Courtesy of John Nyaradi.
An exclusive interview with investing legend Paul Merriman, author of “Financial Fitness Forever,” and presenter of a new nationwide television program, “Financial Fitness After 50,” from Public Broadcasting System (PBS)
John Nyaradi: Hi there. I’m John Nyaradi, publisher of Wall Street Sector Selector, a financial media site specializing in exchange traded funds and economic analysis. Today, I’m really pleased to welcome our special guest, Paul Merriman. Paul, welcome to Wall Street Sector Selector.
Paul Merriman: John, it’s great to be back. Thank you.
John Nyaradi: Paul Merriman is the founder of Merriman Inc, an investment advisory firm based in Seattle. They manage approximately $1.6B in investments for thousands of family across the country. Paul is a widely respected expert on mutual fund investing and editor of an educational website, FundAdvice.com. He’s also the host of Sound Investing, a podcast that was named in 2008 as the best money podcast by Money Magazine. He’s a great author, previously wrote “Live it Up Without Outliving Your Money: Getting the Most from Your Investments and Retirement, ” widely quoted in all the business press.
Now, he has a new book out from McGraw-Hill that is paired with a public television presentation. Paul, your book is called “Financial Fitness Forever: 5 Steps to More Money, Less Risk, And More Peace of Mind.” Let’s start with kind of a big picture view of the book, what’s your goal here and what do you want people to get out of it?
Paul Merriman: Well, John, it goes right to those five steps. This book is dedicated to helping investors make more money with less risk and at the end of the day, I think the whole idea is finding more peace of mind. The focus of the book is not just to give people some good general information, but this is two books in one. There’s the general information followed by a large number of specific recommendations regarding mutual funds, asset allocation, portfolios and the like.
John Nyaradi: Item number one seems to be, “Where will you place your trust?” Let’s talk about that.
Paul Merriman: I think having trust in whatever you’re doing with your money is no different than trusting your spouse, your kids, your boss. You’re going to have greater peace of mind if you really do trust that source of advice or that relationship. And where do I trust and what do I trust? Well, what are the choices? Wall Street, Main Street, or what I call University Street, the academic community. And I know not everybody trusts the academic community as I do, but my bottom line is of all the groups or sources of information about investing, the academic community is by far the most trustworthy.
John Nyaradi: How about beating the market? You pose a question in your book, “Will you accept the market or try to beat it?” What’s your view on that?
Paul Merriman: I really think people are better served to try to simply be the market rather than beat the market because most people in the end who try to beat the market get beaten. I am just amazed at those numbers that Dalbar puts out every year that indicates that investors are getting less than half of the return of the market in their equity holdings and most of that comes because they want to beat the market. So I want to show investors how to be the market most efficiently.
And one more thought on that, John, my experience is and I’m 68 years old and I’ve been around this business for over 45 years, my experience is that if people get market-like returns, they will meet their financial needs.
John Nyaradi: Let’s talk about risk. How much are you going to take?
Paul Merriman: I think the biggest culprit in the process of investing for most people is taking too much risk. If we are very careful about establishing the right amount of risk for the return that we either need or we want, we are more likely to in fact achieve what we’re after. I have said for years that if you follow my advice, I guarantee you’ll lose money and people don’t like to hear that. But the reality is, however you build your portfolio, there is an exposure to loss along the way. We all hope it will be temporary, of course, but we never know. The more clear we are about that exposure to risk and then build a portfolio to address that risk, the more likely we are to succeed in the long run.
John Nyaradi: There are so many financial products around today that it really gets confusing. When you look at a portfolio, what assets should a retail investor consider for his portfolio?
Paul Merriman: Well a fork in the road that we come to there, John, is are we going to believe the Wall Street sales force or are we going to believe the academics, University Street, if you will? And University Street would conclude that the asset classes that have a real history of getting the premium for the risk you take would be stocks over bonds, value as well as growth, small cap as well as large and certainly international securities. All of these asset classes are available to build the right balance of risk and likely return. And if there’s any magic in this business, a properly diversified portfolio exposes investors to a risk level that is about the same as the S&P 500 (NYSEARCA:SPY) (NYSEARCA:IVV) but historically has produced about 2.5% better per year in return. And if you can get 2.5% more on the equity part of your portfolio, you don’t have to take as much risk in the stock market. You can have more in bonds if you’re a conservative investor by doing the best that you possibly can in the equity part of your portfolio or if you’re an all equity kind of investor.
John Nyaradi: Let’s talk about emotions a little bit.
Paul Merriman: Well that’s certainly one of the five important steps and you avoid those psychological mistakes by automating the process of investing. And some of those steps towards automation are pretty simple, dollar cost averaging and rebalancing, using index funds, all of those are basically automated steps.
And if you take the time to make sure you’ve got the right balance of fixed income and equity, you are more likely to maintain that automated approach because you’ll be within your risk tolerance and that should lead to the return that you need. But you’ve got to get the sales pitch out of your life. You’ve got to get your fears and greed out of your life and just invest in the best and keep the rest out of your portfolio.
John Nyaradi: That’s a good way to say it, invest with the best and keep the rest out. You’re a widely recognized expert in mutual funds, do you have any best mutual funds families you like, worst mutual fund families? How do you look at that whole big world of mutual funds?
Paul Merriman: There are some that I would say are the worst because their expenses are high and their diversification is low and their turnover is high. I mean those are all things working against you as an investor. But in the book, I have recommendations about Vanguard and how to use ETFs because they offer low expenses and broad diversification. On the other hand, for people who are going to turn to a professional for help, I would be an advocate for the Dimensional Funds as the best approach in terms of a family of funds to work with. Because they have more diversification than Vanguard, low expenses, and give you access to asset classes you just can’t get at Vanguard.
Plus, and I think this is going to be a biggie for some people, I’ve looked at the 50 largest 401K plans in America including the Thrift Savings Plan with the US government and made my recommendations as to how to get the best from those 401K plans. And I think those recommendations will make a huge difference in what you’re likely to achieve in the future.
John Nyaradi: You talk about the investor with the best chance to beat Warren Buffett. Who’s that guy?
Paul Merriman: I am quick to say that there is no risk in the past, but if I look at the return of a value portfolio of big, small, US, international, and I look at the return over the last ten years, it’s almost twice the return of what Warren Buffett’s Berkshire Hathaway got and we all think of Warren Buffett as the great, the premiere value investor. So it may be that in the future, you’re going to have a better return with an all value portfolio if you’re trying to compete with Warren Buffett simply using index funds, but get that exposure to small and get that exposure to international along with the large value in the US.
John Nyaradi: Let’s turn now to the PBS program that’s the companion of the book. I looked at that very carefully, it has its own website; you 
have a Financially Fit Kit with books, workbooks, DVDs, CDs. Can you just talk about what you’re doing there with PBS and how people can participate in that?
Paul Merriman: Well, at age 68, I thought my teaching days were mostly behind me, but about a year ago, PBS came to me and asked if I’d be willing to do one of these pledge week shows and that was the motivation for writing “Financial Fitness Forever.” And this show that PBS has named “Financial Fitness After 50” is dedicated to helping people in all the ways that I know, John, to do better whether it’s in their IRA, their 401K or their taxable portfolio.
The workbook has a piece called “101 Investment Decisions Guaranteed To Change Your Financial Future,” and I want you to hear that word “guaranteed.” Now to be fair, I can’t guarantee whether you’ll do better or worse with my advice, but I can guarantee it will turn out differently. But I think in every one of those 101 decision points, my advice will make you at least another thousand dollars for having made that decision and in some cases, I’m thinking about young people now, John, it could literally be millions.
So, this is my life’s work all put together in about three hours of DVDs, five hours of CDs, the workbook, the book. And lastly a new website that is for the contributors only from PBS who in fact pledged to get this Financial Fit Kit where I will personally be there to answer questions that aren’t answered in that kit. So this is my retirement and I suspect that I’ll spend the rest of my life answering questions from these PBS contributors.
John Nyaradi: I always like to wrap these up kind of the open-ended question. You know, the one thing that’s really on your mind right now we’re talking just before Thanksgiving in 2011. What should people watch out for? What’s on your mind right now in light of the book, in light of what’s happening in the world?
Paul Merriman: Well, I think whether we’re talking Occupy Wall Street or building a portfolio, the bear market, the fear of what the political structure is going to do to us, or the banking structures are going to leave us with, people don’t know what to trust. And I think what I’m focused on in my life is trying to give people advice that, in fact, they can have a sense of trust even knowing that the future is really unknown. And trying to help people invest in a way that you don’t have to know what the market is going to do tomorrow, but that you are truly positioned to take advantage of the future.
I am hopeful. I have never trusted the market in my almost 45 years of being around this business. But I do trust that if we invest in capitalism and we do it right, they will find the answers. They always have and I see no reason why they shouldn’t find the answers again. And I’m not going to be the richest guy in the business because I’m so well diversified and have a lot of fixed income in my own personal account, but I think I’m going to achieve my goals and help others achieve their goals.
John Nyaradi: Folks, we’ve been talking with Paul Merriman, the founder of Merriman Inc, a registered investment advisor and the author of this new book, “Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind.” The book has gotten tremendous advance reviews from people like Paul B. Farrell, a well-known Dow Jones Market Watch columnist, Alan Mulally, President and CEO of Ford Motor Company, and Knight Kiplinger, editor-in-chief of Kiplinger Publications.
I’d like to add my humble endorsement and say this is really a great book. It’s a companion project with PBS and a great project that has tremendous value for people that comes from one of the true financial greats of our time. To learn more about Paul and his work, just follow the link at the end of this interview where you can learn about the book and the PBS project.
Paul, it has been wonderful chatting with you today, as always. Thanks for joining us and I know we’re all looking forward to talking with you again soon.
Paul Merriman: Thank you, John.
(recorded interview, edited for length and clarity)
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