you add a million dollars. Finding more of those half of 1% and adding them up is a lot sexier than finding the hottest thing in the market.

  • In his book, Paul lays out 12 simple ways to capture those half 1% that the market is ignoring.

  • Paul's been hearing complaints for years that his work has been too complex. It's was something his firm did for his clients, but most individuals do not want to make it that complex.

  • Someone in their twenties, investing just $5,000 a year for 40 years, can use these strategies to make millions over an investing lifetime.

  • It's not all because you took more risk, it's also how you protect your money from others getting their hands on it, like money managers.

  • Choosing to save can be a million decision, and choosing to save early can be another million.

  • In one mind-blowing statistic, Paul says 25% of millennials will not put money in the stock market.

  • The ultimate buy and hold portfolio might be difficult to replicate inside a 401K. To make things more simplified, Chris Pedersen developed a system to implement the philosophy with roughly 98% of the benefits.

  • The goal is to keep it as simple as possible so that anyone can do it and won't need to manage it other than for a few minutes a year.

  • One way to buy a target date fund. But because they don't have enough value or small cap companies represented, have 90% of contributions go to the target date fund and 10% to a small cap value fund. The target date fund is broadly diversified and automatically adjusts to become more conservative as you age.

  • Chris said the problem is young people should have more invested in small cap value and came up with a formula for calculating just how much, which is 1.5 times your age into a target fund and the remainder in small cap value.

  • For example, a 30-year-old should multiply 30 years x 1.5 to get 45% in a target date fund and 55% in small cap value.

  • Paul and Chris encourage continuing to hold 10% in small cap value at the age of 60 and beyond which is good during the 30 or more years in retirement.

  • Not all target date funds are created equal. Look for one that is low cost and contains total stock market funds.

  • Jonathan doesn't like having bonds in his portfolio and notes that target date funds have bonds in them. Paul agrees and said he spoke with John Bogle about it once. He was told that bonds are defensive and do good when the rest of the portfolio is down 50%.

  • You can reduce your exposure to bonds in target date funds by adding equities to your portfolio.

  • With target date funds, the year indicates how aggressive it is.

  • As with a traditional portfolio, rebalancing your portfolio is a part of the small cap value strategy. If you want to be true to your strategy, you need to sell some winners and buy some of the losers.

  • Jonathan has modeled one of the Ultimate Buy and Hold Portfolio pies Paul has on his website in his taxable brokerage account with M1.

  • Paul says it's never been easier or efficient to invest. Even if the market does return as much as in the past, you can probably make the same return because it used to cost so much to do before.

  • They are coming out with all new recommendations for best-in-class ETFs. Paul has all his buy and hold funds in DFA dimensional funds and now anyone will be able to buy DFA funds through DFA or Avantis without paying a commission. Since it's an ETF, you can buy commission-free with M1.

  • Pauls' book is free for teachers and students, just email Paul at [email protected] to get the PDF by email. The book is also available on Amazon. If you can't afford the $14.95 price tag, email Paul for the PDF.

Resources Mentioned In Today's Conversation

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