Investment Decisions Guaranteed to Change Your Financial Future, with Paul Merriman

Episode: 150
Originally Aired: November 24, 2015
Topic: Investment Decisions Guaranteed to Change Your Financial Future, with 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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Please note: *This podcast episode aired in the past and some of the information contained within may be out of date and no longer accurate. All podcast episodes are intended to be used and must be used for informational purposes only. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment strategy or plan will be successful. Investment advisory services offered by Lange Financial Group, LLC.


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  1. Introduction of Paul Merriman, Author, Investor and Financial Educator
  2. Make Investment Decisions One at a Time, Based on Past Performance
  3. Over Decades, Average Loss for Small Cap Was Less Than Large Cap
  4. Small Cap Is a Good Investment to Get Through the Bad Times
  5. There Are Differences in Small-Cap Funds, and in Large-Cap Funds
  6. Large-Value Funds Have Outperformed Large-Growth Funds for 80 Years
  7. Add Small-Cap Value to Boost Target-Date Retirement Fund
  8. How to Avoid Hiring a Crook to Manage Your Assets
  9. Even Among Supposed Fiduciaries, There Are Unscrupulous Advisors
  10. Stocks Are the Accelerator in Your Portfolio, Bonds Are the Brakes
  11. Taking Pension and Social Security Lets You Play Market with Less Risk

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Introduction of Paul Merriman, Author, Investor, and Financial Educator

Dan Weinberg: Welcome to The Lange Money Hour. I’m Dan Weinberg, along with CPA and attorney Jim Lange, and this week, the topic is investing, and we’re welcoming Paul Merriman back to the program. Paul’s a nationally recognized authority on mutual funds, index investing, asset allocation and active-management strategies. He’s now retired from the Seattle-based investment advisory firm he founded in 1983. He’s authored several books on personal investing, including 101 Investment Decisions Guaranteed to Change Your Financial Future. Paul also writes regular columns for MarketWatch, and he created, a couple of years ago, the Merriman Financial Education Foundation, which aims to help people get the most out of their investments without taking too much risk. Now, tonight, Jim and Paul will touch upon a wide range of financial issues, among them why bonds are the most important asset class, how much should you invest in each asset class, and should you worry about interest rates rising? We are taking your questions tonight, so please do call in. The number in the studio is (412) 333-9385. And now, let’s say good evening to Jim Lange and Paul Merriman.

Jim Lange: Welcome, Paul!

Paul Merriman: Jim, it’s great to be with you again.

Jim Lange: Well, I always enjoyed your shows back in the old days when you were the moderator or the host and I was the guest, and today, when we have it where I am the host. But you have been a great champion of educating consumers, and you did this back when you were in practice, and you are continuing to do it right now.

Paul Merriman: Well, I think … by the way, as I understand your practice, you’re doing what I used to do, and that is, I used to give workshops almost every month trying to help people make better decisions, and a certain number of people decided they didn’t want to do business on their own, and so they’d asked me to help them, and I think you’ve done the same thing. I have a sense that, when you retire, you’re probably going to start the Lange Financial Education Foundation.

Jim Lange: Well, I mean, very frankly, Paul, you have been a model to me in many ways. First, that is my exact business model. I do workshops every month, and I try to put on the best information I know how, and a certain number of people that go to those workshops become interested in working with me. The other area that you were really influential, and you started putting me in this direction, I don’t know, many years ago, is that you said, “Hey Jim, you really want to be with a low-cost index provider, and the best low-cost index provider on the planet is a group called Dimensional Fund Advisors,” and it took me awhile, but that’s ultimately the group that I am working with, and I will thank you publicly for giving me that tip because it’s made a huge difference, and the growth of our firm and the quality of the services that we’re able to offer our clients is just tremendous because we are working with Dimensional Fund Advisors.

Paul Merriman: I think that’s great, Jim, and I know that that’s where I have my money, so I think DFA is still … I mean, they just keep getting better, and I’m really pleased that’s the direction you went.

Jim Lange: Well, and I know that you’re always a big fan of academic information. In other words, not from Wall Street, not from Main Street, but actually from academia, where people do not have an ulterior motive. They’re just trying to put out the best information possible, which is the way I perceive what you are doing now, even in your so-called retirement, when you have all these wonderful e-books out there, and you write these great articles, and hopefully we can get into some of the meat of some of your material that people can get either for free or for very little money.

Paul Merriman: I’d love to.

Jim Lange: OK. And I hope you don’t mind, but I kind of think of you as kind of like the elder statesman of finance or personal finance because you’ve just been doing it for so many years, and I also remember the promise that you made your wife, that in your so-called retirement, you’re not allowed to do anything that makes any money for you.

Paul Merriman: Well, actually, what she thought I said, Jim, she thought I said I wouldn’t work anymore. But instead, what I said was “I won’t work for money anymore.” And in fact, I just flew all the way down to North Carolina to make a presentation to some 50 DFA advisors. They didn’t pay me a penny. I am thrilled when I have a chance to help a DFA advisor become a better DFA advisor. It’s what I call leverage. It’s the kind of leverage I recommend.

Jim Lange: Well, the only thing that I don’t like about that is that I wasn’t there.

Paul Merriman: Well, I will tell you the rest of the story. The people that asked me to come down there were Mass Mutual insurance company. I actually didn’t realize that the insurance industry was using DFA funds. That was kind of a surprise to me.

Jim Lange: Well, it is to me, too, because I usually, with all due respect, think of insurance companies as big, dumb companies, and then when I hear that they’re using DFA, I give it a second thought.

Paul Merriman: Well, it’s going to be interesting to see what happens there. But let’s talk about things to make your listeners more money!

Jim Lange: Yeah. So you offer these really just tremendous pieces of information. Now, my favorite book of yours, of course, is Financial Fitness Forever. Of course, that’s going to cost people a couple bucks on Amazon. Again, my favorite is Financial Fitness Forever. But you also offer a number of books for free or for very little money, and I want to direct listeners to your website, which is, and in there, you actually have three e-books, but the one I’d like to talk about is the 101 Investment Decisions Guaranteed to Change Your Financial Future, if that’s OK with you?

Paul Merriman: I love that book. I think I’ve tried to get every first-time investor to read that, and I think even seasoned investors are going to find things in that book, and as you say, it’s free, and I just think it’s filled with a lot of great information.

Jim Lange: Well, I do, too. In fact, it’s kind of interesting. When I first read it, I was thinking, “You know? Boy, this information might be a little bit basic, and maybe I should go into some of the advanced points,” and then I thought about our process.
So, the way we get a client is, let’s say somebody comes to a workshop and is interested in meeting with me, and I meet with them and, of course, we also offer legal services, and we look at the whole picture and Roth IRA conversions and Social Security, et cetera, and what I will typically do is, I’ll meet with somebody for an hour or maybe an hour-and-a-half, and if they like me and I like them, I say, “Can you please leave your investment statements with us?” And we’ll analyze them — actually, we just use Morningstar — and then we’ll show you what your asset allocation is, and then we’ll show you where we might think you would be better placed, and then that might give you some more information. And I get relatively savvy people. People who are smart, a lot of engineers, a lot of quantitative types, and they are so far off from the recommendations that you make in 101 Investment Decisions Guaranteed to Change Your Financial Future that I thought that it really is necessary to go over some of the basics. So, if we could talk about some of the things that you have, and you have … I love the way you set it up, with very specific questions. You know, should you invest in stocks or invest in bonds? But without me asking any one of the particular investment questions that you have asked and answered, can you just say, let’s say, generally, an approach that investors should be taking in terms of asset-allocation savings? Maybe that’s a little bit too broad, but I just want to give you an open-ended question to answer however you like.

2. Make Investment Decisions One at a Time, Based on Past Performance

Paul Merriman: Yeah. No, I appreciate that. I really do, because I think that the whole process of making good investment decisions is very simple as long as you don’t ask me to make them all at one time, and unfortunately, that’s what most people are stuck with. And I think, for example, whatever position you have in the market, whether it’s big cap, small cap, value, growth, whatever, I want to know, do you think it makes sense to have low expenses or high expenses? I asked this of my 20-year old daughter here just yesterday. I have a class I do with her just one-on-one, and she knows immediately. She’s ready for the question. She knows that the best practice, because every one of these forks in the road is simply about best practice, and best practice is lower expenses. Best practice is more diversification. In fact, my own portfolio — I’ll bet your portfolio, too — I have over 12,000 stocks in my portfolio. If Enron goes broke, it does not change my life. So I look at each one of those decisions and I make what I think is to be the very best decision.

Now, one of the challenges we have I think, Jim, is there are decisions that we make about the future based on the past, but what if the past is wrong? What if it turns out that large cap does better than small cap? What if it turns out that growth does better than value? What if it turns out that bonds do better than stocks? All those things are possible, may not be likely, but are possible, and so I think you build a portfolio to include those other things so that almost under any condition, you will be a successful investor, and it all goes back to one decision at a time, and my view is if you disagree with any one of the decisions that I recommend in my free e-book, I want to know why. Why do we disagree about whether you should have high expenses or low expenses? And let’s face it; you and I, like, you talk about looking at people’s portfolios and you see mutual funds with expenses of 1-plus percent, and of course I know you want to jump through your skin. You want to just say, “Wait a minute! Why do you give that money up without a fight?” Anyway, I’m sorry to talk so much, Jim, but that’s the bottom line: One decision at a time until you’ve made them all, you’ve made them all the best you can with what we know about the past, and the rest you have to leave to the unknown.

Jim Lange: Well, a couple things that you said there. The first shocker was that your daughter actually sits down for a one-on-one and listens to what you have to say. That’s been the most astounding thing I’ve heard today!

Paul Merriman: It’s the truth, and I asked her whether she wanted these classes, how long she wanted them to be. I was thinking she’d say 15 minutes. She said a half-an-hour, and the class yesterday went for 45 minutes!

Jim Lange: Well, that’s pretty incredible. The only thing that I can think of … by the way, my daughter would not put up with it. Maybe it’s a different dynamic, whatever it is. The only thing that I can think of that is … well, it’s not even the equivalent, but I had one client who always had a hard time convincing their children that they should have a financial education, and he’s in his, let’s say, mid- to late-70s now, and he had a novel approach. He handed each one of them a copy of my book, and he said, “So here’s the deal: If you want to inherit any of my money, you have to read this book!”

Paul Merriman: That’s great! I love it!

Jim Lange: So you did it a little bit more with love and affection. But you mentioned a couple things, and I know that you did it as an example, but I think you mentioned three really important comparisons, and I think most people get these wrong, and maybe we can take them one at a time, but you talked about small companies versus large companies, you talked about value companies versus growth companies, and you talked about stocks versus bonds, and maybe we can take a look at all three of those comparisons and see what, again, has historically happened, and what you might be thinking, let’s say, in general terms for those three comparisons. So, could we start with small versus large?

3. Over Decades, Average Loss for Small Cap Was Less Than Large Cap

Paul Merriman: Well, yes, and that’s a huge decision because in one of my articles at MarketWatch, I look at the results of small versus large in one-year increments, in 15-year increments and in 40-year increments. I look at the worst 40 years, the best 40 years, the average 40 years, and it starts with this goal for me, Jim, in terms of what I’m trying to get people to think of, these little bites. If I could find an extra half a percent in a portfolio for the rest of somebody’s life, it’s a game changer. But when you look at the returns historically of small cap and small-cap value, it’s anywhere from 2 to 4 percent a year better than the large-cap asset class. Now, that’s huge, and here’s what fascinates me: When I look back at all of the years the S&P 500 lost money, from all the way back to 1928, which means you go to go through the Depression, you got to go through ’73-’74 and all these losing years we’ve had the last 15 years, and if I look at the average loss for the S&P 500 and I look at the average loss for small cap, it turns out the average loss is actually smaller for small cap than it is for large cap.

Jim Lange: Well, I hope listeners are getting this because this is probably the most common mistake that I see when I look at somebody’s portfolio, which is that they are significantly underweighted in small cap. And so here’s Paul, an objective observer, saying, “It’s great if you could find a half a percent,” but he’s sometimes finding between 2 and 4 percent difference and, over time, that’s hundreds of thousands of dollars and, depending upon how much is invested, maybe millions of dollars. Is that fair?

Paul Merriman: Yeah. I mean, it doesn’t matter how much it is. We still want to take advantage of that extra return if it isn’t putting us at undue risk, and it’s always a balance between risk and return.

Jim Lange: All right. And by the way, you actually said that small caps didn’t go down as much. I always think of small caps as an asset class that is more volatile, and that your reward for accepting that additional volatility is a higher return, but you have to be willing to have that investment for more years. Is that not a fair way to think about it?

4. Small Cap Is a Good Investment to Get Through the Bad Times

Paul Merriman: You know, that’s a fair statement, and what I used, and maybe I misused statistics in doing this, I know that where people get really antsy, and they start to get nervous, is when something they own is going down more than the market is, and all I’m saying is that when we look at those times that you would feel real, real antsy and nervous and “Oh my God, I’d better get out of this small,” it turns out that small cap actually did OK. Now, sometimes it lost more, but sometimes not only did it not lose as much as the S&P 500, but sometimes it actually made money. 1977, the S&P 500 is down 7 percent, I think it was. Small-cap value or small-cap blend was up over 15 percent. So, yes, there’ll be times that it’ll lose more than the S&P 500, but on average in terms of the bad times, because it’s the bad times that are hard to get through, not the good times.

Jim Lange: All right, and right now, we’re talking about the general category of small versus large. Are there subdivisions though, and, for example, in your book Financial Fitness Forever, you have a section that compares directly, let’s say, the small-cap Vanguard versus the small cap of Dimensional Fund Advisors, and people can sometimes have a hard time understanding how one index fund beats another. So is it just the general concept of small, or are there differences in, let’s say, different index funds of small companies?

5. There Are Differences in Small-Cap Funds, and in Large-Cap Funds

Paul Merriman: Well, this is where it gets just a little more complex because a lot of people … I have Vanguard and T. Rowe Price and Fidelity and Schwab portfolios, and people will be challenging me about why do I choose that small-cap fund versus another fund in the same family that’s also small cap. But there can be big differences in what’s called small cap. At DFA, one of the things I know that you and I like about their small-cap funds is that the average-size company is smaller, and the smaller it gets … and I’m not talking about penny stocks, by the way, I’m talking about companies whose capitalization, the price per share times the number of shares, is over a billion dollars. So they’re not little companies that are going away tomorrow. But some small-cap funds, the average-size company is $3 billion. So, yes, there can be a huge difference, and the same with other, even large. Large can be different. You can have an average-size company of 50 billion, or 25 billion, and what do we know about the past? The $25 billion company does better than the $50 billion company. So, yes, there’s some fine tuning that needs to be done, but in a way, that’s your job, Jim, that most people are not going to dig deep. You and I, our job is to dig deep. I’m trying to figure out how to educate people, and you not only are educating, but you’re managing money. So you need to know all this stuff and, of course, I know that you do.

Jim Lange: And we are talking about great sources of free financial information, and I think one of the best, if not the best source for that are some of Paul’s e-books that are available at his website, and if you go to, he has three free e-books. We’re mainly concentrating on one called 101 Investment Decisions Guaranteed to Change Your Financial Future, but they are all excellent, and Paul also has some terrific articles, and I’m hoping to get to some of them, and Paul, what is the easiest way for people … oh, I guess that’s also on your website, too. Is that right?

Paul Merriman: Yes, all the MarketWatch articles …

Jim Lange: The MarketWatch, that’s it.

Paul Merriman: … after one day, we’re able to contractually put up on our website. The thing is, for people who, for example, today, an article came out regarding how much you need in bonds in your portfolio. What’s the appropriate amount of bonds? If you go to, you can see all the comments that are made after the article. If you just want the article, then you’ll be able to get that at tomorrow.

Jim Lange: OK. I would like to talk about bonds, but I’d like to finish up very quickly the other two comparisons that we were talking about, because I think you gave our listeners some great insight on small versus large, and hopefully, a fairly compelling reason that they should have at least some small-cap representation in their portfolio, and what about value versus growth? Could you give a similar comparison of how value versus growth has done, and maybe even combine the two? That is, small value and small growth and large value and large growth?

6. Large-Value Funds Have Outperformed Large-Growth Funds for 80 Years

Paul Merriman: You know something, Jim? It’s almost unbelievable to people when I tell them about the difference between what we would call really great companies, the growth companies, whether they’re large or they’re small, and those out-of-favor companies, the value companies, the companies that the market doesn’t put a real high value on. If you look at their returns over very long periods of time — and this is true over short as well, oftentimes — but going back even 80-plus years, there’s a 2 to 4 percent … in fact, small growth from 1928 to 2014 is less than a 9 percent return. The return of small value is over 13. Now, that’s huge. If we’re talking to a young person just getting started, I don’t want them to put a specific small growth fund. I would put up with a fund that we call “small-cap blend,” which is some value and some growth, but pure growth has not been a highly profitable way to invest in the long run. It’s contrary to what people believe because people hear that word growth, and immediately, they think it’s going somewhere and they can get a lot of money.

Not true. But about anywhere from 2 to 4 percent is the difference between growth, whether large or small and value. So I don’t want to throw growth out entirely. I just don’t want to have too much growth, and when people buy a target date fund at Vanguard or Fidelity, what they end up getting is mostly large, very little small, mostly growth, way underexposed value, and that has an impact. Think about it: For somebody who starts at age 22 and invests until they’re 92, and the whole time they were underexposed to asset classes that would’ve made them an extra 1 or 2 percent. That’s really a big deal.

Jim Lange: Well, you just actually answered another question that I was going to talk about, which is some of these, in effect, age-weighted funds. I mean, to me, the idea of it is kind of interesting. It’s kind of simple. You just say when you plan to retire, or maybe how many years of your investment horizon, and they automatically calculate the asset allocation. But you’re saying that at least Vanguard, and probably Vanguard’s better than most, they don’t do a good job because they overweight growth, underweight value, overweight large, underweight small, and as a result, people don’t do as well. Is that fair?


7. Add Small-Cap Value to Boost Target-Date Retirement Fund

Paul Merriman: That’s fair, and I’ve got an answer for you, Jim. I love this article. It’s entitled “How to Double Your Target Date Retirement Fund’s Return in a Single Move.” Now, the whole idea of a target-date fund is to allow somebody to only have to invest in one single fund, and everything else gets taken care of. Well, I’m going to ask them to do one more thing. I don’t want them to do two more things! I want to make it simple. But if they would just put some small-cap value … you could do this at Vanguard easy enough. You could do it at Fidelity easy enough if you’re in one of those 401(k) plans. But to add some value, and for example, if you just added 25 percent value to the portfolio, the compound rate of return of a 2050 target-date fund is probably going to go from 8 percent to about 9½ percent by adding that 25-percent position and that gives you more value, that gives you more small cap, and that one extra fund can be a life-changer.

Jim Lange: I don’t know if the listeners here are appreciating the importance of what you’re telling them. Could you please be very specific on where they can get that article? Because I think it’s a great source.

Paul Merriman: OK, well, they can go to, or they can go to MarketWatch, but it’s “How to Double Your Target Date Retirement Fund’s Return in a Single Move.”

Jim Lange: Well, I think that that is such wonderful advice, and sometimes people …

Paul Merriman: Well, wait a minute. You have a website.

Jim Lange: I do.

Paul Merriman: Can you just put a link there and people could even go to your website and get it?

Jim Lange: Well, I can do that, but if they go right now, it’s not there.

Paul Merriman: OK, OK, OK. I stand corrected.

Jim Lange: But by the way, if you give me permission, I would love to put that on.

Paul Merriman: Of course!

Jim Lange: OK.

Paul Merriman: I mean, I’m here to spread the word. Remember, I’m not supposed to be making any money. You don’t need permission. Just copy away!

Jim Lange: Oh good! I’m going to just cannibalize your whole website.

Paul Merriman: Of course! Put your name on it! What do I care?

Jim Lange: All right. And then, I’m going to use some search engine optimization, and then nobody will come to your website. No, no …

Paul Merriman: Well, now I’m getting sad.

Jim Lange: No, I’m obviously being facetious.

Paul Merriman: I know you’re kidding.

Jim Lange: But really, your website is just a huge resource, and for me, very honestly, I have an ulterior motive. I want people to go to my website, get great information, but then a certain number of people will be attracted to that information and potentially do business with me and, as you know, our model — in a large part, due to your advice — is we invest using Dimensional Fund Advisors, and since I am not a money manager, I use a firm called DiNuzzo Index Investors, which we believe is an excellent set of index investors who uses DFA. Our company, we call it, “runs the numbers.” We do the Roth work, the Social Security work, the how much you can spend, the estate planning, and then together we charge one percent or less, but the underlying investments, very frankly, are exactly where you have your own money, which is DFA. But ultimately, when I have a website up, I’m hoping that somebody will be interested, and if they do become interested and they become clients, I obviously make some money. In your case, there’s no way on your website that anybody can pay you money.

Paul Merriman: Right, and by the way, as you know, I started an investment advisory firm back in 1983, and they manage about $1.6 or $7 billion, but I purposely, when I sold out, I sold all of my shares. I don’t own any piece of that company anymore because when I set up my foundation, I did not want any conflicts of interest. And so, I really am here to help you, Jim, and help any DFA advisor expand their reach because the competition, in many ways, is the enemy, and I say that and, I mean, I mean it. There are so many crooks out there, and do you have a second? I can tell you about somebody who just, when I heard about it, sent me right through the roof?

Jim Lange: Sure, go for it.

8. How to Avoid Hiring a Crook to Manage Your Assets

Paul Merriman: OK. I mean, I know you’ve got other things you want to do, but a friend of mine, a casual friend of mine, who I knew over the years from church, sweet, nice people. In fact, his wife is even the church secretary, and he’s in the choir, and they’re always doing good stuff for the community. They’re just so nice. But this person ends up being laid off from Microsoft, and as a part of that process, they go through this thing where they coach them. They have a firm that comes in and coaches them to help with the transition to whatever they do next in their life, and during that transition coaching, they present to somebody who would go to one of those free workshops, I mean, free sometimes isn’t exactly the right word because out of that workshop came an invitation for a meeting to have this person look over their investments and, of course, the big investment was the 401(k).

And so, this person, acting in the “best interest” of the investor — which, of course, you’ll know in just a second is totally not true — took all the money from that 401(k) and put it into a variable annuity, and that client, that person, that nice person, was then paying somewhere between 2 and 3 percent a year for the rest of their life! To get tax deferral that they already had! So I, behind the scenes, started … and by the way, you know there’s a period of time that you can get out of these things, but their time was long gone. So, I started coaching them, telling them the questions to ask, and after every meeting with this person, because they wanted their money back. They knew they’d been had, and it took three meetings, and we were able to force them to realize that somebody understood the sales pitch and how misleading, and I can’t even think of the word right now that the government uses where people really motivate folks to do the wrong thing. And her sales pitch was so clever! Every time they came up with an objection, Jim, she was ready to overcome that, including — and you’ll love this one … your audience may not know all about this — but when they complained about being in a variable annuity inside of their IRA, she said, “Well, Ben Bernanke has a variable annuity in his retirement plan!” Well, Ben Bernanke was a professor, I think at Princeton, if I’m not mistaken, and they used TIAA-CREF, a family you know well, and they have a kind of what would be a variable annuity, but it’s not even close to what this insurance company had them in and, of course, it had a 9 or 6 percent penalty to get out of it for the first so many years. We got them totally out, Jim, totally out of that investment.

Jim Lange: Well, that’s great that you got them out, and by the way, that’s one of the things that I really do feel strongly about, that people should go to what’s called a fiduciary advisor. That is, an advisor that not only has the moral because I believe we all have the moral, but also the legal obligation to do what is in the client’s best interest. Some of those annuities, by the way, sometimes pay a commission of maybe 8, 9, 10 percent to the advisor. In the business model that I have, I literally have to work for 20 years doing Social Security advice, Roth IRA conversion advice, estate planning, meeting with clients, running the numbers, I have to do that for 20 years to make as much money as I would if I sold a variable annuity, and I’ve never sold one to anybody because I don’t believe in them, and I don’t get the money upfront. I get a little bit in year one, a little bit in year two and a little bit in year three. So, we’re on the same wavelength for some of these products.

9. Even Among Supposed Fiduciaries, There Are Unscrupulous Advisors

Paul Merriman: But there’s a warning, Jim, that people should hear. See, this idea that you always do business with a fiduciary … these folks are very slippery. What they do is they have access through a registered investment advisory firm that’s related to the insurance company, where they have the ability to call themselves a fiduciary. They also have another arm where they go directly to the insurance company where they are not a fiduciary. So, when asked three times of this lady, “Are you a fiduciary?” She said, right up to the end, “Yes, I am a fiduciary.” Well, yes, if she had done something other than what she did to them, she could’ve been called a fiduciary, but what she did to them had nothing to do with a fiduciary. They are so slippery, it drives me nuts!

Jim Lange: I do want to tell you that Paul has just such wonderful information — Paul is retired now … he has promised his wife that he will not make any money on the information that he, let’s say, sends out there — at He has three terrific e-books. One is called First Time Investor: Grow and Protect Your Money, the second one, which we have been talking about today, is 101 Investment Decisions Guaranteed to Change Your Financial Future, and the last one is Get Smart or Get Screwed: How to Select the Best and Get the Most From Your Financial Advisor. They’re all great resources. He also has articles that have been published in MarketWatch. MarketWatch is a very discerning magazine. They only publish the best, and there are quite a few of them. One, for example, is called “Why Bonds Are the Most Important Asset Class,” which I do want to talk about after I’m done with this. The other one that I think is excellent is called “The Ultimate Equity Portfolio.” If we had time, I’d want to talk about that also. And there’s … let’s see, there was one more that I liked, but why don’t we just leave that for the moment because … but I did want to talk about bonds, and some of the information that you have about bonds, frankly, is not what most people would expect when you’re talking about bonds, and why bonds are the most important asset class because, you know, sometimes, you think, “Gee, over a long period of time, stocks have outperformed bonds so significantly, what do you need bonds for?” So, maybe you could tell us a little bit about bonds and bond funds and individual bonds, and let me just throw out an open-ended question about bonds to you?

10. Stocks Are the Accelerator in Your Portfolio, Bonds Are the Brakes

Paul Merriman: OK. Well, first of all, let’s put bonds in perspective. We have the gas pedal, the accelerator, those are equities. That’s where you get your speed. That is where, if you’re in any kind of a race in life, you are not going to win a race with the brake. The bonds are the brake in your portfolio. At my age, for example — 71 — I am not going driving without a brake! And I don’t want to invest without a brake, and here’s what I know from having been around this business for over 50 years: The thing that gets people into trouble is when they take too much risk. Now, for some people, it could be something so simple as putting all their money in their company’s stock. Too risky. For other people, it could be putting all their money in one equity-asset class. I even think that is more risk than you should take. But sometimes people simply have too much in stocks in general. Yeah, I’ve got 12,000 stocks, but that only represents half of my portfolio. The other half, I’ve got the brake on here, and that’s the part that’s the bonds.

And here’s what happens to people when they take too much risk: they get overexposed, they hate to lose money, all of a sudden they’re losing more than they’re comfortable with because they didn’t figure it out, or their advisor didn’t figure it out as to how much risk they should be exposed to, and then they bail out and get out of the car entirely and decide they’re not going to go driving anymore. They just want to be someplace where it’s safe. They’re going to sit at home. That’s a bad decision. Have enough bonds in your portfolio so it brakes during the tough times, and it’s worked for almost 90 years. If you have the right amount of brakes on, you’re going to slow things down to the point that you can take the ride, and for young people, we want to be pedal to the metal. But when you get to be 40 and 50, then you got to put more brakes on, and that’s what the bonds are about.

Jim Lange: Well, let’s talk for a minute about, let’s say, bonds are fixed income versus stocks because people are sometimes looking for a magic percentage. “OK, you know, I am 70 years old. Therefore, I should be in 70 percent bonds and 30 percent stocks,” which is the old rule, and the way I always thought about it is I like to, let’s say, cover my base with fixed income or guaranteed income. So, let’s say, for discussion’s sake, that I’m receiving Social Security, maybe I’m getting a pension, and I need some additional money every month to meet my nut, or, let’s say, the required amount, and it might be very, very different with two people that have the identical portfolio, but maybe one has Social Security and/or a pension and the other one does not. So, to me, I don’t think there is a magical percentage, and it’s different for each person, and then you actually have to figure out what are your needs, and I know the way P.J. does it, I mean, he gets your budget down to the cable bill, and he doesn’t do it because he’s nosy. He just wants to figure out, and he calls it the “stack analysis,” where he has multiple portfolios where the short-term portfolio is much more conservative than the long-term portfolio, and probably a number of portfolios in between. Is that a reasonable way of doing it?

Paul Merriman: It is a reasonable way. In my book 101 Investment Decisions, at the end of the book, I have a chapter devoted to 10 different strategies to go from equities to bonds over your lifetime, and many people, myself included, we take more of a total-return approach, and so I am, once a year, once a year, I take my money out for the year, I put it into a short-term bond fund, draw on it through the year as I need it. But I actually have oversaved, Jim, and that’s an important consideration. People who have oversaved have more choices as to how they set up a portfolio to access it for income. In fact, in a couple of weeks, I’ll be doing a series of three articles on distributions and different ways to take money out of a portfolio.
But I think the way you’re doing it, talking about it, is a very, very conservative way. What that’s going to leave in today’s low-interest-rate market is a lot of people are going to end up with almost no equities in their portfolio because, by the time you make enough out of bonds, in order to add to the money from Social Security and pension or whatever, it just takes a lot of bonds to be able to cover that nut. But that is a legitimate, and it is a conservative, approach and I suspect will serve most people who are willing to do that, will serve them well. There are those of us who want to leave more to children or charities, and so that’s a reason for some of us to take more risk.

11. By Taking Pension and Social Security, You Can Buy Stocks with Less Risk

Jim Lange: Well, oh yeah, and I wouldn’t say that I always want to get 100 percent of the portfolio, or even short-term portfolio, from bonds. But I think that using that as a starting point, and not just mechanically doing 60/40. In other words, what I’m introducing is, if you have Social Security, and by the way, we talk about when and how to take Social Security, but if you have Social Security and a pension, that you can afford to actually have more money in the market because part of your nut is already covered.

Paul Merriman: Yes.

Jim Lange: So, this is actually a way for people to get more money in equities and still be safe.

Paul Merriman: I think that’s great. I mean, there’s so many variables like, I used to love sitting down … my favorite part of the business when I was an investment advisor was sitting down with a couple for the first time. I just loved it, because that’s when you get to know all of the skeletons, and you get to find out how the husband and the wife, the partner, how they’re feeling about investing, and, of course, as you know, with a couple, there’s normally one who’s aggressive, one who’s conservative, one who wants to spend a lot, one who wants to save a lot, and boy, is that fun as an advisor to help people work that out and walk away with a smile on their face.

Jim Lange: Well, just even listening to you, it sounds like you have a smile on your face. This has been terrific information. Honestly, I wish I could go on for another hour, or even more than that. By the way, for whatever it’s worth, I have a whole list of questions that we didn’t get to because you have just so much information out there. But for listeners who want excellent, excellent information, my favorite Paul Merriman book is Financial Fitness Forever. Now, that will cost you a couple of dollars on Amazon, but for free, it is He has those three free e-books, and then a slew of articles, all of which I think are excellent.

Dan Weinberg: All right. Thank you, Jim and thank you, Paul, for a terrific conversation tonight.

Paul Merriman: Thank you. Thanks guys.

Dan Weinberg: All right. Take care.