We're Talking Millions! with Paul Merriman Part 1

My mother was a nurse who witnessed doctors working until they collapsed because Wall Street was making the money, not the investors. In this podcast episode, the hosts interview Paul Merriman, a passionate educator of individual investors. Paul discusses his book, "We're Talking Millions," which offers 12 simple steps to supercharge retirement savings. The book emphasizes the importance of starting early and taking action to secure a comfortable retirement. It also highlights the need to ignore Wall Street hype and focus on long-term investing. Paul encourages people of all ages to become educated investors and take control of their financial future. My mother was a nurse and she worked with doctors that worked until they just fell over. Because Wall Street was making the money, not the investors. And now you look at what that money pays you out in retirement and what it leaves to others. Hi, and welcome to Catching Up to Fi, a podcast on mindset, money, life on the journey to financial independence. I'm Bill and I'm a late starter. I'm Becky, and I'm also a late starter. And we're your hosts. We're here to help you with your journey to financial independence, no matter where you're starting from. We're going to talk to other late starters, experts, and we'll explore topics related to our mission. Join us as we catch up to fi together. Hello and welcome back to Catching Up to Fi. I'm Bill Young with Becky Heftig, my co-host. And today we have a guest we're very excited to share with you. Paul Merriman is so many things, first and foremost. And last, he is a passionate educator of the individual investor. He is a nationally recognized and award winning authority on mutual funds, index investing and asset allocation. Among his many professional lives, he has been a stockbroker on Wall Street and a wealth manager at Merriman Wealth Management, which he founded in 1983. After he, quote unquote, retired in 2012, he became busier than ever. Paul created the Merriman Financial Education Foundation, dedicated to providing investors of all ages with free information and tools to make informed decisions in their own best interest and successfully implement their own retirement savings program. He is the author of eight books, a columnist for Market Watch and produces the podcast Sound Investing. At his website, paulmerriman.com, he provides an abundance of evidence based free books and resources. Notably, at a time when quality personal finance education is still too often absent in formal education, his foundation supports the curriculum development and presentation of an accredited course, personal finance for non-business majors at Paul's alma mater, Western Washington University. I have been fortunate to know Paul virtually since I started the Facebook group Financial Literacy Project, of which he is a community member. I could go on and on. But we are here today to talk about his book, co-authored with Richard Buck, We're Talking Millions, 12 Simple Ways to Supercharge Your Retirement. It is an absolute honor for me to welcome Paul all the way from his home on Bainbridge Island, Washington, to Catching Up Defy. How are you today, Paul? I'm great, Bill. You know, when you started out there and said, first of all, he's really old. Thank you very much. Did I say that really? I just felt it coming out. I really appreciate being with you and giving me an opportunity to talk with the folks that that are following your work. So this is this is a joy. How are you today, Becky? Oh, I'm doing great. And I'm excited also to have Paul here. I can't wait for all the nuggets that I know that are going to be in this episode. And I want to start out, Paul, by just giving you a little snippet about our audience. So our audience is made up of late starters who unfortunately no longer have time on their side. We probably have a pretty wide spectrum of skill levels in our audience, all the way from people who know how to, quote, handle their money, but they're just down the road of their career. And the other end of that spectrum is going to be people who have just woken up, said, oh, my gosh, what have I been doing, and what do I do now, and they haven't yet gained the tools to start handling their money right. So this is kind of who we want to address in our conversation today while we're going through your book of We're Talking Millions, which I really enjoyed reading. I just wanted to let you know I did really enjoy that. So we're going to start here talking about the book. And we've got several quotes in the book. I loved all the quotes that you put at the beginning of your chapters. So I'm going to start out with this one, that there's no magic here, just common sense. Your job is not to be a financial wizard or a lucky lotto winner. Your job is to be a normal person who can and will regularly set aside a small part of your income and stick to a simple plan for the years before you retire. And in the next one, the heart of this book is 12 small steps with big payoffs. Each one of these steps can potentially add $1 million to the retirement nest egg of somebody who applies it starting in their 20s and early 30s, which obviously that's not where we are today, but I just want people to know that this is possible. So my first question for you is why did you write the book and who did you write it for? Well, I wrote it for all ages if they have an interest and a curiosity. But as far as being able to really change lives in a big, big way, when they're in their 20s and 30s, even their 40s, there is leverage. The leverage, of course, is time for them to do some remarkable things. And the beauty is that if we can get people to see how easy this process is and if they can ignore Wall Street, and Wall Street is more than just the stockbrokers and the insurance people. It's the financial communicators and the folks who are hyping this and that, and all of those things that are very exciting in the press are not worth anything when it comes to being an investor. And the fact is, is that what gets in the way of people's success in many cases is they lose sight of the difference between the long journey of investing, regardless of what age you start, and the events. We focus on the events. We focus on things like a one-day 22% decline in October of 1987 or the 2008 losses or the real estate. All these things that make the news, inflation and a bank failure and all of those things, those are events. And those events actually have nothing to do with the long-term journey of successful investing. And that long-term journey, I'm 79. I have a long 11 years left, possibly, and other people have a long 30 years. We just gave a check to my daughter to put into an account for our new granddaughter last November, and it's a check that's supposed to be working for her for 100 years. So we're here to help every age, but the main point is, is that each one of these decisions, and I just want to correct one small thing, Becky, because I think it's important. That million dollars we talk about, it's an extra million. It's not just a million, but if you took a step and you might have produced a million, we will show you how we think had you taken a different fork in the road. It might have been two million. Now, I have to say it might have been because we don't know. But it is meant really to help people who want to be do-it-yourself investors recognize how simple the process is. If I may just talk about the White Coat Investor Conference in Arizona a few weeks ago, I met people like yourselves who spent years and years and years to develop the knowledge to be able to serve people efficiently. There are people in my industry that it takes weeks before they're able to take what they've learned and go out and service people. And unfortunately, not necessarily well, but they still are allowed legally to do that. These people would never be allowed, I don't think, to practice in the medical community. So I want to give them the tools to be able to do for themselves what an investment advisor would do for them. And that's an interesting challenge. But because it's so easy to become an investment advisor, it can be done, and it can be done with the information that we provide. Okay, Paul. One of the things you say in your book also is it's never too late to start. It's never too early to start. And there is no shame in starting small. I had a great deal of shame when I woke up at 50. I left my head in the sand for months, if not a year or so, trying to figure out what had happened and how I had gotten to this place where I'm starting at 50. You want something from your reader when you wrote this book. You want action. Isn't that correct? Well, it is. It has to be action once you've taken the time to figure out what you need to do. And people who are 50 and have not saved a lot, there's a story behind that and why that you hadn't saved a lot. Sometimes for people it's because they came upon some hard times. I just got off the phone with a fellow who's lost a job, and it could take him quite a while to get back aboard doing what he wants to do. But then other times it's just about habits. And habits are a challenge to create. The habit to save, the habit to have, the delayed gratification. We know what's the YOLO, you only live once, is how some people feel. And so even when they think, I've got to do that, I've got to do something different, I've got to start saving, I've got to invest properly, at the same time you've got people who are very good at dangling that little thing out there for you to buy, and they're so good at what they're dangling out there to sell you, that all of a sudden you lose that desire. So how do we get people to save, to learn the basis of investing, and then to make a commitment for the long term? That is not a simple thing to do, but it does require people who maybe haven't been good savers. Were you just a good spender, Bill, or were you not a good saver? I didn't know my needs and wants. I put my wants first, and I never learned them as a child. And I am a physician. I've been to the White Coat Investor Conference. That was part of my wake-up call. It flipped my entire mindset, as you're talking about in your book, actually, and we're going to run through the 12 steps that you want people to take action on. One of the quotes, however, you have in your book, I think, really illustrates how simple it is to own your own finances. I'd like to read that for you now. You say it takes 16,000 hours to get through a high school or earn a bachelor's degree. Experts say it takes at least 2,000 hours to master a skill such as playing an instrument or learning to fly. You can implement our recommendations in about an hour, two at the most. That could be the most valuable time you ever spend. That hour or two plus maybe 30 minutes or so a year could be worth millions of dollars over your lifetime. Small steps with big payoffs. Well, that hour or two is going to depend about how long it takes to read the book. I think it's about two hours. But the reality is we all come to forks in the road. Instead of trying to solve the problem by trying to answer everything at one time, let's just peacefully, calmly look at one fork. Say versus spend. Stocks versus bonds. Whatever that fork is, what are the implications of taking one direction or the other? And they are not complex. I teach this to high school kids. And they don't always get it immediately, but within a couple of minutes, they understand the difference between an expensive mutual fund and a cheap mutual fund and actively managed fund and a passive one. They understand the differences and the implications to their pocketbook. Now, some people will respond by saying if it's that easy, why isn't everybody able to do it? And, of course, the problem is that there are so many people who are waving these flags out there. Take my path, not that path. Don't buy that no-loan mutual fund. Pay higher expenses. Let us actively manage because we can beat the market. They all are trying to sell you something, and the key is to get to that fork in the road and look at the facts. Look at the math. I've been teaching this lately, Bill and Becky, that the first thing people need to do is understand the math of investing. The math is guaranteed. The history is not. Nor is the future, but if you understand what expenses do to you, as an example, which I know you'll get to, then it makes it easy. So there's nothing complex about any of this as long as you just take one fork at a time. You know, Paul, I know that saving is sort of where this all starts, and that was the problem that I had is we hadn't saved anything. We didn't think we needed to save anything. We were just going to worry about that later. You know, we were having too much fun on that day, and we'll save later. Let's kind of go back to almost a step one here. Why do we need to invest rather than just save? We kind of know we need to save, so why do we want to invest? Well, I guess that's one fork in the road then. Let's say that we've decided we're going to invest versus just save because then you're going to come to this fork that says, should I put my money in something safe, which that word, I'm just going to save, I'm not going to invest, or that phrase suggests that investing is risky and saving is not risky. And so bonds, I think something like 23% of millennials will not touch the stock market because it's so risky. So the first thing that people need to step back and ask is, well, what kind of a return have people gotten on the bonds? And what do we know? We know $100 in bonds over the last 93 years has grown to somewhere, depending on whether you get really safe bonds or more risky bonds, is somewhere between $2,000 and $15,000 for $100. So then what about stocks? Well, for that same $100, the range is from $7,500 for the S&P 500 to about, I think, $12,000 for the small cap value index for those kinds of different stocks. So what are we talking about? You mean there is actually a difference of $100 becoming worth $2,000 or becoming worth millions? And so why wouldn't people want to gravitate towards the millions? And, of course, the older we get, then we start missing out on the time that we could have had working for us if we had started in our 20s or our 30s. But then we look, and this, I think, is very important, is that we look at what are the worst times for stocks, the worst 40-year period. And if somebody is 50 years old, they've got 40 years of investing ahead of them, more than likely. If you look at the worst 50-year return for the S&P 500, it's about 9%, the worst. The best was 12.5%. Other equity asset classes, the worst is 11% and the best is 16%. I mean, the differences are wider with the more risky asset classes, the more volatile on a short-term basis. But now we're saying, wait a minute, are you saying that everybody who invested prudently in a diversified portfolio would have made money over any 40-year period in the U.S. history going back to 1928? And the answer is yes, absolutely. And with so much more, why wouldn't you want stocks? Well, for a lot of people who haven't saved anything when they're 50, one of the reasons they haven't got any money is they didn't trust the stock market or they tried it once and it went down for the first month. Enough of that. I'm never going to do that again, they'll say. And they've talked themselves out of a lifetime of not guaranteed, by the way, but really historically great returns. So we've gone through a couple of points already. We talk about saving as step number one. And Warren Buffett has a great quote there that you use in your book, do not save what is left after spending. Instead, spend what is left after saving. This is my problem. This is a fundamental issue. And, by the way, when you mentioned YOLO, I had a boat named YOLO. That's beautiful. It's been sold and it was part of the recovery. But I think Warren Buffett is right here. And if you do this, if you just save and invest first and spend last, that takes care of so many of the budgeting issues that people can get caught up in. Yeah. And we know for, I'll call it a fact, that when 401K plans changed from asking people to opt into a target day, something in the 401K plan, to do you want to put money into this on a regular basis and we'll take it out of your pay, very few people opted in. But when they automatically opted them in and in order for them to stop, they had to opt out. Something like 83% of the people did it. And so a lot of times this is just a matter of establishing a habit. And, by the way, when we start to get 40, 50, 60 years old, not only are we maybe having trouble saving, but sometimes we have kids that are having trouble and they're looking to us to help. And if we haven't done the saving ourselves and we're the kind of parents that have a tendency to give in because we love our children, you know, that's double trouble. And it makes it even more difficult. So there are a lot of hurdles you've got to really get. And I'm sure that you have. You've got to get thick-skinned and tough about this commitment to saving. And then, of course, to make sure that you invest it properly in every way we know. As far as savings rates, this is one of the issues that late starters have, I think. And I have a rule of thumb that I've come up with, and I want to ask your opinion on it. We talk about when you're in your 20s, save 10%. So, functionally, every decade, if you subtract 10 from your age, I think that gives you a rough idea of what percent you've got to save at that point if you haven't saved much prior. So for me at age 50, for example, I had to save 40% if I wanted to retire in 13 to 15 years. What do you think about that rule of thumb? Well, it might work for people in the medical community. That would probably be difficult for people who don't have the potential income that they have in the medical. But, yes, that makes intuitively good sense. And what amazes me, how many people I met at the White Coat Investor Conference that are saving half of what they make. But the other thing that distressed me is how many people I spoke with that were anxious to move on in their life and do something else with their life. My mother was a nurse and she worked with doctors that worked until they just fell over. But they were dedicated to the industry and doing what they did. And I'm not even sure it was about the money the way that they worked. And it was in a small town, Wenatchee, Washington, if you've ever been there. But the range, the spectrum of situations where people are just kind of getting started at a certain age and they're behind, they need oftentimes to talk to somebody. And I'm not talking about some money manager who charges 1%, but probably an hourly person who could help them get their program together and know what it's going to take. And to make sure, by the way, that this is why I love people who work by the hour in this industry. They're not a lot of them, but they're a lot like nurses from what I know. It isn't about the money. You would never choose to be an hourly advisor when you can work for 1% of money under management and build an annuity. Many people need some hand-holding along with the education because, let's face it, if we look at the challenges, well, having been an investment advisor, the how to invest is simple. It's easy. It's the psychological challenges that individual investors, and oftentimes a couple. And one of the couple is a spender and the other is a saver, or one of them is an aggressive, not only an aggressive saver, but an aggressive investor. And the other one is not sure they want to save that much, and they are conservative. There are psychological challenges that make it more than just a matter of knowing how to invest, which is where I really can't help very much. My expertise is showing people how to make the basic right decisions and then showing them the tables of results if you did that in the past, going back 50 plus years. That's what I'm good at. But somebody sometimes has to sit down with those folks and talk psychology and feelings. I have a tip there, actually. I have a good friend named Cheryl Garrett. I don't know if you know her. Oh, absolutely. But she has a website called the Garrett Planning Network, and she's put together a list of those folks that are fee-only, flat-fee, fiduciary, financial planners that I think if somebody's lost and wants to go looking for help in their local area or virtually, that would be a great place to start, don't you think? You know, I do. Many of those people do both hourly and assets under management. She requires that they at a minimum have to do hourly. Many of them only do hourly, but then many of them have discovered that the bigger money is in the assets under management. But yes, it is worth the effort to go to her website, and you can actually see on her website if there are people in your area, and you're just going to have to pick up the phone and start calling to find people that will help. And I will warn you right now that many of those people are so successful at what they do on an hourly basis, they have a hard time taking new clients. I talked to one recently. There's a six-month wait. And, you know, when you're 50 and you're behind where you want to be, waiting around six months to get started could really be frustrating. If we move on to number two or chapter two in your book, it says start saving earlier instead of later. And all of us in this community can probably collectively say, gosh, I wish I had. But I do want to talk about this for just a moment, because even those of us that are late starters have younger people in our lives. We have kids, grandkids, neighbors, friends at church, whatever it is, that are younger and that, you know, I wish someone had explained this to me when I was younger. Now, I don't know if I would have listened, but at least I would have tried. Yeah, well, the interesting thing is, of all the things that I teach, the thing that seems to be most surprising to people who are numbers-oriented kinds of folks like engineers, the one that turns out to be the most surprising is how important that first five years can be. So the person that starts at 25 versus the person that starts at 30. What happens is if you put away $6,000 a year, and for the first five years, whatever that becomes, you can make that a separate account. Because the person who then kind of picks up at that point with you, that little pile of gold right there is going to be the impact of you investing earlier. And it is a huge amount of money over a lifetime. One of the things I try to do is to get people to realize that the return on your investments, the real return is the money that you take out to live on in retirement and the money you leave to others. That is the total return on the money that you put aside. Now, I'm not talking about money you save for the down payment on a house and short-term kinds of things. But I'm talking about retirement and the long term. That first five years, that approximately, let's call it $30,000 to $40,000, depending on whether you increase the amount each year. There are things you can do to help it go faster, which we recommend. But that little bundle of money there grows. And that first five years, two things can happen during that period of years. The market can go down terribly, which is great, because it gives the young person a chance to position themselves in really great companies at low prices. I mean, Warren Buffett would be applauding that if they would do it. Oftentimes, they get afraid, oh, my God, I'm doing the wrong thing. This is not working out when, in fact, it is working to their advantage. The other thing that could happen, it could be like 1995 to 1999. The S&P compounded at over 28% a year for five years. What an amazing way to start as an investor. So whether it's terrible or it's great, it's a wonderful way to start. And now you look at what that money pays you out in retirement and what it leaves to others. We're talking millions. It just doesn't seem reasonable. But remember, a dollar a day from the day a child is born until they're 65 years old could be worth four million, anywhere between two and four million dollars in equities just because of that early start. You wait until you're 10 to start putting that money away, and it takes at least a million dollars off the table. So it's amazing what time does. And the problem for the people who are older is they don't have that magic of compounding the same way that a really young person does. So I really think, obviously, they have to focus on saving. But it seems to me if they've started, if they're a little bit behind, it isn't just about saving. It's about recalculating their cost of living and learning how to live on less. Because what happens if during that period of time you do save, that the market doesn't perform very well? There's a lot of luck in this process. And so maybe you did the right thing as a saver, but the market didn't support you in your effort to catch up because you were a late starter. Well, now you've still got this problem. You've still got the problem of your cost of living. And so you're going to pull in your horns to try to save more. But I don't think it's just about saving to invest. I think it's about saving or living on less to learn how to reestablish that cost of living or that style of living. I think Becky and I can both say we had that issue. I need to reiterate what I've said in a prior episode, that at the time I turned 50 and was waking up, we were house poor, spending too much for the big doctor house. We were single-digit to low double-digit savers. And we de-risked our portfolio out of fear of the 2008-2009 crisis. And so during the bull market that went up, we had three factors working against us. We were low savers. We were house poor, so we couldn't really save anymore. Our lifestyle was too high. And during a time of a great time to invest, we were probably 30% equities. And in a way, it's a combination of our emotional responses to the world and the luck. Because from 1975, a period that was important to me in my life of saving and earning, to 1999, the S&P 500 compounds at over 17% a year. That's 25 years of 7 over 17%. No wonder John Bogle was famous for his index fund, because it sat there and just gobbled all those returns up, because that's what it did. It wasn't supposed to do anything but do what the market did, and the market did amazingly. But from 2000 to 2020, you made more money in a bond fund than you did in the S&P 500. It was about 6.1%, as I recall, not 17. And all of a sudden, people are saying, well, what's wrong? I thought investing was supposed to give you more. Well, you're just not very patient is the problem. And that's not easy when you're getting older and the clock is ticking. Absolutely true. Go ahead, Becky. I would think that one of the main points for me that comes out of this is no matter where you are, you've got to start. You've got to start now. And speaking of that, and you mentioned John Bogle, that brings up a quote that you said that I like a lot. He said, don't look for the needle in the haystack, just buy the haystack. In this quote, you're talking about not just owning stocks, but owning many stocks, not just a few. What do you mean by that? Well, that haystack was the index fund that he created in 1976. You owned them all. You didn't have to pick and choose. See, there's something that most investors do not know that is part of the history of investing, that the academic community has found out for them. And that is that if you go back to 1926 and look at all of the public companies, half of them either went out of business or did not make any more than a 3% rate of return, which is the return of T-bill rates. That's what you're going into. You're going into buying securities that many will not survive. And the S&P 500, this is not like some passive index. There are about 20 companies that are changed every year. At the end of a decade, there's normally 200 of the 500, and there's a change that's been made. And that's been true since 1970. And if you read about the projections for the future, they're predicting faster changes because of the nature of the high-tech industries and obsolescence, quick obsolescence in many cases. And so a lot of people don't realize how unlikely it is that you're going to do well picking individual stocks. But if you own them all, this is the beauty. If you own them all, it's about a 10% compound rate of return since 1928. And by the way, there are a lot of people in this fire movement that pay homage to J.L. Collins for his total market index. Well, I just want you to know that since 1928, the total market index has underperformed the S&P 500 by one-tenth of 1% a year. They are both virtually the same. Large cap growth. Now, there's value in there. Yes, there's value. But the value doesn't have the power, the earning power, and the P.E. ratio of the growth companies. So it's mostly growth in terms of the numbers that it puts on the board. And so his idea is just own them all. And where John Bogle and I agree is just own them all. But I believe in also owning all the major equity asset classes. That's where John and I disagreed. He thought the S&P 500 was all you need. But there are periods the S&P 500 is El Stinko. The 1970 to 79, 2000 to 2009, those were not good decades for investors. But if you had a portfolio of big and small value and growth, U.S. and international, you did just fine in those periods that the S&P 500 performed poorly. And that's because it's basically one asset class. And I think people should have more than one asset class in the equity part of their portfolio. All of the history tells us that. But I certainly don't have any problem understanding why those 500 companies, they're great companies as a group. It's just that they're also just a group of public companies. And there are other kinds of groups that don't go up and down together. The most open table on our website is a table that shows the S&P 500 one year at a time since 1970. And now the other side of the page, small cap value for those same years. And in between are all the combinations in 10% increments between those two different asset classes. It, to me, is amazing. Because you go from the S&P 500 paying 11%, actually 10.4 since 1970, up to about 12.3, I believe it is, or 12.1 for the 50-50 combination of the S&P 500 and small cap value. Now, you go from 10.4 to 12 point something, you're picking up some important half of 1%. There's like four one half of 1% potentially in there somewhere. And that means if every half a percent is worth over a million more, the potential to make another $4 to $6 million. And the killer is, what I think is absolutely amazing, is if you add up all the negative years, both of them lost money sometime, the combination of the two lost less money than the S&P 500 itself, which is the power of combining not only different companies, but different equity asset classes. Paul, can you give our listeners just a really quick primer of what you mean by the different asset classes? Oh, sure. And in fact, if they want to hear me talk about it for an hour, I just recorded it. I think the audio goes out, the podcast goes out tomorrow. But here's what we've done to show people what happens when you start with the S&P 500. Now, that's a combination of growth and value, mostly growth, but also some out of favor companies, companies that aren't exciting, that don't have amazing futures like the growth companies tend to have. At least perceptually, people perceive that they have this great future. But what happens if you just, and I'll try to recall a number, $100,000 over this 53-year period in the S&P 500 turns into about $19 million. So what happens if you just took 10% of that and you put it all in large cap value as a standalone equity asset class? All the companies are boring, all the companies are kind of out of favor, sell for lower P-E ratios for whatever reason. It's the point that Warren Buffett loves them. And what happens if you just put 10% in there? Well, it increases the return by two-tenths of 1%. The standard deviation, the volatility measurement is the same. And you've added almost, I believe, $2 million to the return. Just because you put 10% of this other asset class. But then what happens if you put in some small cap blend? Blend means some growth and some value. It increases another one-tenth of 1%. And then you put in some small cap value. It increases four-tenths of 1%. And what you're doing, these are all of the academics. I didn't make this up. These asset classes for years have been identified by the academics as the asset classes, the groups of stocks, just like the S&P 500. It's a group of large cap blend. They have measured the premium return for these particular equity asset classes. Includes REITs, includes emerging markets, includes large cap blend internationally, and large cap value internationally, and small cap blend and small cap value internationally. These are 10 separate equity asset classes that can be going in different directions. And just like when you have different stocks in the S&P 500 going in different directions, it tends to kind of moderate the volatility. And by the time you're done, that combination takes you from about 10.4 up to, I think, about 12.3. Now, the problem with 10 is what's the likelihood that you're going to take care of them, Becky, that you're going to rebalance them, that you're going to be staying on top? It just takes a few minutes a year to do it, but you've got the responsibility to do it, and that's weighing on you. In fact, it weighs on you more than the doing of it, as many things in life can do. And so what we've tried to do to help people is to go through this group and figure out, can we capture that premium by using just a combination of the S&P 500 and small cap value? It gets you to most of what you're looking for, and it does. And then what happens if you took a portfolio 25% S&P 500, 25% large cap value, 25% small cap blend, 25% small cap value? We tested that all the way back to 1928, and it adds about 2% a year to the return. And those four together, if you looked at every year's performance since 1928, almost over half of them are just right in the middle of all of those because it's the average of the four. The S&P 500, it's at the top, it's at the bottom, back at the top, down at the bottom, all over the place, but not the four together because it's a diversified portfolio. This is the kind of thing we're trying to teach people because it allows you to increase the diversification and maybe, just maybe, increase the return. We can guarantee, according to the studies, that it's a better rate of return. We just have no way to guarantee the future. Well, there's an even more simple way we're going to talk about in a little bit that you managed to come up with. And I'll give a little prelude to Two Funds for Life. Stay tuned as we get to that. We need to circle back to our 12 steps, and it gets us to step number five, which is cut expenses. Now, John Bogle again said, the two greatest enemies of the equity fund investor are expenses and emotions. I've learned this the hard way too, and you get every dollar that you don't spend. Tell us about where expenses come up in investing and how you can minimize them, please. Well, this is the easiest one of all because we can go to Morningstar and we can see what they call the operating expense of every mutual fund in the industry and every ETF in the industry. So we know what the internal costs are. And those internal costs are created by the companies who manage those funds. Some mutual funds that look like an S&P 500 fund charge over 1% to do it. Well, why would anybody buy it? Well, maybe because the salespeople who are selling it belong to a church and they're selling to people in the church and the people in the church want to do business with people who are selling it. This actually happens. On the other hand, you can buy virtually that same mutual fund. The return is going to be very, very close, except instead of spending 1% a year, you can spend 1 20th of 1% a year. So anybody who wanted to take the time could discover those differences. Remember, if every half a percent leads potentially to another extra million dollars, expenses are the same basically forever. And Bogle says this. You know, returns come and go. Expenses are there forever. And the academics have told us if there's any one variable that leads to higher rates of return, it's lower expenses. Now, I'm not talking about comparing a bond fund to a stock fund because you might have lower expenses than a bond fund. It's a much less risky, much easier portfolio to manage theoretically, okay? What we want to do is compare bond funds with bond funds and stock funds with stock funds and small cap value stock funds with small cap value stock funds. So it is in the group that that particular fund is operating. We want to see how does it charge, how much. Fidelity has mutual funds that have zero. Zero fee to buy. Zero fee to sell. Zero fee to manage. Their operating expense is zero. And while it is basically a way to attract money, by the way, they are called the Fidelity Zero Funds, but they are there to attract money into Fidelity. I don't believe they make any money on it. They have ways in the mutual fund industry to make a little bit of money with the stocks that are in that portfolio, and they may be doing that, but it really is a marketing effort to attract people. But think about it. You want to open an account for an 18-year-old with $100 and get diversification? You could actually divide. You could divide that $100 into 25% large cap blend, small cap blend, large cap value, small cap value. You could create with $100 a portfolio built for a multimillionaire. It's never been more efficient. Investing has never been more efficient than it is today. I've been around it since 1963. It is amazing how efficient it is. And that leads me to believe that if you do the right things and take advantage of those efficiencies, you should make a lot more money in the future than people made in the past, because Wall Street was making the money, not the investors. But now, now most of that money goes to the investors if they choose to invest that way. So you are a proponent of index funds, and I initially drank the Kool-Aid under 10 funds, and I followed your strategy. I did it for a year or two, and I found it exhausting. It was just too hard to keep up with, and I found myself learning later in life that I just needed to keep it simple, stupid, and I went to a much more three to five fund portfolio. I own Total World. I have a small value tilt. I have a REIT tilt, and so I find in doing that I get a lot of diversification and a lot less headache. What do you think about keeping it simple? Well, since 2017, when John Bogle waggled his finger at me and criticized me for making things too complex, we have, with the help of Chris Pedersen, who's our director of research, one of a number of people who are donating their time to our cause, we have developed a group of two funds, three funds, four funds, five funds. I think the most we have is five in that group. And as I mentioned earlier, the small cap value in the S&P 500, I would almost guarantee that's a better rate of return than the, did you say you have four or five funds in your portfolio? Correct. Yeah. And by the way, we show the year-by-year returns on our site going back to 1970. Again, it's all about the numbers. And I wish we could stamp the big red guarantee on the page, but it's all about the numbers. Not only do we break it down year-by-year, we look at decades. We look at how they did in the best of years and the worst of years. We do everything to let people look at the inside of these portfolios so they can, almost like a flight simulator, if you will, let people take the ride. And then we build tables that show what if you use that two-fund strategy and you added bonds to it. We show you that. And we do that with all of these different portfolios. Now, I will say this, though, Bill, and I think this is so important. Some people will say that the best portfolio that you will own is the one you will stick with for the journey. And if you have one right now where you trust it and there's no reason for you to trust something else anymore, then if you do that for the rest of your life, you'll probably be okay. Our friend, Jim Dolley, Jim has created that article in 2014, 150 Portfolios Better Than Yours, is what it says. And all he meant by that is there are hundreds of good portfolios. The key is finding one that you will take the journey with. And our goal is to show people so much information about the long journey, some of our work going back to 1928, that maybe that will give people the confidence to stay the course, particularly if we have been very careful to show you what the bad times look like as well as the good times. So we've covered small, we've covered value. Those are steps seven and eight. We come to buy and hold, which you've just mentioned. And John Vogel said with regards to this, I've said stay the course a thousand times and I have meant it every time. I want to comment on that. That's really, really important as a teacher. You guys, you're teaching people, I'm teaching people, and the idea is to give them something to do that it will work for them. But here's what I know, and that quote in a sense says it all. If I had a thousand students 30 years ago, and I told them I wanted them all to buy and hold the S&P 500, and I want you to come with your checks to class tomorrow because we're all going to open the account tomorrow. In 30 years from now, we're going to see how you've done. I don't want you to take any money out. I don't want you to put more money in. I just want to see how this recommendation did. If they all lived up to that promise and they put that money in, every one of them would have exactly the same return for 30 years. But give people the right to dash in and dash out and to try to do better or try to protect against the downtimes and then try to get back in. I've met people who got out in the spring of 2008, and they're still trying to figure out how to get back in the market. Because market timing, I know it intimately. I am somewhat of an expert on market timing, and I will tell you that it is rare that anybody actually maintains a single market timing system. Not only do they jump in and out of the market, they jump in and out of different market timing systems looking for the one that will work this time, not having an understanding of how inaccurate those market timing systems are going to be. And by the way, there's nothing pretty about the S&P 500. If they're changing 200 companies every decade, there's something going on that these companies that looked good enough to be in there before aren't there anymore. And the fact is, a lot of them do go out of business, and a lot of them do get merged away. I mean, there's a whole bunch of reasons why. But if you buy and hold, the whole group will look the same. So they may want to line me up and shoot me at the end of 30 years, but that's the risk of investing. But we do know that the best way to keep you out of responding to the events is to have you committed to being a buy-and-hold investor. One of the phrases that I heard early and often when I was going down the rabbit hole of learning and educating myself on what to do with my money was, it's not timing the market, it's time in the market. Yes. Yes, that is absolutely right. And let me just say that there are some sayings like that that I think are really meaningful, because what you're looking for is the leverage of time. It's the greatest leverage that we can have that's not risky, typically. The other thing is, for example, the commitment to stocks. If you go from a 5% instrument to a 10% instrument, and that's all the further you get, that is a huge step in terms of return. And so the extra you might make from having some small cap, and maybe you do add on an extra 2%, and you do leave your kids way more money because of it, but the fact is it's getting from the 5% to the 10% that is the big step. And the same thing is getting to that buy-and-hold commitment versus some way, but somebody smart must be able to figure out what's going on. There must be somebody who followed. Maybe Jim Cramer has been around long enough now that he can figure that out, and it turns out he can't figure it out, and nobody can figure that out. Nobody knows how to tell you the future. Now, market timing typically is what we call the ICSIA strategy. This is the most common, I can't stand it anymore. And so that means that you're making this decision for emotional reasons, and the minute you're going to your emotions, it's not that you're doomed, but you are probably going to reduce your performance by a lot, and people who try market timing on their own are likely to retire with half of what they would have had had they just bought and held the right combination of assets. We hope you've enjoyed this episode of Catching Up to Five. We would appreciate it if you could leave a five-star review so that our message can reach others. We are not lawyers, financial advisors, accountants, or tax experts. Please consult your own professional advisors before making any important decisions. Our content is for entertainment and education purposes only. We'll see you next time on Catching Up to Five. Okay, Catching Up to Five, this is Bill, letting you know that this episode is part one of two parts with Paul Merriman. Please tune in next week for the remainder of this episode. Look forward to seeing you then.