Paul Merriman Ultimate Buy and Hold Strategy
Many strategies and approaches exist to help investors achieve their financial goals. One such strategy that has gained popularity among long-term investors is the Paul Merriman Ultimate Buy and Hold Strategy.
This strategy, developed by financial expert and author Paul Merriman, emphasizes the importance of diversification and buy-and-hold investing to achieve long-term growth.
In this article, we’ll look into the allocation, advantages, and disadvantages of this strategy and determine who it may be best suited for.
Key Takeaways – Paul Merriman Ultimate Buy and Hold Strategy
- The Paul Merriman Ultimate Buy and Hold Strategy is a popular long-term investment strategy that emphasizes diversification and buy-and-hold investing.
- The strategy’s unique allocation involves dividing the portfolio into ten distinct asset types, providing broader market exposure and risk mitigation than going with a single asset type.
- While the strategy offers advantages such as its relative simplicity, diversification, and long-term potential, it may be too conservative for investors seeking higher returns or a more hands-on approach to their portfolios.
- We ran a backtest to see how it did against the S&P 500.
Paul Merriman Ultimate Buy and Hold Strategy Allocation
The cornerstone of the Paul Merriman Ultimate Buy and Hold Strategy is its unique allocation, which is designed to provide investors with broad market exposure and mitigate risks.
This strategy recommends dividing an investor’s portfolio into ten distinct asset classes (technically asset types or flavors as they aren’t technically different asset classes), with each assigned a specific percentage of the total investment.
These asset classes include:
- Large-cap US stocks
- Large-cap international stocks
- Small-cap US stocks
- Small-cap international stocks
- Emerging market stocks
- US real estate investment trusts (REITs)
- International real estate investment trusts (REITs)
- US government bonds
- International government bonds
- Inflation-protected bonds (TIPS)
They’re generally assigned 10% each.
The allocation of these asset classes aims to ensure that an investor’s portfolio remains diversified across various sectors and geographical locations, reducing the impact of market fluctuations and providing steady returns over time.
The allocation to each varies and is provided on his official website.
It tends to concentrate most of the assets in equities ETFs.
Paul Merriman Ultimate Buy and Hold Strategy Advantages
The advantages of the Paul Merriman Ultimate Buy and Hold Strategy lie in its simplicity, diversification, and long-term potential.
By spreading investments across multiple asset classes, investors can lower the risk and volatility in their portfolios.
Additionally, the buy-and-hold approach encourages long-term investing, which has historically shown to outperform short-term trading strategies, which tend to be higher risk and higher reward.
Long-term holding is more strategic – i.e., picking an allocation and letting it do its thing over the long run – while short-term day trading is more tactical and about spotting mispricings.
(We cover more about strategic asset allocation vs. tactical trading in a separate article.)
Furthermore, this strategy is relatively easy to implement, as investors can allocate funds to low-cost index funds or exchange-traded funds (ETFs) that track the recommended asset classes.
Paul Merriman Ultimate Buy and Hold Strategy Disadvantages
While the Paul Merriman Ultimate Buy and Hold Strategy has many advantages, it is not without its drawbacks.
Some investors may find the allocation too conservative, potentially limiting their returns in strong market conditions.
Additionally, the diversification across multiple asset classes can lead to a lower overall yield, as some asset classes may underperform in certain market conditions.
Lastly, this strategy may not be suitable for those who prefer a more hands-on approach to investing or prefer more of a trading approach, as the buy-and-hold methodology requires patience and a long-term outlook.
Who Is the Paul Merriman Ultimate Buy and Hold Strategy Best For?
The Paul Merriman Ultimate Buy and Hold Strategy is best suited for long-term investors who prioritize diversification and risk management.
This approach is particularly beneficial for those with a lower risk tolerance, as it aims to provide steady returns with minimized volatility.
Moreover, individuals seeking a straightforward and easy-to-implement investment strategy may find this method appealing, as it primarily relies on low-cost index funds or ETFs.
However, investors seeking higher returns or more active investment strategies may find this approach too conservative for their preferences.
Performance of the Paul Merriman Ultimate Buy and Hold (UB&H) Strategy
We did a 10% allocation to each of the 10 asset classes listed above and compared it to an all-stocks approach (the S&P 500).
Because certain data (various TIPS maturities) only go back so far, we looked at it from 2001 forward.
Here were the results.
Results
| Portfolio | Initial Balance | Final Balance | CAGR | Stdev | Best Year | Worst Year | Max. Drawdown | Sharpe Ratio | Sortino Ratio | Market Correlation |
|---|---|---|---|---|---|---|---|---|---|---|
| UB&H | $10,000 | $46,176 | 7.09% | 12.29% | 33.77% | -27.99% | -44.05% | 0.51 | 0.72 | 0.86 |
| S&P 500 | $10,000 | $50,099 | 7.48% | 15.79% | 33.35% | -37.04% | -50.89% | 0.45 | 0.64 | 1.00 |
There is improved performance from the vantage point of risk-adjusted returns, with a better Sharpe ratio, Sortino ratio, and CAGR relative to volatility (as measured by standard deviation).
However, the Paul Merriman Ultimate Buy and Hold Strategy is still equity-centric at an 80% total equities allocation, so from a risk perspective almost all of the portfolio is still in equities.
Below we have some performance statistics, comparing the two in more detail:
Performance Statistics
| Metric | UB&H | S&P 500 |
|---|---|---|
| Arithmetic Mean (monthly) | 0.64% | 0.71% |
| Arithmetic Mean (annualized) | 7.91% | 8.83% |
| Geometric Mean (monthly) | 0.57% | 0.60% |
| Geometric Mean (annualized) | 7.09% | 7.48% |
| Standard Deviation (monthly) | 3.55% | 4.56% |
| Standard Deviation (annualized) | 12.29% | 15.79% |
| Downside Deviation (monthly) | 2.45% | 3.13% |
| Maximum Drawdown | -44.05% | -50.89% |
| Stock Market Correlation | 0.86 | 1.00 |
| Beta(*) | 0.67 | 1.00 |
| Alpha (annualized) | 1.93% | -0.00% |
| R2 | 74.47% | 100.00% |
| Sharpe Ratio | 0.51 | 0.45 |
| Sortino Ratio | 0.72 | 0.64 |
| Treynor Ratio (%) | 9.30 | 7.11 |
| Calmar Ratio | 0.20 | 0.55 |
| Active Return | -0.39% | 0.00% |
| Tracking Error | 8.09% | 0.00% |
| Information Ratio | -0.05 | N/A |
| Skewness | -0.91 | -0.57 |
| Excess Kurtosis | 3.89 | 1.07 |
| Historical Value-at-Risk (5%) | -5.46% | -8.12% |
| Analytical Value-at-Risk (5%) | -5.20% | -6.79% |
| Conditional Value-at-Risk (5%) | -8.26% | -10.01% |
| Upside Capture Ratio (%) | 68.47 | 100.00 |
| Downside Capture Ratio (%) | 63.58 | 100.00 |
| Safe Withdrawal Rate | 8.44% | 5.60% |
| Perpetual Withdrawal Rate | 4.35% | 4.71% |
| Positive Periods | 176 out of 268 (65.67%) | 173 out of 268 (64.55%) |
| Gain/Loss Ratio | 0.85 | 0.81 |
| * US stock market is used as the benchmark for calculations. Value-at-risk metrics are based on monthly values. | ||
FAQs – Paul Merriman Strategy
How do I implement the Paul Merriman Ultimate Buy and Hold Strategy in my portfolio?
To implement the strategy, you can invest in low-cost index funds or exchange-traded funds (ETFs) that correspond to the recommended asset classes.
Allocate your investment according to the specific percentages suggested for each asset class, and periodically rebalance your portfolio to maintain the desired allocation.
Can I use single stocks instead of ETFs?
Yes, but you’ll have the following drawbacks:
- won’t get the same level of diversification
- concentrated risk exposures
- potentially higher transaction costs
How often should I rebalance my portfolio when using the Paul Merriman Ultimate Buy and Hold Strategy?
Rebalancing frequency depends on your personal preferences and goals.
However, it is generally recommended to rebalance your portfolio at least once a year or whenever the allocation deviates significantly from the target percentages due to market fluctuations.
We have more on rebalancing a portfolio in this article.
Can I customize the allocation of the Paul Merriman Ultimate Buy and Hold Strategy to fit my risk tolerance and investment goals?
Yes. While the strategy provides a suggested allocation, you can adjust the percentages to better suit your individual risk tolerance and goals.
Keep in mind that deviating from the original allocation may impact the strategy’s effectiveness in terms of diversification and risk management.
Is the Paul Merriman Ultimate Buy and Hold Strategy suitable for investors in retirement or approaching retirement?
The strategy can be adapted to suit investors in or nearing retirement by adjusting the allocation to include a higher percentage of bonds and other lower-risk assets.
This shift provides a more conservative portfolio, focusing on capital preservation and income generation.
How does the Paul Merriman Ultimate Buy and Hold Strategy compare to other long-term investment strategies, like the Bogleheads or the Permanent Portfolio?
The Paul Merriman Ultimate Buy and Hold Strategy shares similarities with the Bogleheads approach, as both advocate for diversification and long-term investing using low-cost index funds or ETFs.
However, Merriman’s strategy emphasizes a broader allocation across ten distinct asset types (though still very equity-heavy).
The Permanent Portfolio, on the other hand, involves allocating equal portions of investment capital into four asset classes: stocks, bonds, cash, and gold.
The main difference lies in the level of diversification and the specific allocation of assets in each strategy.
Can I use the Paul Merriman Ultimate Buy and Hold Strategy with a tax-advantaged account, like a 401(k) or an IRA?
Yes, the strategy can be applied to both tax-advantaged accounts and taxable accounts.
When implementing the strategy in a tax-advantaged account, consider the tax implications of the investments, as some assets may be more tax-efficient than others.
Additionally, some 401(k) plans may have limited investment options, so you may need to work within those constraints to achieve the desired allocation.
Related
- Harry Browne Permanent Portfolio
- Golden Butterfly Portfolio
- Yale Portfolio (David Swensen Lazy Portfolio)