June 24, 2026 • 26 mins
Tom welcomes legendary investor educator and longtime friend Paul Merriman for a wide-ranging conversation about the evolution of indexing, the proposed changes to the S&P 500, and why investors should understand both the strengths and limitations of traditional index funds. Paul explains why firms like Dimensional Fund Advisors and Avantis Investors use a more flexible, evidence-based approach than traditional indexing and discusses how academic research has reshaped portfolio construction over the past several decades.
The discussion also explores lessons from market history, including the importance of understanding major bear markets, determining appropriate risk levels, and building portfolios that align with personal goals rather than chasing maximum returns. Paul shares insights from the latest Dimensional Matrix Book and explains why he believes studying 100 years of market data helps investors stay disciplined during inevitable downturns.
Finally, Paul introduces a simple but powerful strategy for helping newborns and young children build substantial retirement wealth through small annual investments that can compound over many decades.
Timestamps
0:11 Special guest Paul Merriman joins Talking Real Money
0:55 Long friendship and investing partnership between Tom and Paul
1:20 S&P 500 rule changes and earlier inclusion of major IPOs like SpaceX
2:07 Historical examples of S&P 500 additions and omissions
2:35 Microsoft’s delayed entry into the S&P 500
2:56 NVIDIA replacing Enron in 2001
3:29 How index rule changes can affect future returns and volatility
4:08 Why indexing remains the preferred strategy for most investors
5:16 Traditional versus non-traditional index funds
6:37 How Avantis and Dimensional incorporate factors beyond company size
8:05 Why factor-based investing differs from traditional indexing
9:02 Problems with rigid index reconstitution schedules
10:16 Momentum, flexibility, and portfolio management advantages
11:22 Introduction to Dimensional’s annual Matrix Book
11:53 Using market history rather than forecasts to guide investing decisions
13:09 Lessons from past bubbles, crashes, and lost decades
14:20 Why Paul trusts academic research more than Wall Street forecasts
15:14 The case for small-cap value investing
15:49 Clarifying Paul’s allocation to small companies
16:53 Investing for heirs, charities, and future generations
18:10 Remembering investor panic during the 2008 financial crisis
19:18 Determining an appropriate risk level for retirement portfolios
20:43 Different investor goals: beating the market, maximizing returns, or minimizing risk
21:28 Peace of mind versus maximum growth
21:55 Helping young people build retirement wealth early
22:54 The $365-per-year retirement funding concept
24:09 Final thoughts and appreciation between Tom and Paul
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:05):
We're gonna do a really great financial future.
Tom and Don are talking realmoney.
SPEAKER_03 (00:12):
Welcome to a very, very, very special edition of
Talking Real Money.
Hi, I'm Tom Cock.
Don McDonald's got the day off,and that's great news because I
get to bring in one of myfavorite guests and a guy that's
had untold influence on so manypeople uh regarding investing
retirement, including yourself,because uh he's the guy that
(00:33):
drug me back in this business uhgoing back about 30 years, and I
love it, and I love the factthat we're still pals and we
used to be partners, and nowhe's writing, he's recording,
he's he's ubiquitous in thisbusiness.
What a pleasure to welcome PaulMerriman to Talking Real Money.
Paul, you know it's always greatto get you on the show.
SPEAKER_02 (00:55):
You know, I am very, very, very happy to be here.
I gotta tell you that uh thetrip we've been on uh together
as we've done our own thing, Ijust I just think has been
marvelous.
And uh when they get my diary,they'll know the rest of the
story after I pass on.
SPEAKER_03 (01:14):
I I got my lawyers ready for the editing on that
one.
So we'll see how it works out uhat many levels.
So let's let's let's dive into acouple of things that have been
topical here lately.
The Standard Poor's uh folkshave decided to change their
rules a bit.
I think they're gonna allow thisnew IPO uh SpaceX and maybe some
of the anthropic and some ofthese other humongous ones,
(01:37):
because I think SpaceX, once theIPO is is uh done, is gonna be
like the seventh largest companyuh in the index.
So they're gonna move it intothe index earlier, the changing
the rules a little bit to allowthat.
But you and I have beenproponents of index funds or
index-like funds for decades.
(01:58):
Does that change your opinion ofthem all?
And what's the good news, thebad news, and the ugly news
about index funds that peopleneed to know about?
SPEAKER_02 (02:06):
Well, uh uh looking backwards, we know how we could
have made a lot more money onthe S P 500.
Now, we probably uh could say weknow ways that we could have
made less, but the fact isthey've been changing the rules
for decades.
Microsoft, a lot of people don'tknow this.
While they came public in 1986,they were not allowed on the SP
(02:31):
500 until 1994.
And by the way, it'sfascinating.
The company they replaced off ofthe SP 500, uh American
Touristur.
So what would the value of theSP 500 be today if they had
(02:52):
allowed Microsoft early on to bepart of that index?
It it it theoretically couldcould be huge.
And and uh and even Nvidia, Ilove the NVIDIA story, believe
it or not, it replaced Enron in2001.
So so uh yes, it will change thefuture of the S ⁇ P 500.
(03:18):
And uh I suspect that means moreexcitement on the upside and
more fear on the downside,because the the more aggressive
we make this portfolio, the morevolatility we're likely to see.
SPEAKER_03 (03:32):
Yeah, which is something that uh we'll talk
about that in a couple minuteshere, because I think people
have forgotten about the toughtimes in stocks, the big the big
downturns of the 2008s, the1974s, et cetera.
But still, this uh this change,and you make a very good point
around the flexibility of theSP.
I think people oftentimes thinkthe SP 500 is some sort of
(03:54):
golden rule.
There's no there's no humanaspect to it, and of course
there is, but that doesn'tchange your overall opinion that
the still the best way for mostpeople to invest would be using
index funds, correct?
SPEAKER_02 (04:08):
Well, absolutely, Tom, and and the list is long,
and I would just tell you thatthe bottom line is trust.
And I have in all my 60 yearsaround this industry seen any
product that is more trusted asan investment than the S P 500.
(04:29):
And and and the reality is everyexpert that at least that I
know, and you're among them,would say the key is to be
invested so you can stay thecourse, and there's no
investment that's ever beenbuilt, I think, to support that
emotion than the S P 500.
Yeah, I think you're right.
(04:49):
And indexing.
And indexing.
SPEAKER_03 (04:51):
Indexing in general.
So let's just turn that dialjust a little bit to um to the
folks at Avantis and DimensionalFunds, for example.
How do you label these arefactor-based, these are not pure
indexes, right?
They're there's some selectionprocess that is rules-based.
But how do you label them versusregular indexing?
SPEAKER_02 (05:16):
Well, the government actually has labeled them
non-traditional index funds,interestingly enough, and and
and that would certainly be truebecause if you compare what
Avantis and DFA are doing tobuild their non-traditional
index funds versus what JackBogle did to create the S ⁇ P
(05:42):
500.
Because remember, the S P 500 isabout as simple an investment as
you could come up with.
Now, he could have also he couldhave also picked the SP 100.
He didn't have to go for five,but for whatever reason, he went
for the 500.
And what do we know?
(06:02):
It is based on one thing,basically, well, two things.
One, the committee has to letyou into the into the portfolio.
That's number one.
But secondly, it's only abouthow big your company is.
And so you just you just mmentioned the idea that a
company that has absolutely noearnings, which would not have
(06:24):
been allowed before, but has noearnings is going to likely hold
a very large piece of theday-to-day value of that SP 500.
So what we see with the DFAs andthe Avantises of the world,
people who will look at index itand say, that's perfect.
(06:47):
But you know what we don't wantto do?
We don't want to tell anybodywhat we're doing because we
don't want to be fighting withthe public and the institutions
getting in and out of thepositions we want to be in and
out of.
And beyond that, there's waymore to investing than just the
size of a company.
There is the the the the qualityof its earnings.
(07:10):
There there is the the valueorientation, growth versus
value.
All of these things have been inessence discovered since 1976
when Bogle came out.
So from my viewpoint, I like theidea that somebody is updating
(07:31):
the system, if you will, tomanage the money for people and
doing it always, I love thisabout those folks, always in
what is the best interest of theinvestor in the funds.
You can't say that about thetraditional index funds because
they aren't always built in thebest interest of the investor.
SPEAKER_03 (07:54):
Aaron Powell Yeah, you make some really good points
there.
By the way, for those of you uhwho don't recognize that voice,
you should.
It's Paul Merriman who's joiningus here on Talking Real Money,
and we really appreciate it.
Um okay, so but let's dive intothis this this pool of you know
non-traditional indexing, if youwill, uh just a little deeper.
Um that what they're uh are arethey I think that it still begs
(08:19):
for a simple explanation formost people because this comes
up an awful lot.
They hear it say, you know,index fund is fine, et cetera.
Oh, but you guys, you you youuse and you recommend Avantis
funds and dimensional funds.
How do how do we tell folks,what do you tell folks about why
they should use that approachrather than just purely buying
(08:43):
the market?
SPEAKER_02 (08:45):
Well, I I I I think the the number one reason is
because they have looked at allof the steps in the process.
Uh and it is a complex processas as as we noted, because let
me give you an example.
Microsoft, well, Nvidia Imentioned, uh I think I
(09:08):
mentioned the fact that when itcame on the index, uh it came on
the SP 500 to replace Enron.
Enron had just gone from$90 ashare to 25 cents a share, at
which point the SP 500 took themoff the the the out of the
(09:31):
portfolio and replaced it withNvidia.
That was a lucky exchange there.
But the bottom line is that theway they rebalance or
reconstitute the index is insome cases once a year,
quarterly, whatever the indexmight that you're looking at
might be.
(09:52):
But the bottom line is that withthe DFAs and the Avontas, they
don't have to sit there and waitfor for the the business to go
down to almost nothing to getout.
When they see a reason to getout based on their disciplines,
they get out regardless of whattime of the year it is.
(10:14):
And on the upside, when it'stime to get out of a company on
the upside, because maybe theybought a small company that's a
value company and now all of asudden it's a mid-cap growth
company for whatever whateverhappened to cause that to be the
reality, they still don'timmediately sell as long as the
(10:34):
momentum of that stock is up.
And that's not the way it workswith the major traditional
indexes.
It's it's much more hands-offwith the with the traditional,
more hands-on with thenon-traditional.
And I believe from everythingI've seen about the past, that
(10:59):
that advantage is going to be atleast a half a percent a year in
in essence, whatever asset classwe want to look at.
SPEAKER_03 (11:10):
Wow, that's uh really well put.
Uh, you and and here's the thingabout the past uh dimensional
issues every year.
Some people get excited when thenew if you remember the new
phone book would come out,right?
To see if they're in the phone.
That's a bad joke.
Uh, but you you get excitedabout a book called The Matrix,
which Dimensional puts out everyyear, which just came out, which
(11:30):
looks back at in a way that onlyDimensional could do it.
I wonder how many numbers thereare in that book.
Uh, but they look at basicallyall the asset classes, they look
at all the stuff going back nowalmost uh is it a hundred years
or pretty close to it?
But what are some of your bigtake?
Is it a hundred what are some ofyour big takeaways from the
brand new hot off-the-pressmatrix from Dimensional?
SPEAKER_02 (11:53):
I I can't even tell you, Tom, when I received my
copy, I could not wait to get itopen and just dig into those
numbers.
See, I think there's a fork inthe road that that advisors and
individual investors uh have totake.
They may they may not thinkabout it, but they're gonna do
(12:14):
it one way or another, and thatis you're either gonna base the
the your investments and thefuture of those investments
based on some feeling you haveabout the future, because you
can't know, you can't know onething about the future, but we
can know so much about the past,and I am absolutely committed to
(12:38):
the idea that the future willlook just like the past, with
one exception, with oneimportant exception.
I can look, and and and in theMatrix book, they make it so
simple to see this.
How many years was the market up10 to 15 percent or 15 to 20, or
(12:58):
down 10%, or 20%, or whatever?
And you can see just with aquick view of what kinds of
returns have been achieved.
I believe that the future willlook like that.
The thing that I can't know iswhat the sequence of returns is
going to be, which then at leasttells me and the people who want
(13:22):
to follow the work that thestuff we teach, that if there's
been a 1929 to 1938, itshouldn't shock us when the same
thing basically happened from2000 to 2009 because we have
seen it before.
We have seen the bubbles, wehave seen the collapses, and my
(13:44):
belief is if you're gonna havepeace of mind around investing,
you have to know what that whatthat trip's going to be like,
and looking at every year'sreturn, going back a hundred
years, gives you a sense ofinvesting that I don't think in
terms of trust or confidence,whatever it is, you can't do
(14:06):
that with making up a storyabout the future, but you can do
that if you look back at whatreally happened.
SPEAKER_03 (14:14):
You trust a hundred years of data?
Is that enough for you?
Is that or are you gonna you'regonna have to wait till two
hundred years to really believeit?
SPEAKER_02 (14:20):
You know, somebody just asked, actually just asked
that question.
You go back to 1970 withinternationals.
Well, can you go back a hundredyears with internationals like
you can the U.S.?
Unfortunately not.
And I will tell you that truth,that truth about the past did
not come out of Wall Street.
It came out of the University ofChicago and what we what we call
(14:45):
the academic uh community.
And again, there again, I havemore trust in what I learn from
the academic community than whatI learn from Wall Street.
SPEAKER_03 (14:57):
Aaron Ross Powell Yeah, and and and one of the
things that comes out of Matrixand one of the, I mean,
Dimensional really started thiscrusade, if you will, back in
1981 when they got in thebusiness of actual uh creation
of mutual funds to give youaccess to stocks that most
people really didn't haveaccess, and that is small
companies that are value have avalue orientation that are
(15:21):
beaten down, unloved, whateverfor whatever reason are are are
smaller than than than what thethe people that add up all the
value think they are worth, theaccountants.
So you have been a proponent ofthis asset class.
Somebody just wrote me and saidthey're trying to figure out
their asset allocation, and theysaid Paul Merriman believes in
having 50% of his money in smallcap.
(15:43):
I went and looked.
AVGE, for example, the Vanta'sGlobal Equity Fund has somewhere
between 12 and 15.
Do you really advocate half ofyour money being in small cap
stocks?
SPEAKER_02 (15:54):
Well, it isn't about having half of the money in
small cap as so much as it ishalf the money in small and half
the money in large, half themoney in U.S., half the money
international, half the moneybasically in value, and a little
less than half the money ingrowth.
And then being 82 years old,half the money in bonds and half
(16:16):
the money in stocks.
So I'm not even thinking of itas uh how much I have in that
asset class.
Uh I am thinking of it as atotal portfolio, just the same,
Tom.
When I think about the S P 500,the smallest company I just
noticed was Zion's Bank.
(16:37):
Well, okay, I own Zion's Bank.
At the other end, I own NVIDIAthrough the S P 500.
So what I get in the S P 500 arethe big and the small within the
very large companies.
On the other hand, all of theevidence points that those value
(16:58):
companies and small companieshistorically not only are they
more risky, but they haveproduced a better return over
time.
And so I do that, but I alsoremember at age 82, I am not
investing for an 82-year-old guyand and a slightly younger wife.
(17:21):
I'm investing for my my programat Western Washington University
that'll get a bunch of moneyafter I die.
That my children will get abunch of money after I die.
I have not put you on the list.
SPEAKER_03 (17:37):
Okay, all right.
I break even there.
I guess I'm okay with that.
SPEAKER_02 (17:41):
Okay.
But but the but the fact is I'mnot just investing for us, I'm
investing for the people whoshould have part of their
portfolio in small.
SPEAKER_03 (17:52):
Yeah, that's a really, really good point.
One thing that I think isoverlooked today, but we've had
we had these downturns thatwe've had in stocks, 2020, the
spring of 2020, it was sharp,but it was short.
The downturn in 2022, you know,it wasn't horrible.
But you go back to 2008, forexample, and I can remember
(18:15):
because you and I were workingtogether, people calling late at
night, and people just it it waspanic.
It really was.
People were very scared.
These are people living off oftheir money, and they're seeing
it go down every day, and it wasgoing down a lot in the fall of
2008.
And and you and I used to talkabout this that uh that I trust
(18:36):
the future more than you do insome ways due to our
backgrounds.
But what should people if you'reputting together a portfolio
today?
I see great overconfidence.
I just met with somebody thisweek, again, similar age to you,
you living off the money, thatis 87% of their money in stocks.
Uh, because the stock marketonly goes up.
Um, folks, it doesn't alwaysjust go up.
(18:58):
And and you're old enough, Paul,to remember 74, which was
another difficult time withstocks.
So, what do you tell people whenthey're trying to figure out
their asset allocation and howmuch risk they should take about
these stock markets that willthey they will hurt you from
time to time?
SPEAKER_02 (19:18):
Well, I think we had to find out, and this is where I
think almost everybody shouldspend a little time in the
trenches with a professionalperson who understands how these
things all work and how you canput them together in your best
interest.
But what your best interest isis going to be driven by some
things that you as an investorbelieve.
(19:40):
And you and I, when we used todo workshops, I don't know if
you still include this in yourworkshop, but there is this
difference between the personwhose primary goal is to beat
the market.
Then there's another personwhose primary goal is to get the
highest return within whatevertheir risk tolerance is.
And then another typical uhstrategy is to get the find the
(20:03):
lowest risk way to get the rateof return you need.
So we got need and we got wantand we got want with a uh with a
hope of doing something reallyspectacular.
And until we understand thatabout an investor, it's really
difficult to put together theright portfolio.
I've got lots of friends who areolder than I who are all in
(20:26):
equity, and they think I'm crazyfor having half of my money in
bonds.
But it's who I am.
I'm always afraid of the of thecatastrophic.
They aren't.
And and and by the way, theyhave way more money than I do.
Be it's it's why I ought to knowthem.
Yeah.
But I have felt safe, and Istill feel safe that I'm taking
(20:50):
an appropriate amount of riskand uh living within the money
that my wife and I get everyyear from our investments.
So even there, we have astrategy to create a peace of
mind that we don't have to sitaround and worry.
SPEAKER_03 (21:07):
Yeah, I think that uh a piece what did you used to
say, peace of mind, piece of theaction with peace of mind or
something.
I think that was pretty liquid.
That's working.
Before you we let you go, I seeyou're working hell on the new
is I don't think it's new, buthow you can help young people
more, as you know, we've alwaysadvocated 529s and custodial
Roth IRAs, and now you can takethe 529 and turn it into a Roth,
(21:32):
you know, make those Rothcontributions for a young
person.
I think it's wonderful.
But um, tell us briefly here.
I I think I read something aboutyour$365 a year that could lead
to a million dollars for a youngperson in the long haul.
Give us give us a little updateon that.
Well, let me let me I alwayshave a new idea.
SPEAKER_02 (21:49):
I know the newest idea, okay is that we want to
help uh a young person, anewborn child, let's say, we
want to help them have money fortheir Retirement.
Let's just say that's what wewant to do.
And we want it to be a reallynice retirement on top of
whatever they've saved.
If you would put away that firstyear three hundred and
(22:11):
sixty-five dollars, and youshould have a little dash uh for
70 years from whatever that dateis, because that three hundred
and sixty-five dollars is goingto fund a year of retirement in
seventy years.
And that three hundred andsixty-five, if you can get a
twelve percent compound rate ofreturn, and the SP 500 average
(22:36):
return over 40 years is over11%.
So we know that it's notimpossible, particularly if you
happen to have half in small capvalue and half in SP 500, but in
the next year you put awayanother$365.
It is earmarked for 70 yearsfrom that year.
(22:58):
So you actually you make 30different, I mean, I this is a
little work, but not much.
30 different accounts all goingto be transitioned into Roth
IRAs as soon as possible.
And each one of them is built tostand alone as the income that a
(23:19):
person might have 70 years fromnow.
And okay, so you don't get 12,you get 10, you still got almost
a half a million dollars.
So so it it is is something thatwe can do with very little and a
very smart long-termperspective.
SPEAKER_03 (23:38):
Yeah, which is really great, and that's that's
a great what message to youknow, sort of help help young
people too, and hopefully alongthe way they're learning about
how markets work and all thatkind of stuff, too, and not
being making bad mistakes aroundpicking stocks and all the rest
of it.
Listen, it's always a it'salways a pleasure to uh to have
you on talking real money.
It's always a pleasure to talkto you anyway.
People can learn more by goingto paulmerriman.com.
(23:59):
That's the best place for allthe goodies, write the
newsletter, etc., correct?
SPEAKER_02 (24:03):
You got it, um, and thank you again for this
long-term partnership that we'vehad.
Uh, and I still consider you theboss.
SPEAKER_03 (24:11):
So thanks.
Thank you for that.
And I I still consider you agreat friend, which has been so
important to my life, as youknow, these last 30 years.
So it's been it's beenwonderful.
Paul Merriman, thank you forbeing on uh Talking Real Money.
SPEAKER_02 (24:25):
Thank you, Tom.
SPEAKER_03 (24:27):
And for all of those you uh you're out there, you
want to ask a question, you wantto help them some more help, go
to talkingrealmoney.com.
You can ask a question there,you can meet with an advisor,
all those things that we do totry to help you be a better
investor, more prepared forwhatever's coming, and to get
things right as you move intoyour further down into your life
(24:48):
and putting money in its place,that's what I like to say.
Because you know we're gonna behere every day talking real
money.
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And the lawyers get richer.
We're gonna do a really great financial future.
Tom and Don are talking realmoney.
SPEAKER_03 (00:12):
Welcome to a very, very, very special edition of
Talking Real Money.
Hi, I'm Tom Cock.
Don McDonald's got the day off,and that's great news because I
get to bring in one of myfavorite guests and a guy that's
had untold influence on so manypeople uh regarding investing
retirement, including yourself,because uh he's the guy that
(00:33):
drug me back in this business uhgoing back about 30 years, and I
love it, and I love the factthat we're still pals and we
used to be partners, and nowhe's writing, he's recording,
he's he's ubiquitous in thisbusiness.
What a pleasure to welcome PaulMerriman to Talking Real Money.
Paul, you know it's always greatto get you on the show.
SPEAKER_02 (00:55):
You know, I am very, very, very happy to be here.
I gotta tell you that uh thetrip we've been on uh together
as we've done our own thing, Ijust I just think has been
marvelous.
And uh when they get my diary,they'll know the rest of the
story after I pass on.
SPEAKER_03 (01:14):
I I got my lawyers ready for the editing on that
one.
So we'll see how it works out uhat many levels.
So let's let's let's dive into acouple of things that have been
topical here lately.
The Standard Poor's uh folkshave decided to change their
rules a bit.
I think they're gonna allow thisnew IPO uh SpaceX and maybe some
of the anthropic and some ofthese other humongous ones,
(01:37):
because I think SpaceX, once theIPO is is uh done, is gonna be
like the seventh largest companyuh in the index.
So they're gonna move it intothe index earlier, the changing
the rules a little bit to allowthat.
But you and I have beenproponents of index funds or
index-like funds for decades.
(01:58):
Does that change your opinion ofthem all?
And what's the good news, thebad news, and the ugly news
about index funds that peopleneed to know about?
SPEAKER_02 (02:06):
Well, uh uh looking backwards, we know how we could
have made a lot more money onthe S P 500.
Now, we probably uh could say weknow ways that we could have
made less, but the fact isthey've been changing the rules
for decades.
Microsoft, a lot of people don'tknow this.
While they came public in 1986,they were not allowed on the SP
(02:31):
500 until 1994.
And by the way, it'sfascinating.
The company they replaced off ofthe SP 500, uh American
Touristur.
So what would the value of theSP 500 be today if they had
(02:52):
allowed Microsoft early on to bepart of that index?
It it it theoretically couldcould be huge.
And and uh and even Nvidia, Ilove the NVIDIA story, believe
it or not, it replaced Enron in2001.
So so uh yes, it will change thefuture of the S ⁇ P 500.
(03:18):
And uh I suspect that means moreexcitement on the upside and
more fear on the downside,because the the more aggressive
we make this portfolio, the morevolatility we're likely to see.
SPEAKER_03 (03:32):
Yeah, which is something that uh we'll talk
about that in a couple minuteshere, because I think people
have forgotten about the toughtimes in stocks, the big the big
downturns of the 2008s, the1974s, et cetera.
But still, this uh this change,and you make a very good point
around the flexibility of theSP.
I think people oftentimes thinkthe SP 500 is some sort of
(03:54):
golden rule.
There's no there's no humanaspect to it, and of course
there is, but that doesn'tchange your overall opinion that
the still the best way for mostpeople to invest would be using
index funds, correct?
SPEAKER_02 (04:08):
Well, absolutely, Tom, and and the list is long,
and I would just tell you thatthe bottom line is trust.
And I have in all my 60 yearsaround this industry seen any
product that is more trusted asan investment than the S P 500.
(04:29):
And and and the reality is everyexpert that at least that I
know, and you're among them,would say the key is to be
invested so you can stay thecourse, and there's no
investment that's ever beenbuilt, I think, to support that
emotion than the S P 500.
Yeah, I think you're right.
(04:49):
And indexing.
And indexing.
SPEAKER_03 (04:51):
Indexing in general.
So let's just turn that dialjust a little bit to um to the
folks at Avantis and DimensionalFunds, for example.
How do you label these arefactor-based, these are not pure
indexes, right?
They're there's some selectionprocess that is rules-based.
But how do you label them versusregular indexing?
SPEAKER_02 (05:16):
Well, the government actually has labeled them
non-traditional index funds,interestingly enough, and and
and that would certainly be truebecause if you compare what
Avantis and DFA are doing tobuild their non-traditional
index funds versus what JackBogle did to create the S ⁇ P
(05:42):
500.
Because remember, the S P 500 isabout as simple an investment as
you could come up with.
Now, he could have also he couldhave also picked the SP 100.
He didn't have to go for five,but for whatever reason, he went
for the 500.
And what do we know?
(06:02):
It is based on one thing,basically, well, two things.
One, the committee has to letyou into the into the portfolio.
That's number one.
But secondly, it's only abouthow big your company is.
And so you just you just mmentioned the idea that a
company that has absolutely noearnings, which would not have
(06:24):
been allowed before, but has noearnings is going to likely hold
a very large piece of theday-to-day value of that SP 500.
So what we see with the DFAs andthe Avantises of the world,
people who will look at index itand say, that's perfect.
(06:47):
But you know what we don't wantto do?
We don't want to tell anybodywhat we're doing because we
don't want to be fighting withthe public and the institutions
getting in and out of thepositions we want to be in and
out of.
And beyond that, there's waymore to investing than just the
size of a company.
There is the the the the qualityof its earnings.
(07:10):
There there is the the valueorientation, growth versus
value.
All of these things have been inessence discovered since 1976
when Bogle came out.
So from my viewpoint, I like theidea that somebody is updating
(07:31):
the system, if you will, tomanage the money for people and
doing it always, I love thisabout those folks, always in
what is the best interest of theinvestor in the funds.
You can't say that about thetraditional index funds because
they aren't always built in thebest interest of the investor.
SPEAKER_03 (07:54):
Aaron Powell Yeah, you make some really good points
there.
By the way, for those of you uhwho don't recognize that voice,
you should.
It's Paul Merriman who's joiningus here on Talking Real Money,
and we really appreciate it.
Um okay, so but let's dive intothis this this pool of you know
non-traditional indexing, if youwill, uh just a little deeper.
Um that what they're uh are arethey I think that it still begs
(08:19):
for a simple explanation formost people because this comes
up an awful lot.
They hear it say, you know,index fund is fine, et cetera.
Oh, but you guys, you you youuse and you recommend Avantis
funds and dimensional funds.
How do how do we tell folks,what do you tell folks about why
they should use that approachrather than just purely buying
(08:43):
the market?
SPEAKER_02 (08:45):
Well, I I I I think the the number one reason is
because they have looked at allof the steps in the process.
Uh and it is a complex processas as as we noted, because let
me give you an example.
Microsoft, well, Nvidia Imentioned, uh I think I
(09:08):
mentioned the fact that when itcame on the index, uh it came on
the SP 500 to replace Enron.
Enron had just gone from$90 ashare to 25 cents a share, at
which point the SP 500 took themoff the the the out of the
(09:31):
portfolio and replaced it withNvidia.
That was a lucky exchange there.
But the bottom line is that theway they rebalance or
reconstitute the index is insome cases once a year,
quarterly, whatever the indexmight that you're looking at
might be.
(09:52):
But the bottom line is that withthe DFAs and the Avontas, they
don't have to sit there and waitfor for the the business to go
down to almost nothing to getout.
When they see a reason to getout based on their disciplines,
they get out regardless of whattime of the year it is.
(10:14):
And on the upside, when it'stime to get out of a company on
the upside, because maybe theybought a small company that's a
value company and now all of asudden it's a mid-cap growth
company for whatever whateverhappened to cause that to be the
reality, they still don'timmediately sell as long as the
(10:34):
momentum of that stock is up.
And that's not the way it workswith the major traditional
indexes.
It's it's much more hands-offwith the with the traditional,
more hands-on with thenon-traditional.
And I believe from everythingI've seen about the past, that
(10:59):
that advantage is going to be atleast a half a percent a year in
in essence, whatever asset classwe want to look at.
SPEAKER_03 (11:10):
Wow, that's uh really well put.
Uh, you and and here's the thingabout the past uh dimensional
issues every year.
Some people get excited when thenew if you remember the new
phone book would come out,right?
To see if they're in the phone.
That's a bad joke.
Uh, but you you get excitedabout a book called The Matrix,
which Dimensional puts out everyyear, which just came out, which
(11:30):
looks back at in a way that onlyDimensional could do it.
I wonder how many numbers thereare in that book.
Uh, but they look at basicallyall the asset classes, they look
at all the stuff going back nowalmost uh is it a hundred years
or pretty close to it?
But what are some of your bigtake?
Is it a hundred what are some ofyour big takeaways from the
brand new hot off-the-pressmatrix from Dimensional?
SPEAKER_02 (11:53):
I I can't even tell you, Tom, when I received my
copy, I could not wait to get itopen and just dig into those
numbers.
See, I think there's a fork inthe road that that advisors and
individual investors uh have totake.
They may they may not thinkabout it, but they're gonna do
(12:14):
it one way or another, and thatis you're either gonna base the
the your investments and thefuture of those investments
based on some feeling you haveabout the future, because you
can't know, you can't know onething about the future, but we
can know so much about the past,and I am absolutely committed to
(12:38):
the idea that the future willlook just like the past, with
one exception, with oneimportant exception.
I can look, and and and in theMatrix book, they make it so
simple to see this.
How many years was the market up10 to 15 percent or 15 to 20, or
(12:58):
down 10%, or 20%, or whatever?
And you can see just with aquick view of what kinds of
returns have been achieved.
I believe that the future willlook like that.
The thing that I can't know iswhat the sequence of returns is
going to be, which then at leasttells me and the people who want
(13:22):
to follow the work that thestuff we teach, that if there's
been a 1929 to 1938, itshouldn't shock us when the same
thing basically happened from2000 to 2009 because we have
seen it before.
We have seen the bubbles, wehave seen the collapses, and my
(13:44):
belief is if you're gonna havepeace of mind around investing,
you have to know what that whatthat trip's going to be like,
and looking at every year'sreturn, going back a hundred
years, gives you a sense ofinvesting that I don't think in
terms of trust or confidence,whatever it is, you can't do
(14:06):
that with making up a storyabout the future, but you can do
that if you look back at whatreally happened.
SPEAKER_03 (14:14):
You trust a hundred years of data?
Is that enough for you?
Is that or are you gonna you'regonna have to wait till two
hundred years to really believeit?
SPEAKER_02 (14:20):
You know, somebody just asked, actually just asked
that question.
You go back to 1970 withinternationals.
Well, can you go back a hundredyears with internationals like
you can the U.S.?
Unfortunately not.
And I will tell you that truth,that truth about the past did
not come out of Wall Street.
It came out of the University ofChicago and what we what we call
(14:45):
the academic uh community.
And again, there again, I havemore trust in what I learn from
the academic community than whatI learn from Wall Street.
SPEAKER_03 (14:57):
Aaron Ross Powell Yeah, and and and one of the
things that comes out of Matrixand one of the, I mean,
Dimensional really started thiscrusade, if you will, back in
1981 when they got in thebusiness of actual uh creation
of mutual funds to give youaccess to stocks that most
people really didn't haveaccess, and that is small
companies that are value have avalue orientation that are
(15:21):
beaten down, unloved, whateverfor whatever reason are are are
smaller than than than what thethe people that add up all the
value think they are worth, theaccountants.
So you have been a proponent ofthis asset class.
Somebody just wrote me and saidthey're trying to figure out
their asset allocation, and theysaid Paul Merriman believes in
having 50% of his money in smallcap.
(15:43):
I went and looked.
AVGE, for example, the Vanta'sGlobal Equity Fund has somewhere
between 12 and 15.
Do you really advocate half ofyour money being in small cap
stocks?
SPEAKER_02 (15:54):
Well, it isn't about having half of the money in
small cap as so much as it ishalf the money in small and half
the money in large, half themoney in U.S., half the money
international, half the moneybasically in value, and a little
less than half the money ingrowth.
And then being 82 years old,half the money in bonds and half
(16:16):
the money in stocks.
So I'm not even thinking of itas uh how much I have in that
asset class.
Uh I am thinking of it as atotal portfolio, just the same,
Tom.
When I think about the S P 500,the smallest company I just
noticed was Zion's Bank.
(16:37):
Well, okay, I own Zion's Bank.
At the other end, I own NVIDIAthrough the S P 500.
So what I get in the S P 500 arethe big and the small within the
very large companies.
On the other hand, all of theevidence points that those value
(16:58):
companies and small companieshistorically not only are they
more risky, but they haveproduced a better return over
time.
And so I do that, but I alsoremember at age 82, I am not
investing for an 82-year-old guyand and a slightly younger wife.
(17:21):
I'm investing for my my programat Western Washington University
that'll get a bunch of moneyafter I die.
That my children will get abunch of money after I die.
I have not put you on the list.
SPEAKER_03 (17:37):
Okay, all right.
I break even there.
I guess I'm okay with that.
SPEAKER_02 (17:41):
Okay.
But but the but the fact is I'mnot just investing for us, I'm
investing for the people whoshould have part of their
portfolio in small.
SPEAKER_03 (17:52):
Yeah, that's a really, really good point.
One thing that I think isoverlooked today, but we've had
we had these downturns thatwe've had in stocks, 2020, the
spring of 2020, it was sharp,but it was short.
The downturn in 2022, you know,it wasn't horrible.
But you go back to 2008, forexample, and I can remember
(18:15):
because you and I were workingtogether, people calling late at
night, and people just it it waspanic.
It really was.
People were very scared.
These are people living off oftheir money, and they're seeing
it go down every day, and it wasgoing down a lot in the fall of
2008.
And and you and I used to talkabout this that uh that I trust
(18:36):
the future more than you do insome ways due to our
backgrounds.
But what should people if you'reputting together a portfolio
today?
I see great overconfidence.
I just met with somebody thisweek, again, similar age to you,
you living off the money, thatis 87% of their money in stocks.
Uh, because the stock marketonly goes up.
Um, folks, it doesn't alwaysjust go up.
(18:58):
And and you're old enough, Paul,to remember 74, which was
another difficult time withstocks.
So, what do you tell people whenthey're trying to figure out
their asset allocation and howmuch risk they should take about
these stock markets that willthey they will hurt you from
time to time?
SPEAKER_02 (19:18):
Well, I think we had to find out, and this is where I
think almost everybody shouldspend a little time in the
trenches with a professionalperson who understands how these
things all work and how you canput them together in your best
interest.
But what your best interest isis going to be driven by some
things that you as an investorbelieve.
(19:40):
And you and I, when we used todo workshops, I don't know if
you still include this in yourworkshop, but there is this
difference between the personwhose primary goal is to beat
the market.
Then there's another personwhose primary goal is to get the
highest return within whatevertheir risk tolerance is.
And then another typical uhstrategy is to get the find the
(20:03):
lowest risk way to get the rateof return you need.
So we got need and we got wantand we got want with a uh with a
hope of doing something reallyspectacular.
And until we understand thatabout an investor, it's really
difficult to put together theright portfolio.
I've got lots of friends who areolder than I who are all in
(20:26):
equity, and they think I'm crazyfor having half of my money in
bonds.
But it's who I am.
I'm always afraid of the of thecatastrophic.
They aren't.
And and and by the way, theyhave way more money than I do.
Be it's it's why I ought to knowthem.
Yeah.
But I have felt safe, and Istill feel safe that I'm taking
(20:50):
an appropriate amount of riskand uh living within the money
that my wife and I get everyyear from our investments.
So even there, we have astrategy to create a peace of
mind that we don't have to sitaround and worry.
SPEAKER_03 (21:07):
Yeah, I think that uh a piece what did you used to
say, peace of mind, piece of theaction with peace of mind or
something.
I think that was pretty liquid.
That's working.
Before you we let you go, I seeyou're working hell on the new
is I don't think it's new, buthow you can help young people
more, as you know, we've alwaysadvocated 529s and custodial
Roth IRAs, and now you can takethe 529 and turn it into a Roth,
(21:32):
you know, make those Rothcontributions for a young
person.
I think it's wonderful.
But um, tell us briefly here.
I I think I read something aboutyour$365 a year that could lead
to a million dollars for a youngperson in the long haul.
Give us give us a little updateon that.
Well, let me let me I alwayshave a new idea.
SPEAKER_02 (21:49):
I know the newest idea, okay is that we want to
help uh a young person, anewborn child, let's say, we
want to help them have money fortheir Retirement.
Let's just say that's what wewant to do.
And we want it to be a reallynice retirement on top of
whatever they've saved.
If you would put away that firstyear three hundred and
(22:11):
sixty-five dollars, and youshould have a little dash uh for
70 years from whatever that dateis, because that three hundred
and sixty-five dollars is goingto fund a year of retirement in
seventy years.
And that three hundred andsixty-five, if you can get a
twelve percent compound rate ofreturn, and the SP 500 average
(22:36):
return over 40 years is over11%.
So we know that it's notimpossible, particularly if you
happen to have half in small capvalue and half in SP 500, but in
the next year you put awayanother$365.
It is earmarked for 70 yearsfrom that year.
(22:58):
So you actually you make 30different, I mean, I this is a
little work, but not much.
30 different accounts all goingto be transitioned into Roth
IRAs as soon as possible.
And each one of them is built tostand alone as the income that a
(23:19):
person might have 70 years fromnow.
And okay, so you don't get 12,you get 10, you still got almost
a half a million dollars.
So so it it is is something thatwe can do with very little and a
very smart long-termperspective.
SPEAKER_03 (23:38):
Yeah, which is really great, and that's that's
a great what message to youknow, sort of help help young
people too, and hopefully alongthe way they're learning about
how markets work and all thatkind of stuff, too, and not
being making bad mistakes aroundpicking stocks and all the rest
of it.
Listen, it's always a it'salways a pleasure to uh to have
you on talking real money.
It's always a pleasure to talkto you anyway.
People can learn more by goingto paulmerriman.com.
(23:59):
That's the best place for allthe goodies, write the
newsletter, etc., correct?
SPEAKER_02 (24:03):
You got it, um, and thank you again for this
long-term partnership that we'vehad.
Uh, and I still consider you theboss.
SPEAKER_03 (24:11):
So thanks.
Thank you for that.
And I I still consider you agreat friend, which has been so
important to my life, as youknow, these last 30 years.
So it's been it's beenwonderful.
Paul Merriman, thank you forbeing on uh Talking Real Money.
SPEAKER_02 (24:25):
Thank you, Tom.
SPEAKER_03 (24:27):
And for all of those you uh you're out there, you
want to ask a question, you wantto help them some more help, go
to talkingrealmoney.com.
You can ask a question there,you can meet with an advisor,
all those things that we do totry to help you be a better
investor, more prepared forwhatever's coming, and to get
things right as you move intoyour further down into your life
(24:48):
and putting money in its place,that's what I like to say.
Because you know we're gonna behere every day talking real
money.
SPEAKER_01 (24:55):
The opinions and views expressed on this podcast
were current on the daterecorded.
Opinions, estimates, forecasts,and statements of financial
market trends that are based oncurrent market conditions
constitute our judgment and aresubject to change without
notice, including anyforward-looking estimates or
statements which are based oncertain expectations and
assumptions.
Although information andopinions given have been
obtained from or based onsources believed to be reliable,
no warranty or representation ismade as to their correctness,
(25:16):
completeness, or accuracy.
Information presented on thepodcast does not personalize
investment advice from OppelloWealth.
The views and strategiesdescribed may not be suitable
for everyone.
This podcast does not identifyall the risks, direct or
indirect, or otherconsiderations which might be
material to you when enteringany financial transaction.
We hope you realize that theinformation provided on Talking
(25:38):
Real Money is for informational,educational, and hopefully
enjoyable purposes only.
The podcast is not trying to getyou to buy or sell any financial
products or securities.
Instead, the program is providedas a public service by Apello
Wealth, a fee-only registeredinvestment advisor.
See Appello Wealth's ADB Part 2Aon our website for information
regarding Appellos fees andservices.
Apello Capital, LLC, DBA ApelloWealth, is an investment
(25:59):
advisory firm registered withthe Securities and Exchange
Commission.
The firm only transacts businessin the states where it is
properly registered or excludedor exempt from registration
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Registration with the SDC or anystate securities authority does
not imply a certain level ofskill or training.
Apello does not provide tax orlegal advice, and nothing either
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Thanks for listening, and pleasevisit talkingrealmoney.com for
(26:21):
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