Most of what people believe about investing is wrong, and the wrong beliefs are expensive. In this conversation, Jack Lempart sits down with Paul Merriman, founder of The Merriman Financial Education Foundation, who has spent sixty years around markets and more than forty of them teaching people how to invest. Paul opens by naming his own biggest mistake: a scarcity mindset that, by his own admission, has kept him at fifty-fifty in stocks at eighty-two, when he says he should probably be fully invested.
From there the conversation works through the myths investors repeat to themselves, one by one, with numbers attached: why the casino comparison runs exactly backwards; what a hundred dollars a month invested from a first paycheck compounds into — about three million dollars at eight percent and, at twelve percent, which Paul says is possible in small cap value, thirty-seven million; why only about one active manager in ten or twenty beats the index over the long run, with no academic study showing how to pick them in advance; and what actually sits inside an ETF once you stop treating the wrapper as the product. Merriman also explains why splitting a portfolio half US, half international did not raise long-run returns but changed when those returns arrived, and why the small cap value premium has, four times in roughly a hundred years, gone missing for stretches averaging around seventeen years.
This is a conversation for anyone who has ever said “it’s a bad time to invest”, “I don’t have enough to start”, or “I’m not smart enough for this” — and for the experienced investor quietly losing faith in a lagging strategy. It was recorded in two sessions (Paul was called away mid-conversation and the two picked the thread back up later), and it ends with the one thing Merriman asks a listener to do tomorrow morning: list what you can actually control, and automate everything you can.
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Chapter 1: Sixty years in markets, the mistake that keeps teaching, and the casino myth
Paul opens with the scarcity mindset that has kept him at fifty-fifty when, by his own reckoning, he should probably be all in on stocks — then explains why the casino comparison gets the odds exactly backwards.
“I should probably be a hundred percent equities. We can afford to do that. I chicken out and we’re fifty-fifty and feel like I’m really being aggressive with that.”
Jack Lempart: Most of what people believe about investing is wrong, and the wrong beliefs are expensive. They either keep you out of the market for decades or they quietly take a fortune from you while you’re in it. My guest today has spent sixty years in the markets and over forty years teaching people how to invest. And he’s made, by his own admission, almost every mistake we’ll talk about today. Paul Merriman, welcome back to the show.
Paul Merriman: Hey, it’s great to be back, Jack. Thank you very much and congratulations on the success you’re having with all your new work on ETFs. I wish you well. I’m happy to be back to share some new information.
Jack Lempart: Sure. Thank you. I’m pretty sure it will be a great discussion. So as I mentioned, Paul, you’ve spent six decades around markets. And before we talk about other people’s mistakes, could you maybe tell us what your biggest one was? I mean, the mistake that taught you the most?
Paul Merriman: Well, and by the way, Jack, it keeps teaching me today, unfortunately. You know, we come to the money topics with some, whatever our background is. And I came to discussions around money — based, I think, on scarcity. And so I have always been, and I still, if I bring up a subject or my wife brings up a subject, something we should do, I immediately come up with a list of ten big risks if we do that. And so even as a young investor in my early twenties, I can remember starting to look at what is really the bad news.
I have been telling people for decades that there is list A, the good news, list B, the bad news. They both exist at all times. But my brain focuses on the bad news. And what comes out of that is insecurity when you think about taking the risk of the stock market, which of course is where the returns are over the long term. And so over my sixty years of being around investing, a lot of it has been spent trying to defend against that risk of equities. And I still struggle with it. I should probably be a hundred percent equities. We can afford to do that. I chicken out and we’re fifty-fifty and feel like I’m really being aggressive with that. So I think that was — it kept me from putting more money into equities, which would have left us with more today, I’m sure.
Jack Lempart: On the other hand, quite often people say that the stock market is like a casino. And I think it’s kind of a myth, because I also hear it quite often. And they say that the stock market is just gambling — it’s a casino. Why is that exactly backwards?
Paul Merriman: Well, it is backwards, actually. And I’ve been a fan of casinos at some time in my life. The reality is the casino, I can almost guarantee you, well, I would say in ninety-plus percent of the people, that if you go to a casino and you keep betting and betting and betting, the longer you bet, the higher the probability you’re going to run out of money. That’s just the way it’s built. And on top of that, if we get ahead, we start to identify that money as — it’s not our money, it’s the house’s money. And the house is going to figure out how to get that money back.
So gambling means that the probabilities of losing are very, very high. On the other hand, we believe just the opposite with investing. And that is: the longer you invest, the higher the probability of success. And so it’s a world of difference.
At the same time, I want to add a little of that little part of me that’s afraid. I also know that the longer we invest, the higher the probability of a bear market, a crash, something catastrophic. And that’s built into the cards as well. So that is a fear, which is why at age eighty-two, I’m fifty percent in stocks and not a hundred percent in stocks. So I think we have to manage our exposure to risk over a lifetime. But the risk in investing is very, very small if you do it right.
Jack Lempart: Right. And I would say the funny thing is that the same person who says stocks are gambling will happily, for example, take a thirty-year loan to buy an apartment in one city, which is also kind of a risk. They don’t see it this way, but they will say that just the stock market is a casino. And by the way, I took it from your newsletter, where I think it was Ben Carlson who was saying something along these lines — that actually the longer you play, the higher your probability of losing in a casino, which is quite the opposite with the stock market.
Paul Merriman: Exactly. By the way, that book that Ben wrote, Risk & Reward, I still think that is one of the finest books on knowing and understanding the risk you’re going to experience as an investor. If you can come to grips with that, you’re on the track to long-term success — but you’ve got to come to grips with what that ride is going to be like.
Jack Lempart: We’ll put this book into the show notes.
Chapter 2: Two excuses: “I don’t have enough” and “I’m not smart enough”
A hundred dollars a month, the Roth IRA, a thirteen-year-old grandson doing compounding math — and then the Mensa investment club, which shows how little intelligence investing actually requires.
“It would take an hour to be enough of an expert to be a successful investor for the rest of your life.”
Jack Lempart: Another thing I quite often hear is people saying they don’t have enough money to start. And they say something like, I can’t start with the little I have. And I also saw in another newsletter from you that you just gave a talk to eighty-nine nursing graduates at Texas A&M about exactly this. And what do you tell a young person with just, let’s say, a hundred dollars a month?
Paul Merriman: Well, it’s pretty amazing. In fact, you might not even believe the implications of a hundred dollars a month. But if you started at age twenty-two and for forty-five years you invested in, let’s assume with this hundred dollars, small part of your portfolio at that point, that’s all you did for that forty-five years, a hundred dollars a month, all equities, and you got an eight percent compound rate of return.
Now, here’s how I look at the long-term returns, a little different than others. I look, one, at how much you have from doing that at the day that you retire, at that forty-five years. Okay, that’s an important number because that is going to dictate what you can take out of that financial commitment in retirement. So for thirty years, we make an assumption of how much you take out of that retirement, but I also want this hundred dollars to be in a Roth IRA1 where it will compound tax-free, it will be distributed tax-free. And when you die with present rules, regulations, you get, your heirs get to take that money out tax-free for up to ten years.
So when I track this money and what that fifty-four thousand dollars turns out to be worth, is that right? Fifty-four thousand, hundred, that’s a hundred dollars a month, yeah, I believe that’s right. That, what that is going to become worth. At eight percent, about three million. At ten percent, it’s eight million. And at twelve percent, and that’s possible, absolutely possible, if you put it in small cap value2, that would be thirty-seven million dollars over that. I know, it just blows my mind, but all that is, is the impact of compounding.
And I recently gave a birthday present to my grandson who just turned thirteen. I threw an extra twenty dollars on the gift and I said, this is yours as long as you will take the time to tell me what that twenty dollars will be worth when you’re ninety-three years old. And he took the time to do that, so he got the… The numbers that time builds those things, and to give perspective to it that’s real.
When I talk to those nurses, I know how much they’re likely to make. Right now, their starting wage is about sixty thousand dollars a year. Average nurse nationally is about ninety-five thousand dollars a year. Now, what did I get paid for what I did? And it’s not like I had a bad job. I was a stockbroker working for a major New York Stock Exchange firm. I made less than five thousand dollars a year when I started. Now, I was making more than that when I retired.
But the bottom line is most of that difference in what we make comes from inflation. So we’re not getting this huge return because the investments necessarily did that well, but inflation caused their earnings to get higher by the nature of inflation. And over time that grows, the P/E ratio sometimes grows, and what was a little… So what does that mean about what should you be doing right now if you’re just taking your first job? I don’t care whether it’s ten dollars a month, fifty dollars a month, a hundred dollars a month — get started now in the process. You can go to Fidelity, open up a Roth IRA. You can put in ten dollars a month if you want to. You can even put that ten dollars into two different mutual funds if you want to. There’s a way you could do that. And so, get into the habit.
If I had just started my life with good eating habits, I really believe this, Jack, because I’ve been on a diet since the fifth grade. I have lost thousands and thousands of pounds over my lifetime, but I had that wonderful lady who loved to cook pies and cakes and would make fried mush pancakes in the morning for breakfast. I mean, I look back at what my eating habits were like. They were terrible and they’re still not all that good.
So get started now doing the right thing. And remember, whatever you’re going to do with your money, whether it’s a little bit or a whole bunch, there’s an industry out there that’s saying, hey, come over here. I want to talk to you. I’ve got an idea for you. You’re going to like this. This is going to make you rich. And they are going to try to convince you to do something that is in fact not in your best interest. So yes, you got to get started. But yes, you also need the basic information so you don’t get a sucker punch right out of the gate.
Jack Lempart: Right. So maybe let’s touch on this point, because another excuse which we can quite often hear is that someone says, I need to maybe be smart. I need to be an expert. I’m not a finance person. I need to maybe study for four years before I can touch this. So my question is, how much knowledge, how much intelligence does good investing actually require?
Paul Merriman: It’s amazing how little it is. It is truly ninety-nine percent your willingness to save and your willingness to stay the course and maintain the discipline that has led to long-term success. Literally, Warren Buffett, one of the richest people in the world, has said, you only need one investment for the rest of your life. And it’s an investment that anybody my age could have put money into in… And if they left it there, every person who put it in there and left it there made exactly the same amount of money over the last fifty years. Because that’s the way the mutual fund works. Everybody makes the same amount. Now, some people will make more because they started with more. That’s a whole different question. But in terms of the actual percentage increase, a ten-thousand-dollar investment — you can divide that by whatever number you want — between nineteen seventy six and today is over two and a half million dollars, investing in a mutual fund of five hundred companies of the highest quality, most profitable corporations in the United States. I’m talking public corporations, and anybody can do that. You don’t have to…
It would take an hour to be enough of an expert to be a successful investor for the rest of your life. But let me tell you, the psychological hang-ups that people have, those things, not maintaining that discipline to stay the course, putting that little bit of money away every month, that’s the key, because the rest of it is really pretty simple.
Jack Lempart: By the way, you had Larry Swedroe on your podcast as well, where he was talking about his book Enrich Your Future. And he tells in that book the story of the Mensa investment club. I mean, the people with very high IQ, like the top two percent of the population. And over fifteen years, they earned about two and a half percent a year, which is almost thirteen percentage points below the S&P five hundred. And, you know, one member described from Mensa, he described their strategy as buy low and sell lower, because that’s what they were doing. I mean, the most intelligent people. Indeed, in investing, character and process probably win, not IQ.
Paul Merriman: May I add to that? Because where that story originally popped up in my life is in a book by Jason Zweig. And it’s a book I’ve read at least six times, Your Money and Your Brain. And if you want to put a link to a book that helps people deal with the psychological hurdles, I think that is a great book because it is basically focused on about a hundred different academic studies that have to do with: how do we process financial decisions? And we’re not very good at it because there are obviously so doggone many emotions attached to it.
But yes, I think Larry writes about that and Jason Zweig writes about that. And that very famous book by Housel Morgan, Morgan Housel, Housel Morgan, whatever, called The Psychology of Money. That’s another one that people swear by, because that hurdle, the psychological hurdle is the tough part. Just like my being afraid of things that I shouldn’t have been afraid of. That was a psychological hurdle that was created by other forces. I didn’t even really understand it at the time.
Chapter 3: “It’s a bad time to invest” — and what you actually own
Why waiting for a better moment feels smart and costs so much, why low prices are the best thing that can happen to a young investor, and Paul’s reminder that twelve thousand real companies sit behind the ticker.
Jack Lempart: So here we go — another myth that can be linked to it is when people say it’s a bad time to invest right now. I mean, it’s the kind of myth that never dies. The market is at an all-time high, or it’s just about to crash, or it’s too uncertain — as if there are some times when it’s certain. So people say that they will wait for a better moment, when they will maybe be able to predict what will happen. And why does waiting feel so smart? But on the other hand, it costs so much as well.
Paul Merriman: Well, it’s because of how smart you are. And what you did, more than likely, is you considered list A the good news and list B the bad news. And list B made it more risky than was comfortable for you. And your brain really is glad to help you figure that out. But the problem is that the brain is afraid of so many things that it has no way to calculate the possibilities or the probabilities of all of those things on your list.
But here’s what we do know, and this is particularly important for a first-time investor. If there’s ever a point in your life where you cannot do the wrong thing, it is when you are starting to invest your first dollars. You don’t have very much. So whatever you put in there, it’s all about you, and maybe you’ll get a good return, and maybe you won’t. But what if you did in that first five years get a wonderful return? Then boy, would you be glad that you got in? And would you be glad that every month you didn’t second-guess the market, because you dollar-cost averaged into the market — so that when the market was low, you bought more shares, and when the market was high, you bought fewer shares? But over time, it guarantees more or less — I mean, we’ve got to be careful about the word guarantee — that you’re going to have invested at a lower cost than you would have otherwise. And what you pay for stuff really matters.
Now, having said that, the reality is if the market plummeted, if for that first five years everything went to hell — and whatever it was, politics or the world economy or war — but the market was down and dirty, and you then dollar-cost averaged, you kept the faith for the long term. It’s always about faith because nobody can say what it’s going to be. And you bought all those cheap shares while the market was out of favor. That’s the best thing that can happen to you. It doesn’t feel like it at the time because your brain is saying, “Are you stupid? You keep putting money into this market that keeps going down.” And your friends, by the way, will weigh in and be critical of you as well. This is the fight you’re going to have to take to your brain, to keep the faith, to keep doing it. Lower is better when you’re young.
On the other hand, I maybe have five or ten years to live. It may be a week. Who knows? But the bottom line is I’m kind of hoping that during the five or ten years we don’t have a catastrophic event, I’d like to go out in good times like all of us would like to. But I also know the bad times can be just around the corner. That is the unknown we have to deal with.
But don’t think you can figure out what the market is going to do or that you’re going to be smarter than the market. There is no evidence that you are going to be smarter than the market. And that’s not a personal attack on you. There’s no evidence that I can be smarter than the market.
But the market means one thing we should never forget. I know I’m a shareholder. I have over, my wife and I have over twelve thousand stocks in our portfolio. You can, too, with a thousand dollars. Okay, takes more. You could do it with one hundred dollars. You could have twelve thousand different companies. But I know I own part of IBM. And I’m a legitimate shareholder in that company. I also own part of Microsoft. We could sit here for three or four hours, me listing all the companies my wife and I own. And every one of those companies is working to turn a profit.
Now, yes, there are some crooks in there. Absolutely. There are some people who are trying to figure out how not to put forty hours of work in. They just don’t want to work that hard. All those people are going to be within that twelve thousand companies. And we’re going to have political differences with some of the people who run those companies. But at the end of the day, the employees, the officers and directors, the people who are in the stock market business, and the people who are the shareholders, like my wife and I are, we’re expecting those people to go to work and make a living — and pass part of it on to us as well.
This isn’t some casino. Again, as you started out, Jack, this is not a casino. This is about owning legitimate companies that are working hard to grow and be better. As a matter of fact, it’s amazing the new things they are coming up with to make our lives better. When you live as long as I do, you remember what a phone is — something on the wall that you had to wait until your neighbor was off of it before you could talk. So you’d pick the phone up and you’d breathe heavy into it because they’d make you wait for five minutes. I mean, life is so different and it will continue to be different. That’s the way it’s going to be. It’s going to feel like the new stuff is outrageous and that we want to go back to the old days. It ain’t going to happen. It’s just not going to happen. And you got to learn, I think, to profit by the hard work of the millions of people who are also, by the way, working hard so they can pay their bills. We’re all headed to the same end result.
Chapter 4: Star managers versus the index
SPIVA, the lottery ticket, Bill Miller’s fifteen good years and terrible decade — the question Jack asked just before the first session was cut short, and again when the two reconnected.
Jack Lempart: So we know that stock picking is hard, and I know that everyone would like to find another Apple, another Nvidia, but we know it’s hard. But maybe if this is hard, someone can think that maybe we can pay a professional to do it for us, to find an active fund with a star manager. And what does the scoreboard say in this case? If we are not experts in stock picking, maybe there are some experts we could hire.
“Fifteen years in a row, he outperforms the S&P five hundred. The money rolls in, bags full of money. […] For the next decade, he’s literally the worst. He’s in the bottom one percent of all managers.”
Paul Merriman: Well, you said earlier something about the things that we believe so often are wrong. But the reason that is so common is because it seems so obvious to people, from what we know, that people who have more experience would be able to pick better stocks than we would. And in fact, some will. How do I know? Because I’ve seen study after study that tells me that they will. And as a matter of fact, I could go so far as I guarantee they will.
Because of all the studies that look back, let’s say, at twenty years of performance — and there’s one called SPIVA, S-P-I-V-A; every six months they update their information. They’ve been doing it for a long time. And they look at all the active managers. Every one of those active managers wants to beat the market so much because if they beat the market, they get paid more. They can become a multimillionaire or maybe a billionaire, for all I know, if they are good enough at beating the market. And at the end of twenty years, depending on which kind of stock, big, small, value, growth, US, international, about one out of ten or one out of twenty of these active managers, in fact, win.
And that’s great, except there is not one study that’s ever been done — I’m talking academic study — that will actually show you how to pick them ahead of time. So when you pick an active manager, the reason that all of us who know the numbers will say this is because the odds are so much against you to get on board with the manager who is going to be that one out of ten or one out of twenty — and when the other choice you have is to be in the upper ten percent for the rest of your life, without having to worry about whether that manager is going to be out of sync somehow. Because what you own is the markets — you own the index, you own something that costs very little, that has massive diversification, that has better tax ramifications, all built in your best interest.
So you might ask, who would ever put money into an actively managed fund if only one out of ten or one out of twenty people are able to win that? Well, I may ask you, who would put money into, I’ll call it a gamble at this point, I’ll call it a gamble, something that the odds of you winning, three hundred million to one, three hundred million to one, that you are, you’re not going to win the lottery. Now, somebody will, and they will say I was a fool to tell you not to buy a lottery ticket. God bless them. That’s just like the people who happen to end up with the manager who beats the index. It’s going to happen. There’s going to be a random event, because picking that one out of three hundred million to one, we all understand that was a random event. Even if it was your favorite six numbers, that’s still a random event.
So I do think that the professional you want is the professional who’s working to make the best index fund. And you can say, well, wait a minute. Why would, how can, is it possible somebody then could be better than better? Well, let’s say one index fund has an expense ratio to manage that fund of half a percent a year, and another one offers it free or for one one-hundredth of one percent. Now that’s a meaningful difference. So if I can get for that index a lower expense, I can even be better. My index fund can be better than the other index fund. And that you should be smart enough to be able to figure out. And by the way, whether you use Morningstar’s data or — Jack — your data, you tell people what the expense ratio is on every ETF and every mutual fund, right?
Jack Lempart: Yes, we do. We do. And we also calculate the impact of this.
Paul Merriman: Sorry, my wife just walked in the room.
Jack Lempart: No problem.
[Paul was called away at this point and the first session ended here. When the two reconnected, Jack returned to the same question — and Paul answered it a second time, from a different angle.]
Jack Lempart: Okay, Paul, I have one more question regarding investing. We said that actually stock picking is very hard, at least for, let’s say, an average investor. So what if maybe we could find some professional investor who could do it for us? I mean, an active fund with, say, a star manager.
Paul Merriman: Well, I’ll tell you, there are a whole bunch of — I’ll call them different kinds of star managers. Because recently there’s been quite a bit written about the star managers who are gathering money by the billions, in the billions, because they had a short, relatively short term — huge upside attracts money because they [the investors] think recent performance really means something. It probably will always be this way. There may never be a time when people don’t still believe that somebody who’s been getting it right recently is going to be somebody right for the future.
What we do know, of course, as I’ve talked about many times, is the SPIVA report, which shows that about one out of ten or one out of twenty active managers, star pickers, stock pickers, if you want to look at them like that, are able to do better than the benchmarks, the indexes. And what we know from the long-term studies, if we look at fifteen or twenty years, is that yes, there are advisors or managers who do better than the market. It’s about one out of ten or one out of twenty, which means you can do better than the market.
The problem is nobody has been able to figure out how to identify those that have outperformed in the past, because what happens next is you get into that fund manager and they underperform, and sometimes they underperform terribly. Bill Miller from Legg Mason Trust is the classic example. Fifteen years in a row, he outperforms the S&P five hundred. The money rolls in, bags full of money. And at the end of that fifteen years, when he’s getting rich because he’s got so much money under management, for the next decade, he’s literally the worst. He’s in the bottom one percent of all managers.
And recently, we had this young genius who had these huge returns. But what do we know when we look a little closer? We look a little closer: you include the huge returns with the terrible returns. And while, yes, the fund was up over three hundred percent over the last ten years, the average investor lost money. I mean, think of that. And that’s because the average investor got all excited, hot and bothered that they have finally found somebody they could count on. And you can’t. You literally cannot count on those people as much as you can on simply owning the index itself.
In a sense, and this may not sound legitimate to say this, but I believe it’s true. When we put our money into an index fund, you are guaranteed to get the return that you’re after. That’s because the return you’re after is the return of that part of the market, which is what an index is being hired to do. So at least at the simplest level, if you want to go with the probabilities of success, and really, Jack, I think that successful investing is about doing the right thing. Look at each little fork in the road. What do I do, right or left? What’s the probability if I go right or left? And if that probability is between the active manager and buying the index itself, it seems like it’s really in your favor by a multiple of ten times, maybe, if you want to look at it this way.
And here’s the killer. At the same time as investing in that index fund gives you a guaranteed return, less the expenses of managing it, the other side of that coin, with the active managers, is that you might not end up in the top twenty-five percent, you might not end up in the top fifty percent, you might not even be in the top seventy-five percent, because one out of four is going to be in that bottom twenty-five percent. And that could legitimately mean about two to three percent a year less return. So it’s not just that you might not get the very peak return. It’s that you really take the risk of underperforming by an amount that means more years to work, having to save more, fewer years in retirement. I mean, they’re easy decisions as I see it.
Chapter 5: Inside the ETF wrapper
The ETF is a bottle — what counts is the contents: which index, what kind of growth, how many stocks, what expenses, and how often the portfolio is reconstituted.
Jack Lempart: I wanted to move a bit towards instruments. You’ve mentioned index funds, and especially I’m here more focused on ETFs, which are, let’s say, close cousins. But the thing is that quite often people just say buy an ETF and they think the job is just done. But an ETF is just a wrapper. It’s kind of like a bottle. And what matters is what’s inside that bottle. How should a beginner tell the difference between a great ETF and a terrible one?
Paul Merriman: Well, it does start with an education. And even in getting that education, you’re going to find some forks in the road. You could say, I got a good education, but then I might look at what you’ve learned and what you believe and say, well, I’m not sure, because I might be disagreeing. Like you just said, active management versus passive. If you get an education and you understand how to invest, but at that moment when you come to that fork in the road, you decide to get active instead of passive, well, that means you’ve got to make a whole bunch of other decisions, because now you’ve got to select amongst those active managers and you have to continue to check on what they’re doing. You’ve got to see if they’re really living up to those expectations that you created as you looked at their past results.
On the other hand, if your path in the road is to look at indexes, because there are obviously those amazing ETFs that — like you say, it’s the wrapper — house indexes, just like there are open-end mutual funds that do it. Now, at that point, you have to ask yourself: okay, that fund maybe that you’re impressed with — let’s just assume that it happens to be a large cap growth portfolio. So then you need to understand: okay, in that index-like portfolio, the ETF, what kind of growth? And what expenses in that fund, and how many stocks in the portfolio? There’s a whole bunch of things you’re going to be looking to — to, in essence, grade that ETF.
And so it would be my assumption, of course, because I’ve got certain beliefs, that I don’t want a standard index. I want what they call a non-traditional index.3 So I want to know, how is that manager going to take that index and do something about it that is potentially going to make it more money? That might be, for example, to be more value-oriented than another fund. It may be smaller company size than another. It may be how that mutual fund or ETF management company manages the fund. For example, some indexes are rebalanced internally and changes are made in the portfolio — what they call the reconstitution — once every six months or once every quarter. That means then that they are going to be making changes in the portfolio quarterly. Others literally do it daily. I don’t mean that they’re day trading. But if something bad has happened to one of the stocks in their portfolio, they may have the ability to adjust that right now. They also may have the ability to adjust it without asking the shareholder or telling the shareholders that it’s being done, because they’re trying to do it in a less costly way. And the fewer people who know what you’re doing, the less costly it is to make changes in a portfolio. There are all sorts of little nuances that can make a big difference over a long period of time.
What we’ve done to try to help in that regard is we’ve zeroed in — if you believe in the things we believe in, in terms of what you expect the managers to do for you — and found what we think are some of the very best in the entire industry. And fortunately, we follow their work and we know how these people have done in the past. We know how they manage. We know what asset classes they’re trying to replicate. And on all of the things that are important to us, we give people that list at no cost. It’s just part of what we’re doing to try to help investors do better.
Chapter 6: Home bias, international, and the cap-weighted trap
The premiums for small, value and mid cap in Vanguard’s own numbers; why half US and half international does not raise the long-run return but changes when you get it — and why the top ten companies in a cap-weighted world fund are a quarter of the portfolio.
Jack Lempart: Great. Paul, let’s talk for a while about home bias. I know it’s a never-ending story. And I think this one plays a bit differently for our two audiences. I mean, Americans may ask, why would I ever leave the S&P? On the other hand, my international listeners often keep most of the money in their small home market. And do you see it as the same mistake with just maybe two flavors? By the way, I had JL Collins here just recently, and he was always mentioning investing in VTSAX4 and the S&P five hundred. And he admitted in that interview with me that actually he also goes international from now on.
Paul Merriman: Interesting. I did not know that. Well, I will tell you, just for the fun of it, I just think he’s a marvelous, marvelous guy. And he has helped, I think, millions of people. I wish I could help as many people as he has. For one reason, I think they would do better. But he actually admitted in the conversation that we had with, I don’t remember who the fellow is that interviewed this right now. But what I do know is he admitted some of the shortcomings of that total market index. And so I’m hoping someday he might even allow somebody to put a little bit of small cap value in the portfolio and pick up that premium.
But here’s what I know. I know that the academic community believes that there is a premium for small. Now, if I look back, and I don’t want to bury us with numbers here, but I want to give you a few I just looked at this morning. If I look back at Vanguard, not even the special funds that we want people to use, the non-traditional, when I look back at the Vanguard S&P five hundred, which has virtually the same return as the total market index in the US going all the way back to nineteen twenty eight — now, what do I see? I see that the Vanguard S&P five hundred compounded at eight point eight percent.5 Now, I see that the small cap value fund compounded at ten point five. And I also know that the mid cap, smaller than large, bigger than small, the mid cap compounded at ten point two.
So what I’m seeing here through my eyes is that over a very long period of time, exactly what the academics have taught us for thirty plus years, those premiums for small and value and mid cap have been earned over, looking this morning, about twenty-six years. I was going back to just the beginning of two thousand and looking at the returns.
Now, if that’s the case, I don’t care if you want to be indexed with traditional or non-traditional. I really want to have my portfolio have some of those equity asset classes that we know have performed better, and not because anybody was smart, not because anybody picked the right companies. All we know is from this academic research that smaller companies are more risky — this is not a free lunch — more risky, and pay a premium for having taken that risk. That’s all we know. Now, do we know that’ll happen in the future? Well, we know sometimes it doesn’t happen that way for a decade. Sometimes for almost two decades, you will see that large outperforms small. But in the work that we’re doing and you’re doing, this is not about one or two decades. It’s about the rest of our life.
I just, two days ago, my thirteen-year-old grandson called me. He wanted my advice on what to do with his bar mitzvah money. And he was going to put a thousand dollars to work in the market. And we talked about small versus large and index versus active. And I thought it was really cool that after I explained these choices and what I know about history, he ended up dividing his portfolio half in small cap value and half in the S&P.
Now, talking about taking it beyond that and going to the internationals, it turns out, Jack, that when we look at the returns of a portfolio that’s half US and half international over very long periods of time, the returns are very similar. Because the large got similar returns, the small got similar returns, the small value got similar premiums over the small blend — all of those things worked internationally as well as here in the US. So it turned out that by adding the international, it doesn’t increase your long-term return, but what it does do is, through some of the most important periods of your investing life, it may modify, stabilize the return.
Big example: two thousand through two thousand nine. Let’s say you retired in two thousand and you had all of your money in the S&P five hundred in the US. For the next decade, you actually lost one percent a year, but those first three years — two thousand, two thousand one, two thousand two — the market was down about fifty percent. On the other hand, over that decade, instead of losing one percent, if you had a portfolio that was half in large and half in small, half in value, half in growth, half in US, half in international, you made about seven point three percent a year. And you even made enough to almost break even during that same period of time that you lost fifty percent in the S&P five hundred. So the rewards aren’t necessarily just about how much you made. It’s kind of when you made them, and adding that international is going to reduce the volatility. Certainly we saw it last year [2025].
Jack Lempart: Yes, definitely. So the bottom line is that basically going international, having the global stock market, is just giving us maybe more peace of mind that our portfolio is not as risky as when we go all in one country — no matter if it’s the United States, still it’s just one country and the risk is focused on a single country.
Paul Merriman: And it’s going to be the same decision path, Jack, index versus active, traditional versus non-traditional. You’re going to make these same decisions, whether you’re international, or you can, if you want to, or you’re doing it in-house.
Jack Lempart: Right. And by the way, now going even international, there is still almost seventy percent of the United States in it if it’s cap weighted.6 So that’s another thing. And also, as you mentioned, for example, if we go towards some funds like value-tilted, then this amount, the size of the United States in such a portfolio, may be smaller. I wanted to ask you one more point. I think it’s important.
Paul Merriman: When you are in these non-traditional funds, one thing you don’t end up with is cap-weighted portfolios. That’s important. You don’t have to have forty percent of your portfolio in high tech. Traditionally what you find is when you diversify US and international and big and small, but you do it, you’re weighting the portfolio, but you’re weighting it to the different asset classes. You literally could have ten percent S&P five hundred, large cap value, small cap value, small cap blend, US, international, REITs7, and emerging markets. You can slice and dice and have as many as literally ten different legitimate equity asset classes that all have a history of success. It’s just when they have that success.
Jack Lempart: Right. And by the way, in the cap-weighted global stock market, the top ten companies — they are about twenty-five percent of the whole portfolio. Just ten top companies. They constitute about twenty-five percent of the portfolio, which is quite heavily, let’s say, focused just on the big techs.
Paul Merriman: And maybe, again, maybe companies with very high price-to-earnings ratios that, if the market corrects across the board in terms of what people are willing to pay for earnings, could see a huge decline there compared to a relatively small decline in the value, for example. So it really is much more risky in many ways to be cap weighted than to be asset class weighted.
Chapter 7: The first portfolio: too scared or too brave
Why the first five or ten years almost cannot be lost, why falling prices are a gift to a saver, and why forty years in T-bills is its own kind of catastrophe.
Jack Lempart: Thank you. Right. I wanted to talk about, let’s say, young investors, because when it comes to the first decision, some of them may be too scared, some may be too brave, I would say. And let’s say we have a person at twenty-five who keeps everything, let’s say, safe in cash or bonds. And another person, on the other hand, goes one hundred percent into the riskiest assets, let’s say one hundred percent into stocks. And they may be sure — I mean, inexperienced investors — that they can handle any crash, at least until the first real one. How does a beginner find the right level of risk before the market tests them? Because it’s hard to read about it — if you tell someone that there was something like the global financial crisis, but they have never gone through it. So they don’t know. I mean, they may read it, but they don’t, you know, know how it feels.
“It’s also catastrophic if you put your money in US government T-bills for the next forty years. It’s almost guaranteed to be catastrophic because you’re not going to have made enough to keep up with inflation.”
Paul Merriman: Well, it’s difficult, because you made a point here that is not a minor one, I’ll tell you, and that is that early experience can mean so very, very much to a young investor, because they think they are learning the way it’s going to be the rest of their life, at the emotional level. They may know better intellectually. We try so hard to show them the past one year at a time, all the way back to nineteen twenty eight, so that they can get an idea of what this process looks like. And I have no reason to think the future is going to be any different. Good times, bad times, high prices, low prices. It’s all coming to a theater close to you in your investment life.
So what do we need to know that will allow us to stay the course and ignore all of that noise? Well, the first thing might be to understand, even if all you own is the S&P, or a large cap (basically growth) global portfolio like VT8 — what do we know? We know that that is made up of thousands of companies. And if you looked at each one of those companies, had a chance to talk to the management, had a chance to review the financials, you might sit back and you say, you know something? That is a company I would like to have owned for the last thirty, forty, fifty, sixty years. In fact, if you want to pretend, you could pretend you got into Coca-Cola when it came public by, I think, nineteen nineteen or something. I think it was actually started being tracked about twenty, twenty three or so.
But the bottom line is when you own the S&P five hundred, you own these companies. You legitimately, I mean, it’s not like you just pretend you own them and that somehow there’s a magic number that somebody’s going to make up. No, you’re actually owning companies and that price is established every day. And obviously when we’re just getting started, we don’t have much money in the portfolio. Even if it goes up, it’s not going to be a life changer. And if it goes down, it’s not going to be a life changer. It may inside, you may have emotions about that, but in terms of the next forty or fifty years of investing, or if you’re in here, if you’re thirty, you’ve got sixty to seventy years of investing probably ahead of you.
And so what you have to understand is that every one of these businesses has been through many, many ups and downs. And yes, many people, companies didn’t make it. They went into bankruptcy. General Motors went into bankruptcy. At one time, it was said, as General Motors goes, so goes the country. Well, that would suggest that the company went broke. It didn’t go broke. It’s that General Motors came on hard times. Enron came on hard times. And what do they replace Enron with? Nvidia. I mean, literally, that was the stock that they replaced it with. And Nvidia took over and did better by far than had you continued to own Enron. But all of that is being managed inside of that portfolio.
So here’s the thing the young person just must know: you almost can’t lose that first five or ten years of investing — regardless of what happens, it isn’t going to mean as much as it feels like it’s going to mean. Because the first thing that could happen is you could have a wonderful ten years. It could be like eighty to eighty nine or ninety to ninety nine, but not two thousand to two thousand nine. But in those long periods of going up, you put your money in — you dollar-cost average every month, you put your hundred dollars to work. When the market was down, you bought more shares. When the market was up, you bought fewer shares. But at the end of a ten- or twenty-year period, you have saved the money. And by the way, you are the champion. You are the heavy hitter in the partnership. Because in the early years, you can’t make enough to have as much impact as the money you’re putting in. Because you put in a hundred dollars and it goes up five percent. All right, the market made you five. You made the portfolio a hundred.
But what if the thing that you so fear — and that is, the market goes down? Well, if the market goes down and you’re investing in the five hundred largest companies, like from seventy to seventy nine or two thousand to two thousand nine, it means you bought more shares. Every time you put one hundred dollars in and the market went down, you got more shares. So the best thing that can happen to a first-time investor is for the first ten years to have the prices be low, and then go up.
And so we need to get our mind straight. We’re buying legitimate companies where people go to work and try to make a living. The officers and directors try to make a living. The shareholders try to make a living. Everybody’s trying to make a living. So from my viewpoint, when you think of it as a business — and you want to be a bigger part than you are today. Because we know historically that’s where the growth comes from. But we can never fool ourselves. We always live with the possibility of a catastrophic [event]. We can’t get around that. But it’s also catastrophic if you put your money in US government T-bills9 for the next forty years. It’s almost guaranteed to be catastrophic because you’re not going to have made enough to keep up with inflation. You’ll have less money than what you started with. That’s the decision that you’re making. So either way, you take risk.
But the probabilities are of your life, certainly my life. I have lived in the golden age of investing. Many people that I meet that are my age, we think we’re so smart. No, we were there at the right time. The market made us the money. We didn’t make the money. If I made any money, it was from my work. But the minute I start making money from what I invest, I don’t make it. The market makes it. So if we can just get that young investor to wrap their mind around the fact that they are in a legitimate business. And the beauty is you get up in the morning. You don’t have to fire anybody. You don’t have to go to work. All the things about it are wonderful, except for the fact that you have to live through what a business, a normal business actually lives through.
Chapter 8: Small cap value, factor funerals, and one thing to do tomorrow
Seventeen-year stretches with no premium, where the small cap value premium actually comes from, GameStop and momentum — and the last question: what to do tomorrow morning with a coffee.
“They did not get a premium for seventeen years, four times over the last approximately one hundred years. That’s a lot of time to be sitting around and say, why did I listen to that bozo?“
Jack Lempart: Right. We are reaching the end. You’ve mentioned small cap value a few times already, but I have to ask you this question again, because probably you’re the world’s most patient advocate of small cap value. Every few years, the headlines bury it — I mean, I’ve seen many factor funerals, especially small cap value. And we can see headlines like value is dead, this time is different. And after a decade of large growth dominance, especially in the US, how do you talk to an investor who’s losing faith maybe after a decade?
Paul Merriman: Well, by the way, that’s the problem the industry had in nineteen seventy eight. There was the famous front cover of one of the major magazines: “the stock market — is the market dead?” Because stocks were, were — there was a big question of whether there was going to be a future, literally a real future for stocks. And I know that people felt like that after the depression. It took until nineteen fifty five to nineteen sixty before the public started to say, I think stocks are okay for the future. So it’s not going to surprise me if people give up on investment because it doesn’t live up to their expectations.
But here’s what I know. I just want to give you a few more numbers, Jack, because I looked at them this morning. I mentioned that small cap value — a ten-thousand-dollar investment in February two thousand. A company — a fund — managed by DFA, where you can still get in now to an ETF and basically get the same kind of management. A ten-thousand-dollar investment is now worth three hundred and — excuse me, I’m going to get the right number here — one hundred and eighty thousand dollars, a little more than a hundred and eighty thousand. On the other hand, the S&P five hundred over that same period, ninety-one thousand two seventy-three. Now, the ninety-one thousand two seventy-three was a compound rate of return of about eight point eight. It has not been the best period of time for the S&P five hundred. It has struggled. And as I mentioned earlier, the small cap value, from DFA, was eleven point eight.
What DFA told me when I went to their two-day class in nineteen ninety four is that we believe there should be a three to five percent premium for small cap value over the S&P five hundred. That was from a two percent premium for the size factor and a three percent premium for the value factor. And they did not get five percent. They got three percent after all of the internal expenses. By the way, most of those years, the expenses were higher than the expenses that we have today in the ETF that we can go buy. So if we could replay this at today’s expenses, we’d have a heck of a lot more than one hundred and eighty thousand dollars.
Now, if you were in the mid cap at Vanguard, it would be a hundred and twenty-four thousand. So you would have done better if you had fifty-fifty S&P five hundred and mid cap at Vanguard, if that’s what you want. You would have made more having that other asset class. They are very different asset classes.
And here’s the part that people, many people will never get, because they will ask me what’s wrong with small cap value, or what’s wrong with the S&P five hundred when it was underwater for ten years. That is normal. That is normal. Going back to nineteen twenty eight — or twenty six, actually — there were four periods averaging around seventeen years when, at the end of that seventeen-year period, the return for the S&P five hundred and small cap value was the same. They did not get a premium for seventeen years, four times over the last approximately one hundred years. That’s a lot of time to be sitting around and say, why did I listen to that bozo?
But that’s going to be true of any asset class you put your money in. Because we always, in hindsight, know what we should have done. If you live in the Seattle, Washington area, and you were there when Microsoft came public, why didn’t you put ten thousand dollars into that company? You would be a multimillionaire today from that ten thousand dollars. Now, we always know what worked in the past. There is no risk in the past. But I do know that there was kind of a risk with Microsoft, because from two thousand to two thousand sixteen, you were waiting to get back to where you were in two thousand. Not counting the dividend, by the way, but just on the price. And so having to wait around to have something come pay you what you thought you were promised.
Now, how many people buy a lottery ticket and actually think they have a chance to win? The probabilities are, what, three hundred million to one against you, as opposed to something like putting your money into the stock market. The problem is to become a multimillionaire in the stock market, it typically takes many, many years and it typically takes market driven returns, and maybe you won’t be as lucky as I was. Remember, Jack Bogle brings the S&P five hundred to the public in nineteen seventy six, and by nineteen ninety nine that equity asset class has compounded at seventeen point two percent a year for twenty five years.11 And when people were asked in December of nineteen ninety nine what they expect the next decade to be like in terms of the return on the S&P five hundred, it wasn’t a negative one percent. It was between twenty and thirty percent a year.
And the problem is, we’re working so hard in the US. I don’t know in Poland how this is going, Jack. I really don’t. But I know today, seventy-five percent of our high school students are now required by their state legislatures to be [taking] a semester of financial literacy. And if in that semester, we can’t teach them these basics, I will tell you, we have failed. But if we can teach them these basics, then I think we’re going to be able to create a class of people who not only know how to read and write, that would be nice as a start, but then on top of that, understand how businesses work, how markets work. And the problem is so often we learn this from TikTok or something that they see in a really exciting, interesting, wildly profitable piece on the internet. And according to the studies, seventy-four percent of the people that are out hawking stuff on the internet have no background in it. That doesn’t mean they couldn’t have read books and gotten up to speed, but they are not professional teachers. They are people trying to figure out how to make a living off the internet while you do something with your money that may not even be good for you, but it’s good for them.
Jack Lempart: Right. By the way, just quickly returning to small cap value, do you have any take on what’s the source of that premium, that small cap value over the very long term is paying more? Is it just taking more risk, or is it just kind of an anomaly? Do you have any theory here?
Paul Merriman: Well, what the academics say — because all this work is from Fama and French.10 And people can go online and read Fama and French. They can read the abstract, and they can read the conclusion in all of their academic papers. But the bottom line is it is identifying premiums — quality, financial. Firms with higher quality financially have a tendency to make better rates of return over the long term than firms that are not of high quality. And where this is very important is with small cap, because small cap companies that aren’t financially relatively strong are at risk of not succeeding, which is why Avantis and DFA try to keep their holdings of small cap value funds in companies that are small and value and financially stable. That’s one. Size is important. And the amount of value.
Some companies, for whatever reasons, get oversold, just like companies get overbought. Look at the Japanese market. At the peak of the market, it was ninety-nine times earnings, and at the peak of the big blow-off in the US, the technology was about forty-four times earnings. Then they came down to twelve and thirteen instead. It didn’t mean they had to go away. It meant that people weren’t willing to pay those kinds of premiums.
So there’s the quality of the companies, the size of the companies, the value orientation. And then another factor that the academics have pulled out is what’s called momentum. And that is when a company, let’s say, has come out of the small cap value group and is now mid cap, what do you do? Well, if you’re in a traditional index fund, you sell that. If you’re in a non-traditional index fund, they watch that and they will track that until the company appears to have started to lose momentum. For example, there was the company, oh man, it was a meme stock that went from ten dollars to three hundred. And it was… Pardon?
Jack Lempart: The GameStop.
Paul Merriman: Yes, GameStop.
Jack Lempart: Right.
Paul Merriman: So it was a value stock when it was under ten. And DFA owned it. Avantis owned it in their portfolio, not because they knew it was a meme stock, but they didn’t sell it when it was then thirty dollars a share and fifty dollars a share. One of those two, I don’t remember which one, got out of it when it was over three hundred, because it continued to rise and it had what they call momentum.
All those little things and the ability to make the trades without people knowing what’s going on, and the ability to buy less than you have to. You don’t have to own so much Nvidia. You don’t have to own so much Microsoft. You can own Nvidia. As a matter of fact, just as an aside, there is a mutual fund that equal weights the S&P five hundred. It has had a very fine track record. And much of the last, from the late eighties on, much of that time, it had a better rate of return than the cap-weighted index, until we had this huge run recently with those tech stocks.
There is so much to know, and you and I have this kind of obligation to try to figure out how to make it as simple as possible. And of course, what you’re doing is you’re giving them the numbers. You have such a luxury in what you have to offer, because you’ve got what they need — the challenge is they need to learn how to evaluate what that all means and put it into good historical perspective.
Jack Lempart: So, Paul, I have the last question then. Let’s say we have someone who listened to this whole conversation today on a commute, and they’re just standing in the kitchen tomorrow morning with a coffee. What is just one thing — the one thing they should do — I mean, not next year, not tomorrow, but just now? Not maybe after listening to another podcast, but to take something from what you have told us today — what should they do?
Paul Merriman: Well, the thing that’s going to change their life is to make a list of the things they actually can control about investing. You can probably come up with twenty things you can control, and then make a list of how much you can’t control, the things you can’t control, and understand that if you want to be smart, make sure you control the things you can. One example is the expenses you’re paying. I don’t mean you have to get everything for free, but to the extent that you can get something from a tenth of a percent to a quarter of a percent that’s costing other people one or one and a half percent, John Bogle would say that returns come and go, but expenses go on forever.
So we want to be smart about those things we can control. Unfortunately, one of those theoretically should be our emotions. And at the end of that list, if you’ve included the things you can control and emotions are one of them, I’m hoping, I’m crossing my fingers right now, that next to that word, emotions, you’re going to put the word automate. Automate everything you possibly can. Because the minute that you start trying to outguess, outthink, outfeel the market, make your personal judgments, you’re more than likely to lose than gain. Doesn’t mean you won’t get lucky. I’ve been lucky more than once in my life. But I don’t think you want to try to build your empire on luck.
And I do hope you’ll read, as you mentioned earlier, our free book, We’re Talking Millions, Twelve Simple Ways to Supercharge Your Retirement, or Your Investments, whatever you want to put on the end. We’ve got twelve of them. Twelve million-dollar decisions there I want you to make. And I want to tell you, I don’t make one penny on anything that you do with us. The goal is for your life to change, not mine.
Jack Lempart: Paul, thank you so much. Everything you have mentioned — I mean, the free books, the podcast, the tables — will be linked in the show notes. And to my listeners, if this episode was useful, please send it to one person who will start investing someday — and hopefully, maybe thanks to you, someday is tomorrow, not somewhere in the future that will never happen. So Paul, thank you so much for all the wisdom you shared with us today.
Paul Merriman: Thank you, Jack, and good luck on your venture. It’s quite exciting.
Jack Lempart: Thank you very much. Take care. Bye bye.
Key takeaways
- The casino comparison runs backwards. In a casino the longer you bet the higher the probability you run out of money; with investing, Paul argues, the longer you invest the higher the probability of success — though he adds that the longer you invest, the higher the probability of also living through a crash.
- The size of the first deposit matters far less than how early you start. A hundred dollars a month from age twenty-two is fifty-four thousand dollars of contributions — money Paul tracks through a Roth IRA, thirty years of retirement withdrawals and up to ten years of tax-free inheritance. On his numbers that becomes about three million at eight percent, eight million at ten, and, at twelve percent, which he says is possible in small cap value, thirty-seven million.
- Intelligence is close to irrelevant; discipline is not. By Paul’s reckoning good investing is “ninety-nine percent your willingness to save and your willingness to stay the course”, and an hour is enough education to last a lifetime.
- About one active manager in ten or twenty beats the benchmark over fifteen to twenty years, and no academic study shows how to pick them in advance. The asymmetry is the point: one in four lands in the bottom quartile, which Paul puts at roughly two to three percent a year less return — more years of work, fewer years of retirement.
- An ETF is a wrapper; grade the contents. Which index, what kind of growth, how many stocks, what expenses, and how often the portfolio is reconstituted — the nuances compound over a lifetime.
- Half US, half international did not raise the long-run return — it changed when the return arrived. Over the two thousand to two thousand nine decade the S&P five hundred lost about one percent a year while a portfolio split across large and small, value and growth, US and international made about seven point three.
- The small cap value premium is payment for risk, and it is not paid smoothly. In roughly a hundred years there were four stretches averaging around seventeen years at the end of which small cap value and the S&P five hundred had returned the same — “a lot of time to be sitting around and say, why did I listen to that bozo?”
Notes
- A Roth IRA is a US retirement account funded with money that has already been taxed — what it earns and what you eventually withdraw are not taxed again. Most countries have some tax-sheltered equivalent; the mechanics differ, the principle does not.
- “Small cap value” means shares of smaller companies that trade cheaply relative to their book value or earnings. Academic research treats the two characteristics — size and value — as separate sources of both higher long-run return and higher risk.
- Editor’s note: throughout this conversation Paul uses “non-traditional index” for funds that deliberately depart from plain market-value weighting — tilting toward smaller or cheaper companies, screening for profitability, or trading on their own schedule — rather than tracking an index exactly as published.
- VTSAX is Vanguard’s Total Stock Market Index Fund — the whole US market in one fund.
- Editor’s note: as Paul says two paragraphs later, the figures he is reading are for the period from the beginning of 2000 — about twenty-six years — not from 1928.
- Cap-weighted (market-capitalisation weighted) means each company’s share of the fund matches its share of the market’s total value — so the largest companies dominate, however expensive they have become.
- REITs — real estate investment trusts: listed companies that own and rent out property, a way of holding real estate through the stock market.
- VT is Vanguard’s Total World Stock ETF, holding large and small companies across developed and emerging markets in a single fund.
- Treasury bills: short-term US government debt, the standard stand-in for a risk-free, cash-like holding.
- Eugene Fama and Kenneth French, the academics whose research identified company size and low valuation as long-run drivers of stock returns. Fama shared the 2013 Nobel prize in economics.
- Editor’s note: “Jack Bogle” is John Bogle, Vanguard’s founder. The span from 1976 to 1999 is twenty-three years; the compound figure Paul quotes belongs to that period.
Mentioned in this conversation: Risk & Reward (Ben Carlson), Enrich Your Future (Larry Swedroe), Your Money and Your Brain (Jason Zweig), The Psychology of Money (Morgan Housel), We’re Talking Millions: Twelve Simple Ways to Supercharge Your Retirement (Paul Merriman — free at paulmerriman.com, along with the Best-in-Class ETF recommendations and the historical-returns tables).
This material is for educational purposes only. It is not investment advice or a recommendation to buy or sell any security, and the historical figures quoted in the conversation say nothing about future returns. Before making any investment decision, read the fund’s official documents — prospectus and key information document — and weigh the risks against your own situation and investor profile.
