Paul Merriman: The One Fund Every Investor Should Own

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Longtermgrowth
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Paul Merriman: The One Fund Every Investor Should Own

Post by Longtermgrowth » Mon Jul 03, 2017 3:22 am

Came across the link for this article posted on the Morningstar forums, and even though it was originally written a few years back, thought some here might enjoy the short yet informative read: http://paulmerriman.com/the-one-fund-every-investor/

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by palaheel » Mon Jul 03, 2017 5:39 am

In the above article, Merriman suggests VBR, the Vanguard Small Cap Value Fund ETF. In this article,

http://paulmerriman.com/not-vanguard-fu ... ted-equal/

he compares VBR (which tracks the CRSP US Small Cap Value Index) and VTWV, the Vanguard Russell 2000 Value ETF. He finally recommends VTWV because of its smaller average market cap and more value orientation.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by oldcomputerguy » Mon Jul 03, 2017 5:42 am

Mr. Merriman has long been a proponent of small-cap value, and advocates a strong tilt in that direction.

I respect Mr. Merriman's work and his efforts to help beginning investors. However, I do disagree with his advocacy of SCV (at least the extent to which he advocates it) for two reasons: (1) SCV is one of the more volatile asset classes, therefore more risky, and I don't believe I need to take that much risk; (2) Past performance does not guarantee future returns, but Mr. Merriman's advocacy always seems to be based on his position that SCV has outperformed the S&P500 over such-and-such time period, which position seems to ignore that fact.

So while a tilt in that direction is certainly done by many here, I'm not one of them.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Mon Jul 03, 2017 8:25 am

Because a significant small cap value tilt is a well known but also much discussed topic, anyone who reads that Merriman article should be sure to thoroughly research what is involved. Larry Swedroe has a whole book out on the topic of factor investing. That would be a start.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by ZenInvestor » Mon Jul 03, 2017 8:43 am

I own a big chunk of the mutual fund version of this, VSIAX. I also own $40k of the DFA Small Value fund. This $40k was in a 401k at a company I am no longer with, so I had to fill out my small value allocation with something. I like DFA for more exposure to small and value premium. I like the Vanguard fund because it is so darn cheap... 0.07%!!!

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by Jags4186 » Mon Jul 03, 2017 9:41 am

oldcomputerguy wrote:Past performance does not guarantee future returns, but Mr. Merriman's advocacy always seems to be based on his position that SCV has outperformed the S&P500 over such-and-such time period, which position seems to ignore that fact.
I don't think Paul Merriman says SCV is 100% definitely going to outperform the S&P 500 in the future but rather that there is the expectation that it will.

Sometimes I think we take the past performance thing too far. After all if past performance doesn't guarantee future returns I don't see how one could make the argument that stocks are the place to have your money. It's certainly more risky than US Treasury Bonds and there is no guarantee they would continue to outperform them...

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by One Ping » Mon Jul 03, 2017 9:44 am

Jags4186 wrote:I don't think Paul Merriman says SCV is 100% definitely going to outperform the S&P 500 in the future but rather that there is the expectation that it will.

Sometimes I think we take the past performance thing too far. After all if past performance doesn't guarantee future returns I don't see how one could make the argument that stocks are the place to have your money. It's certainly more risky than US Treasury Bonds and there is no guarantee they would continue to outperform them...
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by indexonlyplease » Mon Jul 03, 2017 10:29 am

My thinking maybe in the past small companies had a great chance. But with the large corporations getting bigger and bigger and buying other large companies , it seems large companies will out perform in the future. But who knows.

I will come back and tell you in 20 years.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by telemark » Mon Jul 03, 2017 10:57 am

Since this particular recommendation is now four years old it's now possible to back check how it turned out. Past results don't
necessarily indicate future performance, but sometimes they do. The more subtle question is whether there is a benefit after adjusting for risk. If it's only a risk story, you could get the same effect by staying with TSM and reducing your allocation to bonds.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Mon Jul 03, 2017 11:02 am

telemark wrote:Since this particular recommendation is now four years old it's now possible to back check how it turned out. Past results don't
necessarily indicate future performance, but sometimes they do. The more subtle question is whether there is a benefit after adjusting for risk. If it's only a risk story, you could get the same effect by staying with TSM and reducing your allocation to bonds.
Four years would not even remotely verify or contradict the plan on its own terms. The whole proposition has been front checked and back checked for decades in Fama-French. There have been posters on this Forum that have put up data on the issue. There is also the Swedroe book. This is not some sort of peculiar recommendation so much as an enthusiast touting a preference for a well known possible strategy in investing. As with any approach strategy and outcome should not be confused, and it is always a possibility that the next decades of investing will change in some way from past decades in investing. Note Merriman does opt for a highly suspect 1/n fallacy where n = 10.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by Johnnie » Mon Jul 03, 2017 11:10 am

On what basis do Bogleheads believe that having 100 percent of their equities in TSM is likely to be optimal? Or that a three-fund portfolio is optimal?

I assume this belief is based on empirical research on what has happened in the past, subject to all the usual qualifications (PPINGOFR).

How is that different from Merriman's belief that odds favor slightly better returns from SCV in the long term, subject to all the same qualifications?

So where's the beef, and what's the real beef?
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by CyberBob » Mon Jul 03, 2017 11:15 am

It's not possible fore every investor to own that fund. And even if they did, the price would have been bid up so far that the future returns would be extremely low.
It's silly advice. If everyone tilted towards small-value, it wouldn't even be a tilt anymore, but would simply be a new current make-up of the total market.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by nisiprius » Mon Jul 03, 2017 11:20 am

dbr wrote:...The whole proposition has been front checked and back checked for decades in Fama-French. There have been posters on this Forum that have put up data on the issue. There is also the Swedroe book. This is not some sort of peculiar recommendation so much as an enthusiast touting a preference for a well known possible strategy in investing. As with any approach strategy and outcome should not be confused, and it is always a possibility that the next decades of investing will change in some way from past decades in investing. Note Merriman does opt for a highly suspect 1/n fallacy where n = 10...
Yes.

What I find troubling about Merriman (and others) is the pitbull-tenacity with which he insists on the necessity for small-cap value (and for what I'll call the "1995-2005 conventional slice-and-dice portfolio strategy," because the trendy folks have moved on to fresh factors).

John C. Bogle has said "Successful investing involves doing just a few things right and avoiding serious mistakes." Well, having a small-cap value tilt is not a "serious mistake," and not having one is not a serious mistake, either. They're both within the range of the reasonable.

Merriman's article always have too much spin in them for my taste. For example, "It’s no secret that small-cap stocks have a long history of outperforming large-cap stocks." Uh, that's a fairly dubious statement. They have indeed outperformed large-caps on a raw basis, but it's not anywhere near as clear that they've outperformed it on a risk-adjusted basis. The degree of consensus belief in the small-company effect in terms of risk-adjusted reward has plummeted since it was first brought to light in the early 1980s. As I understand what the factor mavens are saying nowadays, they won't go as far as saying it's not there, but they definitely soft-pedal its perceived importance.

As for "And it’s well known that value stocks have outperformed growth stocks," that needs to be put into perspective. The perspective is that the long-term past data are pretty favorable to the value factor, but the value factor is described by factor mavens as having been "missing in action" for quite a while; for example, Swedroe: Value Premium Goes Missing. Read that whole article, it's interesting, because while Swedroe believes the value factor exists and is worthwhile, he doesn't give it anything close to Merriman's cut-and-dried presentation:
...there has been, on average, no realized value premium over the last 10 calendar years.... Even these high rates of persistence demonstrate it’s still possible an investor could wait out a 10-year investment horizon and still face a situation where small value and large value stocks underperform other asset classes.... there’s a tendency for publication of academic research to result in declining premiums....
But he ends up in the same place as Merriman, "No matter how much or how little of your money you have in equity funds, you should have some of that money invested in small-cap value stocks."
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by nedsaid » Mon Jul 03, 2017 11:34 am

I did buy Vanguard Small Cap Value ETF on Paul Merriman's recommendation and so far I have been pleased with it. There are other products out there that better screen for small and value but this ETF has been good enough.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by Dottie57 » Mon Jul 03, 2017 11:36 am

I indeed have small cap value stocks in my fund selection. It is in the total stock market fund.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by WhiteMaxima » Mon Jul 03, 2017 11:45 am

Just total market stock. why tilt to small value?

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Mon Jul 03, 2017 11:53 am

WhiteMaxima wrote:Just total market stock. why tilt to small value?
Because a very large amount of fairly persistent data says you can get higher expected return and may or may not get higher risk adjusted return. You can read Swedroe's book for an exposition and a lot of other material as well. Your question is one that actually has a detailed answer if you want to study the issue.

Disclaimer: I do not take on factor tilts because I do not need to and I do not want to.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Mon Jul 03, 2017 11:54 am

nedsaid wrote:I did buy Vanguard Small Cap Value ETF on Paul Merriman's recommendation and so far I have been pleased with it. There are other products out there that better screen for small and value but this ETF has been good enough.
What does "pleased" mean. I don't understand how that applies to holding or not holding some specific fund in a portfolio.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by One Ping » Mon Jul 03, 2017 12:03 pm

dbr wrote:Note Merriman does opt for a highly suspect 1/n fallacy where n = 10.
Sorry if this is clear to everyone else, but I'm not familiar with this terminology. Please help me out here ... what does this mean?
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by nedsaid » Mon Jul 03, 2017 12:12 pm

dbr wrote:
nedsaid wrote:I did buy Vanguard Small Cap Value ETF on Paul Merriman's recommendation and so far I have been pleased with it. There are other products out there that better screen for small and value but this ETF has been good enough.
What does "pleased" mean. I don't understand how that applies to holding or not holding some specific fund in a portfolio.
LOL!!! LOL!!! LOL!!! Do you want to be my financial advisor? Do I have to provide a justification for everything that I own? Do I have to precisely define every term that I use to your satisfaction?

Morningstar has a 4 star rating on the ETF and I have seen a 5 star on it in the past. I am pleased with the ETF because it has done a good enough job representing the Small Cap Value space that I want to be in. I am pleased because it has performed well and I am pleased with its low cost. It seems to have done a good enough job loading the small and value factors that I want.

I make a passing comment and I feel like my 7th grade English teacher has red marks and comments all over my post. You have made Mrs. Woodward proud.

So hopefully, this has provided some clarification as to what I meant.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Mon Jul 03, 2017 12:29 pm

nedsaid wrote:
dbr wrote:
nedsaid wrote:I did buy Vanguard Small Cap Value ETF on Paul Merriman's recommendation and so far I have been pleased with it. There are other products out there that better screen for small and value but this ETF has been good enough.
What does "pleased" mean. I don't understand how that applies to holding or not holding some specific fund in a portfolio.
LOL!!! LOL!!! LOL!!! Do you want to be my financial advisor? Do I have to provide a justification for everything that I own? Do I have to precisely define every term that I use to your satisfaction?

Morningstar has a 4 star rating on the ETF and I have seen a 5 star on it in the past. I am pleased with the ETF because it has done a good enough job representing the Small Cap Value space that I want to be in. I am pleased because it has performed well and I am pleased with its low cost. It seems to have done a good enough job loading the small and value factors that I want.

I make a passing comment and I feel like my 7th grade English teacher has red marks and comments all over my post. You have made Mrs. Woodward proud.

So hopefully, this has provided some clarification as to what I meant.
Sorry, and you have my apologies. But the reason for the question is in the interests of other readers understanding why it might be a good thing or a bad thing to own that fund. "Pleased" does not explain to people what the point would be. Your explanation is most helpful because now someone who reads this can understand why that fund could make sense. I am sure the expanded detail is most appreciated.

Maybe I should back off. Your comments are appreciated.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Mon Jul 03, 2017 12:35 pm

One Ping wrote:
dbr wrote:Note Merriman does opt for a highly suspect 1/n fallacy where n = 10.
Sorry if this is clear to everyone else, but I'm not familiar with this terminology. Please help me out here ... what does this mean?
It means that a person makes up a recipe that has ten funds in it and just says put 1/10th in each. They are not providing any thoughtful rationale for why that distribution is what is being recommended. I wouldn't have a problem with someone saying that the proportions don't matter very much over a wide range and 1/10 is simple to write about and maintain. But if that is the case, they should give a range outside which the proportions do matter. You could just as well ask which of those funds or asset classes could just as well be eliminated and why or why not. If you are going to be an investment guru and get paid to write articles, you should do a lot better than that. A hazard here is that instead of communicating understanding the writer is communicating more or less "I know something and you don't but you can follow my recipe even if you don't understand it." and I think that is a bad way to invest.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by nedsaid » Mon Jul 03, 2017 1:07 pm

dbr wrote:
nedsaid wrote:
dbr wrote:
nedsaid wrote:I did buy Vanguard Small Cap Value ETF on Paul Merriman's recommendation and so far I have been pleased with it. There are other products out there that better screen for small and value but this ETF has been good enough.
What does "pleased" mean. I don't understand how that applies to holding or not holding some specific fund in a portfolio.
LOL!!! LOL!!! LOL!!! Do you want to be my financial advisor? Do I have to provide a justification for everything that I own? Do I have to precisely define every term that I use to your satisfaction?

Morningstar has a 4 star rating on the ETF and I have seen a 5 star on it in the past. I am pleased with the ETF because it has done a good enough job representing the Small Cap Value space that I want to be in. I am pleased because it has performed well and I am pleased with its low cost. It seems to have done a good enough job loading the small and value factors that I want.

I make a passing comment and I feel like my 7th grade English teacher has red marks and comments all over my post. You have made Mrs. Woodward proud.

So hopefully, this has provided some clarification as to what I meant.
Sorry, and you have my apologies. But the reason for the question is in the interests of other readers understanding why it might be a good thing or a bad thing to own that fund. "Pleased" does not explain to people what the point would be. Your explanation is most helpful because now someone who reads this can understand why that fund could make sense. I am sure the expanded detail is most appreciated.

Maybe I should back off. Your comments are appreciated.
Dbr, I wasn't at all offended and no apologies necessary. You raised a good question but I decided to have some fun with it.

I have always said that an investor should have a good rationale for everything they own and that is the point you were making. One example of this is that an investor might be pleased with an investment and unaware that it is actually underperforming. Another point that could be raised is the importance of benchmarking your portfolio, you may not be doing as well as you think you are.

Probably hardly anyone is really interested but I have posted my own investment results and performed analysis on my own portfolio. Pretty much, it was for my benefit and putting together the materials for a post really helped clarify my own thinking even if no one read why I posted. Bottom line, I am not an idiot but my investment performance has been nothing special. I suppose we all can be legends in our own minds.

The back and forth banter is fun and in the process we all learn. I know that I have learned bunches and bunches here. The biggest thing I have learned is really how little I really know about all of this.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by Longtermgrowth » Mon Jul 03, 2017 1:28 pm

palaheel wrote:In the above article, Merriman suggests VBR, the Vanguard Small Cap Value Fund ETF. In this article,

http://paulmerriman.com/not-vanguard-fu ... ted-equal/

he compares VBR (which tracks the CRSP US Small Cap Value Index) and VTWV, the Vanguard Russell 2000 Value ETF. He finally recommends VTWV because of its smaller average market cap and more value orientation.
^Looks like a good way of showing that a fund with a slightly higher expense ratio could end up being worth it, especially if it gets you deeper into the small value territory.

I wonder if that's why he mentioned DES (WisdomTree SmallCap Div Fund) in the article I posted. It actually tilts a little more to small and value on the Morningstar style grid than the DFA fund mentioned in the article (DFSVX).

Also, his new Motif basket of funds looks to currently hold RZV (Guggenheim S&P SmallCap 600® PureVal ETF) as his pick for domestic small value.
There are certainly quite a few ways to gain exposure to the asset class now, though it does seem that the most popular picks on this forum are VBR (Vanguard Small-Cap Value ETF) closely followed by IJS (iShares S&P SmallCap 600 Value).

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by Jags4186 » Mon Jul 03, 2017 1:39 pm

dbr wrote:
One Ping wrote:
dbr wrote:Note Merriman does opt for a highly suspect 1/n fallacy where n = 10.
Sorry if this is clear to everyone else, but I'm not familiar with this terminology. Please help me out here ... what does this mean?
It means that a person makes up a recipe that has ten funds in it and just says put 1/10th in each. They are not providing any thoughtful rationale for why that distribution is what is being recommended. I wouldn't have a problem with someone saying that the proportions don't matter very much over a wide range and 1/10 is simple to write about and maintain. But if that is the case, they should give a range outside which the proportions do matter. You could just as well ask which of those funds or asset classes could just as well be eliminated and why or why not. If you are going to be an investment guru and get paid to write articles, you should do a lot better than that. A hazard here is that instead of communicating understanding the writer is communicating more or less "I know something and you don't but you can follow my recipe even if you don't understand it." and I think that is a bad way to invest.
AFAIK Paul Merriman identified 10 asset classes and that's where he came up with 1/10.

The reality is, whether you do 33/33/33 TSM, TISM, TBM or slice and dice like Paul M. suggests, or go 50% TSM, 50% TBM, or whatever, you will do just fine is you stick to your guns and don't constantly change your AA outside of your IPS.

The biggest advantage of the TSM (as Paul Merriman spoke about on his most recent podcast about his coversation with Jack Bogle) is that it hides when one sector is underperforming and hides when other sectors are outperforming. The risk of the slice and dice is getting skittish watching some of your funds fly high while others lag or drop in value. If you get scared and sell off the underperforming and buy the outperforming stocks you are almost guaranteed to underperform over the long term.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by grabiner » Mon Jul 03, 2017 9:36 pm

palaheel wrote:In the above article, Merriman suggests VBR, the Vanguard Small Cap Value Fund ETF. In this article,

http://paulmerriman.com/not-vanguard-fu ... ted-equal/

he compares VBR (which tracks the CRSP US Small Cap Value Index) and VTWV, the Vanguard Russell 2000 Value ETF. He finally recommends VTWV because of its smaller average market cap and more value orientation.
Really, what matters is how much exposure you get to small and value. Since VTWV holds smaller and more value-oriented stocks, you need less of it to get the same small-cap and value exposure in your portfolio. But if you can get your desired exposure with VBR by holding more of it, you will pay less to get the exposure because VBR is so much less expensive. Current expenses are 0.04% on VTI (Total Stock Market), 0.07% on VBR, and 0.20% on VTWV, so moving $3K from VTI to VTWV costs as much as moving $16K from VTI to VBR.

If room for holding value funds is tight and you want deep exposure in one fund, it makes sense to hold RZV (Guggenheim S&P 600 Pure Value) at 0.35% expenses. This ETF has very deep value exposure, and is mostly micro-caps. It is also suitable for a taxable account because of its extremely low yield.

I hold VBR (actually the Admiral share class) in my Roth IRA because I prefer to hold Vanguard mutual funds there, and RZV in my Health Savings Account.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by telemark » Tue Jul 04, 2017 12:19 am

dbr wrote:
One Ping wrote:
dbr wrote:Note Merriman does opt for a highly suspect 1/n fallacy where n = 10.
Sorry if this is clear to everyone else, but I'm not familiar with this terminology. Please help me out here ... what does this mean?
It means that a person makes up a recipe that has ten funds in it and just says put 1/10th in each. They are not providing any thoughtful rationale for why that distribution is what is being recommended. I wouldn't have a problem with someone saying that the proportions don't matter very much over a wide range and 1/10 is simple to write about and maintain. But if that is the case, they should give a range outside which the proportions do matter. You could just as well ask which of those funds or asset classes could just as well be eliminated and why or why not. If you are going to be an investment guru and get paid to write articles, you should do a lot better than that. A hazard here is that instead of communicating understanding the writer is communicating more or less "I know something and you don't but you can follow my recipe even if you don't understand it." and I think that is a bad way to invest.
If you look at the recommendations at http://paulmerriman.com/vanguard/ the proportions are not evenly divided between funds. And http://paulmerriman.com/ultimate-buy-ho ... tegy-2017/ does describe some of the reasoning behind those choices.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Tue Jul 04, 2017 8:26 am

telemark wrote:
dbr wrote:
One Ping wrote:
dbr wrote:Note Merriman does opt for a highly suspect 1/n fallacy where n = 10.
Sorry if this is clear to everyone else, but I'm not familiar with this terminology. Please help me out here ... what does this mean?
It means that a person makes up a recipe that has ten funds in it and just says put 1/10th in each. They are not providing any thoughtful rationale for why that distribution is what is being recommended. I wouldn't have a problem with someone saying that the proportions don't matter very much over a wide range and 1/10 is simple to write about and maintain. But if that is the case, they should give a range outside which the proportions do matter. You could just as well ask which of those funds or asset classes could just as well be eliminated and why or why not. If you are going to be an investment guru and get paid to write articles, you should do a lot better than that. A hazard here is that instead of communicating understanding the writer is communicating more or less "I know something and you don't but you can follow my recipe even if you don't understand it." and I think that is a bad way to invest.
If you look at the recommendations at http://paulmerriman.com/vanguard/ the proportions are not evenly divided between funds. And http://paulmerriman.com/ultimate-buy-ho ... tegy-2017/ does describe some of the reasoning behind those choices.
Yes, perhaps my comment is a little unfair, but I still think this needs a lot more justification than is offered. Portfolio 7 is the 1/n example. I am not sure moving something from 1/10 to 1/5 is all that reassuring. Then again we can grant him that it is a general idea and you do have to say something or people will complain that you were never specific enough for anyone to follow your advice. Of course I tend to react against anyone just following someone else's recipe.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by Jack56 » Tue Jul 04, 2017 8:44 am

There is no small cap effect according to the latest research. You are just taking on more risk in the hope of more return. William Bernstein talks about this in one of his books. People who make their living giving advice on investing have to make it complicated or else why would anyone pay them? The best strategy as William Sharpe demonstrated eons ago is to buy the market or as close to the market as you can and then forget about it till you need the money.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Tue Jul 04, 2017 9:06 am

I think the thing that grates with me is the proselytizing approach that presents the whole thing as truth and goodness and you are stupid if you don't do this. The whole subject is a little more complex than that. It is a beef I have with all the articles that build up these engineered portfolios with an underlying implication that the first and simplest one is for beginners and the final presentation is for those sophisticated enough to ask for and get the "best." There is even a Portfolio 8 for people who want "more" and who doesn't. The whole titling of "The One Fund . . . " is just taking the wrong approach to how investment advice should be presented and it is done for editorial effect. I know Larry Swedroe once made a comment about being a little embarrassed by editors choosing the "The Best . . ." titles for his books. I even feel kind of sheepish telling anyone to go read a book called "The Best . . ." of anything.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by oldcomputerguy » Tue Jul 04, 2017 9:10 am

dbr wrote:I know Larry Swedroe once made a comment about being a little embarrassed by editors choosing the "The Best . . ." titles for his books. I even feel kind of sheepish telling anyone to go read a book called "The Best . . ." of anything.
I feel a bit more drawn to the "Dummies" books, myself. I don't know what that says about me.... :?
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by 2pedals » Tue Jul 04, 2017 9:14 am

There is no such thing as a one fund for every investor and certainly not a small cap fund, that is just crazy.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by raven15 » Tue Jul 04, 2017 9:52 am

grabiner wrote: If room for holding value funds is tight and you want deep exposure in one fund, it makes sense to hold RZV (Guggenheim S&P 600 Pure Value) at 0.35% expenses. This ETF has very deep value exposure, and is mostly micro-caps. It is also suitable for a taxable account because of its extremely low yield.

I hold VBR (actually the Admiral share class) in my Roth IRA because I prefer to hold Vanguard mutual funds there, and RZV in my Health Savings Account.
A fellow RZV owner huh. You must be brave! I've recently been thinking that fund is best used by those who add money regularly. When I start nearing the point I want to withdraw money regularly I may start looking at something less volatile.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by willthrill81 » Tue Jul 04, 2017 10:36 am

Jack56 wrote:There is no small cap effect according to the latest research. You are just taking on more risk in the hope of more return. William Bernstein talks about this in one of his books. People who make their living giving advice on investing have to make it complicated or else why would anyone pay them? The best strategy as William Sharpe demonstrated eons ago is to buy the market or as close to the market as you can and then forget about it till you need the money.
My guess is that the 'latest research' is only examining the most recent data (i.e. 10 years), when there's been little difference between TSM and SCV. This has happened repeatedly in the past, though, and it's not surprising at all for one well versed in the historical data. Larry Swedroe and many of his fellow advisers are convinced that it is one of the best equity classes to own.

When you move into 20 year periods, the relative performance of the two asset classes really shines. In all of the twenty year rolling periods (I think there are 69 with decent data), SCV has beaten the S&P 500 in all but one.

If you're basing your investment decisions on what's happened in the last five or ten years, you're performance chasing.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by willthrill81 » Tue Jul 04, 2017 10:41 am

CyberBob wrote:It's not possible fore every investor to own that fund. And even if they did, the price would have been bid up so far that the future returns would be extremely low.
It's silly advice. If everyone tilted towards small-value, it wouldn't even be a tilt anymore, but would simply be a new current make-up of the total market.
Are you aware that that's one of the big arguments levied against passive (i.e. index) investing? "If everyone indexed, there wouldn't even be a market!"

But everyone isn't going to index, and everyone isn't going to own any asset class, including SCV, and Merriman knows that. Just look at how many people in this thread don't own it.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by pkcrafter » Tue Jul 04, 2017 11:37 am

Merriman's blanket advise is not good because the majority of retail investors won't be able to stay with small cap's vexing personality. I don't think there is more than 25% of average retail investors (sorry, but most here fit into this category) can stay with small caps.

Imagine having a 3-fund portfolio and then moving into small caps (of course they are outperforming) and then noticing they are underperforming for 1, 2, 5, 7 years. That is a very long time in dog years, which are equivalent to average investor years regarding patience. There he is holding small caps and noting what would have happened if he had simply held the 3-fund. He sells and goes back to the 3-fund until the next small cap outperformance period.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by bertilak » Tue Jul 04, 2017 12:39 pm

Dottie57 wrote:I indeed have small cap value stocks in my fund selection. It is in the total stock market fund.
I used to think (and say) something similar: "I have SCV exposure via TSM." I have since been educated by Larry Swedroe's response to one of my posts making that claim. The following is my understanding of Larry's correction to my statement.
  • Small Cap and Value are two risk factors (among others) that are recognized by market scholars and factor investors. Another factor, the biggest, is Beta, which represents the risk (measured as volatility) of the market as a whole. A Total Stock Market fund has exposure only (by definition) to a single risk factor, Beta. To be exposed to other risk factors you need to hold stocks having those factors, in proportions greater than their portion of the TSM to get you past Beta exposure.
    [All my words but think it is close to what Larry said.]
Anyway, I still think TSM by itself is the default position and I would need further convincing that tilting away from it is something more than simply "more risk means more expected return." That means I am going with what is called "the risk story." I cannot defend that but feel it is the onus of others to defend the opposite. I accept they might be right and there is indeed something more to it, but not enough more for me to act on it. The extra complication seem to me to perhaps offer, at best, a second- or third-order effect.

As Taylor says, there are many roads to Dublin. I choose the straighter and less bumpy road even though there might be a minor shortcut where I risk making a wrong turn. I only get to make this trip once.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by MIretired » Tue Jul 04, 2017 12:52 pm

Economic stuff happens.
Looking at a comparison of TSM, SV, Mid-blend, of annual returns for the asset classes only, from 1972-present:

SV did it's work in 3 periods: approx: 1975-1985, 1991-1993, & 2000-2007.
All these were marked by (at least for much of these periods) troubling market/economies.
Otherwise, the returns are quite equal.
I wanted to see pre-1999 return comparisons.
To me, it seems a good idea to use TSM as a bogey( tracking error regret/ tilting potential benefit), at least when only looking in the US.

https://www.portfoliovisualizer.com/bac ... Value3=100
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by dbr » Tue Jul 04, 2017 12:54 pm

bertilak wrote:
Dottie57 wrote:I indeed have small cap value stocks in my fund selection. It is in the total stock market fund.
I used to think (and say) something similar: I have SCV exposure via TSM. I have since been educated by Larry Swedroe's response to one of my posts making that claim. The following is my understanding of Larry's correction to my statement.
  • Small Cap and Value are two risk factors (among others) that are recognized by market scholars and factor investors. Another factor, the biggest, is Beta, which represents the risk (measured as volatility) of the market as a whole. A Total Stock Market fund has only (by definition) exposure to a single risk factor, Beta. To be exposed to other risk factors you need to hold stocks having those factors, in proportions greater than their portion of the TSM to get you past Beta exposure.
    [All my words but think it is close to what Larry said.]
Anyway, I still think TSM by itself is the default position and I would need further convincing that tilting away from it is something more than simply "more risk means more expected return." That means I am going with what is called "the risk story." I cannot defend that but feel it is the onus of others to defend the opposite. I accept they might be right and there is indeed something more to it, but not enough more for me to act on it. The extra complication seem to me to offer, at best, a second- or third-order effect.

As Taylor says, there are many roads to Dublin. I choose the straighter and less bumpy road even though there might be a minor shortcut where I risk making a wrong turn. I only get to make this trip once.
There is indeed a need to carefully define expressions such as "I have x in my portfolio.," "I have SCV exposure.," and "I have exposure to Small Cap and Value risk factors." The main distinction is between the first and third of these while the middle of the above is ambiguous.

You are also correct about the second part of your comment that some sort of "risk" story involves far more than simply investing for greater expected return. What it involves exactly is a discussion. Whether Merriman's comments are helpful or more distracting than helpful also is a discussion.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by 2pedals » Tue Jul 04, 2017 1:59 pm

My belief, this question to SCV tilt or not to SCV tilt will go on for a very long time. Once the argument becomes pervasive that everybody must have SCV tilt the genie has been already let out of the bottle. After that happens it might take a while to get the genie back in the bottle.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by saltycaper » Tue Jul 04, 2017 2:53 pm

I don't think every investor should own a SCV fund, but I do know that if I could own nothing but a single fund, it would be a SCV fund.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by willthrill81 » Tue Jul 04, 2017 3:09 pm

2pedals wrote:My belief, this question to SCV tilt or not to SCV tilt will go on for a very long time. Once the argument becomes pervasive that everybody must have SCV tilt the genie has been already let out of the bottle. After that happens it might take a while to get the genie back in the bottle.
Again, that's essentially the same argument used by proponents of active investing: if everyone did passive investing, the market as we know it would cease to exist.

It's simply not going to happen. Again, look at how many people in this thread don't own SCV, despite people like Larry Swedroe and Paul Merriman banging the SCV drum.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by 2pedals » Tue Jul 04, 2017 4:50 pm

willthrill81 wrote:
2pedals wrote:My belief, this question to SCV tilt or not to SCV tilt will go on for a very long time. Once the argument becomes pervasive that everybody must have SCV tilt the genie has been already let out of the bottle. After that happens it might take a while to get the genie back in the bottle.
Again, that's essentially the same argument used by proponents of active investing: if everyone did passive investing, the market as we know it would cease to exist.

It's simply not going to happen. Again, look at how many people in this thread don't own SCV, despite people like Larry Swedroe and Paul Merriman banging the SCV drum.
Active investing versus passive investing is a difference between selecting an index of a particular type. An active fund performance is compared to that index fund type, i.e. a large cap fund is compared to the S&P 500. Currently many BH believe that active investing on average does not have higher returns due to higher costs and tax inefficiencies. If everyone did passive investing, market discovery would not occur. Most likely this will not happen but at some point it could become a problem with the passive investing approach. Then active investing would exploit these market inefficiencies and would outperform the index.

Say you and many investors believe an SCV tilt on average has acceptable risk adjusted and higher returns. Since SCV tilt is a much smaller segment of the total market place, if many people (not everyone) did SCV tilt investing, market discovery would not occur due to the high demand of SCV stocks. If this did happen at some point it could become a problem with the SCV tilt investing approach. Then market indexing would outperform the SCV tilt approach.

Is this essentially the same argument? I don't believe it is. It may be true that SCV tilt investing has not reached widespread proportions to cause these types of problems but statements that every investor should have SCV gives me pause.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by willthrill81 » Tue Jul 04, 2017 5:04 pm

2pedals wrote:
willthrill81 wrote:
2pedals wrote:My belief, this question to SCV tilt or not to SCV tilt will go on for a very long time. Once the argument becomes pervasive that everybody must have SCV tilt the genie has been already let out of the bottle. After that happens it might take a while to get the genie back in the bottle.
Again, that's essentially the same argument used by proponents of active investing: if everyone did passive investing, the market as we know it would cease to exist.

It's simply not going to happen. Again, look at how many people in this thread don't own SCV, despite people like Larry Swedroe and Paul Merriman banging the SCV drum.
Active investing versus passive investing is a difference between selecting an index of a particular type. An active fund performance is compared to that index fund type, i.e. a large cap fund is compared to the S&P 500. Currently many BH believe that active investing on average does not have higher returns due to higher costs and tax inefficiencies. If everyone did passive investing, market discovery would not occur. Most likely this will not happen but at some point it could become a problem with the passive investing approach. Then active investing would exploit these market inefficiencies and would outperform the index.

Say you and many investors believe an SCV tilt on average has acceptable risk adjusted and higher returns. Since SCV tilt is a much smaller segment of the total market place, if many people (not everyone) did SCV tilt investing, market discovery would not occur due to the high demand of SCV stocks. If this did happen at some point it could become a problem with the SCV tilt investing approach. Then market indexing would outperform the SCV tilt approach.

Is this essentially the same argument? I don't believe it is. It many be true that SCV tilt investing has not reached widespread proportions to cause these types of problems but statements that every investor should have SCV gives me pause.
The "why" may be different, but the conclusion is the same.

In both instances, we don't know what proportion of market funds would be needed in order to reduce or eliminate the theoretical gain. Given the skepticism surrounding SCV on this forum at least, I suspect that there's still gain to be had, but this will obviously only be known in retrospect. Betting against history is not my strategy though.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by jhfenton » Tue Jul 04, 2017 5:16 pm

saltycaper wrote:I don't think every investor should own a SCV fund, but I do know that if I could own nothing but a single fund, it would be a SCV fund.
This is where I am. [To be fair, VSIAX is my second largest holding, behind VSS (Vanguard FTSE All-World ex-US Small Cap).]

The very first non-401(k) investment I made in the 90's was a small-cap value fund. (The second was an emerging markets fund.) I've maintained a separate SCV position ever since.

But that's not the simple advice I give co-workers who ask. They're more likely to stick with a target date fund or three-fund portfolio.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by willthrill81 » Tue Jul 04, 2017 5:31 pm

jhfenton wrote:
saltycaper wrote:I don't think every investor should own a SCV fund, but I do know that if I could own nothing but a single fund, it would be a SCV fund.
This is where I am. [To be fair, VSIAX is my second largest holding, behind VSS (Vanguard FTSE All-World ex-US Small Cap).]

The very first non-401(k) investment I made in the 90's was a small-cap value fund. (The second was an emerging markets fund.) I've maintained a separate SCV position ever since.

But that's not the simple advice I give co-workers who ask. They're more likely to stick with a target date fund or three-fund portfolio.
Merriman said pretty much the same thing in a recent interview on "The Doughroller Money Podcast." He said that target date funds are a great solution for many, though he added that moving 10-20% of the portfolio into SCV would likely be a good move, especially for a young investor.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by grabiner » Wed Jul 05, 2017 12:03 am

raven15 wrote:
grabiner wrote: If room for holding value funds is tight and you want deep exposure in one fund, it makes sense to hold RZV (Guggenheim S&P 600 Pure Value) at 0.35% expenses. This ETF has very deep value exposure, and is mostly micro-caps. It is also suitable for a taxable account because of its extremely low yield.

I hold VBR (actually the Admiral share class) in my Roth IRA because I prefer to hold Vanguard mutual funds there, and RZV in my Health Savings Account.
A fellow RZV owner huh. You must be brave! I've recently been thinking that fund is best used by those who add money regularly. When I start nearing the point I want to withdraw money regularly I may start looking at something less volatile.
I don't care about the risk of any one fund in my portfolio; I care about the risk of my portfolio as a whole, and RZV is just 4% of my portfolio. As I approach retirement, I will decrease the risk of my portfolio by holding more bonds, but I will keep my risky investments.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by indexonlyplease » Thu Jul 06, 2017 9:15 am

Paul Merriman states a young investor who is in a Target Dated Fund should put 75% in the Target Dated Fund and 25% in small cap value. Is this a good stategy or just quessing for future better returns??

He reasoning was Target Dated Funds don't hold enough small cap value.

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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by oldcomputerguy » Thu Jul 06, 2017 9:31 am

indexonlyplease wrote:Paul Merriman states a young investor who is in a Target Dated Fund should put 75% in the Target Dated Fund and 25% in small cap value. Is this a good stategy or just quessing for future better returns??

He reasoning was Target Dated Funds don't hold enough small cap value.
I guess it depends on your definition of "enough". Small-cap value makes up less than 5% of the total stock market, which is not a very large portion. If you want to increase risk / volatility, and hopefully increase expected return, then his suggestion makes sense. But then one could say the same thing about any portfolio tilt.
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Re: Paul Merriman: The One Fund Every Investor Should Own

Post by bertilak » Thu Jul 06, 2017 9:33 am

indexonlyplease wrote:Paul Merriman states a young investor who is in a Target Dated Fund should put 75% in the Target Dated Fund and 25% in small cap value. Is this a good stategy or just quessing for future better returns??

He reasoning was Target Dated Funds don't hold enough small cap value.
Merriman has his opinion and others have other opinions. There are acknowledged experts on all sides. You need to form your own opinion. Whatever you decide you will have people who agree with you and people who feel just the opposite.

I think almost everyone will agree that adding SCV to a TSM portfolio will increase expected return. The question is: Is this simply because you will then be taking on more risk, or is there something about that added risk that gets you better expected return than adding risk in other ways? (for example simply upping the equity allocation)
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