Paul Merriman came up with a lazy portfolio and called it the ultimate buy-and-hold portfolio. Is this the ‘ultimate’ portfolio for an investor interested in a long-term, buy-and-hold investment strategy?
In this article, I have comprehensively reviewed the Ultimate Buy-and-Hold Portfolio by Paul Merriman. I provided answers to these questions and even more insights, including its performance over the years, why you should or should not adopt this portfolio, and how to set up your version using ETFs.
So, without wasting time, let’s get to it!
I have picked out the crucial points in this article to create a quick summary. I recommend you skim through this section if you are in a hurry.
- Paul Merriman is a renowned author and financial educator. He created the Ultimate Buy-and-Hold Portfolio.
- Paul believed the S&P 500 can be beaten with minimal risks, so he designed this lazy portfolio to outperform market averages while minimizing risks.
- It follows a long-term buy-and-hold investment strategy that focuses on particular areas of the markets with consistent and outstanding historical performance.
- Paul combined 60% of stocks and 40% of bonds in this portfolio to create a safe balance between risk and reward.
- The portfolio is reviewed annually, with Merriman swapping out the existing funds with better options based on fees, factor exposure, and tracking.
- This portfolio positions investors for excellent growth over time and is thus suitable for risk-averse investors, value investors, and investors who prefer highly diversified portfolios.
- The Paul Merriman Ultimate Buy-and-Hold Portfolio can be modified to suit the risk tolerance levels of different investors.
Introduction to The Paul Merriman Ultimate Buy-and-Hold Portfolio
Let’s start by getting to know Paul Merriman, the portfolio creator. Merriman is an authority on mutual funds, asset allocation, and index investing. He founded the Merriman Financial Education Foundation in 2012 – a medium through which he helped investors access information and tools required to make sound investment moves and decisions. Paul Merriman has written eight books and features regularly on MarketWatch.
The Paul Merriman Ultimate Buy-and-Hold Portfolio reflects the author’s firm investing principles, mostly about outpacing the market averages without putting investors through minimal risks. It is a lazy portfolio requiring minimum inputs from investors regarding rebalancing and scouting for the latest market opportunities. The portfolio is another 60/40 portfolio that allocates 60% to stocks and 40% to bonds, creating a balance between risk and returns. It also focuses on assets that have been proven to perform better than the market while ensuring diversification as a tool to minimize risk.
With this portfolio, investors are better positioned to beat market averages while avoiding the need to pick their stocks or manage their risks from time to time.
Investing Principle of The Paul Merriman Ultimate Buy-and-Hold Portfolio
In creating this portfolio, Merriman focused more on the performance of the market over the years. He outlined market segments with impressive returns during the bear markets, especially those that outperform the markets in such difficult situations. The “ultimate” part of the portfolio’s name came from Merriaman’s belief that it should be a worthy competitor against the S&P 500 and even outperform it without incurring any additional risk.
The portfolio allocates 60% of its holdings to stocks and the other 40% to bonds. According to Merriman, this spread helps investors balance risk and reward. Merriman also reviews the portfolio annually by assessing each fund based on factor exposure, fees, and performance. Based on his findings, he swaps the perceived weak funds in the collection with more suitable options that better reflect the investment goal of the portfolio.
For Merriman, the annual rebalancing ensures the risk involved is very limited and diversification remains high, even if the returns do not increase considerably. While this portfolio will most likely not be the best performing lazy portfolio, it achieves its goal of outperforming the S&P 500 while keeping the risk substantially lower.
Let’s take a closer look at the asset allocation in the Ultimate Buy-and-Hold Portfolio by Paul Merriman.
The Paul Merriman Ultimate Buy-and-Hold Portfolio Assets Allocation
As mentioned earlier, this portfolio adopts the classical 60/40 investing wisdom, with 60% going to stocks and 40% going to bonds. The reason for this allocation is simple – the bonds minimize volatility and risk while the stocks deliver the expected growth over time. This allocation can be altered by any investor with a different risk tolerance level without negating the original goal of the portfolio to be a better performer than the Standard & Poor’s 500 index.
We can summarize the portfolio’s assets allocation as follows;
- 60% in stocks
- 40% in bonds
The 60% stock allocation in the Ultimate Buy-and-Hold Portfolio is not as straightforward as it seems. Interestingly, this part of the portfolio comprises five different sub-parts, all carefully curated to arrive at a 60% allocation for stocks.
1. Large-Cap U.S Stocks
Large-cap U.S. stocks are associated with popular, highly stable, and publicly traded American companies. Their track record of paying impressive dividends over time informs the choice of these companies’ stocks. As a result, they are essentially a reliable source of stable growth for the portfolio. In addition, most of these blue-chip stocks are also listed on the S&P 500, attesting to their reliability and consistency.
2. Real Estate Investment Trusts (REITs)
The second sub-part aims to represent the real estate industry. Merriman introduced a few real estate investment trusts (REITs) to add some balance to the portfolio. These assets are known for their low correlation to the stocks, so they keep things steady when the stock market is in turmoil. They also balance out the increased risk associated with some of the riskier funds in the portfolio.
3. Small-Cap Stocks
The third sub-part comprises the small-cap stocks. These stocks are well known for their impressive performance over the years – better than the large-cap stocks. You will find these stocks on major exchanges, which means they have great potential. But they are primarily included in this list because of their limited exposure – these stocks are not yet exposed to the mass audience like their large-cap counterparts.
4. Value Stocks
Merriman justified his inclusion of value stocks in the mix by citing their outperformance of the growth stocks in the previous years. Value stocks are stocks of companies that are generally perceived as underpriced but with better performance than growth stocks. Having this as part of the stock allocation increases the chances of the portfolio outperforming the entire market.
5. International Stocks
The international investment market is another segment of the market that is well covered in this portfolio. According to Merriman, international stocks can be a proven source of diversification to the portfolio. A good number of multiple funds in the portfolio are international value stocks in both the emerging and international markets.
In summary, the 60% stock allocation of the Paul Merriman Buy-and-Hold Portfolio is spread among:
- Large-cap U.S. stocks
- Real Estate Investment Trusts (REITs)
- Small-cap stocks
- Value stocks
- International stocks
The bond allocation strategy of this portfolio is more straightforward. Merriman simply opts for a conservative approach by choosing only intermediate-term and short-term debt securities and inflation-protected bonds (TIPs). We can summarize the 40% bond allocation of this portfolio as follows:
- Intermediate-Term Treasury Bonds
- Short-Term Treasury Bonds
- Inflation-Protected Bonds (TIPS)
Notice the absence of corporate bonds? That is because the author believes they are not as safe as the treasury securities. While that is true, the choice of fixed-income holdings does come with a few downsides.
For example, long-term bonds are less represented in the portfolio, while shorter-term bonds are more frequent. This means this portfolio is missing out on the potentially higher returns of the former. Similarly, treasury bonds only promise minimal returns, unlike the corporate bonds that are better performers. With this allocation, Merriman aims to position the portfolio for the maximum returns possible while staying as safe as possible.
Overall, I will summarize the asset allocation of the Paul Merriman Ultimate Portfolio as follows;
- 6% U.S. Total Stock Market
- 6% U.S. Small-Cap Stocks
- 6% U.S. Small Cap Value Stocks
- 6% U.S. Large-Cap Value Stocks
- 6% REITs
- 6% International Value Stocks
- 6% International Small-Cap Value Stocks
- 6% International Small-Cap Stocks
- 6% International Developed Markets Stocks
- 6% Emerging Market Stocks
- 6% TIPs
- 12% Short-Term Treasury Bonds
- 20% Intermediate-Term Treasury Bonds
Note: There are several other variations of the Ultimate Buy-and-Hold Portfolio, each designed to suit the risk tolerance level of an investor.
The Paul Merriman Ultimate Buy-and-Hold Portfolio Performance
The assessment of any portfolio is incomplete without looking at how it has performed over time. According to PortfoliosLab, the Paul Merriman Ultimate Portfolio recorded a 9.79% annualized return over the last decade and a -10.24% Year-To-Date return.
Hypothetical Portfolio Performance
If we considered a hypothetical investment of $10,000 in the Ultimate Buy-and-Hold portfolio in 2010, the same investment would be worth about $27,000 at the moment. This represents roughly a 170% increase in the initial capital. The same $10,000 investment in the S&P 500 within the same time frame would have yielded a 271.4% increase, translating to about $37,000 as the final portfolio worth.
Dividend Yield and Drawdown
In dividends, the portfolio has returned 2.73% in dividend yield over the last twelve months. In the last ten years, the highest dividend yield was recorded in 2011 at 3.76%, while the lowest was in 2020, at 2.18%. The portfolio recorded its worst drawdown also in March 2020, which was 38.24%, and recovered in November of the same year.
Risk and Volatility
The portfolio also currently has a negative Sharpe ratio, which means its risk-free rate is higher than its return. In addition, the current volatility of the portfolio is 12.35% – it is less volatile than the S&P 500, which has 20.93% volatility.
Pros and Cons of The Paul Merriman Ultimate Buy-and-Hold Portfolio
Yes, this portfolio works, but it is not perfect, as you will find out in this section. Here are the strong and weak points of the Ultimate Buy-and-Hold portfolio.
Pros of the Ultimate Buy-and-Hold Portfolio
1. The exposure is rich
The portfolio offers investors excellent exposure to high-value opportunities by combining small-cap stocks, value stocks, and emerging market stocks. This combination has proven to return impressive dividends over the years.
2. The diversification is high
Investors measure the risk levels of any portfolio by how diversified it is. This portfolio maintains a high diversity in both its stock and bond allocations. Therefore, investors can expect decent returns while keeping the volatility significantly low.
3. Maintenance is easy
The portfolio lives up to its name – buy-and-hold. You can adopt this portfolio and leave it to run for up to a year without any adjustment. It removes the need to monitor the market, economic conditions, and the performance of the assets you have chosen.
Cons of the Ultimate Buy-and-Hold Portfolio
1. It is very conservative
The ultra-conservative nature of this portfolio means it is very safe. However, it also comes with the downside of limiting the potential returns an investment can earn.
2. Risk associated with the international market and small caps
Despite choosing ultra-conservative assets, this portfolio is not shielded from the risk associated with international stocks and potential losses from that segment of the market. Similarly, the small-cap stocks in the portfolio expose investors to the seldom declines associated with these stocks. The risks can be higher for investors who are opposed to the long-term view.
Recreating The Paul Merriman Ultimate Buy-and-Hold Portfolio Using ETFs
One of the beauties of this portfolio is that you can recreate it using low-cost mutual funds and exchange-traded funds (ETFs.). Based on our outline in the portfolio allocation section of this article, you need 13 ETFs to create the traditional Ultimate Buy-and-Hold portfolio. As mentioned earlier, Merriman offers ETF recommendations on the ETFs to include in this portfolio every year. Then, all you have to do is rebalance the portfolio using these recommendations as an investor.
Here is Merriman’s list for 2022;
- 6% Avantis U.S. Equity ETF (AVUS)
- 6% Avantis U.S. Small-Cap Value ETF (AVUV)
- 6% Invesco S&P 500 Pure Value ETF (RPV)
- 6% Vanguard Real Estate Index Fund ETF (VNQ)
- 6% iShares Core S&P Small-Cap ETF (IJR)
- 6% iShares MSCI EAFE Value ETF (EFV)
- 6% Avantis International Equity ETF (AVDE)
- 6% Schwab Fundamental International Small Company Index ETF (FNDC)
- 6% Avantis International Small-Cap Value ETF (AVDV)
- 6% Avantis Emerging Markets Equity ETF (AVEM)
- 8% Schwab U.S. TIPS ETF (SCHP)
- 12% Vanguard Short-Term Treasury Index Fund ETF (VGSH)
- 20% Vanguard Intermediate-Term Treasury Index Fund (VGIT)
The list above is heavy on Avantis offerings rather than the old names you would expect. According to Merriman, the choice of Avantis is informed by their reliable factor targeting, especially in terms of value and size.
It is also important to note that this list is not absolute – an investor can make adjustments or swap the funds with suitable options in line with their preferences. You can do this by yourself if you are an experienced investor. Alternatively, you can consult an investment advisor if you are a newbie with little or no experience.
The Paul Merriman Ultimate Buy and Hold Portfolio ETF is indeed the ultimate. There are not so many lazy portfolios that balance risk and reward better than this portfolio. The author worked out a strategic allocation using historical performance as a major yardstick. The result is a highly-diversified portfolio comprising ten stocks and 13 bond funds, collectively creating a highly-diversified portfolio with minimal risk and volatility.
As mentioned earlier, an investor cannot go wrong with this portfolio if they want excellent exposure to top market opportunities without risking too much or too little. It gets even better when you realize how easy it is to maintain this portfolio. The author rolls out a new set of ETFs every year for the portfolio – all you have to do is put them together, and you have a functional Ultimate Buy-and-Hold Portfolio.
Who Should Adopt the Paul Merriman Ultimate Buy-and-Hold Portfolio?
This consistent outperformer of the market is an excellent portfolio for a wide range of investors. For example, if you are a value investor who prioritizes value over growth and income, this portfolio should top your list of considerations. In addition, investors who want to minimize risk as much as possible will find this portfolio very suitable. The allocations are designed to ensure safety in the current market. The third selling point of this portfolio is its high diversification. Investors who are fans of heavily diversified portfolios can finally get their hands on one – a portfolio consisting of 13 different funds
With that, I will be rounding up this edition of our lazy portfolios review. If you find this helpful, please check out other portfolio reviews here and other useful and educative investment articles written by seasoned finance researchers and writers.