[00:03:08] Paul Merriman: There were lots of people who didn’t want to do it themselves. So I had been teaching, in fact, it was my favorite part of the business. And when I sold my part of the firm in 2012, I stopped working for money, promised my wife I would never work for money again, and started the foundation to continue teaching.

[00:03:32] Paul Merriman: And I had no idea what was coming because the number one item we had on our nonprofit, the goals was to underwrite a class at Western Washington University on personal investing. Not personal finance, but personal investing for non-finance majors because there are a lot of young people who are not taking finance and accounting, et cetera, and need this information to make good decisions as as they come out of the university.

[00:04:05] Robert Leonard: So I’m curious, just from a business perspective, obviously it’s a nonprofit, but from a business mind perspective, how are the donations used? Are they used to cover the cost of, I know you have podcasts, videos, newsletters, books, all kinds of materials. Are the donations used to cover the cost of producing that, like video editors and any other costs like that?

[00:04:25] Paul Merriman: Yes. We don’t have it for specific items. It just goes into the general fund to underwrite our total expenses. And our total expenses aren’t high. Our donations aren’t high. I have had the responsibility of making sure that we’re okay with making donations ourselves, my wife and myself. But the fact is that our goal is to get our work in the hands of at least a million young people.

[00:04:54] Paul Merriman: And I think we’re going to get there before we run out of money. 

[00:04:59] Robert Leonard: Chris, how did Paul get you on board? What made you interested in joining the journey that he’s building? 

[00:05:03] Chris Pedersen: Well, Paul was the teacher at the right time for me. I was coming up on retirement and I was realizing I needed to get a deeper understanding of personal finance so that I could live off my investments and be more confident that they were invested prudently.

[00:05:19] Chris Pedersen: And I started listening to a lot of podcasts, reading a lot of books and magazines. And Paul’s message just resonated with me because I have a technical background and it was data driven. It was evidence-based, it was grounded in academic research. So I reached out to Paul and volunteered. I just said, Hey Paul, can I help you out thinking, maybe that’ll get me the chance to learn a little bit more.

[00:05:43] Chris Pedersen: Cause I always learn better what I’m doing than when I’m just studying. And I thought it was a long shot, but Paul did what he usually does. He picked up the phone and he called me. When people reach out to Paul with a question, a lot of times he likes to just talk. And to my surprise, he had a project, he had an idea of something he wanted to do that I could help him with, and I had an idea of something I wanted to do that he was interested in.

[00:06:08] Chris Pedersen: And so, we started working together. And those first two things were motif investing and the best in class ETFs. Motif is long gone now, but it’s been really fun working with Paul. He’s one of the best bosses, I’ll put that in quotes, air quote, that I’ve ever had. He’s just very appreciative.

[00:06:28] Chris Pedersen: And Susanna points out, I’ve had other bosses that paid me money. Susanna is my wife. Paul doesn’t pay me money, but the emotional and psychological income is great. 

[00:06:38] Robert Leonard: What has been the biggest challenges with the nonprofit? 

[00:06:42] Paul Merriman: The interesting thing is I would’ve thought the maintenance of a nonprofit was going to be, a bit of a hurdle.

[00:06:50] Paul Merriman: It turns out there’s an organization called Foundation Group and I looked at what others would charge us to set up a nonprofit. And by the way, ours is what they call an operating nonprofit. We’re actually working to do something as opposed to simply giving money away. And for about $2,000, other people quoting me $20,000, not only did Foundation Group set us up, but for a very minimal fee.

[00:07:20] Paul Merriman: They take care of all the tax reporting for us, and it makes it possible for almost anybody who really wants to have a nonprofit foundation. And now we gotta find out what the future of that foundation will be. But it’s all in place now to continue helping people theoretically, forever. 

[00:07:41] Robert Leonard: Is that fee monthly or annually or just a one-time setup fee?

[00:07:45] Robert Leonard: What is that like? 

[00:07:47] Paul Merriman: It was a $2,000 one time fee. I fill out the forms, then they do all the work to get it through the i r s and they assured me they had never had one that didn’t get through the i r s. The IRS is real suspicious of people who claimed to be in the financial education business. They suspect it may be a way to be finding an access to people pretending to be a nonprofit.

[00:08:14] Paul Merriman: So you have to prove that you really are going to be doing something that would be appropriate for a nonprofit. But they got us over all the hurdles and we got approved and we’ve been working with them for 10 years. I think they probably cost us $1,500 a year to maintain our legal status and to do what’s called a nine-90 pf.

[00:08:38] Paul Merriman: You have to submit to be a nonprofit. They do all of that tho Those are the kind of things I do not want to do. So that was not a hurdle, but our hurdle is always going to be how do we reach the young people that we want to help? And by the way, we also help a lot of old people because our work covers from birth to death.

[00:09:02] Paul Merriman: But it’s much easier to get to the old folks than it’s to the young folks. Cause they really don’t know about us in a normal way. It’s when you want to get to old people, you can do work for the American Association of Individual Investors, which I have for 40 years. So there are lots of ways to get to the audience there.

[00:09:23] Paul Merriman: But boy, this opportunity to be on this interview with you, Robert, is golden to us because we know we’re talking to the young people that our work truly can be a life changer. 

[00:09:37] Robert Leonard: Yeah, we’re going to get into, through all of that and talk about all the life-changing financial education and knowledge you and Chris both have to share.

[00:09:45] Robert Leonard: One more question about the nonprofit is why do you think so many people pay for financial education when there’s content that is like yours freely available and maybe it’s not even just yours, but there’s other people that create free content. We create free content. Like why do people pay for education, financial education specifically when you could just get it for free, like through you guys or any other great source that there is.

[00:10:06] Paul Merriman: Well, part of it may be that old saw that you get what you pay for, and so if you’re getting it free, it either isn’t very good or it’s only an attempt to find another way to get into your pocket. And by the way, that is not uncommon. There are a lot of people who offer OK, free advice, but then when the rubber meets the road, they’re recommending things that are terrible for investors.

[00:10:33] Paul Merriman: So there’s a lot not to trust. I just had a G P T chat question regarding a particular online advisor. I won’t mention the particular person, but they got it all wrong. I mean, they claim that this guy is recommending no load funds when in fact he’s recommending load funds. And so it makes me question, at least in our industry, how good the chat G B T is going to be.

[00:11:01] Paul Merriman: Maybe later it’ll catch on, but right now it hasn’t figured it out. 

[00:11:06] Chris Pedersen: There’s a lot of different ways to pay for financial education too. You can buy a book and I think a lot of people would get good bang for their buck out of buying and reading a book about personal finance. And I think to Paul’s point, a lot of the free information comes from people who charge you for a service.

[00:11:28] Chris Pedersen: They’re charging in some other way. But there are services you can pay for that are just informative as well. And sometimes there’s a conflict of interest. Sometimes there’s not. I think the really tricky part for a young investor is figuring out, and Paul talks about this a lot, who to trust, what’s the source that you trust?

[00:11:50] Chris Pedersen: And there is a tremendous amount of good information available for free. There’s also bad information for free. And so it’s kind of up to the investor to navigate that. And unfortunately, it’s a. It’s an area with a lot of conflict of interest and a lot of bad information that comes along with some good information. 

[00:12:11] Paul Merriman: And I think it’s fair to add that we can offer it free because we’re retired.

[00:12:17] Paul Merriman: Chris is retired. I’m retired, Darryl’s retired. We have a few people working for us, a handful, but that we pay. But basically, we’re a bunch of folks who have simply been through the school of hard knocks and have learned a lot. By the way, it’s not very difficult, it’s not complex. In fact, the best information is probably the most simple information, and that’s something else.

[00:12:42] Paul Merriman: People don’t necessarily trust that Could it really be, that one little thing you might do would put another million dollars in your pocket? It just doesn’t sound right, but I can assure you if the future looks anything like the past. There are ways that are going to put an extra million dollars into people’s pockets, and Chris and I are not going to make a penny on that.

[00:13:08] Paul Merriman: But I will tell you, and Chris will, I think agree, the psychic income we get from what we do is just as good as the money at this point in our lives. So, we are getting paid just not with money. 

[00:13:22] Chris Pedersen: And we’ve worked really hard to keep that conflict of interest out of the foundation. It was one of the things that drew me to it and led me to trust in it, is that Paul makes no money off of sponsorships or giving favoritism to a particular investing strategy or to, favoring a particular fund.

[00:13:46] Chris Pedersen: We do have an affiliate relationship with M one Finance. Which we disclose openly because we think it’s an efficient and easy way for somebody to set up a brokerage account but if they want to do a brokerage account at Schwab or Fidelity or wherever their 401K is instead, we’re totally fine with that.

[00:14:06] Chris Pedersen: But keeping that conflict of interest out of the way and making sure that our motives are pure, is really important to the foundation. 

[00:14:15] Robert Leonard: To your guys’ point about who not to trust, on your homepage of your website, it says, we are educators, not financial advisors. Our work is geared toward do-it-yourself investors, but we always recommend seeking qualified and ethical fee-based professionals to discuss your unique life goals, risk tolerance, and the consequences of various investment decisions.

[00:14:38] Robert Leonard: The part of this section that on your website that stood out to me was where it talks about a fee-based professional. Explain what the difference is between a fee-based financial advisor and one who is not fee-based and why you believe in one over the other. 

[00:14:54] Paul Merriman: I’ll take it first, Chris. Cause we both had strong feelings about this.

[00:14:58] Paul Merriman: I think fee-based, first of all, let me talk about what we don’t want you to do. We don’t want you to invest where there’s a conflict of interest where somebody is getting an immediate commission for having made that purchase. Because we would like to believe that whoever that advisor might be, and we are not advisors and we say it where teachers, but that whether it’s an advisor or a teacher, what they are suggesting is something that is in best interest and there are.

[00:15:36] Paul Merriman: Who take a commission, which means in the normal situation, that commission is going to be because they sold an actively managed mutual fund that recently has had a good track record. That’s always a requirement, and they are going to pay a price for that in more than one way. Not only are they going to pay a commission, but they’re going to get less diversification.

[00:16:01] Paul Merriman: More than likely, not only are they going to pay a commission and get less diversification, they’re going to pay higher taxes according to Morningstar in those actively managed funds than they would in an index fund. So there’s all sorts of reasons why they’re required, suggesting that you invest in certain things, but they’re not in your best interest.

[00:16:26] Paul Merriman: That does not mean they won’t work out. Doesn’t mean you’re going to run out of money before you run out of life. That, that, that’s not necessarily the outcome of dealing with somebody who has that conflict of interest, but you’re not maximizing what you could have gotten without taking any more risk to, and your family, a family that you know, and family you’ll never know.

[00:16:47] Paul Merriman: And so we want that relationship to be without conflict of interest. And then there’s one other group of people out there other than people like us that are doing it for free, and those are people who do it by the hour. And they will charge virtually, 500 to a thousand dollars to take a look at your situation and tell you what you should do, but then recommend that you be in kinds of investments that are truly for you rather than for the good of somebody else.

[00:17:20] Paul Merriman: And those are great. And finally, and this is a tough one because I had an I, I had a firm, I was running the firm that managed money for people and got a percentage of the money under management. Now, as I said before, we told them how to do it on their own and we needed to be paid for what we did. And when you manage money that way, you can put the investor in the very best thing that you know and get paid out of that account, as opposed to being rewarded for selling a particular fund to somebody.

[00:17:57] Paul Merriman: Now that’s a more complex potential conflict of interest. And so even there, there can be conflicts of interest, but that’s generally for people who are never going to do it on their own, they’re always going to have somebody else do it. They take a fee, a percentage typically for that work, and I think that’s fair.

[00:18:19] Paul Merriman: What would you add, Chris, out of curiosity? 

[00:18:22] Chris Pedersen: Two things. Part of what we’re looking for in that fee-based relationship, as Paul described it, is this lack of conflict of interest. And one indicator of that is that the person you’re working for the fee is acting for you on a fiduciary basis. That will help explain that there isn’t a conflict of interest.

[00:18:44] Chris Pedersen: Now, there’s a lot of people in the industry who will say that they can act as a fiduciary, but that’s different from acting for you in a fiduciary capacity. And so that’s an important thing to clarify. And then the other piece is, I think, related to this idea that we’re focused on DIY and not everybody wants to do DIY.

[00:19:06] Chris Pedersen: It takes learning and and developing at least enough understanding that you can do it for yourself. And there’s a lot of people who just not interested. They don’t want us take the time to learn. I’ve had so many people come to me and say, just tell me the answer. Just tell me what I’m supposed to do.

[00:19:24] Chris Pedersen: Those are the kind of people who are probably best served by an advisor because if you’re not going to take the time to learn, you’re not going to have the conviction to stick with an investing strategy until it benefits you and you really need somebody to help you stay the course and hold your hand and guide you and that may very well be money well spent for people who don’t want to learn on their own.

[00:19:49] Paul Merriman: And Robert, if I could add one more thing, we believe that the do it yourself investor has a responsibility to learn what an investment advisor needs to know because you have the most important investor in the world as your client, and that is yourself. And what is it that an advisor really knows to do that’s so special?

[00:20:18] Paul Merriman: It’s not an asset allocation. There’s some, balance of stocks and bonds. That’s not the secret sauce. The real secret sauce for a good advisor is that when the investor wants to jump ship and you sit there and you calmly talk them out of panicking and likely selling it just the wrong time. Now, the problem for the do-it-yourself investor is now they’re talking to themselves.

[00:20:46] Paul Merriman: About this, which means Chris and Darrell and I have to provide them information so that they truly understand how the market works, the volatility you’re going to live through, the implications of how much fixed income you have in the portfolio. Truly, they have to know what an advisor understands, and if they’re not willing to do that, then we’re probably not the best teachers for them.

[00:21:13] Paul Merriman: But if they get it, I really believe they can be a really successful lifetime. Do-it-yourself, investor, which means you never have to pay anybody else. You keep it all in the family. 

[00:21:26] Robert Leonard: We’re going to get into Chris’s book next, but before we do, I want to talk to you, Paul, a bit about, and ask you to explain the ultimate buy and hold strategy, what it is, what it consists of, and how the idea of what’s quote unquote right in investing has changed over the years, as has medical advice around smoking and even protein consumption.

[00:21:49] Paul Merriman: The ultimate buy and hold strategy. This was a way, initially in mid 90s, it was a series of steps that would help me explain the importance of using a whole bunch of different equity asset class, big companies, small companies, value companies, growth companies, us international res, emerging markets.

[00:22:14] Paul Merriman: There were bunch of, and so I wanted to do it way that was super, super simple. And there weren’t too many moving parts when they looked at this portfolio, when they were done. So what we did was we made the assumption that you put all your money in the s p 500, how would you have done over a period of time?

[00:22:37] Paul Merriman: Then we took step number one, we took 10% of that portfolio and put it into a different asset class, and we looked at, okay, 90% in the S&P 500, 10% in large cap value. What difference did it make? Did it do anything for the returns? Did it do anything for the risk? And it turned out the risk went down a little bit or stayed the same, but the return went up a little bit.

[00:23:08] Paul Merriman: Not a lot, but up a little bit. And then we showed, okay, pretend you started with a hundred thousand dollars. What did you now have as compared to the S&P 500? And then we did it one baby step after another, adding small-cap blend, adding small-cap value, adding REITs, adding international different asset classes, adding emerging markets.

[00:23:34] Paul Merriman: So you had this portfolio that had 10 different equity asset classes and it was producing a much higher return. I mean, significantly higher return than just having your money in the S&P 500. And that’s how we managed money for people. Obviously, if you tweaked it, you’d want to have more money in one equity asset class than another, but that now suggests you’re starting to do market timing and doing things to make the process more complex.

[00:24:07] Paul Merriman: It wasn’t the ultimate because we knew how to make more money, but it was a portfolio that you could say, look, You have massive diversification. You are protected against stock risk. The only thing that you are not protected against is market risk, but you are protected if by chance, the S&P 500 decides to go down for 10 years and other peoples don’t, other assets don’t.

[00:24:36] Paul Merriman: And so you had this big advantage of this additional diversification beyond just the number of companies, but among different asset classes. And that’s how we managed money. And that’s how I started teaching people with our foundation until Chris came along. And then my life changed and John Bogle criticized my work and then our work changed.

[00:25:03] Paul Merriman: And they were both John Bogle and Chris and there, all these people were instrumental in figuring out ways that you don’t have to own 10 different equity asset classes. 

[00:25:16] Robert Leonard: So that is perfect because the subtitle of Chris’s book is “A quest for simple and effective investing strategies”. And that caught my attention because of the word simple and effective.

[00:25:29] Robert Leonard: Because when I read about everything that you just said, Paul, and explained the ultimate buy and hold strategy, the very first thing that I thought to myself was, I don’t want to have to do all that work. I don’t want to have to buy all these ETFs. I just want simplicity. So Chris, talk to us a bit more about your book and your quest for simplicity.

[00:25:47] Chris Pedersen: We really wanted to have something that we thought a lot of people could do. And so the quest part of it in some ways was me challenging myself to do enough research to be confident that what we were going to recommend would work for people in the future. There’s, when you test looking backwards, there’s no guarantee that the future will look like the past.

[00:26:10] Chris Pedersen: So we tested lots and lots of different periods of time, hundreds of different scenarios, starting as early as 1928. And we did January of 1928, February of 1928, March, all the way through to the end. And we looked for very simple but effective strategies that would help people prudently get a gain on the money that they set aside while taking reasonable risks and, hopefully help them set up for a good retirement.

[00:26:43] Chris Pedersen: Most of us are not going to be able to save enough money to retire uncomfortably. It just doesn’t work. That saving 10% per year, let’s say you work for 40 years, you saved 10% for 40 years, you’re only going to have four times your annual salary saved. Well, if it didn’t grow, you might be able to live off that for four or five, maybe six years in retirement.

[00:27:07] Chris Pedersen: But most of us are going to be retired a lot longer. And so we were looking for ways with not 10 funds, but just one or two funds to be able to recommend something that we thought would be prudent and would help people grow. And obviously the simplest solution and the one that lots and lots of young people use is a target date fund.

[00:27:27] Chris Pedersen: If you invest in a target date fund, the back testing says that the median, like half of the scenarios are better and half of the scenarios are worse. But the median outcome is that you’ll have about. Twice your lifetime spending power if you save 10% for 40 years working and then are retired for 30 years.

[00:27:48] Chris Pedersen: So that means if you weren’t to invest at all in the target date fund, you’d just have the money that you earned to spend. That’s it. But on an inflation adjusted basis, if you set 10% aside into the target date fund, and that’s all you do, by the time you retire with 4% withdrawals, and then by the time you die between what you spend in retirement and what you die with and what you spent while you were alive it’s worth double what you would’ve had you not saved.

[00:28:15] Chris Pedersen: So that’s a huge win, and that is a simple and effective strategy. It’s an amazingly simple and effective strategy. 

[00:28:23] Robert Leonard: You outlined also in your book the different levels of elegant simplicity. You had symbiosis, intermediates, and complexity for different fun combinations. Take us through those different levels.

[00:28:35] Chris Pedersen: Obviously, one fund is about as simple as it can get, so it’s a target date fund. You just pick the year you’re going to retire and you find the fund that’s got a name that’s pretty close to that. That’s as simple as it can get. But we think most investors could probably handle a little bit more complexity.

[00:28:50] Chris Pedersen: And in fact, we know that people who invest in target date funds often also invest in a second fund or a third fund. They do almost, they can’t help themselves. They add a little complexity. So then the question comes up, well, if you’re going to add a little complexity, what would be the best complexity to add?

[00:29:09] Chris Pedersen: Would it be adding more target date funds of different dates? I have friends that do that because they’re uncertain about when they’re going to retire. The net effect is that you just average the dates together and that’s what you’ve got. You still really only have the glide path of one target date fund, so that does nothing.

[00:29:29] Chris Pedersen: So the question was what could you add that would make a meaningful difference? And from the work that Paul had previously done, I was led to the academic work of Nobel Prize winners Fama and French, who basically have studied how different parts of the stock market perform over time. And what they say is that, or what the research shows is that the small and value part of the market goes up and down at slightly different times.

[00:29:59] Chris Pedersen: It behaves a little differently than the large part of the market, which dominates what’s inside a target date fund or the S&P 500 or a total market fund. And it has a little bit higher return historically, the small and value parts of the market. And so when you combine these two things, the small and value parts with the total market, which is kind of the equity piece inside a target date fund.

[00:30:24] Chris Pedersen: You end up with a higher return per unit of risk, you get an improve improvement in the performance with only a slight decrease or increase in the risk. And that seems like a good gain. And in fact, if you just take, let’s say you’re doing that 10% saving rate in the target date fund, that means you’re saving 10 pennies out of every dollar into a target date fund, and you’re spending the other nine on taxes and living and everything else you got going on.

[00:30:52] Chris Pedersen: Well, if you take one of those 10 pennies, you’re saving towards retirement and you put it into small-cap value, the difference over a lifetime is millions of dollars. It’s a huge bump in what you will have to spend and pass onto errors. If you take two of those pennies and put it in small-cap value, it’s even more.

[00:31:12] Chris Pedersen: And in the book I, I talk about how you can do that with just two funds, US small-cap value and the target date fund. Or since you mentioned it, the slightly more complex chapter talks about, well, what if I still want international diversification? You can split that small-cap value in us small-cap value in international small-cap value and then there’s all kinds of questions that come up about other ways to do it.

[00:31:38] Chris Pedersen: And that’s why I wrote a book. I knew that along the way as somebody invested in this strategy, there would be a lot of questions and I wanted to prove to myself and also give readers the answers when they needed them. These other questions. 

[00:31:53] Robert Leonard: You briefly touched on this, but I want to dive a little bit deeper.

[00:31:57] Robert Leonard: What are the pros cons in maybe shortcomings of back testing and all the back testing research that you’ve done? 

[00:32:05] Chris Pedersen: Well, the biggest pro is that the future might not look like the past and, or, I mean, the biggest con is that the future might not look like the past. Because everybody’s history, everybody’s life experience is going to be different.

[00:32:19] Chris Pedersen: But you could say that about a lot of things. The weather, the future weather might be the future. Climate might be different from the past, but my best indicator of what is likely to happen when I walk out the door is still what I know about last year’s weather or about, the forecast. And so I rely on it and I adjust my clothing accordingly.

[00:32:40] Chris Pedersen: It’s a very imperfect science. So what we looked for when we look at these back tests is not, a one-off occurrence. That said, small-cap value helped. But we look at every 20 year period since 1928, and what we see is that 99 plus percent of the time, small-cap value was a performance enhancer. It helped.

[00:33:05] Chris Pedersen: And so the odds of small-cap value being helpful to somebody moving forward. Then we conclude is pretty good. And the other thing we look at looking back is how often did it hurt And it very rarely hurt somebody. It’s an imperfect science, but we try to look for things that have overwhelming evidence that they’re likely going to be helpful.

[00:33:30] Chris Pedersen: And because it’s an imperfect science, it tells you probably shouldn’t go back and, be too extreme in the conclusions you that you draw. We would not recommend that somebody put all of their money only in small-cap value for their entire lifetime, even though history says that has the highest return.

[00:33:49] Chris Pedersen: Not just because we think that it may be different in the future, but because you could wait through five years or 10 years or 15 years of underperformance before that premium or advantage came to pass. And if you were to give up on it partway through and trade while it’s down, so to speak. Then you have no chance of getting the benefit.

[00:34:12] Chris Pedersen: So it’s really important that you pick a strategy that is, I’ll call it moderate enough that you can stick with it. And that’s one of the reasons I love the idea of putting 10% or 20% into small-cap value and not even rebalancing it. Because if it’s 10% and it’s a little underperforming, a, you probably won’t notice.

[00:34:33] Chris Pedersen: And B, it’s not a huge part of your portfolio. So I think people are likely to stick with it and stay the course. Where if you put all of your money in it and then you find out five years in that the S&P 500 has been outperforming, you’re far more likely to second guess your strategy and switch.

[00:34:52] Robert Leonard: Paul, in your book, we’re talking millions, you wrote, the reality of having a million dollars 40 years from now might fall short of your fantasies. And you also wrote that 40 years of actual inflation from 1980 to 2020 reduced the purchasing power of a thousand dollars to slightly less than 300. How should young investors be thinking about inflation and its impact on their retirement?

[00:35:16] Paul Merriman: Well, I think they should be building it certainty into their plans as a cost of living, just as they would healthcare and taxes and other things they’ll have to deal with. When I came into the industry in the 1966, I used to talk to a lot of young people and if you asked them, what is your financial dream?

[00:35:38] Paul Merriman: How much money would you be happy with? If just, if you just have that as your goal? And what was the answer? A million dollars. A million dollars. And again, I mean, it was always a million dollars. And I still teach, I teach university classes and I’ll ask young people today. How much would you like to have?

[00:35:59] Paul Merriman: What’s that number? It’s a still a million dollars. Now a few engineers in the class will say five or 6 million, but most people still think a million dollars is a really big deal. And of course in order to replicate that million dollars that looks so good in 1966, you probably do need 6 million today.

[00:36:20] Paul Merriman: So they need to understand that the cost of living is likely to be a lot higher in the future from everything we know about the past. And they need to understand that the expected life that they’re going to live is going to be longer. We have a brand new granddaughter just born last November.

[00:36:43] Paul Merriman: According to Actuarials studies, she will has a 50% chance of living until she’s 103. And in Japan, the number’s 107. So not only do we have to worry about inflation being part of our life, we may have to worry about it being a longer term that it’s going to be impacting our financial needs. So I think it’s imperative that you understand that is a cost and so many young people are not willing to put money in the stock market because it’s so risky and it’s gambling and it’s speculative and it, you might as well go to the horse races and put money in the stock market.

[00:37:23] Paul Merriman: Well, none of that is true over the long term, but what we do know over the long term is bonds have made about 5% the safe investment and stocks have made about 10. I also know the worst 40 year period for the S&P 500 since 1928 was an 8.9% compound rate of return. If we look at the bonds, the worst 40 year period is a gain of 1.6% a year.

[00:37:51] Paul Merriman: Those people who are hiding in bonds because they’re afraid of the risk of the stock market, just don’t get it. And that’s because they haven’t looked at it carefully enough to see that the risk is in the bonds, not in the stocks. When we look at the long term and between living longer inflation, higher taxes, by the way, when I came into the industry, Robert the marginal tax bracket was about 70%.

[00:38:19] Paul Merriman: That was the highest they would take from you. Now it’s much lower than that, but you know, something 50 years from now, it could be right back up at 70%. So they have to also understand that’s a possibility. I want them to overs save. I want them to have more money than they think they needed. Not because I’m greedy or they should be greedy, but because things don’t always work out like we think they will.

[00:38:47] Paul Merriman: And unfortunately, One of the factors that most of us are really not prepared for is bad luck. And in the market there are periods of good luck. Like 1975 to 1999 is 17 plus percent compound rate of return, but put the money into the same investment in 2000 and since then it’s only been a 7% return, 10% less per year.

[00:39:15] Paul Merriman: And that’s the bad luck. And the other was a good luck. Unfortunately, I grew up during the good luck period and that helped a lot. 

[00:39:24] Robert Leonard: You mentioned that bonds are the risk compared to stocks when you’re looking at returns. I think there’s also the risk of people my age, not just not investing. Everything you said Paul is so true that I’ve heard.

[00:39:39] Robert Leonard: Not to say that you gentlemen are old, but I’m a little bit younger than you guys and I hear it every day from my friends, my family, like. I grew up in a very blue collar family. I think I’m the first one in my family to like ever make any type of real stock investment or any type of real investment.

[00:39:55] Robert Leonard: So the conversations I have with them are very, I want to just say representative of like general population America, of like non investors. And that’s a lot of my friends growing up were the same way. And everything you said in terms of like, they all say, oh, it’s gambling. I’ll just go to the, I’ll go and go to the casino, or, I’m just throwing money away.

[00:40:13] Robert Leonard: Like, those are all legitimate real things that I hear almost every day, every conversation I have with people that are not educated on financial topics, whether it’s stock investing, personal finance, budgeting, et cetera. It’s so, so true. 

[00:40:26] Paul Merriman: And Warren Buffett has a great quote. I’ll be 80 in October, so I’m trying to come up with my favorite 80 quotes for October.

[00:40:35] Paul Merriman: But one of them is Warren Buffett’s quote. He says, don’t say what’s left over after spending. But spend what’s left over after saving. Just pay yourself first. And it doesn’t have to be a lot. And the idea that, well, I can’t possibly afford that because I have so many expenses and things. Well, if that’s the case, take a second job.

[00:41:01] Paul Merriman: Now, I know that sounds very aggressive, but I have known a lot of young people that in order to fund their retirement, they took a second job. Not a lot of time, but enough to be able to fund that. And that commitment means delaying gratification. And we know for a fact, and I’m the first to admit that I’m guilty.

[00:41:23] Paul Merriman: Delaying gratification at the dinner table for me is really difficult. I have been overweight since I was a kid and I’m still overweight because, it’s there. It’s fun, I love it. And you just have to be able to have the discipline, the beauty of investing. Is that you can put it away and just forget about it.

[00:41:41] Paul Merriman: You don’t have to watch it. That’s not true of eating. Every day I have to face three to four meals and start all over again. But with investing, no, you can just do it once a month and ignore it. 

[00:41:56] Robert Leonard: Some people, Paul, say that we have a limited amount of decision making capabilities or ability to delay gratification, et cetera.

[00:42:05] Robert Leonard: So you just used all of your, all of that in your investing. And so now in the food side of things, you might not have as much left to give. I’m now you both, Chris is very analytical Paul, but you both are pretty principled in your investment approaches. So I’m curious to hear how you, this is probably one of the questions I was most excited to ask you both is how you think about the debate between investing versus paying down debt.

[00:42:30] Robert Leonard: Should they be done together at the same time? Should they be done one before the other? Should they, like, how do you guys think about that? 

[00:42:37] Chris Pedersen: We lived through a very different history than the one that young people are living through today. Although it’s a little more similar now than I wish it was.

[00:42:46] Chris Pedersen: When we bought our house, it was, I think it was a 10 and a half percent annual percentage rate on the loan, and so it seemed prudent to us to try and pay it down and our mental models about personal finance were very unsophisticated. We just thought to ourselves, we have four children. We want to help them with college because our parents helped.

[00:43:12] Chris Pedersen: Well, my parents helped me with college, and I thought, alright, I’m supposed to pay this forward. That’s going to be incredibly expensive. If we have our house paid for by the time the kids are in college, then it’ll work out. We’ll have that cashflow to help for them. I know coming up on retirement, we were also really stressed about cashflow.

[00:43:32] Chris Pedersen: Just trying to figure out like, what’s it like to live off your investments? Will they maintain their value? Will we be watching them decline in value? As my wife said when we retired, she’s like, where’s the money going to come from, right? I mean, that’s kind of, you’ve had this paycheck for all of those years.

[00:43:49] Chris Pedersen: So when I think about paying down a loan, the thing that comes to mind first for me are the psychological factors of having debt. I think at a purely analytical perspective, or, from a purely analytical perspective, if you have a one or 2% loan, I too would not be unheard of in recent years.

[00:44:09] Chris Pedersen: Two to 3%, you’ll probably get a better return in other places. But that doesn’t mean that there aren’t psychological advantages to, or cashflow advantages within your life that may make it interesting to pay it down sooner. It’s a balance, a very personal thing. I think for many young people, if they have a low interest loan, I would encourage them to get going on the retirement savings while just paying down the loan at whatever the minimum required rate is provided that fits with their comfort levels and their other life plans and things.

[00:44:48] Paul Merriman: I do think that there are a couple things that I would like to see young people do. First of all, the choice between a regular 401K and an ira and a Roth 401k and a Roth ira. There are lots of reasons why you might pick the traditional over the Roth, but I really encourage young people to take advantage of the Roth now only because we have no idea what tax rates are going to be 40 or 50 years from now, and it is a way of protecting against the risk.

[00:45:24] Paul Merriman: Of higher taxes later so that is one fork in the road that may not be the same as other advisors would recommend as far as this decision between debt and putting money away for retirement. When you see how big that first five years of IRA investments are compared to the rest of your portfolio, and by the way, it may even be that you would say, okay, this is my first five years I’m going to be all equities and as a matter of fact, I’m going to, with this five years, I’m going to be all equities for the rest of my life.

[00:46:03] Paul Merriman: The rest of my portfolio is going to be a traditional, more balanced portfolio, but this is for the long term and boy does it have a long term to work. And if you miss those five years, you miss an absolutely golden opportunity. To maybe early retirement, having way more in retirement or leaving more. I mean, those are the potential outcomes of that.

[00:46:27] Paul Merriman: Now, if that means extending the payment of the debt period, I would be okay with that. Now, when it gets to be got debt that costs 12 or 13 or 14%, that’s a hard one to suggest that they do the 401k or the IRA first. But with, when there’s a match out there, there’s no question you should jump on that match.

[00:46:52] Paul Merriman: I don’t think you ever let a match go by because that’s free money. And even if you end up spending more interest in the long run, you’ll have caused a discipline to happen that when you look back at it, you’ll say, you know something, the extra two years I had to pay on that debt is nothing compared to what I got in my pocket right now.

[00:47:14] Paul Merriman: The problem is we can’t get young people to look at life. 50 years from now, and I don’t think that we probably did either, but boy, we see it now. That would be my approach. There’s a balance between when it makes sense to go ahead and invest and pay the debt later. I don’t mean make your regular payments.

[00:47:34] Paul Merriman: I’m not suggesting you stop making payments, but as far as paying it off, it’s okay to wait. If you’re doing something powerful with that money and getting it to work in a tax-free environment at a young age, that’s golden. 

[00:47:51] Robert Leonard: Yeah, I think that powerful piece is important because if you have money to pay down debt and you don’t invest the question is invest versus pay down debt, not pay down debt or spend that money frivolously, right?

[00:48:02] Robert Leonard: Like if you’re going to either pay down debt or go spend that money on a new com, new bag or computer or car or whatever, that, that’s different than the question between debt and investing. So I think your point is right there at the end is really important, Paul, but. I asked this question, I was excited to hear you guys’ answer because this is something I’m really struggling with myself right now, and listeners of the show go back even a year ago, two years ago with this podcast, and you listen to my philosophy on debt back then, I was okay with debt.

[00:48:28] Robert Leonard: I was okay with if you had some like consumer debt, maybe a car loan or any other type of debt that was really low rate, 2, 3, 4, 5%, but you had some extra cashflow. My philosophy back then was I would rather buy a rental property with that, generate cashflow from that, take the cashflow from the rental property to cover the debt and now you’re getting the asset, you’re still covering your, et cetera.

[00:48:50] Robert Leonard: So that was my philosophy for had been, but the LA and I was so against Dave Ramsey, I like, I couldn’t stand him. He just made me cringe. And now the last, I don’t know, six months or so, I’ve kind of. I don’t know, Dave Ramsey has been kind of getting in my brain a little bit and I’m actually like coming around a little bit to what he’s saying and I like, I kind of understand and I’m kind of going that way.

[00:49:11] Robert Leonard: And Chris, to your point, some of it’s psychological. My, I had a truck loan, it was relatively small, it was like 10,000 bucks. So it wasn’t like a big deal, but it was 2%. And I was like, okay, I could do a lot better things with this money. But just knowing that truck loan was there, it just bugged me.

[00:49:26] Robert Leonard: And I just, it wasn’t too big of a deal, so I just focused on paying it down. But I looked at like the interest calx, it tells you like, okay, if you pay a little bit extra, like I was only going to save like total like 250 bucks in interest. So like I really wasn’t saving much an interest and it just mathematically wasn’t probably the right decision, but it just bugged me having the car loan there or the truck loan I should say.

[00:49:48] Robert Leonard: And so I just got rid of it. But now I have a little bit bigger debate because I have my student loans that I’m trying to decide, do I want to pay those out a little bit faster? That’s a little bit bigger balance, but. I’m thinking like, okay, let’s say that’s like 50,000, so that’s a little bit bigger than 10.

[00:50:03] Robert Leonard: And now I have to say, okay, well if I put 50,000 into my investments now, like how much is that going to be in the future versus if I pay down my student loans. And so I have Dave Ramsey on one shoulder. I have, the investment thesis kind of on the other shoulder and I’m like, I don’t know what to do.

[00:50:18] Chris Pedersen: Personal. There’s a reason that there’s a reason that personal finance is called personal. It’s very individual. It’s not all analytical. It’s got a lot of emotional components to it. We went through times in my life where I was out of work and not having obligated payments or having smaller obligated payments in those period of times helped a lot.

[00:50:44] Chris Pedersen: So it’s really hard to know exactly what’s going to come your way and when you’re going to appreciate not having those payments. Yeah, it’s tough. 

[00:50:53] Paul Merriman: Well, and the other part, the reality. Making the choice to invest is about one out of four years. The market goes down and so you can decide to invest and not pay off the truck.

[00:51:08] Paul Merriman: And the next thing you find out a year later, the money you put it is down 40% or 30%. And because there’s no risk in the past, we always know what we should have done. It really bothers us. We get upset with ourselves. I can remember as an investment advisor sitting with couples and they had just gone through a year when the market was down and one of the couple would say, we could have gone on a trip to Europe with that money.

[00:51:34] Paul Merriman: And so that isn’t the way you should think about it, but it is the way people think about it very often, and it doesn’t make for great investors if that’s how you look.

[00:51:47] Paul Merriman: When you invest in the stock market, it’s a passive business, but you are in a business that goes up and down, like businesses go up and down. I started a business, my investment advisory firm back in 1983. It took 30 years of ups and downs before it matured and became what I was able to use to pay for my retirement.

[00:52:09] Paul Merriman: But if every time it was down, I would try to get out and go to work for Boeing or something, you know it, it would not have worked. And that is the hard part, is helping people, particularly young people who are inexperienced, get into that state of mind that says, look, this. It is not something I’m worried about day to day, year to year.

[00:52:31] Paul Merriman: It is something I’m worried about for 40 years, and even though the foundation may not be as big as it could be because I could have invested in the market went up, but it went down. The fact is you got some money working in the portfolio and in the early years, it is your money that is most important.

[00:52:49] Paul Merriman: This is one of the interesting points that Chris brings up in his book the importance of that early money. It’s not about the stock market, it’s about you building the foundation, and you have to understand that it might not quickly work out well, but that’s part of the process. 

[00:53:07] Chris Pedersen: One of the hardest truths about personal investing is that it’s too easy to learn the wrong lessons.

[00:53:15] Chris Pedersen: You can step into the market, you can see it go down, you can conclude that, oh, this is not for me. This is never going to take me to a good spot. You can get out and stay out the rest of your life. And it’s just too easy because of the randomness, to learn the wrong lessons. And that’s where we’re really trying hard as educators to help people understand that even though there might be short-term volatility in the long run, these are prudent risks that are going to help you out.

[00:53:45] Paul Merriman: And if I could add something that I think is really important, we have a, on our website, a thing that says Bootcamp. Bootcamp. There’s a series of eight articles, eight podcasts, and eight videos, about eight of the biggest decisions that you’ll ever make. And one of those decisions is to understand the implications of adding bonds to your portfolio.

[00:54:11] Paul Merriman: To modify the volatility in the bad times. But we don’t just say, get ready for losing some money along the way. We show you in every situation, whether you’re a hundred percent bonds or 10 or 20 or 30 or 40% bonds. What was the worst month? What was the worst a year? What was the worst three years, the worst five years?

[00:54:35] Paul Merriman: This is what you have to expect to go through to make it to the end of this trip. And that is hard. And it’s the reason that I think this is important, that so many of our followers are engineers or other people who are numbers driven. People by their nature and people who don’t like numbers will probably find our work to be a little bit frustrating.

[00:55:01] Robert Leonard: I can’t give myself much credit as an investor, but the one thing I can give myself credit for is. I tend to have a really good stomach when it comes to this stuff. Like I, I don’t really go in and out like friends of mine during Covid and that crash, they were always like, what are you doing? And I’m like, honestly, I haven’t logged into my brokerage account in like, I don’t know, two years.

[00:55:21] Robert Leonard: Two years. Like I can go years without ever logging in. It’s all automated. I haven’t looked at it, I haven’t done anything. Like, I’ve literally gone years at a time without even logging into my brokerage account and thinking about it. So that is the one thing I can kind of give myself a little bit of credit for.

[00:55:36] Robert Leonard: But I have one last question for you both before we wrap up today, and that is, is there a place in people’s portfolio for play money? Is there a small percentage of a portfolio that people can go pick stocks, trade options, play with pennies, do whatever they want, really? Is there a 1% of their portfolio, 5%, 10%?

[00:55:57] Robert Leonard: Is there an allocation you guys think that’s reasonable to be able to go play around and make kind of risky non long-term investments? 

[00:56:05] Chris Pedersen: I think play with what you want to lose. That would be my starting point. Just assume that if you’re playing, you might lose it all. Now, having said that, there’s some fun history in my family.

[00:56:17] Chris Pedersen: My grandmother and grandfather bought some uranium rights in Utah and then sold it. It kind of went crazy, and they did well by, it was a small investment, and they ended up buying houses for their kids out of the game. So, sometimes these things play out, but I can tell you it didn’t change their investing strategy for the rest of their lives.

[00:56:44] Chris Pedersen: They, that was the only time they ever invested in uranium. It wa and in fact, if anything, they got more cautious as they got older and they invested less and less in that kind of play. Many stuff because that uranium stuff that they sold at a profit. Eventually went to zero. They just happened to get lucky.

[00:57:04] Chris Pedersen: Right. And they could recognize it for what it was luck. I think that if you’re going to play with something, make it the money you’re happy to lose. And I personally, I don’t play with anything more than, actually, I don’t have anything in my portfolio I would call play money, but yeah, if I did it would probably be 1% or less.

[00:57:24] Chris Pedersen: because I don’t want to lose a lot. 

[00:57:26] Paul Merriman: I don’t have any money in my portfolio that I would call play money. I would say that in way in 1983 when I started the investment advisory firm, I said I was not starting the firm to have it grow, be a big firm. I was looking to do something that I thought would be fun and so I committed to being willing to lose 15,000 and that was it.

[00:57:54] Paul Merriman: And that’s all I ever invested in it. Of course I put a lot of sweat equity into it over the years, but as far as actual investing and taking a risk, but in a sense it was like, for me, because I don’t have any hobbies, what I’m doing right now, this is my hobby. I don’t play golf. And so I was investing in a sense in my hobby, and I don’t see how that’s any different than spending money on golf.

[00:58:23] Paul Merriman: But I do say to people who want to speculate, all I care for you is that you don’t speculate with money that you might need later in life. And the problem with that is we have no idea what we’re going to need later in life. My wife and I have a dear friend who’s, I think she’s 68 and she requires around the clock help.

[00:58:46] Paul Merriman: And I think her cost of living is something like, I mean, cost of being taken care of is $24,000 a month, and she had accumulated. A lot of wealth thinking she was going to leave it to her daughter. And in our last conversation she says, I’m not going to leave anything to my daughter because it’s likely to take what I’ve got to get through where I am.

[00:59:11] Paul Merriman: So how do we know this stuff? And of course, at that point you could say, well, with that $5,000 have made, really made any difference. So there’s probably, it’s all back to what Chris said about when it’s about personal investing, they’re all personal decisions and behind almost every one of those decisions is a kind of a dream.

[00:59:33] Paul Merriman: Either a short term dream or long-term dream because it’s about the unknown. It can’t be anything more than a dream in a sense. But I really don’t encourage people to speculate with a lot of money. 

[00:59:48] Robert Leonard: Well, thank you guys both so much for joining me. You both were very generous with your time. I know you’re retired, but I still, time is still very valuable and I appreciate you taking out over an hour of your time out of your day today to chat with me and the audience and help us get better with our finances.

[01:00:02] Robert Leonard: So thank you both for joining me. Where can the audience go? Where would you like them to go to connect with you both? 

[01:00:09] Paul Merriman: Well, we are both available at paulmerriman.com and our dream in life is that every one of your listeners will get the free two funds for life and the free, we’re talking millions and the reason we provide it as a free PDF is because you can then send it to all of your relatives you think might find it helpful.

[01:00:38] Paul Merriman: We really are on a quest to help as many people as we can, and that is the greatest help. That people can be in helping others get our stuff. So thank you, Robert, for this opportunity. 

[01:00:53] Chris Pedersen: And Paul said earlier that the ultimate buy and hold wasn’t the ultimate in the sense that it’s the ultimate for everyone.

[01:01:01] Chris Pedersen: But we really want people, if they’re going to be buy and hold investors to find their ultimate portfolio, whether that’s a target date fund, a two fund for life strategy, any of the other portfolios we have on our website, it really is about finding the one that is right for you that you can stick with.

[01:01:19] Chris Pedersen: Because that’s what lets you, Robert, look away, right? You’ve decided, Hey, I’m good. I got it. I mean, this is good for me. And the six words in investing that I love to quote from Jack Bogle, were buy right hold tight, don’t peak. And to do that, you have to find your ultimate buy and hold. You have to find your portfolio.

[01:01:39] Chris Pedersen: And that’s really what we’re trying to help people do. 

[01:01:42] Robert Leonard: I’ll put a link to you guys’ resources, the website, everything in the show notes below for anybody that’s interested. And to what Paul alluded to is that if you go to their website, there’s a book section. If you click on the books, the titles, it actually opens a PDF with the books for free.

[01:01:56] Robert Leonard: Like the entire books all in pdf. It’s no email capture, no nothing. It’s free. It literally just opens right up. So it’s pretty neat. I was telling Paul and Chris before the interview that I was surprised that it worked that way, but it’s pretty great. So if you guys want those free books, go to the website, check it out.

[01:02:10] Robert Leonard: I’ll put links in the show notes below for everything that we talked about today, the website and all their resources. And again, Chris, Paul, thank you guys so much for joining me today. 

[01:02:18] Chris Pedersen: Thank you. Yes, thank you, Robert. Appreciate the opportunity. 

[01:02:21] Robert Leonard: All right, guys. That’s all I had for this week’s episode of Millennial Investing.

[01:02:25] Robert Leonard: I’ll see you again next week. 

[01:02:28] Outro: Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com.

[01:02:49] Outro: This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.