Paul Merriman is a financial advisor who founded an investment advisory firm in 1983 and has since retired. He became a legend in the stock market and is known as a Wall Street guru.
Even in his retirement, Merriman hosts podcasts and publishes various free educational articles on his website PaulMerriman.com. He’s also regularly featured on the stock market news and analysis website MarketWatch.
The strategies Merriman follows are based on sound investing principles with a focus on outpacing market averages while maintaining peace of mind through less risk.
Although Merriman has developed multiple portfolios, his most famous by far is known as the Ultimate Buy-and-Hold Portfolio. Learn about this hands-off portfolio model and how you can build it for yourself.
What Is the Paul Merriman Ultimate Buy-and-Hold Portfolio?
Merriman’s most famous portfolio falls into a class known among the investing community as lazy portfolios. These portfolios are designed for the buy-and-hold investor who’s not interested in extensive rebalancing efforts or constantly looking for new opportunities in the market.
Instead, the Ultimate Buy-and-Hold Portfolio follows a strategy of balancing risk and reward. It invests in assets known to outperform the overall market and keeps diversification as a central focus for the ultimate protection against risk.
The ultimate buy-and-hold strategy was designed to give investors the ability to beat market averages without having to devote significant amounts of time to stock picking and risk management.
Portfolio Asset Allocation
Any balanced portfolio will include heavy diversification among multiple asset classes. The Ultimate Buy-and-Hold Portfolio is based on investments in a wide range of exchange-traded funds (ETFs), providing access to various corners of the market that vary in levels of risk.
Merriman updates his ETF recommendations for the portfolio annually. For 2021, his recommendations are as follows:
- 6% in Avantis U.S. Equity ETF (AVUS). Merriman allocates 6% of the portfolio to the AVUS ETF, which includes a wide range of U.S. stocks across various sectors and market capitalizations while overweighting stocks with certain value characteristics in an attempt to beat overall market returns.
- 6% in Invesco S&P 500 Pure Value ETF (RPV). The investment thesis the portfolio is centered around is heavily focused on value stocks. Thus, 6% of the portfolio is invested in the RPV fund, which includes investments in S&P 500-listed stocks that display strong value characteristics.
- 6% in iShares Core S&P Small-Cap ETF (IJR). The recommended allocation allots 6% of the portfolio’s assets in the IJR fund, which provides access to S&P 500-listed small-cap stocks. These stocks are important because quality small-cap stocks are known to outperform large-cap stocks that have already achieved market saturation.
- 6% in Avantis U.S. Small-Cap Value ETF (AVUV). The AVUV fund combines the outperformance potential of small caps with the high expectations of value stocks, all in one ETF. The portfolio allocation suggests that 6% of your investment dollars should be invested in this fund.
- 6% in Vanguard Real Estate Index Fund ETF (VNQ). The recommended portfolio invests 6% in VNQ, an index fund of U.S. investable real estate. Because real estate has a historically low correlation with the stock market, these types of investments help to offset risk and volatility in the portfolio as a whole.
- 6% in Avantis International Equity ETF (AVDE). Another 6% of the portfolio is invested in AVDE, a fund that contains international equities. The fund’s inclusion highlights the fact that Paul Merriman believes any well-diversified portfolio should include exposure to international securities.
- 6% in iShares MSCI EAFE Value ETF (EFV). The EFV fund is another international fund, specifically focused on investments in value stocks in Europe, Asia, and the Far East. 6% of the portfolio’s assets are allocated to the EFV.
- 6% in Schwab Fundamental International Small Company Index ETF (FNDC). Merriman recommends allocating 6% of the portfolio’s assets to the FNDC fund, which includes smaller international companies. This is yet another fund whose inclusion shows how much Merriman values small-cap opportunities over large-cap plays.
- 6% in Avantis International Small-Cap Value ETF (AVDV). Representing 6% of the allocation in the portfolio, the AVDV fund is yet another focused on investing in quality small-cap and value opportunities outside the United States.
- 6% in Avantis Emerging Markets Equity ETF (AVEM). Among the international investments in the portfolio, emerging markets are important. These developing economies have the potential to generate significant growth, which is why the AVEM fund invested in emerging markets, takes up 6% of the portfolio.
- 12% in Vanguard Short-Term Treasury Index Fund ETF (VGSH). The portfolio is focused as much on the reduction of risk as it is on the production of profitability. The VGSH fund, which is invested in short-term Treasury debt securities, represents 12% of the portfolio.
- 20% in Vanguard Intermediate-Term Treasury Index Fund (VGIT) The largest allocation, 20%, goes to VGIT, a diversified fund made up of intermediate-term Treasury debt securities. These securities help to balance risk by maintaining relatively steady value and providing income.
- 8% in Schwab U.S. TIPS ETF (SCHP). Finally, 8% of the portfolio is invested in the SCHP, a fund made up of Treasury inflation-protected securities, also known as TIPS. These securities aren’t the biggest earners on the market, but they do provide stability like no other asset and protection against inflation.
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The Investment Thesis Behind the Portfolio
Merriman took a historical perspective when developing the portfolio. He invested in segments of the market with a history of either outperforming the market or maintaining value when bear markets strike.
Merriman named it the “Ultimate Buy-and-Hold Portfolio” because he believes in it as a passive investment that consistently outpaces returns from the S&P 500 without any additional risk.
The portfolio follows a 60/40 allocation strategy — 60% in stocks and 40% in bonds — a balance that Merriman believes to be the perfect center between risk and reward.
Importantly, Merriman acknowledges that everyone’s risk tolerance is different and that investors should consider adjusting the allocation based on their financial goals and appetite for risk.
Here’s how the stock and bond allocation theses differ from one another:
Bond Allocation Thesis
The strategy suggests that the bond portion of the investment portfolio should be very conservative, made up primarily of short- and intermediate-term Treasury debt securities.
Perhaps just as importantly, you won’t find a corporate bond in the portfolio at all, because Merriman firmly believes Treasury securities are a much safer bet.
Although this may be the case, there are a couple of major drawbacks to the structure of the fixed-income holdings within this portfolio:
- Less Focus on Long-Term Bonds. Long-term bonds do come with inflation risks, but they also pay a higher return to offset that risk. This portfolio lacks much exposure to long-term bonds in favor of shorter-term bonds, meaning the portfolio’s bond returns are minimal.
- Treasury vs. Corporate Bonds. Sure, Treasury securities are safer investments than corporate securities, but again, safer bets often come with minimal returns, as is the case when you compare Treasury bonds to corporate bonds.
As you can see, the bond allocation thesis this strategy follows is simple to understand: Invest the safe-haven side of your portfolio in the safest possible assets for the best possible outcome.
Stock Allocation Thesis
The stock allocation thesis in this portfolio is a bit more complex.
The first part of the stock allocation is focused on investments in large-cap U.S. stocks listed on the S&P 500 index. These stocks are some of the largest, most well-rounded, and most stable publicly traded companies on the market today.
Many of these are blue-chip stocks that pay dividends, making them stable income investments, but they won’t provide the significant growth the portfolio aims to achieve by themselves.
Next up, the portfolio is diversified with exposure to the real estate industry through investments in real estate investment trusts (REITs).
Investing in real estate balances your portfolio with assets that have a low correlation to the stock market, offering further stability and a counterweight against some of the portfolio’s riskier holdings.
Next up, a healthy dose of small-cap stocks is mixed in. Historically, small-cap stocks listed on major exchanges have outperformed their large-cap peers.
This is largely because small-cap stocks listed on major exchanges have great concepts and products but haven’t yet tapped into a mass audience, whereas large-cap companies have generally already saturated their markets.
Next, regardless of the size of the companies, the portfolio places special emphasis on value.
In his research done when developing the strategy, Merriman found that value stocks consistently outperformed growth stocks over the long run. Therefore, by investing in a mix of small-cap and large-cap value stocks, the investor has the potential to outperform the market as a whole.
Finally, you’ll find multiple funds in the portfolio centered around international investments. That’s because Merriman believes that a well-diversified portfolio must include international stocks, so a large percentage of the portfolio is allocated to international value stocks of all market caps, as well as stocks from emerging markets.
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Pros and Cons of the Ultimate Buy-and-Hold Portfolio
Merriman’s Ultimate Buy-and Hold Portfolio has become popular among the retail investing community for good reason: It works. Investors who take part in it consistently outpace the S&P 500 and other benchmarks when comparing their stock portfolios to them.
Nonetheless, as with any portfolio, this one comes with its own set of pros and cons.
Ultimate Buy-and-Hold Portfolio Pros
Some of the biggest benefits offered through the portfolio include:
1. Exposure to High-Return Opportunities
Much of the portfolio is built up of small-cap stocks, emerging markets stocks, and value stocks, all of which are known for generating compelling returns for investors.
The portfolio offers significant diversification, both within its stock holdings and from an overall asset allocation perspective. This diversification allows for exposure to high-return assets while providing stability through assets known for low levels of volatility.
Many investment portfolios require you to keep a keen eye on the market, economic conditions, and the assets within the portfolio, adjusting your holdings weekly or monthly. That’s a cumbersome process.
Buy-and-hold investing strategies don’t require nearly as much work, making them more appealing to investors who lack the knowledge or desire to commit several hours per week to researching and rebalancing their portfolios.
Ultimate Buy-and-Hold Portfolio Cons
Although there are plenty of reasons to be excited about the Ultimate Buy-and-Hold Portfolio, there are also some downsides to consider. Some of the most important include:
1. Ultra-Conservative View of Safe Havens
The safe-haven side of the portfolio leaves something to be desired. It’s incredibly conservative, possibly to a fault. To make the most of the portfolio, investors may need to adjust these holdings to produce better returns.
2. International Risk
While the risk in the portfolio is offset by the ultra-conservative safe-haven side of it, there’s also considerable risk involved in investing in international stocks. In some cases, this increased risk could result in excess losses.
3. Emphasis on Small-Caps
While small-cap stocks have historically outperformed the market as a whole, few experts suggest such heavy exposure to them. Small-cap stocks in particular are more susceptible to the whims of the economy and the stock market.
When making small-cap investments, you must take a long-term view that allows you to absorb the occasional painful declines that will take place among these stocks.
How to Customize the Portfolio to Fit Your Needs
There’s no such thing as a one-size-fits-all investment portfolio, although this one is just about as close as it gets. In fact, it could be a good fit for anyone if you’re willing to customize it a bit to fit your goals and risk tolerance.
Adjusting Asset Allocation to Your Risk Tolerance
First and foremost, the 60/40 allocation in the portfolio is the perfect balance for some, but for many, it’s way too conservative — and for others, it might be somewhat risky.
Rather than sticking to a specific asset allocation outlined by someone else, it’s best to think of your specific appetite for risk, keeping in mind that stocks are riskier than fixed-income investments.
If you’re unsure where your allocation center of balance is, it’s best to use your age as a guide.
For example, if you’re 21 years old, you might invest 21% of your portfolio in bonds and the remaining 79% in stocks. By this method, when you’re 55, you’ll have 55% of your investments in bonds and 45% in stocks.
Using this strategy, your exposure to risk reduces as you age, which is especially important for investors working to build a financially stable retirement.
This allocation strategy takes into account the fact that younger investors have more time to bounce back from declines than investors with a shorter time horizon. It makes annual adjustments to match up to risk tolerance as it changes.
International vs. Domestic
About 50% of the stock investments made in the Ultimate Buy-and-Hold Portfolio are made in international and emerging markets stocks.
While this strategy has worked for many investors in the past, some are uncomfortable with international stocks for a few reasons:
- National Pride. First and foremost, when you invest in U.S. companies, you’re investing in the businesses that contribute to the growth of the U.S. economy. As such, many investors want their investing dollars to stay here at home, rather than supporting companies abroad.
- Investing in What You Know. Investing in international companies means you’ll likely be investing in companies you’ve never heard of that make products you’ll never use. Many investors find investing in what they know to be a far more suitable option.
- Risk. Finally, investing in international stocks comes with additional risk, especially when investing in emerging markets. These investments will be susceptible to economic changes within their own regions, as well as supply and demand surrounding their products and the audiences they serve. Ultimately, keeping your investments domestic can yield a lower-risk investment portfolio.
As a result, many investors decide to tweak their holdings, sticking to the basic concepts of the Ultimate Buy-and-Hold strategy, except without the international assets.
To make this change in your version of the portfolio, simply forgo investing in the international ETFs listed in the portfolio’s allocation, and allocate the excess percentage of your portfolio evenly across the remaining stock ETFs that represent domestic investments.
Adjust Fixed-Income Holdings to Your Risk Tolerance
If you’re an ultra risk-averse investor, the fixed-income side of the Ultimate Buy-and-Hold Portfolio is built for you. It’s very conservative, taking the two key risk factors associated with these types of investments into account:
- Time. The portfolio is focused on heavy allocation to short-term to intermediate-term income assets. These assets shield the investor from inflation risk, but also limit the investor’s earnings potential in the long run.
- Issuer. The portfolio only invests in debt securities issued by the United States Treasury, which are backed by the full faith and security of the U.S. government. While that kind of security in your investment is great, Treasury debt securities pay lower returns than corporate bonds.
If you’re OK with taking a moderate amount of risk on the safe-haven side of your portfolio, you’ll want to adjust your holdings quite a bit. Follow these tips:
Follow the 80/20 Rule
Most investors have a long time horizon and would benefit from the higher returns offered on long-term debt securities.
As such, instead of focusing the majority of your bond holdings on short-term offerings, 80% of these holdings should be invested in bonds with longer maturity dates.
It’s also important to keep your time horizon in mind when doing this. Long-term holdings should span the majority of your investment time horizon, if not the entire thing.
Don’t Be Afraid of Corporate Bonds
While there’s slightly more risk involved in investing in corporate bonds issued by companies with solid credit than there is investing in Treasury bonds, the difference is microscopic.
That is, until you look at the returns, which can be significantly larger on corporate bonds than on Treasury debt securities.
As a result, it’s best to consider adding some corporate bonds into the mix if you want to earn some additional returns from your fixed-income securities.
Rebalance Your Portfolio Quarterly
Buy-and-hold investment portfolios like this one are designed to produce maximum benefit to the investor with minimum work. As a result, many investors are under the impression that the act of rebalancing their portfolios is unnecessary when following this type of investment model.
That’s not the case.
In order to stick with the Ultimate Buy-and-Hold strategy, you’ll need to make sure that your allocation stays somewhat consistent, which is impossible without the occasional rebalance because the values of various assets within your portfolio will rise and fall.
While it’s unnecessary to rebalance your portfolio on a monthly basis when following this strategy, it is best to rebalance quarterly.
To do so, simply make sure your allocation percentages align with those outlined in the strategy. If you find that one asset has grown to take up too high a percentage of your portfolio, sell a portion of your holdings to bring it back in line, and use the funds you’ve freed up to bolster your holdings elsewhere in your portfolio.
Who Should Take Advantage of the Ultimate Buy-and-Hold Portfolio?
As mentioned above, this particular portfolio could be a fit for just about any investor, especially when you customize it to your needs using the tips above. Without customization, the portfolio is best for:
- Risk-Averse Investors. This portfolio is designed to expose investors to minimal risk with heavy allocations to some of the safest (but lowest-yielding) investments on the market today. As a result, if you’re a risk-averse investor, it’s likely a great fit.
- Value Investors. The portfolio puts value above other investment strategies like income and growth. If you’re interested in exposure to value opportunities in the stock market, the strategy is a great fit.
- Investors Looking for Heavily Diversified Portfolios. There are plenty of portfolios that will suggest you should invest in four or five different ETFs. However, this portfolio suggests investing in 13 different funds, making it one of the most diversified prebuilt portfolios available today.
All told, the Paul Merriman Ultimate Buy-and-Hold Portfolio has stood the test of time, with plenty of investors using it as their path to wealth. It offers a seamless balance between risk and reward while focusing on sectors that are known to outperform flagship stock market benchmarks.
Nonetheless, if you’re going to follow the portfolio and the strategy it’s built around, it’s best to take the time to customize it to your unique needs and risk tolerance.
This may require some research and an initial time commitment, but doing so is well worth your while because it will result in a portfolio that matches your needs and allows you to take a lazier approach to investing moving forward.