John Nyaradi:
Hi, everyone, I’m John Nyaradi, publisher of Wall Street Sector Selector, a financial media site specializing in exchange traded funds and global financial and economic analysis. Today, I’m pleased to welcome our special guest, Paul Merriman. Paul, welcome to Wall Street Sector Selector.
Paul Merriman:
Thanks John, it’s great to be with you.
John Nyaradi:
Paul is one of the true giants of the investing and financial management business. He is founder of Merriman Incorporated, an investment advisory firm based in Seattle, Washington, that manages approximately $1.6 billion for thousands of families across the country.
Paul is a widely respected expert on mutual fund investing. He’s editor of the FundAdvice.com website and his podcast, “Sound Investing,” was named the best podcast in 2008 by Money Magazine. He’s author of a highly acclaimed book, “Live it Up Without Outliving Your Money: Getting the Most from Your Investments in Retirement,” by John Wiley and Sons and is widely quoted in major financial magazines and media.
Paul, let’s start out with your company’s motto, “Invest wisely and live fully.” I like that a lot. Can you give us a sense of what you mean by that, “Invest wisely and live fully?” How do you do that for people?
Paul Merriman:
My view of investing wisely is simply to do the smart, savvy things with our money to maximize our return without getting greedy. And I think one of the wisest things we can do is to invest within our risk limits. Investing wisely also means minimizing expenses and taxes. We believe in massive diversification. We believe that the more stocks you have in the portfolio, the better you will do, not the more average you will be.
The live fully aspect means that not only do you have enough money but that you are also able to enjoy it. Too many people have way more money than they need but find it difficult to enjoy it.
I just spoke with a client who’s down in Mexico. He’s been a client for over 20 years, and I know he’s got more money than he needs. He wants to buy a second house in Mexico. He must have talked to me five times about whether the purchase makes sense. And every time I spoke with him, his burning question was, “Now Paul, are you sure we have enough?” We convinced him, yes, he does have enough…and he’s making the offer, closing the deal, and that is what we think living fully is. Not just having enough, but feeling secure so you can spend it and enjoy it.
John Nyaradi:
That’s got to be a rewarding work especially in today’s environment after the post crash environment we’re in and the pain everybody went through.
Paul Merriman:
John, would you mind if I comment on what you just said?
John Nyaradi:
Please, go ahead.
Paul Merriman:
A lot of people complain about the emotional and financial pain of the 2007-2009 bear market. I think the problem was compounded by going through two big bear markets in 10 years, each of them about the same as the 73-74 decline. That much pain without an extended bull market in between is hard for people to digest and build confidence in the market. It has been one hell of a 10 year period.
John Nyaradi:
Yes, it really has been…you’re a unique animal, Paul, I think, because people tend to be either buy-and-hold people or market timing people, but you do both in your portfolios. I’ve read about what you call “the ultimate buy and hold strategy,” could you give us a little insight into that?
Paul Merriman:
Well, “the ultimate buy and hold strategy” is the title of one of my favorite articles to help people build a better buy and hold portfolio. The term “ultimate,” sounds like a big promise, but it simply means it’s the best I’ve been able to find.
As you know there are thousands of ways to build a portfolio using different asset classes. What we’re looking for are asset classes that have an absolute record of success, and a record of high units of return per unit of risk.
Now, obviously, I can’t know, nor do I try to predict, the future. But what I do have is 80 plus years of evidence that these asset classes have produced great returns. Sure, they don’t go up all the time, but not a one of them has ever failed. Not one has declared bankruptcy. Not one has ever experienced a permanent bear market.
John Nyaradi:
Right.
Paul Merriman:
All of these asset classes qualify as being survivors on a long term basis. So once we determine which asset classes qualify to be in the portfolio we have to decide how much we should invest in each one. I have tried to make that easy by giving people exact percentages in each asset class and funds that offer those asset classes.
John Nyaradi:
I think you said at one point that the choice of those assets is responsible for 95% of your return. How do you fine tune these allocations?
Paul Merriman:
For over 15 years we have recommended a very simple equity allocation. Half U.S., half international, half large, half small, half value and half growth. The equity part also includes REITS and emerging market asset classes.
Then it’s simply a matter of finding the right balance of fixed income to go along with exposure to the equity asset classes. I find most investors are unwilling to accept the risk of an all equity portfolio so we need to find the right balance of fixed income that produces the needed return within the risk limits of each investor. I am always looking for the combination that will produce peace of mind with a reasonable piece of the action.
John Nyaradi:
Sure.
Paul Merriman:
I’ve tried to help investors by building a tabIe of many combinations of fixed income and equity asset classes. The table is in, “Fine Tuning Your Asset Allocation,” at Fundadvice.com. And John, all my work comes with a guarantee. I guarantee if you follow my advice, you will lose money. That’s not the guarantee investors want to hear, but it’s the reality of any risk oriented investment.
John Nyaradi:
Sure.
Paul Merriman:
We should all know what level of risk we’re taking. And I don’t mean some generic risk that is indefinable. I’m looking for a number. The table covers over 40 years of data. It gives an investor a real time relationship between risk and return. If you’re willing to lose 5% to 50% of your money the table shows the likely return you will get over the long run.
John Nyaradi:
Could you talk a little about the market timing in your portfolios?
Paul Merriman:
To start with, I want to make sure that your audience understands that I’m not advocating timing over buy and hold. I know buy-and-hold is a lot easier emotionally. And it’s also a lot more tax efficient.
But there are a lot of people who will simply not accept the idea of holding equities without an exit strategy. Some advisors will tell investors, “You’ve got 50% of your money in bonds so why should you worry about stocks going down? They always come back.” And the investor’s response is, “Hey listen. This is my money, buddy, and I don’t want to sit and watch it decline without some way of protecting it.”
It’s really the catastrophic decline that most people are worried about, and so we use timing with almost the same view philosophically as we use for buy-and-hold. We market time funds in dozens of asset classes. We market time equity funds as well as bond funds. Each account is built to the same risk tolerance test as the buy and hold investors.
Most of the timing we do uses traditional trend following strategies. We never predict where the market is going, only follow the trends. A lot of timing critics think market timers are trying to predict the future. We believe there are trends and they stay in place one way or the other for long periods of time. Those trends can make you decent money on the upside but the most important work is protecting against some terrible losses on the downside.
John Nyaradi:
I hear the word “risk” over and over in our conversation. In your list of 18 mistakes people make, I thought it was really interesting that mistake number 3 is taking too much risk, and mistake number 4 is taking too little risk. That sounds like a conflict.
Paul Merriman:
Well, too much risk is normally a challenge for people who are over confident and think they have more control over their investments than they do. Also, people who take too much risk are not aware how much risk they need to take. If you found out that you could achieve all your financial goals with half as much risk as you’re taking right now, I’d have to challenge you to why are you taking all of that risk?
John Nyaradi:
Sure.
Paul Merriman:
For some the higher risk comes because the investor thinks their friend appears to doing better than they are. By the way, I’ve yet to find an honest amateur investor when it comes to reporting returns. And so we have to be so careful what our benchmark is and how we measure our success.
But then people can also be scared to death of almost any risk. I’ve met people with 10% of their portfolio in stocks, and when they’re down during a bad bear market, they jump to the conclusion that it’s happening to their whole portfolio.
I know it doesn’t sound reasonable to feel that way, but that’s the way a lot of peoples’ minds work. They hate losing money. The fascinating part is if we can just get those people to commit 20 or 30% of their money to stocks, they can literally double their return in retirement. Just a little bit of additional risk. They don’t have to go 50% or 60%. Just to get up to 20%, or 30% can make a huge, huge difference.
John Nyaradi:
Paul, we’re taking in July, 2011, and looking ahead over the next few months, what do you see is the biggest dangers for us as retail investors and the biggest opportunities?
Paul Merriman:
Well, it looks to me like the last 45 years. I have been a chicken for as long as I’ve been in the investment business. I call myself an aggressive chicken, but a chicken nonetheless.
But the fact is there’s always list A, the good news and there’s always list B, the bad news. Both of those lists exist at all times. I have always tended to look at the bad list and to be cautious, so I’ve probably been more defensive as an investor than I needed to be. But what I really worry about is not about me because I have found 100% peace of mind with my investments. I’ve saved enough that I can quit working anytime and have plenty of income in retirement. So that worry is behind me.
John Nyaradi:
Sure.
Paul Merriman:
But here’s what I worry about. I worry that people who have learned the right things, the smart things, the wise things about investing will somehow get spooked by the market and either jump to some ultra safe situation, and as you know, typically at the wrong time, they’ll be enticed into putting their money into something like a guaranteed equity index annuity or some other terrible security that will cost a fortune in fees and be difficult or expensive to liquidate.
John Nyaradi:
Well, folks, it has been a real honor today to have been talking with one of the real giants of the industry, Paul Merriman, founder of Merriman Incorporated in Seattle, Washington and editor of FundAdvice.com. To learn more about Paul and his work, just follow the link at the end of this interview, and that will take you to his website, Merriman.com.
Paul, thanks so much for joining us and we’re all looking forward to talking with you again soon.
Paul Merriman:
Thank you, John, very, very much.
Visit Merriman Incorporated.
(This interview edited for length and clarity)
The CNN Washington Bureau’s morning speed read of the top stories making news from around the country and the world. Click on the headlines for more.
WASHINGTON/POLITICAL
For the latest political news: http://www.CNNPolitics.com
CNN: Obama cancels fundraisers amid stalled debt talks
President Barack Obama has canceled two fundraising appearances Monday, a campaign official said, as weekend talks to resolve the nation's debt-ceiling crisis hit a new stalemate. Asian stocks also fell Monday, the first reaction in global markets after congressional leaders and the Obama administration failed to agree on a deal to raise the U.S. debt limit.
CNNMoney: No deal on debt ceiling
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House Democratic leader Nancy Pelosi is asking for an ethics investigation of Rep. David Wu of Oregon, who has resisted calls to resign following a news report alleging he made sexual advances toward the daughter of a longtime campaign donor. The allegations against Wu, a seven-term Democratic congressman, were published Friday by The Oregonian newspaper in Portland.
CNN: Bachmann links Pawlenty to Obama
After repeated attacks on her record from Republican presidential rival and fellow Minnesotan Tim Pawlenty, Michele Bachmann hit back Sunday, vehemently contrasting her record in Congress with his as governor.
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2012 Republican presidential candidates are traveling this week, mostly in early presidential-contest states. Here's a look at where they're headed.
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CNN: First New York couples wed under new same-sex marriage law
A city official married the first couple in New York City to wed under the state's new law allowing same-sex marriage Sunday. Phyllis Siegal, 76, and Connie Kopelov, 84, were married in a chapel at the city clerk's office as a crowd of onlookers cheered. Hundreds of same-sex couples heard the news Friday that they made the cut in the marriage lottery that New York state instituted for Sunday, the day that the state's Marriage Equality Act took effect.
CNN: Hotel maid goes public with allegations against ex-IMF chief
The maid who accused former International Monetary Fund Chief Dominique Strauss-Kahn of sexually assaulting her in a New York City hotel room has ended her months-long silence and gone public. Nafissatou Diallo, whose credibility has been questioned by Strauss-Kahn's lawyers and prosecutors, spoke to Newsweek magazine for an article posted on its website Sunday. She also conducted an interview with Robin Roberts of ABC News, which is set to air Monday on "Good Morning America."
CNN: NFL optimistic lockout will end as players meet over deal
An end to the NFL lockout may be imminent as a committee of league players is scheduled to meet Monday in Washington to consider an offer by club owners. A larger group of player representatives is on standby in case the 13-man executive committee votes on the deal, the NFL said Sunday on its website. If accepted, the deal would end the the lockout that started in March.
Wall Street Journal: Summer Cuts Launch Lunch Scramble
When schools in California and elsewhere closed for the summer to save money, educators expressed worries about the academic consequences. Now, many warn of low-income families losing the government-paid, and generally healthy, meals served there. Such low-cost alternatives as pasta and cereal served at home can contribute to childhood obesity, say advocates.
Arizona Republic: Obama administration debating care of U.S. national forests
The Obama administration is crafting a new plan to manage the nation's 155 national forests, including six in Arizona, for the next 15 to 20 years. …The U.S. Forest Service says the new plan, due by year's end, is urgently needed to replace the so-called forest-planning rule written in 1982 during the Reagan administration. That rule, which emphasized using the forests for logging, does not reflect the latest science on climate change and how best to protect wildlife and water, the Forest Service says.
INTERNATIONAL
For the latest international news: http://edition.cnn.com
CNN: Man accused of Norway terror attacks set to appear in court
A man who authorities say confessed to Norway's terror attacks is expected to make his first court appearance Monday, when, according to his attorney, he wants to "explain himself." The court appearance comes as authorities continue to search for possible victims of Friday's bombing in downtown Olso and a mass shooting at a political youth retreat on Utoya island. At least 93 people were killed and 96 were wounded in the attacks.
CNN: Europe's resurgent far right focuses on immigration, multiculturalism
The far right in Europe has enjoyed a renaissance over the past 30 years, driven by resentment of the growing powers of the European Union and by rejection of the "multiculturalism" that has accompanied rapid immigration from the developing world.
Washington Post: U.S. trucking funds reach Taliban, military-led investigation concludes
A year-long military-led investigation has concluded that U.S. taxpayer money has been indirectly funneled to the Taliban under a $2.16 billion transportation contract that the United States has funded in part to promote Afghan businesses. The unreleased investigation provides seemingly definitive evidence that corruption puts U.S. transportation money into enemy hands, a finding consistent with previous inquiries carried out by Congress, other federal agencies and the military.
Bloomberg: Greece Credit Rating Cut Three Levels by Moody’s
Greece’s sovereign credit rating was cut three steps by Moody’s Investors Service, which said the European Union’s financing package for the debt-laden nation implies “substantial economic losses” for private creditors. Greece’s long-term foreign currency debt was downgraded to Ca from Caa1, the ratings company said in a statement in London today.
CNN: Egypt's revolution at 6 months: 'We can't go back'
Six months after the improbable revolt that toppled one of the world's longest-serving rulers, protesters are once again camping in Cairo's Tahrir Square to demand speedy change. …The result is a revolution that remains incomplete, with the coalition that formed in Tahrir Square splintering over different visions of a post-Mubarak future. But few dispute that the uprising launched on January 25 has changed an ancient nation in a fundamental way.
BUSINESS
For the latest business news: http://www.CNNMoney.com
CNNMoney: Stocks: Big week ahead
Strap in for an eventful week in the markets. The debt ceiling clock is ticking and politics is strangling policy in Washington. At stake: The creditworthiness of the United States. Meanwhile, the end of the week will bring an important report on the economy: The first official reading on growth in the second quarter - a period when the recovery lost steam.
Houston Chronicle: Big Oil expects big profits, drivers’ anger over gas costs
Big Oil is expected to report another round of big profits this week after sharply higher crude prices during the second quarter helped boost their bottom lines, but few Americans are likely to celebrate the achievement. …Analysts said companies likely received the biggest boost in the April-June period from higher oil prices, which averaged $102.34 a barrel, up from $78.05 a barrel in the second quarter of 2010.
Detroit Free Press: Earnings are key as auto talks open
In the days ahead, the Detroit Three will report their second-quarter financial results and kick off national labor talks with the UAW. …The Detroit Three are likely to report combined profits of more than $4 billion, before one-time charges, despite the challenging economic backdrop of the last three months.
In Case You Missed It…
A Civil War battle commemoration provides a small Virginia town with an economic boost. CNN's Brianna Keilar reports.
http://www.cnn.com/video/#/video/us/2011/07/24/keilar.reenactment.economy.cnn
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