Episode 74 – The Four Keys to Successful Investing with guest Paul Merriman

Episode: 74
Originally Aired: June 10, 2014
Topic: The Four Keys to Successful Investing with guest Paul Merriman

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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The Four Keys to Successful Investing
James Lange, CPA/Attorney
Guest: Paul Merriman
Episode 74

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  1. Introduction of Guest – Paul Merriman
  2. Resource for Do-It-Yourselfers
  3. University Street Vs. Main Street
  4. Be a Mechanical Investor
  5. Vanguard Vs. DFA Funds
  6. Understanding Fiduciary Relationship

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1. Introduction of Special Guest – Paul Merriman

Hana:  Hello, and welcome to The Lange Money Hour, Where Smart Money Talks.  I’m your host, Hana Haatainen Caye, and of course, I’m here with James Lange, CPA/Attorney and best-selling author of the first and second edition of “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.”  Jim’s guest tonight is Paul Merriman.  He is nationally recognized as an authority on mutual funds, index investing, asset allocation and both buy-and-hold and active management strategies.  Paul is the author of four books on personal investing, including his newest book, “Financial Fitness Forever.”  He has also hosted a weekly radio program and has been a featured guest on local, regional and national television shows.  Paul has written many articles for fundadvice.com, a service of Merriman, Inc., identified by Forbes as one of the best online resources for investors.  On tonight’s show, you will learn all about the four keys to successful investing: how markets work, how mutual funds work, how our emotions sabotage us and how to build a plan that incorporates it all.  Paul will share with you how to know if your advisor has your best interests at heart.  In addition, Paul will compare and contrast two popular index-investing strategies.  With all of Paul’s experience in TV and radio, he is sure to be an entertaining guest.  But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in with your questions for Paul.  The number is (412) 333-9385.  Good evening, Jim, and welcome to the show, Paul.

Paul Merriman:  It’s great to be here.  Thank you very much.

Hana:  Well, we’re happy to have you.  Before we go into speaking about all that you have to say, I wanted to let our listeners know that we, sadly, let them know that Jim’s mother passed away on March 30th, and Barnetta was an amazing woman, and there is a website that Jim put up that’s dedicated to her that I would encourage all the listeners to visit.  It’s an inspiring website, beautiful pictures of this remarkable woman.  The website address is www.barnettalange.com.  Barnetta suffered a stroke on March 18th and she spent her last days at Forbes Hospice, which Jim’s going to talk a little bit about, but I just wanted to highlight some of the things about Barnetta’s life: she was an accomplished pianist and she lived independently at the age of 95.  She was still playing piano for an hour a day.  She did that for over 85 years, and as recently as six months ago, she performed for about a hundred people at a retirement community.  Jim’s going to really miss their standing date to go to the symphony.  She was his date to go there, and that’s going to be quite a loss for him.  Another remarkable thing about Barnetta is she had her PhD from the University of Pittsburgh in Foundations of Education, and she taught journalism at Point Park.  She received her BA in Music Education from Carnegie Tech in 1938.  So, it’s just remarkable for her to have accomplished these things as a woman in those days, and her family history of philanthropy, if you look back at her history, you’ll see that they had a lot to do with the founding of Montefiore Hospital, and so it’s just a really remarkable story.  I encourage you to go to www.barnettalange.com just to read more about her.  She was also a staff writer for the Jewish Chronicle for many years.  So, Jim, I know that Forbes Hospice was really a comfort to you, and you were fortunate enough to be with your mother and spend the night before she died with her and be with her as she passed.  Do you want to talk a little bit about Forbes?

Jim Lange:  Well, just for a minute.  I usually don’t have any commercials except for my own workshops on this show, but I will say that Forbes Hospice is an unbelievable place, and if you have a relative who is terminally ill, they have a program both where if the person can remain at home, they send nurses out and they are experts in making people comfortable.  My dad died thirty years ago.  He had Forbes Hospice at home.  They did a remarkable job, and the final days when we could not control the pain at home, we had him actually at their in-patient facility, and they did a great job.  The same thing with my mom.  I genuinely believe those nurses and the people who work there are the angels on Earth.  I think they are just remarkably dedicated women and men who spend a lot of their waking hours helping people who are dying die in a dignified, comfortable way.  Now, sorry to throw you off your game, Paul, because I do want to get back to…

Paul Merriman:  I’m sorry for you, Jim, and it sounds like you could write a book about your mother, and what a wonderful relationship that must have been.

Jim Lange:  Well, it was, and she was a writer.  She taught journalism, and she did edit my books and there weren’t too many pages that escaped the red pen.  She was pretty tough!

Paul Merriman:  I like that, I like that.

2. Resource for Do-It-Yourselfers

Jim Lange:  All right.  Well, speaking of books, and speaking of fine books, I mean, wonderful books, I think that Hana mentioned briefly that Paul is the author of “Financial Fitness Forever.”  Now, Paul’s written a number of books, and I have actually had Paul on the show before and we have talked about his other books, and nothing against your other books, Paul, but “Financial Fitness Forever” I just thought was outstanding.

Paul Merriman:  Well, thank you.

Jim Lange:  And, you know, I read it before.  I actually read it when it was just a manuscript before it was a book, and I did give you a testimonial, which is in the book, which is well deserved.

Paul Merriman:  You did, thank you.

Jim Lange:  But then, in going and preparing for tonight’s show, I went through it again, and I just think it’s so outstanding.  One of the things that you do, a lot of times, people give some general concepts, which you do, but then you also give this amazing specific information.  So, for example, you have, I believe, recommended asset allocations for the top fifty companies.  So, if you work for any of these top fifty companies, you can go to your book and instead of trying to dissect this long discussion about asset allocation, you go boom!  If you work for whatever it might be, work for Wal-Mart, here are your choices, here are the ones I recommend for conservative, for moderate and more aggressive, and I just think the book is full of wisdom and congratulations.

Paul Merriman:  Thank you, Jim, and I cannot overlook the Government Thrift Savings Plan, because there are a lot of people who are putting their money there.  It’s interesting how that book developed, Jim, because PBS came to me.  They asked me to do a special pledge week show and it meant a new book, and they didn’t want my typical book that was not…I love specifics, I love numbers, so the first part of the book was pretty much a narrative.  It was supposed to explain investing, but for the beginner.  I just couldn’t stop there, and I begged them to let me create an appendix that may be the largest appendix in history, and to get into the numbers, like you say, in the recommendations that Vanguard, Fidelity, ETS, give people the specifics so they actually know exactly what they need to do.

Jim Lange:  Yeah, and by the way, that’s another thing.  You know, on our show, we do have do-it-yourself audiences, and you do talk about…and we’ll get into it more specifically, but I do believe that you said that you think that the best mutual funds for do-it-yourselfers are Vanguard, and then you go ahead and you tell people, you know, again, conservative, moderate and aggressive portfolios for Vanguard investors.  So, it could be a real no-brainer for somebody.  They can just buy your book, look at the percentages for Vanguard, go to Vanguard and have probably a pretty reasonable diversified portfolio using high quality, low cost index funds.

Paul Merriman:  Well, as a matter of fact, Jim, I suspect that over the last decade, that those Vanguard strategies were exactly what I suggested people do, and Holbert, that tracks our newsletter recommendations and the access to those recommendations, it’s free, and what do we find, is that we probably out-produced with that simple Vanguard strategy, whether it’s 40% equity or 60% equity or 100% equity, outperform 99% of investors.  So, it’s further proof, and I know you agree with this, that you don’t have to be a genius to look like one when you invest properly.

Jim Lange:  Well, that’s a heck of a statistic that your allocation is beating 99% of the investors.

Paul Merriman:  Now, wait a minute.  Now, you sounded a little bit like, well, how does he know that?  I’ll tell you how I know that: I follow the returns of almost all of the newsletters in America, and of course, mutual funds are very easy to follow through Morning Star, and it is amazing to me how poorly most mutual funds did over the last decade.

Jim Lange:  I’ll tell you, Paul, you’re also brave.  I’m not as brave as you, so I’m not going to talk about some of the losers that you mentioned in your book.  I’m surprised those guys haven’t sued you!  But, all right.  So, anyway, Paul, you have some really good thoughts in the book, and what I’d like to do…and the other thing, I did promise in the e-mail that I sent out to people that we were going to cover at least four things, and there are more things that I want to cover.  So, if we could, if we could switch over to, I think, one of the core issues, which is how do markets work, Paul?  And why has this Vanguard strategy beat most of the active investors?

3. University Street Vs. Main Street

Paul Merriman:  Well, first of all, it’s this simple: I did not depend on Wall Street for any of the basis of the recommendations that I made.  Not one idea came from Wall Street.  So, as you know, Jim, they’re stricken from my thought process when it comes to helping others.

Jim Lange:  You are no friend of Wall Street and Wall Street is no friend of yours!

Paul Merriman:  I think that’s probably fair.  I’ve gotten lots of e-mails from brokers who think I’m very unkind.  I just think I’m being honest, and I’ve been around this business for about 45 years, so you do learn something along the way, but I also didn’t depend on Main Street.  Main Street would be your next-door neighbor, your cousin, your uncle, or somebody at the office who just sounds like they know so much about investing.  I don’t depend on those people to give advice to others, but I will tell you who I do depend on, and I mean 100% depend on, and that is the work that’s been done by the academic community, what I call University Street, and the reason that I have such confidence in what they teach us is that there are studies and numbers and they’ve looked at investing inside-out without an eye on how could I make a buck off the next investor?  That’s the basis of those portfolios, and it is what they’ve taught me, some of it’s pretty sophisticated and complex when you look at the formulas, but if you get underneath those formulas, what is it they really want us to do?  That’s the source of my information.  That’s what I trust.  That’s where my own money is, and I think from what I know about your attitudes about investing, I think that’s where your money is too, Jim.

Jim Lange:  Well, as a matter of fact, our office has recently switched our own investments to Dimensional Funds.  I know you have been a Dimensional Funds fan for years, and certainly, we’ll touch on Dimensional Funds, but I also want to talk about the concepts for the do-it-yourselfer, but yeah…and plus, as I am reading more and frankly becoming much more enthusiastic than I ever was in the past, although in the past, I always just had this kind of general feeling that low-cost index investing was a great way to go, and now, when I’m starting to see some of the statistics, I’m not sure I quite came up with 99% like you did, but I came up with that index investing is a really good way to go, and I think that listening to University Street is going to be a lot more productive and profitable for people than listening to Wall Street.

Paul Merriman:  And I absolutely agree with that, and Jim, if you look where John Bogle got us, and I really think that he is one of my heroes and starting the Vanguard funds and starting the first retail index fund, he got us about halfway there by giving us mutual funds that have very low expenses, broadly diversified, low turnover so they’re very tax-efficient, and again, that makes them inexpensive, and he started a number of those index funds.  But I’ve had him on my show many times over the years, and it was hard to get him to really move over to what the academics were teaching.  Boy, what a difference that made, and he’s even come around in the last few years to looking at it more like the academics, and what I’m talking about is not just the importance of indexing, but what asset classes because now we’re getting into how investing really works.  Yeah, everybody knows that stocks are more risky, but they make more money.  But which kinds of stocks?  Which ones can you depend on making you more money over time, and how can you put them together so that even though you achieve higher rates of return, you take less risk.  I mean, that’s the ultimate reward for an investor is to get higher rates of return and take less risk.  That is what the academics kind of, that was the step beyond John Bogle, but I think it’s just made a huge difference in how individual investors can now expect, really expect to make better rates of return in the future than they have in the past because they’re finding out this information that is truly life-changing.

Hana:  Okay, Paul, we’re going to have to take a quick break.  When we come back, we will continue this conversation.  I want to remind our listeners out there that we are live tonight, so if you have any questions, you can give us a call at (412) 333-9385.  We’ll be right back with Paul Merriman and Jim Lange on The Lange Money Hour.


Hana:  Welcome back to The Lange Money Hour.  This is Hana Haatainen Caye, and I’m here with Jim Lange and Paul Merriman.

Jim Lange:  Thanks again, Paul.  By the way, I should mention to the listeners that I have been a Paul Merriman fan for years, and I actually at one point approached Paul and said, “Hey Paul, you know, maybe we should work together where you do the investments through Dimensional Funds, and I provide strategic advice like Roth IRA conversions and estate planning and some of the things that I do,” and it didn’t work out for a number of reasons, one which was that Paul was based, and I think still is, in Seattle and we’re based here, but the, let’s say, the update on that is I entered into a similar arrangement with P.J. DiNuzzo, so P.J. DiNuzzo actually does the investments through DFA, which is one of the things that we’re going to be talking about tonight, and then I do again the strategic part, and then together, we charge one what I think is a pretty low fee, which is 1% on the first $500,000 and then less as additional amounts are invested.

Paul Merriman:  Well, and Jim, I just got to tell your listeners, I’ve never been to your live workshop.  I have seen a video of your workshop, and I think you do a phenomenal job of educating people, and not just looking for clients like a lot of people are doing, but really helping people as they leave there know about changes they should be making in their lives, and I am still sad that we did not, in fact, put that working relationship together, but you’re right.  I mean, it was just living a long way apart, and now, I’m in Mexico right now.  Your listeners may not want to hear that!

Jim Lange:  That’s okay!

Paul Merriman:  But I retired.  In fact, I’m working on nine books right now, Jim.  Nine books on investing.  And so, I’ve got the best of all worlds.  I’m in the warmth of the Mexican sun, there’s a band practicing in the background and I’m talking to listeners who want to learn more about being more successful investors.  That’s as good as it gets for me!

Jim Lange:  Well, I’ll tell you, Paul, I was a fan of your radio show where you provided great information, and now, you’re too young to be the elder statesman, but I kind of think of you in that way as kind of like the wise man providing wisdom for the masses, and actually, I think that that’s what your book is about, because even if you have $100,000, you can actually learn a lot from your book.

Paul Merriman:  Even if you’ve got $10,000, Jim, that ETF portfolio, almost anybody can put that together with even $1,000 dollars.  So, yes, I want to impact as many people as I can before I have to really retire, and all the profits from all the work that I’m doing now, all of them go to charities that are very important to me, non-profits to help others.  So, I’m done making money.  My job now is to help other people make money, and I think that will reward a lot of the people I care about in the charitable arena.  But this is great fun.  I love being here having a chance to help others, and let’s go to it.  Let’s figure out what they need to know.

4. Be a Mechanical Investor

Jim Lange:  Well, Paul, one of the things that you have in the qualitative, I’m not talking about the number side now, but you talk about emotions in investing, and I think that that’s a very important topic for our listeners, and how our emotional makeup either helps us or hurts us as investors, and I wanted to ask if you could shed some light for our listeners, who might be do-it-yourselfers, on investing and emotions and, let’s call it, the general area of financial behavior, and I know, by the way, that we could dedicate three shows to this topic alone.

Paul Merriman:  Yes, and if they want to read one book on the emotional end of investing, “Your Money and Your Brain” by Jason Zweig, if that doesn’t convince you that most people are a little bit nuts about money, I don’t know what will.  But I will tell you this: the evidence…now, you want to talk qualitatively?  Let me talk quantitatively for a second and tell you why it’s obvious there’s a huge problem.  The textbooks are filled with the solution ‘How to be a successful investor.’  People have tried for a hundred years to preach some of the same information about how to be a successful investor, but there is a firm…in fact, they’re back on the east coast.  They may be close to you, I’m not sure, called Dalbar that tracks the performance, not just of mutual funds and the indexes, but the actual performance that investors got, because if you invest when the market’s high, and you sell or don’t invest when the market’s low, guess what?  You’re not going to show the same return as the mutual funds or as the indexes.  And here are the numbers.  These are the numbers tracked kind of one month at a time over twenty years ending 2010.  While the S&P 500 compounded at 9.1, the average investor got 3.8.  Now, that’s equities.  The index, the bond index, 6.9.  The average investor in bonds, 1%.  Now, this difference even got a little worse last year because there was about a 2.1% gain for the S&P 500, and an 8% lower return for the average equity investor in the U.S., and what’s the reason this is happening?  Well, it certainly isn’t about making money, but it’s about losing money, and people generally aren’t ready to lose money.  They don’t like to lose money.  They aren’t educated about the real risk of investing, and so they panic when markets go down.  We know that in our industry, and believe it or not, Jim, when I became a stockbroker, I admit to people, I was a stockbroker for about two years back in the 60s.  What I was told was, “You better sell a lot of stocks when there’s a big bull market because when the market goes down, nobody’s going to want to buy stocks.”  Guess what?  It’s not so different today!  They keep getting it wrong because they are emotional about money, they claim they’re buying holders but they’re really market timers using what I call the ‘I can’t stand it anymore’ market timing system.  There are so many counterintuitive aspects of investing that make it very difficult for people to emotionally do the right thing, and I’ll just give you one, Jim.  This is for the young listeners.  When the market is going down and everybody’s complaining about how horrible it is, you young people should be celebrating.  There is nothing better for a young investor than the market to go down for the first decade that they’re putting money away for their retirement.  That’s contrary to what their parents and their grandparents are telling them.  Their grandparents and parents are saying they want the market to go up.  No, they want the market to go down.  And it’s that kind of counterintuitive thinking that makes investing successful, but it’s hard for people to do emotionally.

Jim Lange:  Well, as a matter of fact, you mentioned Jason Zweig, who wrote that fine book on behavior, but in your book, you also mention another author for the Wall Street Journal, since retired from the Wall Street Journal, but he’s my favorite Wall Street Journal author if for no other reason that we did about thirty columns together, and that’s Jonathan Clements, and you have a great quote from Jonathan Clements that I’d like to take the liberty of reading because it’s right on point for behavior.  All right, this is Jonathan Clements speaking, not me: “If you want to see the greatest threat to your financial future, go home and take a look in the mirror.”

Paul Merriman:  Yeah, absolutely.  And here’s the wonderful thing, Jim, the wonderful thing is there is a way to invest, and I know you know this intimately, but there is a way to invest that eliminates over 90% of that emotional burden, and it’s very simple, and it comes out of the academic community.  It is to be a mechanical investor.  Dollar cost averaging is mechanical.  Indexing is mechanical.  But it can’t just be a straight mechanical system all by itself.  It has to take into consideration the most important aspect of investing, and that is your risk tolerance, because people do the wrong thing when the market is down, and they do the wrong thing when the market is high, as well, because they chase bull markets and then they flee from bear markets, and if you have knowledge of your own personal risk tolerance…and by the way, Jim, it’s rare that people figure this out without an advisor, and it’s for this reason I would recommend to every investor I ever met who was coming close to retirement, you spend at least one year with an advisor.  If you don’t want to have an advisor for the next fifty years, fine.  But one year with an advisor can be absolutely a life-changing event that gets you on the right path because with help, you’ll find out about your risk tolerance, and make sure you’re not overexposed to risk so that you find yourself going beyond loss limits and then bailing out.  That is so important to keeping people on course.

Hana:  Well, I’m going to be a mechanical host now and say we have to take another quick break.  So when we come back, we’ll continue this conversation, and we’ll be right back with Paul Merriman and Jim Lange on The Lange Money Hour.


5. Vanguard Vs. DFA Funds

Hana:  Hello there, and welcome back to The Lange Money Hour.  This is Hana Haatainen Caye, and I’m here with Jim Lange and Paul Merriman.

Jim Lange:  Thanks, Hana.  And we’re here with Paul Merriman and, just in case we get cut off near the end, I want to remind everybody what a fine book that Paul has written, and I’m really going to say this is one of the best books out there on money, and not only philosophically, but in terms of the mechanics of what to do.  It is “Financial Fitness Forever” by Paul Merriman.  I’m sure it’s at the local bookstores or at Amazon.  “Financial Fitness Forever.”  Paul, one of the things that you said in “Financial Fitness Forever,” and again, I was kind of surprised at the boldness of your book, but I guess, as you said, you’re retired and you can say anything you want.  I guess that does give you a certain credibility.  You said that Vanguard was hands down the best index company, and you even mentioned some of the others, which I’m not bold enough to do, that you said clearly were not as good as Vanguard.  Is there a reason why Vanguard is better than these other companies?

Paul Merriman:  Well, first of all, remember I said that for do-it-yourself investors.

Jim Lange:  That’s correct.  You did.

Paul Merriman:  That’s very, very important.

Jim Lange:  Okay.

Paul Merriman:  And the reason that I am a huge Vanguard fund…and they’ve never even bought me a cup of coffee, so I’m supportive of them without any compensation.  No conflict of interest.  They have extremely low expenses.  What have the academics taught us?  That the variable that most predicts the future returns of a particular fund depends on what asset class, of course, is going to be the expenses, not the manager, not the marketing, not whether Morning Star gives them three stars or five stars, low expenses are going to drive the extra return that you’re looking for.  They also have a broader range for the retail investor than the other mutual fund companies do, and I find it very interesting because I’ve been trying for many years to build similar portfolios at Fidelity, similar portfolios at T. Rowe Price, even similar portfolios with ETS that represent the right balance of big and small and value and growth and U.S. and international and emerging markets and fixed income, etc., and Vanguard has, with virtually the same attempt in terms of asset classes, come out with a better rate of returns.  So, yes, I am a huge Vanguard fan for the do-it-yourselfer, but I got to tell you.  If you’ve got an advisor who is not using the Dimensional Funds, then you’ve got an advisor that I can clearly, easily say is not, in fact, doing the best for you that they could because DFA is even a notch above Vanguard, and I’ve seen it.  I’ve seen it over ten years the difference between DFA and Vanguard.  There’s no secret to it.  There’s no black magic to it.  It’s simple why they make more money, but the bottom line is without taking any more risk, I have seen it.  It is possible.  It is doable and should be in the future to make more money even after you pay some advisor to help you with the DFA funds.

Jim Lange:  Well, wait.  Now, hang on a second, Paul.  We all agree that Vanguard has very low costs, and we also know that DFA costs are very low.  Maybe a tiny bit higher than Vanguard’s, but basically comparable.

Paul Merriman:  For a reason.

Jim Lange:  Right, but if you go through DFA, a consumer can’t just go out on their own and buy DFA funds.  They have to go through a DFA advisor, and those people go through quite a bit of peer review themselves before they’re even allowed to be DFA advisors, but they’re going to have to pay whether it’s a point or maybe a half a point, depending on how much money and depending on the advisor, etc.  Are you telling me that people are better off even after paying a DFA advisor’s fee, and the internal costs of DFA, than they would be if they were a do-it-yourselfer for Vanguard?

Paul Merriman:  Yes, and let me tell you where the break point is because we’ve looked at this.  When a client comes to us…as I said, I’m retired now because I started the Merriman Company, I still say it’s ‘us,’ but when a person is a fifty-fifty investor, 50% equity and 50% fixed income, the return after the investment advisory fee is almost exactly the same.  Now, what do you get for that investment advisory fee?  Well, I’m working on a book right now, “101 Things Your Investment Advisor Should Be Doing For You,” and the bottom line is you get somebody to guide you, hopefully for you, and then after you, your surviving spouse, for the rest of your lives.  And boy, I’ll tell you, when you can get that and get Vanguard returns, obviously I can’t guarantee that.  I can’t tell you what the future will bring, but there is a reason why the DFA funds do better, and there’s 80+ years of evidence as to why that worked over the last 80 years and why it should work over the next 80.

Jim Lange:  All right, and what are some of the, let’s say, strategic or why would one set of index funds even after a fee to an advisor do as well as or even better than, say, the Vanguard funds?

Paul Merriman:  Well, first of all, there are major forces that the academics have pointed out that lead to better rates of return over very long periods of time.  We’re not talking about three months.  We’re talking about, in essence, over our lifetime.  That’s what we should all be worried about, forever, and those forces are the value-orientation of the companies inside of a mutual fund, and what you find at DFA is the portfolio is made up of more deeply discounted value companies.  So, those that are more value, this is right out of Warren Buffett’s book if you want to think of it that way, because he’s an advocate of value investing, but the more deeply discounted the value investing is, the better historically you do.  It’s a premium for risk, is what it is, and at the same time as there’s this force of value, there’s a force from the size of companies.  Smaller companies make higher rates of return over time.  So, if you looked at, for example, let’s even take a large cap value fund, index fund, at Vanguard.  The average-sized company is bigger, and the value is less deeply discounted.  And so, in that difference, you can pick up 1% or 2%.  When we get into emerging markets, if you looked at the returns of the emerging market fund at DFA versus the fund at Vanguard, it’s a huge difference.  Not because the people at DFA are smarter.  It’s because they diversify their portfolio in a way that produces better returns.  Now, to me, the next question that I should hear from the listener is “Okay.  If they’re so smart, it isn’t hard for John Bogle and the Vanguard people to replicate that.  Why don’t they do it too?”  And you brought up a subject, Jim, that is more important than people understand, I think.  You said DFA doesn’t let people invest directly in the funds.  You have to go through an advisor.  And guess what we know about DFA funds?  Because the people who use them are working with a professional advisor, and you hit the nail on the head when you said that it isn’t easy to become a DFA advisor.  You have to jump through a lot of hoops because they want people who are really committed to this belief system.  Now, if the DFA investors only come though advisors, they can go to portfolios that are less liquid.  Because the other side of the coin is, a small cap value fund at DFA, averaged-sized company, smaller, more deeply discounted, more value orientation.  That’s going to be less liquid.  If you get the typical nervous Nellie, a bunch of people jumping in and out of the market of the DFA funds, that would probably cost 1% a year in the turnover cost.  But they control that by not letting the public…in fact, Merrill Lynch brokers can’t use DFA.  In fact, there’s no major brokerage house in the industry, I’m talking about the full-service brokers, who are working like in a grocery store with aisles of products, and they pick a little of this and a little of that and oh, we got something hot right down here!  DFA will not allow their funds to be used by firms like that that are more like a supermarket than a strategy, a discipline, a mechanical way to invest.  And that pays huge rewards from everything I know about the past.  I can’t tell you what the future is, I said earlier, but the past is very clear.

Jim Lange:  Paul, you’re brave naming names.

Hana:  Okay.  I’m going to let Paul respond to this in a minute.  We have to take another break, and when we come back, we’ll continue.  We’ll be right back with Paul Merriman and Jim Lange on The Lange Money Hour.


Hana:  Welcome back to The Lange Money Hour.  This is Hana Haatainen Caye, and I’m here with Jim Lange and Paul Merriman.

Jim Lange:  And again, we are here with Paul Merriman.  We have just about maybe four minutes left.  I want to remind people that I have an unreserved, unmitigated recommendation to go out and get Paul’s book.  Better yet, come to the workshop and get it for free and get some more great information.

Paul Merriman:  You’re too nice!  You’re way too nice!

Jim Lange:  No, no.  By the way, I’ve given your book out like candy, and one of the things that I really like about it is you actually have an objective comparison of Vanguard and DFA, which I really like.  But anyway, the book is “Financial Fitness Forever” by Paul Merriman, available at the local bookstores or at Amazon.com.

Paul Merriman:  Hey, Jim, can I just challenge your listeners?

Jim Lange:  Sure.

Paul Merriman:  And I hope they get the book free because they’ll see your workshop.  I think that’s wonderful.  But I want to challenge them to read all the way to the end of the book because Appendix H, which is some of the most powerful work that I’ve ever done in the forty-some years of being around this business.  It’s ‘Withdrawing Money When You’re Retired.’  I will show you how I approach that as a retiree myself, and I try to help people who don’t have enough, and I try to help people who have more than they need, and there’s a right way to do it so you maximize what you get to enjoy and you maximize what you leave to others.  I challenge you to read to the end of the book.

Jim Lange:  By the way, I will second that.  I think Paul is excellent on that exact issue.  In fact, Paul you may remember or you may not, but you have actually been on this show before and one of the focuses of that show was actually the safe withdrawal rate, and if people want to hear that show, if they go to www.retiresecure.com, which by the way is the website for all those workshops, if it was a little bit confusing, www.retiresecure.com, you can actually hear an hour of Paul and me talking about safe withdrawal rates if you click on ‘listen now’ and scroll down to Paul Merriman.  So, I thought that was great.

Paul Merriman:  Great.

6. Understanding Fiduciary Relationship

Jim Lange:  Paul, we only have about two minutes, but if you could either…I’ll give you a choice to give our listeners a final piece of advice of anything that you like, or answer the questions…and you actually mentioned the name of the company, which I prefer not to do, of how conflicts of interest affect your portfolio?

Paul Merriman:  Look, you are the boss.  I’m talking about, the investor is the boss, and you got to be a good boss, a good steward for you and your family, and my challenge to you is to get an education so you can learn how to take best care of your money for you, and not for Wall Street.  I mean, they’ve got this 1% Wall Street and 99% all this stuff, look, it’s not about percentages.  Abandon Wall Street.  You don’t need to be in Wall Street.  There is a better way to take care of your life, and whether you align yourself with one, or you become one yourself, you’ve got to understand the concept of being a fiduciary, acting in the best interest of you and your family, and if you’re working with an advisor, remember, it’s not just an advisor you’re working with.  You’re working with a person who works for a firm who recommends products.  They should be ethical and competent at every level, the advisor, the firm and the products, and if they’re not, you move on.

Hana:  Okay, I am sorry to cut you off on that, Paul.  I want to thank you for offering this invaluable insight, and I want to thank the listeners for joining us for another The Lange Money Hour, Where Smart Money Talks.  As always, you can catch a rebroadcast of this show at 9:05 on Sunday morning right here on KQV, and join us at 7:05 pm on April 18th when once again we’ll be welcoming our special guest, P.J. DiNuzzo.


jim_photo_smJames Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.