Collins VS Merriman - buy and hold

[doneby35]

So up until today, I was following Collins' strategy when it comes to investing in VTSAX and that's all you need.
Today, i'm a little confused, The ultimate buy and hold portfolio/strategy includes 10 different stock funds with each having 10% as shown here:
http://paulmerriman.com/ultimate-buy-hold-strategy-2016/

What do you guys think about this? I listened to a couple of Merriman's podcasts and he sounds very knowledgeable.

[NoStacheOhio]

OK, so I plugged this into portfolio visualizer. And the end result for 2001-2016--starting with $10,000, contributing $2,500 annually and rebalancing once a year--is VTSAX @ $109,648 and Merriman @ $110,874. Note, I just used the allocation tester, I can't be bothered to look up every single fund.

There is a period of outperformance there in the middle, but if you extend the timeline and use the Vanguard 500 fund as your benchmark, the end result is even closer.

Basically, I'm not seeing anything compelling enough to favor this over a simple two-to-four fund portfolio.

[doneby35]

From my understanding he's minimizing risk while doubling returns (this is of course based on what the market was from 1970 to 2015, a total of 46 years).

[NoStacheOhio]

From my understanding he's minimizing risk while doubling returns (this is of course based on what the market was from 1970 to 2015, a total of 46 years).

Except not, because 40% of the allocation doesn't have data going back that far, and he's probably not including fund expenses.

[Tyler]

Hi doneby35. 

Every portfolio is different, and diversification has its benefits.  When you look not only at a single investing timeframe but all of them, you can see how diverse portfolios can provide very competitive returns to the total US stock market but with much less volatility and downside risk.




You can see the specific Merriman iteration modeled in the chart and browse many more options here: https://portfoliocharts.com/portfolios/  Please note that I'll be updating all the portfolios with new data hopefully this week, but you can preview them yourself using the calculators. 

IMHO, the biggest drawback to the Merriman Ultimate is the sheer number of funds.  Once you account for taxes and trading fees for regularly rebalancing so many funds, the returns may not look quite so rosy.  However, there's a good thread on Bogleheads exploring a simplified 4-fund version of Merriman (add your own bonds to taste), and it seems pretty clear that the full 10 stock funds may not be necessary to largely replicate the returns.  I personally would lean towards that simpler iteration rather than get too carried away with the slicing and dicing. 

TL;DR: While I do believe that there's a lot of benefit to diversifying your asset allocation beyond a single US stock market fund, Merriman is only one option and is perhaps more complicated than it needs to be. 

[doneby35]

That's good information. Thanks for that bogleheads thread and the explanation.

[Radagast]

If you already have decided to have a lot of slices, Merriman's division into 10 equally weighted stock slices and 5 equally weighted bond slices is pretty elegant. It makes a lot of nice round numbers for stock/bond percentages that are multiples of ten, and is especially nice for 50-75% stocks which seems to be a favored range. I am not sure if Merriman's choices for each of those slices is necessarily the best, but no matter.

However, it does raise the question of how beneficial can all of those slices be? It is like rolling a clock down a hill: how many hours can point up at the same time? Just a "12" could make for a pretty lumpy ride. A 12, 4, and 8 can make things a lot smoother. Once you have 2, 4, 6, 8, 10, and 12 though you are getting to the point where adding more hours will be at best marginally useful, but will take a lot more of your time and also quite likely extra fees.

[Scandium]

I've read/listened to some Merriman before. His portfolio smells horribly of curve-fitting/recency bias or whatever else you want to call it. That's generally my feeling of the "small-cap-value" issues too. I'm not willing to bet enough on that showing similar outperformance in the future, just because it did at some points in the past.

Bogle did a talk on this and I believe most of the historic outperformance of SCV came during a few years throughout history, and other times it underperformed for decade or more! Do you trust a period is just a temporary downswing you have to ride through, or is the outperformance of SCV over and you need to drop it? Do the latter and if you're wrong you've messed up for the rest of your life..

Plus this portfolio sounds like a horrible mess to deal with, especially once your balancing between 3-4 or more accounts, some taxed some not etc.

[GreatLaker]

I like Paul Merriman's work, and have learned from his writings, but the two drawbacks I see are:
1) Managing that many funds is hard for an individual investor, especially across multiple taxable, tax-exempt and tax-deferred accounts.
2) It's highly based on the assumption that past performance of asset classes (small-cap, growth, value) will persist in the future. Maybe, maybe not.
3) Segment funds have higher MERs, that may negate any added historical returns
4) It can be tough to stick with a slice and dice portfolio when one or more slices may under-perform for a many years. Tends to lead to dissatisfaction and desire to sell at the worst time.

Actually that's more than two. Bonus!