Sound Investing

Harry Markowitz called diversification "the only free lunch in finance." In this session, part of Paul's series for Next Gen Personal Finance educators, Paul Merriman explains what that means in practice, and why a well-diversified portfolio can help investors stay the course through good markets and bad. Paul covers the history and math behind diversification, from Don Quixote's "don't put all your eggs in one basket" to Warren Buffett, Charlie Munger, and Sir John Templeton. He explains the three kinds of risk investors face (company, market, and asset class), and shows how the "lost decade" of 2000–2009 hit S&P 500 investors hard while more diversified portfolios kept growing. You'll also hear: How adding small "baby steps" of large cap value, small cap, and REITs added about 1% a year to returns since 1970 Why the two-fund strategy (half S&P 500, half small cap value) may be less risky than it looks What a young investor putting away as little as $1,000 a year could build over a lifetime A simple "ultimate buy and hold" for hands-off investors: a target date fund plus a slice of small cap value Plus, Paul shares a free book from market historian Bill Bernstein. Watch on YouTube: youtu.be/MDqaIojI8TE Free book: If You Can: How Millennials Can Get Rich Slowly Tables and research: paulmerriman.com/data-tables Send your questions to Paul at [email protected] (include "NGPF" in the subject line)

Watch the video here. This is the second of five presentations Paul recorded for Next Generation Personal Finance (NGPF.org), whose free curriculum reaches some 150,000 teachers. The sessions weren't open to the public, but NGPF has allowed Paul to share each one with Sound Investing listeners. The subject is index funds, and Paul starts where the story starts: John Bogle, 1976, and a fund launch that nearly got cancelled before it opened. From there he looks at what the evidence actually says about active management over 20 years, why most investors never hear about the costs that quietly come out of their returns, and what happens to a fund that doesn't perform. He also introduces the non-traditional index funds from Dimensional and Avantis that he believes give young investors their best opportunity, and closes with stories from the 90 minutes he spent in Jack Bogle's office. CHAPTERS 00:00 Introduction 02:44 What is an index fund? 04:38 John Bogle and the first index fund 08:50 Active vs. passive: beat the market or be the market 10:52 The SPIVA report 14:53 Quartiles and the 20-year picture 19:49 How long do mutual funds survive? 22:05 Asset class and style drift 25:14 The tax cost of active management 28:51 Bogle on costs and the hidden drags on return 35:18 Myths about index funds 38:28 Beating the S&P 500 with index funds 42:35 Traditional vs. non-traditional index funds 49:06 Dimensional and Avantis 50:23 The number one reason to use index funds 55:46 Stories from meeting Jack Bogle 59:25 Wrap-up NGPF: ngpf.org

WATCH THE VIDEO Want to build a multi-million-dollar retirement portfolio without gambling on single stocks? This is the first session of the four-part series I recorded for the teachers of Next Gen Personal Finance — and I’m sharing it here with you. In it, I break down the timeless principles, the math and the market history every long-term investor needs to know. WHAT YOU’LL LEARN IN THIS EPISODE • The Math of Compounding [01:43] — how finding an extra 0.5% to 1% in returns — or starting just five years earlier — can add millions to your lifetime wealth. • The Power of Starting Early [09:48] — why your initial investment years build your foundation, and how both bull and bear markets work in favor of young, disciplined savers. • Budgeting Strategy [19:43] — applying the “Pay Yourself First” rule and the 50/30/20 framework to establish sustainable saving habits. • Stocks vs. Bonds [22:44] — understanding why stocks are low-risk for long-term growth, while bonds carry inflation risk over decades. • Market Diversification [30:08] — why 4% of companies generate nearly all stock-market gains, and how owning total-market index funds ensures you don’t miss out on them. • Equity Asset Classes [37:59] — comparing large-cap blend, large-cap value, small-cap blend and small-cap value to reduce volatility and boost returns. • Target-Date Funds [49:38] — why automated, age-tailored allocation helps investors stay the course and avoid emotional mistakes. Tune in to discover how staying the course, keeping expenses low, and letting history guide your strategy can transform your financial future. Join us next week for The #1 Reason to Invest in Index Funds.

Paul opens with news of a new opportunity to reach young investors: a five-part series for Next Generation Personal Finance (NGPF.org), available to some 150,000 teachers who use NGPF's free curriculum. Topics include the math and history of investing, the case for index funds, the inside story on diversification, the $5 million payoff for a financially literate high school graduate, and a teacher Q&A session. Each presentation will be shared with Sound Investing listeners the following week. Then Paul turns to two listener questions that go to the heart of how people actually experience the market. The first asks whether broad diversification really produces the best returns, or whether a more focused portfolio would do better. He walks through the Bessembinder research showing that roughly 4% of companies drove most of the market's long-term return, Fama and French data on small cap value going back almost 100 years, and Vanguard's own real time returns since 1998 comparing $10,000 invested in the S&P 500, mid cap, small cap blend and small cap value asset classes. The second is a letter from an investor who put his first real savings, earned at $7 an hour, into Fidelity Magellan in 1985, lost 30% on Black Monday in October 1987, and pulled everything out. Forty years later he still fears the next crash and asks whether Paul's Ultimate Buy and Hold portfolio could leave him waking up with half his money gone. Paul closes with a story about five 24-year-old engineers he met on Bainbridge Island, and an offer to anyone who can gather a group that would benefit from a conversation about investing. LINKS Fine-Tuning Your Asset Allocation tables NGPF: ngpf.org

WATCH THE VIDEO It was a pleasure to be invited back on System Trader with Jack Lempart. Here is a list of the main topics we covered: CHAPTERS 0:53 • My own biggest mistake 3:15 • Why “the stock market is a casino” is exactly backwards 6:48 • “I don’t have enough money to start” — what $100 a month actually becomes 9:33 • A $20 bet with my 13-year-old grandson 13:04 • How much intelligence does successful investing really require? 15:31 • The Mensa Investment Club: buy low, sell lower 16:24 • Three books for the psychological hurdles 17:38 • “It’s a bad time to invest right now” — the myth that never dies 20:00 • Why a falling market is the best thing that can happen to a young investor 24:21 • Can a star manager do it for you? SPIVA and Bill Miller 30:21 • An ETF is only a wrapper — how do you grade what’s inside it? 33:01 • Traditional vs. non-traditional index funds 35:49 • Home bias: half U.S., half international, and the lost decade 44:04 • Cap-weighted vs. asset-class weighted funds 46:26 • Finding your right level of risk before the market tests you 55:20 • Is the small-cap value premium dead? 62:52 • Financial literacy in high school — and who’s teaching on TikTok 64:21 • Where the biggest premium comes from: size, value, quality and momentum 69:29 • The one thing to do tomorrow morning: control what you can, then automate