00:00:00
Speaker 1: Welcome to Hod of Money. I'm Joel, I'm Matt, and today we're talking turning thousands into millions with Paul Merriman. That's right.

00:00:26
Speaker 2: Our guest today hails from the beautiful Bainbridge Island out there in Washington State, right across the water there from Seattle, and he is the I would say, the foremost expert when it comes to DIY investing. Paul Merriman, he started Merryman Wealth Management back in the eighties. He did that for about thirty years, and then he founded the Merriman Financial Education Foundation a little over a decade ago. Of course, the foundation, it's a nonprofit. It's and this is straight from the website. It's dedicated to providing comprehensive financial education to investors at all stages of life, which we're all about. Paul is the author of eight Bucks. He's got a regular column over at market Watch. He also has his own podcast, Sound Investing, and we are honored and privileged to have him here on our podcast podcast today. Paul, thank you for coming on to How to Money.

00:01:15
Speaker 3: It is wonderful to be here. It is it's a kick having a chance to reach out to what I expect are a lot of young investors and that's that's the best.

00:01:26
Speaker 1: Yes, Oh no, we definitely have a bunch of young investors here on the show, and I think you're going to get to why that's the case. We're gonna have hopefully, I think a lot of wisdom from you, Paul. You've been doing it for so long, but your passion remains, which is something that we that enthusiasm is contagious. The first question we ask anybody who comes on the podcast, though, is about what they like to splour je On, Matt and I. We splurge on craft beer, and it's something that we spend quite a bit of money on. Some people would say too much, while we're trying to be why save and invest for our future? So what is that for you? What do you like to splurge on that most people might think, Oh, that's like a little abnormal or a little crazy.

00:02:02
Speaker 3: Well, I don't know that I'm abnormal or crazy. But there is very little that I need or want or spend on myself. But I have found that if I spend whatever my wife needs or wants, that pays the biggest dividends of all. So no, I spurge when my wife wants to travel or she wants to whatever it is, I'm ready to go. But for myself, I got this. I love what I'm doing and helping people take care of their investments.

00:02:36
Speaker 1: See you've taken that happy wife, happy life too. It's extreme. Yeah, that's right, like you.

00:02:40
Speaker 2: Said, sometimes it is the extreme, hopefully not too often. But like jol said, yeah, a fount of wisdom that we're speaking with today. But Paul, let's dive into your history a little bit, like what is it that got you into the work of financial planning investing? Yeah, I guess year is why it is that you're so intent on helping specifically like the average investors that every day kind of folks. So, yeah, can you talk about how you got into it initially and then why it is that you took the approach that you're now taking.

00:03:10
Speaker 3: Well, I kind of fell in love with the investment process itself at about age nineteen, and I had no intentions of teaching anything because I didn't know anything. But I did really appreciate it and I thought it was very exciting. But it wasn't really until I was oh, and I was a stockbroker for a couple of years. Before I discovered the conflicts of interest that you have there in order to help your clients. It's not an easy trip if you try to do what's in the interest only of your client. But then when I turned forty and I had enough, I thought to retire. I decided I wanted to spend the rest of my life teaching people how to invest and to be an investment advisor. And by the way, I was never a financial planner. That's a whole other commitment to helping people. My focus was first and foremost still is on the investment part of that process. And when I started a very small investment advisory firm and we had no money under management in the beginning, took about a year to raise the first million dollars. And I would help anybody. If you had two thousand dollars, I was your guy. I would give you advice because I was doing it for fun. Yes, And I gave free seminars workshops, and if you would sit through a free three hour or six hour workshop, I would sit down, take a look at where you were in your life, tell you what you should do on your own, and if you didn't want to do it, I felt it was too complex or emotional. We were willing to do it and do it for what we thought was a fair price.

00:05:10
Speaker 1: And you're kind of like fire before it was cool then, I guess, Paul, right, is that at age forty?

00:05:14
Speaker 3: Yeah, by the way, I did not, I did not know the term fire. Then. Well, you know something that's interesting because when I went into the industry in the mid sixties, there were no financial planners that were on the street like today. There were people in the brokerage industry where they were just really being paid for transactions, and if you really wanted to get financial planning, you had to have a lot of money and you go to a bank trust department maybe, But of course that has all developed today where there's everybody who's in the business it's supposed to know taxes and investments and insurance and all of that. So it's a very different world today from when it was.

00:06:00
Speaker 1: Yeah, and on that note of just kind of different world, I'm curious, you know, when you started in the industry, the like Vanguard index fund wasn't really well known or it hadn't even really been invented, right, was I mean? When we're talking about with so a lot has changed in the accessibility of investing for everyday investors. There used to be kind of this shrouded in secrecy. Not to mention just obviously higher fees and all that kind of stuff, but it was almost impossible for the average investor to figure out how to invest for their future. And now, yeah, there's some jargon and lingo and some things that people need to learn, but it's a whole lot easier to help educate well.

00:06:41
Speaker 3: And I think it's fair to say that compared to the sixties, when everything was in favor of the house instead of the instead of the gamblers or the speculators or the investors, load funds almost exclusively load funds, regulated commissions. Nobody knew what a small cap or a lot I mean, we didn't think that way. It was the academic community that really forced us into the kind of thinking that we have today. But it has never ever been as efficient today for the first time investor, not even close. Really, Really, you can invest like a millionaire when you've got one hundred dollars, and that's that's not just a cheap sales pitch. That's the truth.

00:07:28
Speaker 2: That's the truth, because you're not selling anything, Paul, you you truly are out there to help individuals. And yeah, what what you're saying is.

00:07:35
Speaker 3: But you still need the products, yes, and that's the beauty. I mean, the no load funds, the index funds, the the ETFs, all of these things are are a pathway to much higher returns. But what we've got to make sure is we we don't get caught up in the sales pitch of the assurance industry or the brokerage industry. You really need if you want to if you want to hit the biggest home run, whatever that might be, you need to learn how to do it for yourself, not because you need to be a genius, but because you don't want to pay the price that the Wall Street's going to charge it it's yours. You can keep that extra profit and it makes a huge difference.

00:08:21
Speaker 1: That's right.

00:08:21
Speaker 2: Yeah, and we are going to talk about how you can turn not just thousands into millions, but even one thousand dollars a year into millions of dollars in retirement. But it's funny that you mentioned that you are not like a personal finance guy quite as much, because so like in your book, like we're talking millions, that's the.

00:08:37
Speaker 1: Title of it. Your latest book.

00:08:38
Speaker 2: It is all about becoming a millionaire, but you don't start with investing, Like the first thing you mentioned in chapter one actually is about cutting spending, which is a little more personal. Financie, can you just touch quickly on why it is that you started with that.

00:08:53
Speaker 3: Well, it's the foundation if you if you look at the process of investing, just look at the map. So you start putting away Let's say the first year you put away one thousand dollars. Let's say the market's up ten percent, So let's say the thousand is eleven hundred. You you can be happy that you have eleven hundred, but eleven hundred basically came from you. And if you don't build that foundation, yes, exactly, And that's the way investing works. And after a while, in fact, we have great tables that show how this works. But after a while, all of a sudden, the money that you're putting in is small compared to what the portfolio is worth. And then you're on in essence to the next journey. And that is that leverage of compound return that it just it really boggles the mind to think that for a dollar a day over sixty five years that could become worth two million dollars a dollar a day from birth. I'm talking now that I think is amazing, but it has to start with that first three hundred and sixty five dollars.

00:10:10
Speaker 1: So pregnant women should play this episode on their belly to help their newborns get accustomed to these ideas, these concepts right now, right.

00:10:17
Speaker 3: I'm always one of my ideas in the bellies.

00:10:20
Speaker 1: Yes, yes, thank you, yes, well okay, So I'm curious to hear your thoughts on this, Paul. There was a Yale economist who came out with this term consumption smoothing, basically saying that, hey, there's no need to start in investing super young. We know that, yes, compounding returns. The earlier you start, the more that's going to build up, the more your money's gonna be working on your behalf. But you're always going to make more money in the future, and you know what, you can increase the amount that you're investing later on in your forties when you're more secure in your career. And to Matt and I that feels like a behavioral miss. Maybe in a perfect economic cycle it would work out for people, but it's also not ideal. So talk to me about starting early and whether or not kind of that idea of taking out a little more debt when you're younger and investing less if that makes sense or.

00:11:08
Speaker 3: Not, Well, it's not what it's not what I preach, because my belief is is that that first five years, assuming that you invested basically the same amount of money over a long period of time, that first five years can be worth forty percent of what you have to live on by the time that you are sixty five at retirement. And on top of that, when you're very young, you really can afford to take more risk, smart risk, always smart risk, but more risk than when you get older. And so those early dollars, they are absolutely magic. And what if what if you're fortunate enough to either have a parent, a grandparent or a company that will match what you're putting in And if you do now you are are showing this high responsibility in the eyes of the company or the parent, the grandparent, and they're willing to help you along. Boy, if you don't take advantage of that, you were kissing. This is just talking about bending over and picking up money off the ground. You can't pass it up.

00:12:20
Speaker 2: Yeah, and the folks who preach the message of that consumption smoothing, they're also counting on the best case scenario happening.

00:12:28
Speaker 1: And here I always predict that.

00:12:29
Speaker 2: And you can yes, that's not always going to happen as opposed to And this is why I feel it was worth highlighting the fact that cutting back on your spending and cutting expenses is such a clutch move is because that is something that you actually do have control over. That's something that is within your own sphere of influence as opposed to investing. And there is a certain degree of luck that comes with investing, depending on when it is that you first started investing, with the market's doing then, or what the market's doing when you first retire, Yes, whence returns risk, So you have all these X factors, but the ability for you to sock money away is something that is completely within your control.

00:13:07
Speaker 3: Well. And if you happen to hit the home run like nineteen ninety five and nineteen ninety nine, is your first five years compound rate of return of the S and P five hundred over twenty eight percent a year. If you started after that, and for the next twenty years, the compound rate of return was about six percent. Boy, I mean there's you don't know the future and the sequence of returns. As you mentioned, that can be the luck that you need to be able to take advantage of. And I don't I'm not suggesting. I'm sure you're not suggesting that people not have enjoy their life. But every study shows that most people who pay themselves first, have the money go into the savings first, don't even miss it because they don't see it as part of what they have to live on. But of course the corporations want every bit that you get in their pocket, not on in yours. So you're fighting an uphill battle to say no, I want to save for the future.

00:14:09
Speaker 1: Yeah, that's right, Okay, talk to me about about how important fees are. There was a comment in the how to Money Facebook group recently and they said, oh, half a percent on that fund. That's that's a topic of a deal, right. But you would beg to differ, Paul, and you would say half a percent is going to radically reduce the amount of money you have to spend in the future.

00:14:28
Speaker 3: And let me give you the numbers. Follow the math. Six thousand dollars a year for forty years, two hundred and forty thousand dollars, and then you go into retirement, take money out, and then after thirty years you die. Okay, what do you leave and what did you spend? The difference between eight and eight and a half percent during the accumulation period and six and six and a half percent during the distribution period, that's the half a percent you're talking about is one point five million dollars.

00:15:00
Speaker 2: That's an entire retirement for somebody else.

00:15:03
Speaker 1: It seems so small in the moment, right like that, what's the difference between point oh five and point five But like that one tenth of a decimal place can be life changing.

00:15:12
Speaker 3: Well, and people who are selling load products, they'll say, you only have to pay once. I mean, this is not like this is going to impact you for a lifetime. That's totally false. A five point seventy five percent commission load on a fund, on an equity fund actually costs you about a half a percent a year in lower expenses over a lifetime. So you know they're they're smarter than you are if you don't take the time to find these things out. But once you know them, you're going to be a defender of the family fortune here and just understand those little bits become fortunes later on.

00:15:53
Speaker 2: And just a second ago, you mentioned basically if we are to invest, to save and invest before that money even truly hits our spending accounts or our checking accounts, that you don't really even miss it. Talk to us a little bit about the wroth versus the traditional debate, because you talk about the need to reduce and to minimize taxes.

00:16:12
Speaker 1: Yes, just curious to hear your take on.

00:16:15
Speaker 2: Yeah, the roth versus traditional like whether or not you should pay tax now and then enjoy tax free growth or vice versa.

00:16:22
Speaker 3: Well, my belief is having started in this industry and marginal tax rates the first year that I got in the industry seventy percent, the year before ninety percent. What we have no idea is what tax rates are going to be thirty forty to fifty years from now. My heart and my gut tell me they're going to be higher. At some point, we're going to have to pay the bills that were accruing, and at that point, they were paying the bills that were accruing, and people gotten along just fine. That's the part that's so fascinating to me is while people didn't like it, they were living a pretty dog one good life. And how do we know that while we may have a relatively low tax rate now that later on, if we put away money that cannot be attached by the government and make it tax free, that could be a bonanza. And then it has to do with what you leave others, because you can also make that roth bonanza flow through to your airs. And so, yes, you don't get the refund. But let me tell you. I've talked to a lot of kids and I've said, hey, what do you do with that refund? Oh, we went on a trip, or we went you know, we did something fun. There's nothing wrong with having fun. But I'm just saying that you just lost that money's tax free growth for the rest of your life. But that's always this thing. We have to decide what do we give up to have more later? As my friend Paul Hayes is a free book that we now offer on our website called Spending Your Way to Wealth, and he reminds us saving is actually spending for later.

00:18:10
Speaker 1: Yeah, yeah, yeah, deferred consumption. I love what you said two about tax rates. I feel like that's really a really important siteration when we're talking about growing deficit, that's what we think, Yeah, and a growing national debt. I agree with you that it's a really important thing to keep in mind, as you know, whether you're putting in traditional versus wroth accounts. But we've got more questions we want to get to on you and including we want to talk about the two fund for life strategy. We want to talk about simple ways to grow that wealth for your future. We'll get to some questions with Paul on that. Right after this.

00:18:46
Speaker 2: We are back for the break and we are again joined by Paul Merriman, and we're discussing how you can turn thousands of dollars into millions of dollars. And Paul, I guess we kind of talk more about the overall sort of philosophy, different approach. I guess we kind of dove into some of the specifics as well. But we're now going to talk about the actual investments, the actual funds. Like you said earlier, the products. Yeah, you set the table nicely. Now let's dig in right exactly. The table has been said. You encourage folks to own stocks, but specifically to buy all of them. We see more videos floating around where there are supposed money influencers. They're just saying that only a few stocks make up most of the gains of the overall stock market, so which is actually true. So why not just buy those specific stocks. That's what we should be doing.

00:19:30
Speaker 1: Right, It's that easy, right, it.

00:19:33
Speaker 3: Is that it is that easy, But the outcome is not that easy. Because we had when I was young, we had it in the early seventies, the nifty to fifty, and these were the fifty companies that generally were regarded as companies you could put aside and just leave that those certificates in the lock box, the safety deposit box, and when you were ready to retire, just reach in, take a few shares, you know, and sell them as you go. Well, it turns out that owning all of the companies in the S and P five hundred since nineteen seventy two produced a higher rate of return, not because some of these companies weren't good. But believe it or not, when I mean, we look at Eastman Kodak, you look at Polaroid. In fact, ge Ge was considered a darling for a long long time until it wasn't. So what the academics say that the more stocks you have in your portfolio, the higher the potential return. Because people aren't very good, even professional money managers aren't very good at picking the best stocks. But I want to hit on one thing and make it very clear, because we kind of went right over it and went from bonds to stocks. There are some I don't know, twenty to twenty five percent of millennials that do not want to go into the stock market because the stock market is risky. Well, I mentioned that a half of percent equals over a million the difference in the return of bonds over the last ninety five years. I'm talking intermediate maturities and the return of the stock market the S and P five hundred five percent for bonds, ten percent for the S and P five hundred, That is five percent. That is ten one half of percent. That means it is legitimately a ten million dollar decision to go to where you think the safety is. And yet if you look at the average return of the S and P five hundred for all the forty year periods, the average is eleven percent. If you looked at the best, it was twelve and a half. If you looked at the worst it was eight point nine. So anybody who thinks that they're going to go into bonds and that's going to be the safe place to be, you are based on all history leaving a bonanza on the table. But what you must do is you must understand the volatility that goes with that. And once you understand it and are willing to live with it, I think you're on your way. But you need to go after that extra ten million dollars.

00:22:25
Speaker 1: Yeah, I like that. And well, and the other thing that people are tempting to do right now is yields have gone up on cash. People are saying, oh, I might just like stick a little more in the highl savs account, keep moore cash in the bank.

00:22:34
Speaker 3: Well, what you're doing you don't maybe don't even realize. You're chasing returns. And one of the biggest mistakes that investors make is chasing what's been doing well lately. As a matter of fact, it's kind of hard for people to believe, but those things that have been doing worse lately are apt to make more over the long term. And so that is a change of thinking, and it is one of the aspects of investing that makes it difficult, and that is that what is counterintuitive is normally the right thing to do. And I'm hoping that people will see a struggling If we had a struggling stock market, that's not a time to be a concern. We're not talking about now. We're talking about many, many decades from now. Lower prices are good for young investors because you get to buy more shares and that's a point of celebration, not sadness and fear.

00:23:39
Speaker 1: It's like a favorite pair of shoes me in sixty percent off. You'd rather buy them then than when they're full price.

00:23:43
Speaker 3: Exactly.

00:23:44
Speaker 2: Everyone's going for the doors when there's a massive sale and we fail to see the opportunity in front of us. So you've advocated actually for something called the ultimate buy and hold strategy for decades, but then meeting with Jack Bogel, the founder of Vanguard, that caused you to reconsider that a bit. Can you talk to us about the two funds for life strategy?

00:24:05
Speaker 3: Sure? And just to fill in the gap there. When I was an investment advisor and in my own personal account with my wife, we have ten different equity funds. It's hugely diversified, big small value growth reads, emerging markets, all of that stuff. But what I met with with the John Vogel, he really gave me a talking to. He believes in all those things too, and that's all comes out of the academic community. That part is not a big deal. What he says is a big deal is that you've got to give them an investment strategy that they if it's for do it yourself ors. I'm not trying to help advisors. I'm trying to help people who don't want advisors or they want to be their own advisors. So he really motivated us to look more carefully, how could we produce the same kind of returns at about the same risk, but only hold two funds instead of ten or in some cases three or four. But the bottom line is is to make it simpler. And about a year before my meeting with Vogel, a fellow Chris Petterson, and we're all volunteers. Chris volunteered to work with our foundation and he came up with this strategy that I think is one of the most clever strategies I've ever seen are portfolios, and that is to combine a target date fund, which is a wonderful way for people who don't want to fool around where their investments, don't want to worry, just want to put the hands the money in the hands of professionals and let them do it the way they think is best. Forever target date funds plus one other fund that has a history of making substantially higher returns with a small part of the portfolio, and those two funds together they make it possible for somebody truly to be able to hit what I would call a home run in terms of long term return. And that second investment is what's called a small cap value fund, and they've been studied going back to nineteen twenty eight. They make a three four percent better than the S and P five hundred hat more risk. I mean, this is not a gimme. You're going to pay be taking more risk with that small part of your portfolio, but it's a very small part of your portfolio.

00:26:55
Speaker 1: I love the two funds because you're right, it's really simple, the kind of behavioral thing that a lot of people can follow through. It's like, oh, I just need to buy these two things. Great, let me go on about my day. It's kind of like when Matt and I wouldn't we shop at aldi and there's not forty two ketchups to choose from, there's one. And it just makes it a whole lot easier to not waste a whole bunch of time and a whole bunch of money standing there staring at the ketchups, which is the kind of thing I would do at a normal grocery store. Right, So behaviorally it makes sense. That's actually kind of what the Target Date Fund was designed for in and of itself, was to be this one stop shop for people. So why is it in your estimation that the Target Date Fund isn't quite enough? Isn't isn't really cutting it for a whole lot of investors, including younger investors, And why is it that they need to add the small cap value exposure.

00:27:41
Speaker 3: Well, you used a magic word, and it was a magic word to John bogl isn't quite enough? In fact, a target date fund by itself, it's probably the best investment product that's ever been created, and it will give you enough. The question becomes is enough going to be enough? Or should we be trying to get what I would call more than enough? And the reason this is not about greed or wanting to be rich or anything. It's about helping you make a return that might make up for mistakes that happen along the way, or maybe you don't get the best sequence of returns, you don't have the best luck. I believe that if most of us are plans could somehow be reconstructed to get a slightly higher rate of return, so that if we don't get that return that we want, that will get that return that we need. And if we fire too low, it may be something will happen in your life that will keep you from getting where you want to be. And let me tell you why I do belie target date fund is enough. There was a study done by Wharton and they did it in cooperation with Vanguard. They looked at one point two million accounts retirement accounts at Vanguard. Some of them had no target date funds, some of them had all target date funds, and the studies were done and the result is this, those people on average who use target date funds were likely to get about two point three percent more return than those people who were doing it themselves. Because there are so many mistakes a well meeting do it yourself investor can make, and most of those mistakes are driven by our emotions, and so the beauty of that target date fund it just takes all of those emotion motions out of that process. But I still, if you have the stomach for it, I still think adding a little bit of small cap value ten percent, twenty percent, I can make the case for fifty percent, but you don't have to go to fifty, But even ten or twenty percent, I think it's going to be a life changer. Keeping in mind that nobody, absolutely nobody knows where this market's going to be thirty or forty years from now exactly.

00:30:32
Speaker 1: Yeah.

00:30:33
Speaker 2: Okay, So on that note, if you're like, okay, I'm a robot. If I think I can handle the volatility, like would somebody who believes that, who feels that way, how comfortable would you be with them going all in on small cap value? And by the way, small cap value it's more volatile. Historically it's been more volatile than the S and P five hundred, and without volatility you get higher returns than the S and P five hundred as well. But are there folks out there who you think should take this more aggressive strategy?

00:31:01
Speaker 1: They've got like an iron stomach?

00:31:03
Speaker 3: Yeah, you know, I my wife and I. Every time we have a grandchild, they get a check, and that check is to underwrite their retirement savings for as long as it lasts in terms of going into either into a wroth Ira or hopefully a wroth four oh one K. But what we have recommended to our kids to do with that money until it's time that those grandchildren qualify for a retirement account, it's just split it half in the S and P five hundred and half in small cap value. Okay, now they're going to leave a lot of money on the table. But here's the problem. People get disappointed way more easily than we imagine. You said, be a robot. Well, I do think if you were a robot, I would still probably I would still probably just try to defend you emotionally suggest half and half. You get about two percent more than just the S and P five hundred if you were fifty to fifty and by the way, the idea that it's more risky. A guy that I have the highest respect for, guy named Ben Felix. He has some wonderful educational YouTube pieces. He did a study recently. He went back to nineteen twenty seven and he looked at all of the ten year periods, every hundred and twenty consecutive months, How many of those one hundred and twenty month periods did the S and P five hundred lose money? One hundred and forty five times. That's amazing. I had no idea it was that many times, and the average loss was two point three three percent. Now you're not at first, you're not going to believe what I'm about to tell you, But the academics have gone back and they dug out the returns of small cap value. In one hundred eight of those one hundred and forty five losing periods for the S and P five hundred, small cap value made money. And if you look at all one hundred and forty five of those losing one hundred and twenty month periods for the S and P five hundred, the average gain for small cap value was over six and a half percent. So it isn't just that small cap value gives a better long term return that we're looking at here, but it's also a hugely historically successful balancing kind of of that's what you're after. I mean, you have why do you have many stocks in a portfolio because you can't trust one might you want some small and some value instead of having everything in large and mostly growth. Yes, you would, because it's more diversification. And that's one of the reasons that I'm not worried about the long term. Sure, I'm worried about the short term, always about the stock market. I'm eighty years old almost, so I don't want any long term peer market. But again, if I were a young person, I would just put that worry out of your mind. Do it fifty to fifty and we actually will have tables up on our site within a couple of months looking at every year since nineteen twenty eight.

00:34:27
Speaker 1: All right, well, talk to me, Talk to me about you just said about like, you're not worried right about small cap value producing outsize returns for people who have more exposure to it over the decades. But I will say there have been a whole lot of hit pieces on small cap value recently in financial publications, in the Wall Street Journal, market Watch, those kind of places, talking about, oh, small cap value, it's been in a slump, is it dead? So I guess my question for you is it sounds like you still retain faith that more exposure to value stocks can help people outperform, even though we've had more recent history where small cap value has underperformed. Yeah.

00:35:04
Speaker 3: Well, this is another part of the story that I will be telling next week, and it shows. There's a table called a telltale chart. The telltale chart compares the relative return to the S and P five hundred going back to nineteen twenty seven. When that telltale chart is going down, it means that the S and P five hundred was doing better. When it's going up, it means that small cap value is doing better. There were three periods that the small cap value underperformed the S and P five hundred of seventeen to nineteen years. That is the way it is, and so right now we happen to be in one of those periods where small cap value hasn't done it as well. The problem is we wait for something to get hot to get on.

00:36:08
Speaker 2: Well, this goes back to what you're saying about chasing returns.

00:36:10
Speaker 3: Yeah, exactly. And if I told you there's a possibility that getting in at the peak could mean you wait seventeen years to an essence break even I don't by the way, I don't mean that you won't have made money. I'm just saying that you would have been better off than the S and P five hundred. But here's the end result. The end result over that ninety five or so years is that the small cap value was worth thirteen times what the S and P five hundred was. But you had to have a lot of patience or you needed to have time on your side. And here I am at eighty and I'm saying I'm not sure I have that time. And my wife asked me, wait a minute, is this money for us or is it for our kids? Oh? Yeah, she's right. It doesn't matter that it doesn't do what I want it to right now.

00:37:09
Speaker 2: It doesn't matter for you.

00:37:10
Speaker 3: You know, I'm just being emotional.

00:37:12
Speaker 2: Gosh, this is making me possibly reevaluate what I've got going on, Paul, because I guess I'll be financially.

00:37:19
Speaker 1: Naked a little bit here.

00:37:20
Speaker 2: But all of my money that's invested in the market, so aside from real estate, it is in the S and P five hundred, and so if I'm looking ahead, I'm looking decades and decades down the road. If I am interested in incorporating some small cap value, how would I go about that? Would I just start buying up some of that and rather than vo which is the S and P five hundred.

00:37:40
Speaker 3: I'm going to make it easier and I'm going to make it better than Vanguard. Okay, now, when I say that, obviously I'm not talking about the future. But based on everything, we know what kind of small cap factors give the best return over the long term. It isn't a Vanguard fund, but it's a fund that's available at Vanguard on a commission free basis. And Chris Petterson every two years updates his list of best in class ETFs and the one that has been at the top of the list is a v u V, the Avanta Small Cap Value Fund. And so you can compare it to VBR or v io v or or the company. Yeah, there's there's about three of them. I believe that are ETFs at at Vanguard. Now it's not that it's better because these people are magic. It's better because, for example, VBR, the average sized company is six billion dollars more than twice the average sized company in a v u V, Plus the companies in ABUV are higher quality, better earnings within the small cap value arena. So the question is are you better than to go ahead and do that right? Now, or do it over time. Well, here's the problem. If you do it over time on a dollar cost average basis, you could take the next twelve or twenty four months to do that and everything would be going just fine. And then at the end of twenty four months, the VBR turns out to be the big performer for the next ten years. A year or two years is a random event. This is so hard for people, I think a lot of people to understand. If you base your decisions on even ten years performance, what do you do with the S and P five hundred after it loses one percent a year for ten years, Why would you ever invest in that? Well, because over the long run they'll tell you it will do better than that, but it doesn't change the decision. Dollar cost average, go ahead and and and get it right right now, I would say, go ahead and get it right or better. Yet, if you don't really trust that, take half your money and do it that way now, and dollar cost average in the other half.

00:40:21
Speaker 1: All right, Yeah, well I like it, Paul.

00:40:22
Speaker 2: We've got a few more questions we're gonna get to. Actually, I might have a little small one there about kids and investing. We've got a couple other questions to get to. We'll get to all that right after the break.

00:40:41
Speaker 1: We're actually talking with Paul Merriman. We're talking about turning thousands into millions, and I love that we're kind of going into depth on the two funds for life approach. It's it's so good and I think it's it's helpful for people because it's it's simple, but it hopefully for most young folks who have a long timeline, will accelerate your returns. Mean, we got more money in retirement. But Paul, we're talking about how a lot of the money that you've got invested is for kids, is potentially even for grand kids, which is awesome. A lot of folks who are nearing retirement age, that's money that they need to live on, right, And so you talk about how the biggest risk in the index fund only strategy is the ability to reduce risk in those later years, and that your two fund strategy creates a better glide path that makes it easier to start drawing down on those retirement funds.

00:41:26
Speaker 3: How is that, Well, what happens in a target date fund is that the people who manage it, they know when you want to retire, if you're sitting in a twenty sixty five target date fund. That's how they work, and so they are going to look not at you personally, but at people like you, and they're going to be conservative. Just got to understand that they're not going to take a lot of extra risk, but they are going to They're going to manage the money very similar to how a pension fund would manage the money. And as you get closer your retirement, because it now instead of needing to produce growth, also needs to produce income, they will be transitioning part of the portfolio to where you might be forty percent in bonds or fifty percent in bonds. And that's what my wife and I were fifty to fifty stocks and bonds because we don't want to take the risk of an all equity portfolio on the short term. So that's the beauty of a target date fund. Not only can you be twenty one years old and start putting your one hundred dollars a month into this fund, but you can when you retire start taking money out of the same fund until you die. It's an amazing thing to be able to have and you never have to make a decision except when you think you're going to retire.

00:42:48
Speaker 1: I love it.

00:42:49
Speaker 2: Okay, So, Paul, you mentioned how you've got grandkids and you basically I think you said, you're underwriting their retirement. Basically it's like seed money, the head start essentially. And think about that. I guess I find myself wondering if money that is set aside, not only for kids, but like you said, grandkids, where man, that is going to be a substantial amount of money off in the future. Do you are you ever concerned that legacy wealth that you're passing down that it'll undermine kid's ambition.

00:43:19
Speaker 3: Let me give you a really easy one that it's just it's outrageous. A child is born, you give them the first year three hundred and sixty five dollars, and that is invested in small cap value if you wanted to, and in essence, that three hundred and sixty five is going to find its way into a roth ira as soon as possible. Now, if that three hundred and sixty five dollars and grows at twelve percent, the compound rate of return of the average forty year period for small cap value sixteen percent. Going back to nineteen twenty eight that I don't think is going to happen again. But I will say that I think twelve percent if the S and P five hundred makes ten is a legitimate return. If you get twelve percent and that money sets there for seventy years, don't ever add anything to it. Just get it into that roth Ira. It would be worth about a million dollars, and if it had compounded at ten percent, it would be worth about four eighty eight Okay, four hundred and eighty eight thousand. Now that's the income for when the child is seventy how about funding seventy one great at their first birthday, you put in another three hundred and sixty five. You open a separate account that is meant to be the retirement at age seventy two. So by the time they're eighteen or twenty one years old, what you'd explained to the kid is that you've started this for them. This money is your gift to them. And I even recommend that you, like for this granddaughter that was just born, for us, she is going to get a letter from us, She's going to get a video from us, she's going to get a podcast from us, so that when she's eighteen, because we'll be gone, more than likely that she will know what was the dream that we had for her. This is not a get rich quick scheme. This is a get rich slowly And if you did that for eighteen years, you have, in essence help fund ages seventy through eighty eight in retirement.

00:45:40
Speaker 1: No. I think that's great because I think what you're speaking to is the fact that not only are you helping with the seed money, but you're offering the education and the reason why you're doing it too, which I think helps complete the picture. And sometimes for some parents it's all about like that concept of generational wealth I think can be a good one, but it can be taken too far, and so you have to think about how you're passing on the education. That's almost more important than the money. Yeah, but if you can pass on, you know, some seed money early on too, that can be helpful for sure and make a big difference in their in their long term future. Paul, I'm curious to hear your thoughts about the financial advice industry, and you've worked so hard for so many years to make this sort of investment advice easy for folks to understand and to implement. But you also talked earlier about how financial advisors are expected to do more. They need to have specific like tax knowledge, and they they're therefore behavioral help as well along the way. Do you feel like the value proposition of financial advisors has gone down in an era of DIY investing that is so cheap and simple to actually pull off.

00:46:50
Speaker 3: Well, my belief is that if a person can learn how to do this on their own, it is a two to three million dollars payoff. So having said that, I have been on a diet since the fifth grade, I have lost thousands and thousands of pounds. I know how to lose weight, and yet I am still at almost age eighty thirty pounds over weight. I have four stints, I have high blood pressure, I have high cholesterol, I have diabetes. I have every motivation to do this right, but I just love to eat and to celebrate today. Now I can't. I have never been able to put it on automatic. But I will tell you that to the extent that you can put it on automatic and just let it ride, the payoff is huge. But if you can't, if you're afraid to invest, a good advisor will do that for you. It doesn't mean they know the future any better than you do. They don't, they can't. They don't know anything about the future. They know a lot about the past. We have over two hundred tables of numbers that are trying to help people understand the past. But if you don't get it and you can't take it, and it's just too much to ask, then you have somebody else do it. And having said that, my wife and I have an advisor. Now. Part of it is for the other stuff that go beyond just the investment part. And I want to make sure that my wife if I go first, and she's a few years younger, and I'm likely to that she'll be taken care of. But I don't want to even think about my own money. We simply ask for a check the first of each year. That is a percentage of the money we have. We try to give away thirty percent of it. And it's really easy to give away thirty percent because our foundation needs lots of money, and so I write a lot of checks. And by the way, Western Washington University will be announcing a program that we are underwriting that will give financial literacy required about forty hours of required classes before you can graduate from Western and I think it is it's unusual, and we're not there to teach people how to buy stocks. We don't want them to learn how to buy stocks. We want them to be in index funds. We want them to understand budgeting. We want them to understand borrowing money. We want them to understand a four h one K plan. We want to make sure they have the language so that they're not going to be over emotionally overwrought with having to face stuff they don't understand. They will understand the basics. And so my hope is that we're going to help a lot of young people do this better and that other universities will do what we're doing.

00:50:09
Speaker 1: That's great. I love it.

00:50:10
Speaker 2: Yeah, whether that's assistance with financial literacy and financial education, or like you're saying, when it comes to advisors, if you are not able to take that initial step to provide some sort of action, because it doesn't matter if your returns are less because you're paying a small fee to an advisor, if the alternative is that you're not going to save and invest at all, right, and so you kind of have to look at the whole picture, Paul, your Foundation does an excellent job at doing that, and.

00:50:35
Speaker 1: We really appreciate you.

00:50:37
Speaker 2: You're speaking with us today and for folks who want to learn. I mean, like you said, you have an incredible resource being your website, some of the different tables and information that you have up there.

00:50:48
Speaker 3: Yeah, and I have to say that book. We're talking millions where we have the free PDF. The reason that pdf is free is because that way you can you can forward it to everybody that you know that might be helped by that book. Sure, it'd be nice to have the Royalty use it at Amazon, but I'd much rather have somebody have that book and be able to share it with others.

00:51:15
Speaker 1: That is impressive and your life's work. It has helped so many people and it's going to help a lot of people today. So thank you so much for joining us. Man. We really appreciate.

00:51:23
Speaker 3: Good luck and you're in your venture. You guys are doing a great job.

00:51:27
Speaker 1: Thank you, Paul Joel.

00:51:28
Speaker 2: You know, like there are multiple folks who say, oh, you guys are doing a great job, but I think when Paul says it, he really means it, and it's because I think we do have such a similar mission and how it is that we're approaching not only personal finance, but paulsk specifically investing.

00:51:43
Speaker 1: We're just not as smart as Paul.

00:51:44
Speaker 2: No, no, we're I was going to say maybe half as smart because we're basically half his age, but I don't even know. But I mean, I'm going to cut straight to it. I think my big takeaway is that I am going to have to figure out how I'm going to start implementing some small cap into my investment portfolio. I don't know if I'm going to pull the switch and go fifty to fifty he like he has for his grandkids right now, half the S and p f F hundred half small cap, specifically of the one that he mentioned with av UV. That's right, We've got to figure out a better way ave of.

00:52:17
Speaker 1: I don't know.

00:52:17
Speaker 2: It doesn't really flow off the tongue like FC Rocks or even VOU, but I yeah, I'm not exactly sure how it is I'm going to start implementing that. But man, I am most definitely going to be taking another look basically because yeah, nobody knows the future. And if you think, oh, well, yeah, small cap value is dead, you're guessing. But what is fact is looking at history, looking at the past and knowing what it is, knowing the performance of something like small Cat Valgue versus the SMP over the past one hundred years.

00:52:48
Speaker 1: I love the two funds approached thing because you and I were all about simple. The reason is is because a whole lot of people they start to hear a lot of gobbledygook from in so called investment experts and they're recommended to start their money away in twelve fourteen, fifteen ETFs and they're like, I don't know what I'm doing, I don't even know what I'm buying, and it just over it muddies and muddies the water, and so oftentimes over complicated. Oftentimes what happens is they walk away from that meeting and they don't do anything. And that is part of our reason.

00:53:15
Speaker 2: And then folks end up going turning to advisors and they're paying out the nose. But yes, that is better than not investing at all. Sure, but there is a simple.

00:53:24
Speaker 1: Path, simple way, and so that's why we've always talked about like that simple index fund strategy approach for people in the wealth building phase of their life. And this I feel like this two fund strategy really helps keep it simple for DIY investors while adding some potential upside benefit from from returns right over the years.

00:53:41
Speaker 2: So I love and I think it historically better returns something like just moving forward with a total stock market in tax fund or even the US and people.

00:53:48
Speaker 1: And it makes it easier than when you're in the draw down phase of your life too, like he talked about towards the end. So but I love too what he said about the first five years of investing can be the equivalent of forty percent of what you live on in retirement. And so that idea of consumption smoothing you and I have kind of taken it to task multiple times on the show because we just think it's the antithesis of the right behavioral moves to be making if you want to grow a significant nest egg for your future. And to say, I get started ten fifteen years from now, but will you? Will you? Actually? And so I think that knowing that those first five years are so important, That's why I'm so energized when I hear listeners who are in their teens and twenties getting started, because I'm saying, man, after it, that head start is going to catapult you above the rest, and it's going to make it actually so much easier in future years when your expenses grow, and will say, maybe you start a family or something like that. It just having done it, being an investor, doing it consistently over a longer period of time is going to be better. You're going to be better off in the long run. Absolutely. Yeah.

00:54:51
Speaker 2: And I will say I don't have as much wisdom as Paul does, right, But that being said, every season of life that I've entered into, I'm so glad that we saved as much as we did early on. Yes, every year that passes, I want to spend a little bit more money than I used to. I don't want to rain that spending in necessarily, because, like you said, we've started a family and there's just other experiences. Even if you don't have kids, do you not now want to in your late thirties start doing a little more traveling with your significant other or your spouse. The ability and the flexibility that you have.

00:55:23
Speaker 1: To live life a.

00:55:24
Speaker 2: Little more on your own terms. Even let's forget travel, let's just say what you're saying yes to when it comes to your job or your career. It just opens up so many opportunities to you, and that is so incredibly valuable.

00:55:38
Speaker 1: And what's the biggest risk. There's the occasional person that's like hardcore in the fire crowd that says, oh man, I save too much. That is not the majority, that it is a rare exception. That is a rare exception. We don't want you to be that person either, because we want to be balanced and enjoy spending things on enjoy spending money on the things you care about in the here and now also, which.

00:55:54
Speaker 2: Is why we quite literally put our money where our mouth is. Yeah, I almost said that when you said that earlier, and I kept myself from interrupting you. But because we are drinking a beer during this episode, quite fittingly, actually we're enjoying a discipline. This is a double by bold Monk.

00:56:12
Speaker 1: What were your thoughts on this beer? And not a double ipadu Bell like in the Belgian sense, right, that's how the Belgians, which which is kind of like a light brown with some of those Belgian yeasts and spices. I thought this was a pretty light on the spices, I would say, but just a great representation of a d bell. And so if you're like trying to an animal double pronouncing him right. But yeah, but if.

00:56:31
Speaker 2: You're American, American, is is it?

00:56:35
Speaker 1: Doubles?

00:56:35
Speaker 2: Do?

00:56:35
Speaker 1: Bells and and quads are my favorite styles of Belgian beers that well, aside from the spontaneously fermented. But I love a good quad too, And this is kind of like the lighter version of a quad. It's got some of those notes going on, but it's super accessible for lots of folks. So I really dug this one totally.

00:56:53
Speaker 2: Yeah, think about a Dubell as a European brown ale Like in America, we've got browns. If you are looking for an exotic brown, look to the Belgian shelf and pick yourself up a.

00:57:04
Speaker 1: Dubell maybe a little more refined too. I don't know, I don't know.

00:57:08
Speaker 2: Maybe there's some there's some really good brown, nice browns out there, folks. That's not a style that a lot of American craft breweries have latched onto, though, interestingly enough, there's just fewer notes that you can draw out of it.

00:57:19
Speaker 1: A good brown, though, like especially like an Imperial brown is now in October, is an ideal, ideal beverage to be consuming.

00:57:26
Speaker 2: We need to find more of those. Yeah, for the rest of this year, but we will include some of the different resources we mentioned during this episode up in our show notes. And yes, we will link to and post the telltale chart that Paul was referencing during our conversation, but you can find that up on the website at hodomoney dot com. But Buddy, that's gonna be it for this one. Until next time.

00:57:48
Speaker 1: Best friends out, best friends out

00:58:00
Speaker 3: It, don't do Hope,