 Welcome to Bogleheads On Investing, episode number 18. Today I have a special guest, Paul Merriman. Paul is an author, speaker, philanthropist, a 50 year veteran of the investment industry and a former guest on Lou Rickhauser's Wall Street Week. My name is Rick Ferri and I'm the host of Bogleheads On Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a 501C3 Corporation. Today my guest is Paul Merriman. Paul is a Renaissance man. He started out in the investment industry in the 1960s as a broker, right out of college. He has run manufacturing plants. He has been successful in his own investment management firm and now he's a successful philanthropist and educator, particularly interested in educating young people. With no further ado, let me introduce Paul Merriman. Welcome to Bogleheads On Investing, Paul. Well, it's great to be with you, Rick. I mean that. I've been waiting years to have a chance to talk to the Bogleheads. When I told the BogleheadsOnTheBogleheads.org forum that you are going to be my next guest, it immediately lit up and I got all kinds of questions for you. Now most of them investment questions, of course, strategy questions. Before we get to that, can you tell us something about yourself? Who is Paul Merriman? Well, Rick, I'm a very old man who started working when he was very young and could never stop working and it rarely had to do with money, although if you do good work for people, you do okay financially, I think. And so I had the good fortune at age 40 to be able to do what those fire people are working to do and that is to retire at a young age. But retire certainly didn't mean to quit working. What it really meant was instead of educating and then managing money, I could just spend all that time educating. I was in the investment advisory business for 30 years. During the week when the market was open and markets were going up and down, it was always uncomfortable. I was always at a certain amount of anxiety because what that market did was going to impact the people I was working for. And on weekends, I felt so at ease with the world. And then I retired in 2012 and started my foundation and started to educate and write and do videos and podcasts. And I never had that, that same sense of responsibility. So I have a good time seven days a week now, rather than two days. So you are all about education now. I am dedicated to helping investors, young and old. I go from high school all the way up to retired people. Figure out how to do better with their investments. Well, Paul, you and I have a similar background in many ways. You actually worked as a broker for a major Wall Street firm back in the 1960s. Can you tell us about that experience and how that shaped you for what you did later on? Well, I did start young. In fact, I started in the industry at a time when they first started hiring young people. Before then, they wanted people to be in their late 20s or their 30s, but they were hiring college graduates and training them at the New York Institute of Finance. I don't know if you went there, Rick, but it was a sales course. I went through the broker boot camp at Kidder Peabody, actually. Oh, yeah. I was with Harris Upham, which became part of Smith Barney. And I learned quickly that the conflicts of interest in that industry are so great that I just could not live with those conflicts of interest. And so I was a broker for less than three years and went to do other things because I really couldn't live with what they were asking me to do. And I was working for a great firm in many ways. But I still didn't like that conflict of interest. And many years later when I'm 40, I have a chance to get back into it. But I love the business. I love helping people. It's just nice to be able to recommend a no-load mutual fund instead of a mutual fund that charges 8.5%. It's nice to be able to recommend an index fund instead of an actively managed fund. You know, those kind of things weren't around in the mid-60s, the index fund and no-load funds like we have today. A whole different world. Absolutely. I completely agree. That was just getting started when I went into the industry. So it has been a real benefit and things have really changed quite a bit. We can talk about how the industry has changed so much during, well, the 50 years that you've been in it, if you will. But you actually left the finance industry and you went into manufacturing. You became the president and the chairman of a manufacturing company up in the Pacific Northwest. I mean, could you tell us a little bit about that experience? Well, it really wasn't about manufacturing for me. I had guided some people to invest in a company. I was, I did not much money, but enough that I felt responsible for them. And the company was going to go bankrupt. And I knew nothing about manufacturing, but I had a good relationship with some people in the brokerage industry. So the company invited me. I offered to do it without any compensation. Well, Paul, that almost sounds like a Warren Buffett story in many ways. You had guided investors to this particular company that was going bankrupt and then you stepped in. Well, I would hesitate to compare the size of this company with a story about Warren Buffett, but in a way, yes, I mean, these people were, many of them were friends. And as it turned out, the man who was running the company before I came in to run it did not have a trusting relationship with the bank. And the reason I got in was because a friend of mine from a bank said, this is the guy you can trust. He doesn't know anything about manufacturing, but I think he'll tell you the truth. So I went to the people on the floor of the manufacturing company. They knew the solutions. I didn't. I didn't have much choice but to listen to them and keep the creditors at bay long enough to solve the problem and keep them out of bankruptcy. And we did. And it was a very rewarding, not financially necessarily, but it was a great experience for me. It made me realize I don't want to run a manufacturing company. But I also, by the way, Rick, I had a jewelry making equipment and lapidary equipment supply house at one point in my career. I did a lot of things before I was 40 and actually found a 30 year career that was absolutely the most fun I've ever had. Well, once you went into the investment industry back in 1983, I mean, back then there was maybe one index one available. But as you were saying, they had the no load fund started coming out T row price and a few other companies were available in no load. So what was your strategy back then? And then how did it change over the years? Well, you, of course, know that in 1983, we had just been through about 17 years of markets that went up and back down and up and back down and up and it kind of went nowhere for a long period of time. And investors hadn't made much money, if any, because because they had been whipsawed and been disappointed and concluded I'll never invest in the market again, that kind of thing that that turns buying holders into something other than a buying holder. And I happened to know something about market timing. And I thought, well, wait a minute, if somebody could help these people navigate these ups and downs in the market, maybe they could stay the course, maybe they would have the trust to wait out the declines knowing that they wouldn't get out at the top and they wouldn't get in right at the bottom. But if they could get the majority of the move, that would be a value to them and they might actually have a good long term return. So I became a real expert, I think, on market timing and and developed a pretty good following doing that. And then in about 1993 or 2004, we had a lot of our clients who had money with us, but but had a lot of money and more money elsewhere. And they were using buy and hold. I think they liked our firm the way we treated them. And they asked if we could provide buy and hold as well. And in fact, over the years, Rick, a lot of people ended up being half in buy and hold, and half in timing, as I myself happened to be. And yet, I know, I know from all of my experience with timing and buy and hold, that probably a good 60% of the folks out there to learn how to be a good buy and holder, maybe 2% of the folks out there can learn to be a good market timer, because there's no question market timing emotionally. Tax wise is the is the toughest strategy of all, but particularly emotionally, it was a different time. Like you were saying, I was actually in college during the 1970s, and I was taking finance courses. And I remember one college professor, every time we walked in the room, he said, hey, look at interest rates. Now they're at 11%. And then the next week, look at interest rates now they're 12%. And it was it was just a completely different time inflation was going out of control in 1980, there was high unemployment. And like you were saying, nobody was making any money in either the stock market or the bond market. So stocks and bonds were highly correlated. And they were both bad. Everything was bad. And it had been that way for a long time. And I can understand where you were coming from that the only way you could hope to make a rate of return when everything is going bad, was to try to get in at a better time and try to get out at a better time and do some sort of a tactical asset allocation. And then I can also understand that later on, by the 1990s, when the market finally bottomed out and started going up, that your you would also have investors who decided that they didn't want to do the tactical asset allocation, at least part of their money, they just wanted to do a buy and hold, which has worked very well. Also, so I can see where you're coming from. But are you still doing that? I mean, do you still look at the markets and try to make a determination whether it's time to get out? It's time to get in. And if so, what is it that makes you one of the 2% that that's able to do it? Well, the the old firm that I I sold my firm in 2012, and I did I did not retain any ownership, because I I really did not want to have any conflict of interest as I moved into being an educator. But they still do both buy and hold and timing. And by the way, you have a background, I know, with the dimensional funds, we certainly never did any timing with dimensional funds, or they would have, they would have thrown us out. We actually had a good relationship with DFA, even though we also did some timing. But we use just traditional trend following kinds of timing. What made us unique in the 80s is we developed a strategy that focused on asset allocation, plus timing, just as we did with buy and hold, except you didn't use the timing. So we had timing with big and small and value and growth in US and international and fixed income. But the fact is that you are wrong so often with timing, that investors just don't get it. I think as my recent article focused on this idea of creating better expectations, that the expectations for timing are almost always going to be that the timer is going to get me out at the top and get me in at the bottom. And I'm going to make money when the market goes down, even though it may only be money market returns. But it's never that easy. You know that it isn't that easy with buy and hold. Well, at least I'm not making any kind of a decision. I'm not hanging my hat, if you will, on my ability to get people in and out at various times. I know how difficult that is because when I first came in the industry, I did use active managers who made or break me, you know, on their decisions. It was I hung my hat on their ability to outperform. And when they didn't, I lost clients. One of the reasons I went to buy hold rebalance of just index funds is because I didn't want to lose clients, you know, I wanted to be able to control what I could control. And I was never good at market timing. You know, it's so hard, you might be able to pick it right, went to get out. But now you got to pick it right when to get back in. So difficult. But when it's all automatic, Rick, it isn't difficult. And when you tell people that you're going to probably lose money on half of the trades, and that you're many times you're going to get back into the market at a price higher than you last got out, that when they go through that bootcamp, they come away thinking, Oh, this guy is, he knows what he's doing. No, no, I've never known the future. I'm only really good on the past. And and so if you don't live up to their expectations, it's it is hard, I think to keep a client positioned in a strategy, when there's activity and when you're wrong part of the time, I have 10% of my own portfolio in a fund that I started in 1995. It's a combination of market timing and leverage. And in the last 10 years that the last decade, it compounded at a little better than 6%. Now, how would a person feel about having spent 10 years at 6% when the S&P 500 made twice that? Well, I feel just fine, partly because one, I know that 10 years is not a meaningful period of time. Well, it is in my life, but not in the life of the market. But the previous 10 years when the S&P 500 lost 1% a year almost, that fund compounded at over 18% a year. So the challenge for investors is to invest in a way, one, that they'll stay the course and two, that that whatever is being done with their money fits within whatever their personal bias might be about the market. And some people have a bias towards buy and hold. Other people when you sit and talk with them, their bias is really market timing. They may tell you, I don't believe in market timing, but their bias is to doing something when things aren't going right. As opposed to John Bogle, who says, don't just do something, stand there. Yes. And I had 90 minutes with Mr. Bogle back in June of 2017. It had a lot of impact on me. But I want people to stand in the right place. That's what I'm trying to get people to do. And where John Bogle, God bless him. I mean, I love what he's done for the world and my friends and all the people that are paying less in expenses today than they used to. We had a major difference of opinion about something that I think is of the greatest import in terms of how an investor should think about the market. So yes, I want them to stand there, but stand in the right place. And I want you to elaborate on that a little more because I find this very interesting. So if you could dig into that a little more, what exactly do you mean by stand in the right place? Well, here's what John Bogle and his Vanguard, what they recommend. And by the way, everything I recommend can be done in Vanguard. It just might not, well, it won't be done the same way that John Bogle and others do it for people. We don't know the future. We have faith in the future. So we're always preaching at some level. But they tell people that if you put your money into the total market index, that you have done the right thing. Now, I'm not suggesting you've done a bad thing. I'm not even suggesting that I think that or that the way I suggest to do it will do better because we don't know what's going to happen. But I do know this, that when we invest in a target date fund, I love target date funds. And what you end up with is a portfolio of equities that are total market, total market US, total market international. And what do we get when we get the S&P 500 and the total market index? We get a cap weighted portfolio. That means that almost all of your your exposure to risk is in large cap growth, I shouldn't say almost all, but certainly over 50% is in large cap growth. And that's not necessarily bad. But when we look at the past that the academics have recreated going back to the 20s, what we know is first thing we know that I that I want to clear up is the return of the S&P 500 is virtually the same over the last 90 years that the total market index is not turning out a better rate of return or it does not create an expected higher return than the S&P 500. Oh, they'll say they've got small cap and they've got value and stuff. But it's so little that those big companies that are in there because it's cap weighted, they just walk all over the small cap companies in terms of impact on the return. So what I advocate for is in the US market is a simple approach where you would you would spread the money away not based on cap weighted, but based on asset class weighted. And this is not anything I ever came up with, Rick. I don't think I've had an original thought in my life. But I went through the DFA process as as you did. And I think they teach you a lot of really good stuff about how investing works. And one way to improve earnings, at least looking backwards, is to rebuild the portfolio to have some small and some value and some large cap in the US. Now, whether you add internationals or not, I'd like you to but you don't have to to historically get a decent rate of return. And what happens is that when you go that route, if you talk in terms of under performance, the large cap driven index funds have produced lower rates of return over time than a combination of big small value growth. And the risk if you look at it over time, it doesn't appear to be any more as a matter of fact, I just did some tables that show the market broken down into decades from the 30s, the 40s, all the way to the last 10 years. And I create a look alike of big small value growth versus the S&P 500. And there are times the S&P 500 is right at the bottom, or just off the bottom of all the equity asset classes. But the combination is always just kind of floating in the middle. Never gets to the top can never get to the top because it's made up of the asset classes that one of them are going to make it to the top. So it never gets to the top. But it also doesn't get to the bottom. So my view is one, people will get a better rate of return. They'll have more peace of mind. And they'll retire earlier, they'll have more to leave to others. And I'm not recommending they put everything in this, but to the extent that they want equities. Personally, I'd rather see them have a broadly diversified asset classes than have it basically be one asset class. And I asked John Bogle about that. And he said, where I'm wrong, is that I don't understand the impact on people when they own a portfolio that has this small and this growth and this value. And those asset classes stink. And the S&P 500, where they should have had their money, is rolling along. And on the other hand, when the S&P 500 doesn't do well, nobody ever seems to go to come to the conclusion that the S&P 500 premium is gone. And it's never going to make a good return again like it did in the past. That's because people trust it. And they don't think to throw it out of out of the house like he would a kid he didn't like anymore. It's this emotional attachment people have to that. Well, people in this country have a bias towards the S&P 500 because their companies they trust. And while you're really talking about what or at least what you're saying that John Bogle was saying here is not that maybe the S&P 500 is the ultimate way to invest. He's not saying that. What he's saying is that people will tolerate bad performance by the S&P 500, but they won't tolerate bad performance by a slice and dice portfolio that has these other magnified sectors. I know you keep calling them asset classes. I have a real difficult time calling small value an asset class. To me, the asset class is US equity. And that means everything in US equity and small value is a style. Value is a style. Size small cap is a style, if you will. So I mean, so I have a I don't consider them separate asset classes, but that's a different conversation. But anyway, it sounds to me like what John Bogle's issue was was that people will accept bad returns when the market is bad, and probably not jump ship. But when the slice and dice portfolio is bad, it's an active type strategy, and people will jump ship. And so in the aggregate, he doesn't like it. Staying in the market is really the key. And the total market fund does that for you. Rather than slice and dice. Is that what I hear you saying? You know something I love. No, I understand what you're saying. But but you have said something that I guess I would disagree with. I don't call it an active strategy. I really don't. I would say that the S&P 500. It is an index that represents large cap blend. Now, I don't know if you'd agree with that, but that's how I see it. No, I agree with that. Okay, you're saying large clap blend. Yes, I would agree with that. If you agree with that. Why couldn't you and oh, and that blend is made up of growth and value. Why couldn't you call a portfolio of all the large value standing on its own large cap value? Why isn't that doesn't that have the right to be a an asset class just like large cap land or large cap growth and well, hold on, Paul, I mean, I didn't say the S&P 500 was an asset class. It's an index of large cap blend, but I didn't call it an asset class. To me, the asset class is US stocks. The entire market. That's the asset class. Now within there, you could divide it up into value growth. You could divide it into industry sectors. I mean, there's a lot you can do with the asset class called US stocks. So my only question was on semantics. I mean, you're referring to these things as asset classes where it's to me, the asset classes US stocks. And these are sectors of that. That was the only difference. And and the only reason I call them asset classes is because those people that DFA caught me. So I really I see where you're coming from. And I think the reason that I reject calling them the US market is because I think then a lot of people might say, I want to put my money into the US market. And so what it ends up following is probably the total market index. I'd agree with that. Yeah, and so I think it's leading them down a path that is going to hurt them. And I might say hurt them. I don't mean it's gonna they aren't even gonna know they've been hurt, Rick, because most people I talk to, they don't know what return they've had. They know they've done fine. They've done just fine. They've made good money. They may be two or 3% a year below the S&P 500 doesn't matter to them. They're doing fine. So I think a lot of people that are attracted and by the way, the number of people who are attracted to my website, it's in this whole scheme of things. It's a very small group of people. But these are folks, many cases, engineers, or you've seen that in the Bogleheads, I'm sure half of them are engineers. Seems that way. know that. But but but it's but but I do I do believe let me just give you one more example with with Mr. Bogle. And he was so kind to me. Oh, my God, he was supposed to give me 60 minutes and he gave me 90. And he answered every question I had. And he gave me advice on how to and how to make do a better job for people. But I asked him about why would a 21 year old have 10% of their portfolio in a target date fund in fixed income? What I have learned is that when you have 10% of your portfolio in fixed income, based on market returns, over the last 90 plus years, it will cost you one half of 1% a year. Okay, I don't like that. Because a half of percent is life changing over a lifetime. So they're sitting with 10% in bonds. And I'm thinking, wait a minute, I want young people when the market is in decline to have all of their money buying lower price securities, not less. And 10% what is 10% it's not going to turn a bear market into something that is much better than what 90% 100% would be. It's almost meaningless. But here was his response. And it's a good one. What we're trying to do is train them to understand there's a process that includes over your lifetime, a gentle increase in exposure to fixed income. And so they are showing them how that works. And I'm thinking to myself, okay, that's great. But what would an education do for these people? What if they understood that they aren't going to protect themselves very much, but it's going to cost them buying lots of good stuff when the market's down and dirty, and etc. I mean, you know the rest of that that story. And yet, they do that to make that fun something people can last a lifetime with. I don't argue that they may get there. But I think with some small changes, it could make a huge difference in what somebody has. When they retire, how much they live on in retirement and how much they leave to others. And I'll be dead and buried before I'll know how it worked out. I'm just hoping somebody will come to my grave and put something I don't know. Well, okay, so the big difference it appears between a three fund bogal head portfolio, which is the total just buy and hold the US total stock market, the you the international total market, and the total bond fund, or just do any bond index fund or a CD ladder for that matter. I mean, it's a three fund portfolio in what you advocate is two fold. It appears. Number one, you treat the various styles of large, small value and small cap value as different asset classes, and to have an allocation to basically those asset classes. And yes, the second thing is that you also advocate a an element of market timing to to this. And by the way, I'm going to jump a little bit around here, I'm going to jump to the bogal head questions, because when I put your when I announced to the bogal heads that you were going to be my next guest, like I said, it lit up and had all kinds of questions. So I mean, one of them asks very specifically about market timing. And this is what he asks is, what do you expect the benefit of your portfolio market timing would be compared to buy hold and rebalance? And that another person asked very similarly, what is the exact buy and sell signals that somebody would use for your market timing portion? So I want to get into this idea that you brought up earlier about being in the right track, and about people who may believe, as you said, when you sit down and you actually talk with them, they believe there is some way of which they could benefit. Well, to begin with, what I believe starts with my fear of the market. I believe that it's highly likely that in my lifetime, which isn't all that much longer, that I will live through a catastrophic event. Now, when I was young, that didn't matter. I didn't have anything. But now I do. And I have always, in fact, it's hurt me financially by a lot. I've always been too conservative, because I've been afraid of a market collapse like we had in in 29, the late 30s. And and so with that in mind, I'm uncomfortable having too much inequities without some sort of an exit strategy. And it's just that simple. I'm afraid. Now, in my buy and hold portion, and that's half of my portfolio, I'm half in stocks, half in bonds. I'm half in US in the half that stocks, I'm half an international. I'm half in small, I'm half in large, I'm basically a little more than half in value and a little less than half in growth. It's like, I don't believe in anything, but in essence, I believe in everything. I'm trying to get the exposure to the market, where I've got massive diversification. And by the way, investors, if they don't know what should know it, according to the academic studies, the more diversified we are, the likelihood is we'll get a higher return, not a not a lower return. You ask about in the timing portion of my portfolio, I'm not 5050 stocks and bonds, I'm 70% stocks and 30% bonds. Why more stocks there? Because when you use timing and you sit out part of the time in money market funds, you have at that point when you're sitting in cash, you have less volatility than a person who buys and holds equities. So in 1987, and everybody in this industry goes back to some time when they looked really good. But in 1987, we had all of our clients money out of the market about a month before the market crashed in October. And it made me for them I was a hero. You're famous. I got on Wall Street. And you know something? Everybody wanted to make a big deal out of it. And I said, wait a minute, I didn't call the market. I happened to be out of the market when it collapsed. There is a difference. But people always looking for gurus, there are no gurus. But the trend following systems you could use, you could use a 100 day moving average, you could use a 150 day moving average. Then doesn't have to be something complex, you just need something that forces you to get in and to get out. And yes, you'll go through whipsaws, etc. But here's the part I think is fascinating. The standard deviation of a 7030 with market timing, 70 equities, 30% fixed income is virtually the same as a 5050 buy and hold. Almost exactly the same standard deviation. And the returns are very similar as well. Now, do they go up and down together? No. And in 2008, and all equity portfolio with these simple trend following systems that the company used after fees, they lost 18% or 15%. It was it was a relatively small amount. And in 1987, I had accounts, actual accounts that were up over 50%. That's the good news. And then everybody rushed. In fact, after that weekend, I was on Wall Street week, or that weekend, actually, we got 400 phone calls at my office, looking for theoretically our help. I mean, we were not prepared. But the fact is the following year, our returns were mediocre. And by the way, you and I know something a lot of other people may not know. And that is a portfolio from 95 to 99, properly diversified big, small value growth US international compounded at 11%, while the S&P 500 compounded at over 28%. That's the way it is. Now, it's also the way that it occurred in the last five years. If you look back to 2014, going forward till today. So the market timing strategy that you employ is relatively simple. It's a moving average 100 to 150 days, something. We're saying now, I want to go back to one point before I get off the market timing. And that is that you earlier talked about young people should have almost 100% of their money in the market. But so when it comes to market timing there, you mentioned that young people, when the market goes down, they should just work and put more money in the market. So when you're talking about market timing, are you speaking about everybody? Go ahead. Old people. Old people. Okay, that's what I was getting at. Old people like me and you. Well, you're older than me. You buy a lot. Yes, it is for, it's for people where preservation is important. But having said that, as critical as I was of the target date fund at age 20, sitting on 10% in fixed income, I've met lots of 20 year olds and 25 year olds who have all of their money in fixed income, because they are afraid of stocks. And I'm begging them just put 20 30% inequities. Let me show you I've got a my my favorite table is called fine tuning your asset allocation. And it shows these different combinations of stocks and bonds over the last 50 years. And and and and what you see is, if you just have 20% in equities, it'll kick your return up by about one and a half percent a year. If you can get up to 30%, you might even kick your return up. I'm sorry, it raises about 1% a year. If you go to 30, it raises it to about 1.5 or so depends on what asset class you use in the equity portion. But I want those young people who are scared to death of the market to just take a little risk. I don't want them to have as much money as the target date fund represents because it's going to end up scaring them out. Okay, let's go ahead and move on to the second phase of that, which we've done the market timing thing. You've differentiated how young people should invest versus old people. Well, now we need to look at the other side. It really where I think most of the questions from the Bogle heads have come in and it is with your 10 fund portfolio and now your new two fund portfolio. And and so this is actually, if you don't mind me saying or using this phrase, the slice and dice of what you do and what you really believe in. Number one, could you talk about the 10 fund portfolio and the complexity of it, and then move then into the two fund portfolio and how that solves the complexity problem? You betcha. So this started maybe 15 plus years ago that I created something I got from DFA, by the way, what I call the ultimate buy and hold strategy. And I was quick to say that it wasn't necessarily anybody else's ultimate buy and hold. But it was the best that I could find without placing any big bets. So what I did was starting with a portfolio that's 100% in the S&P 500. Then all I do is I take 10% of that money and I put it into large cap value. And what happens is you make a little more money. And then I go the next route, the next step, and I put in 10% of small cap blend. Make a little more money. By the way, that little more money is sometimes only one or two tenths of a percent. Then I take another step and I take out another 10% from the S&P 500 and put it in small cap value. No big bets. No big bets. Then I take 10% and I put it in Reets. Now I have 50% in this combination of five different equity asset classes. 50% in the S&P 500. I think people would be probably just happy as could be right there if they stopped because they would have made an appreciable increase in their return. And I tell young people a half a percent more over your lifetime is truly a life changer. So if you just did that, you had made a big difference historically. Don't know about the future, but historically you would have. Okay. But I keep going because I do want internationals in the portfolio. There obviously are times, I wish I didn't have internationals in the portfolio, but I believe that that diversification is what a person should do if they really want to diversify properly. So I take another 10% and go into large cap blend internationally and then 10 in large cap value and 10 in small cap blend and 10 in small cap value. And then the last 10 goes into emerging markets. So I have a lot of really risky investments in that portfolio. And that is what my retirement looks like in terms of equity. I do exactly that 10% each in those 10 asset classes. But the bottom line is for people who are really do it yourselfers, trying to rebalance 10 different equity asset classes can be something they can't figure out. And when I was a money manager, we had a firm. That's what we did. We did it for them. But Chris Pedersen did this analysis of all the ETFs. And he came up with the best large cap blend, the best large cap value, every one of those 10 equity asset classes, he made a recommendation. My belief is, and you probably know this, but supposedly, Schwab is going to be trading ETFs with partial shares. Once Schwab is able to trade partial shares with ETFs or their clients are, then there's no reason why they can't let people build a portfolio and have them automatically rebalanced. Moving along then to the two fund portfolio, which I find to be really interesting. So you solve the problem of complexity with the two fund portfolio. Well, the challenge, and this was, by the way, partly motivated by my meeting with the John Bogle, because he basically said, Paul, you're a nice guy. He had been on our radio show for years. So he knew us and he knew that we were trying to help people. He said, but you've got it wrong. What you're doing with 10 funds is it's just too complex for people and they aren't going to do it. And so Chris Pedersen donating his valuable time as a volunteer to our foundation along with Darryl Balls, another systems analyst, smart guy, you know, that really understands computer work have put together this strategy. And what Chris came up with is the key to treating the extra fund, the second fund in a similar fashion as you would with a target date fund. Because if you put, for example, 20% in a small cap value, and 80% in a target date fund, and you don't ever reduce the exposure in the small cap value fund, you could end up with 50% of your money in small cap value at age 65. So so what? And we really want young people to be exposed to small cap value and then to reduce that exposure as they get older. And what Chris came up with is so simple, you multiply your age of 20, let's say by by 1.5. Now you've got 30. That is the amount that you would put into the small to the target date fund. The rest you put into small cat value too aggressive. Okay, how about large cap value instead? We could do that as well. But it would just be less aggressive. So as you age once a year, you could do it every two years, and it doesn't have to be done every year. But what you're doing by the time you're 30, you'd have 45% in the target date fund, 55 in the small cap value at age 40, you got 60 and 40 at age 60, you are 90% in the target date fund and 10% in small cap value at age 66, you're zero in small cap value. Oh, I see. Okay, I got it. It is so simple. Now, I know what's gonna happen. If anybody really thinks this is a good idea, they're going to reconfigure it and make it better. Because the idea now is there. It's a simple thing to do. But how what formula do you use? It sounds like this, this, this strategy would work with the young person who's just getting invested in a 401k plan, where you've got maybe Vanguard target date funds or other target date funds that are available to you and you're 25 or you say you're 30 years old, you would also need to have in the 401k a small cap value index fund. If you had those two things available, and you wanted to do something more than just target date, and you were more sophisticated, and then you knew what you really understood what you were doing that this would work because by the time you retire at age 66, you don't have any left in the small cap values just all in the target date. So it does make sense from that perspective. And by the way, I work with a lot of people my age, suggesting things for their grandkids. When there's a new grandchild, I'm thinking either 100, I'm sorry, 365 a year for 21 years, or $3,000 once put that in small cap value, keep it in small cap value. When they start working and they can do an IRA, take money out of this account, put it in the Roth IRA, and just let it go, keep contributing to that money is gone. And literally, literally, if you took 3% off of the compound rate of return of the past from small cap value, you could have created 20 million in retirement income, and 30 million as a gift to the heirs at age 95. Now, obviously, it's it sounds like something that you get at a county fair. But the fact is, if you get 12% a year, and why is 12% unreasonable? If 10% in the S&P 500 is reasonable, and it includes the depression, then why isn't 12% reasonable for small cap value? It is the premium for taking that risk. I have to tell you that one of the Bogleheads suggested that I get a glass of wine. And I put it in front of me. And every time you say small cap value, I have to take a sip. So that that's exactly what I did. Okay, I went and I filled up a glass of wine with some Cabernet. We're getting there. And I have to tell you, the glass is now empty. We've been talking for quite a while, I want to get into a few other things before we wrap it up. And some of the Bogle's are curious about just a little bit more about your life. You know, one of the Bogleheads asks, what is the greatest mistake that you made that you are willing to talk about that we can all learn from? Well, I don't know. Mistakes I made as an investor, I lost everything. I was conned, I shouldn't say I was conned. I was talked into putting my original investment of $1,000 into a commodity trade, which I doubled in a matter of weeks. And having found out how easy that is, I took the guy's advice again, and I lost it all. And so that money, if I hadn't lost it, if I had, I put it into small cap value, oh, there's another glass is already empty. You're gonna have to let me go back to the bar. But if you had invested it rather than than having it leak out the bottom in a rush out the bottom of your bail, it would have meant something to somebody. And so I made a lot of mistakes like that early in my career. I invested in some small companies that had products that seem to have some potential. Again, I try to talk young people out of doing that. Their parents say, I'll let them make mistakes. I don't want to let them make mistakes. The cost of those mistakes are way, way more than people know. And they might even get lucky and hit a good one and think they know something. And then it'll even cost them more later. So I did those things. And, and, and I think the other thing is I've never learned the mistake. I'm still I'm still struggling with how do I not work 60 hours a week? I love what I'm doing. Well, anyway, I want to go as long as I can. That's one of the things that John Bogle did for me. He he inspired me. And I'll tell you where I feel my work has value. We are giving advice, very specific advice on how to invest if you're conservative, moderate, aggressive. I don't mean I talk to you. I don't mean I review your situation. I mean, we give you if you want to learn what we believe and then we make it possible for you to know what to do if you believe that. That's not easy for people to do. So Paul, that gives me a great opportunity to ask you, could you tell us about your website and tell us about all the things you're doing and, and how are you educating people? Well, first of all, we've got free books. Probably the best one is entitled 101 Investment Decisions Guaranteed to Change Your Financial Future. By the way, I quickly tell people, I guarantee it will change. I don't know if it will be better or worse. But I think it'll be better. But it's nothing more than best practices. So that was the beginning when we started the foundation. I have portfolios there on our site for Vanguard, Fidelity, T-Roll Price, and the ETFs, Best in Class ETFs. We have over 400 articles and podcasts there. We have videos that we've made. We have a new book coming out in a few months. It is all about $12 million decisions. Well, actually, half of it is about $12 million decisions. And the other half is about two funds for life, because I think you can actually do those 12 things and use the two funds for life and take advantage of those, what I call $12 million decisions. That book will be free to everybody who is on our email list. And by the way, if you're not on our email list, and you know the book is out, you'll be able to get it free. I want I want to help as many people as I can. And I love working for people. I love helping people's lives get get better. I do a lot of nonprofit work here on Bambur's Island and getting medical publications, free medical publications into the hands of physicians in developing nations through an organization called Global Help. So I've got other things I'm working on. I just can't I can't seem to stop. You're doing a great job for a lot of people. You got tremendous respect by the Bogleheads. Tremendous respect from the investment community for providing information. Now, everybody doesn't have to agree with you on everything. Oh, I know that they don't. Well, Paul, it's been wonderful having you on the show. And I know that the listeners have all really enjoyed a lot of the conversation with we've had today. And I'm really looking forward to talking with you again. The website is Paul Merriman.com. Thank you so much for for joining us today. It's been my pleasure, Rick. Thank you and all the best to all those. This concludes the 18th episode of Bogleheads on investing. I'm your host, Rick Ferry. Join us each month to hear a new special guest. In the meantime, visit Bogleheads.org and the Bogleheads Wiki. Participate in the forum and help others find the forum. Thanks for listening.