Financially reviewed by Patrick Flood, CFA.
The Paul Merriman Ultimate Buy and Hold Portfolio specifies very specific market segments based on historical outperformance. Here we’ll take a look at its components, performance, and the best ETF’s to use in its implementation in 2021.
Disclosure: Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.
Who Is Paul Merriman?
Paul Merriman is a financial advisor and educator who is extremely popular in the financial blogosphere for his assessments on index investing and asset allocation in relation to long-term buy-and-hold investing strategies.
Merriman founded an investment advisory firm in Seattle in 1983, from which he has since retired. He is regularly published on MarketWatch.com, and offers free podcasts, articles, newsletters, and more on his website PaulMerriman.com.
He also designed the Paul Merriman 4 Fund Portfolio.
What Is the Paul Merriman Ultimate Buy and Hold Portfolio?
The Paul Merriman Ultimate Buy and Hold Portfolio, as the name suggests, is a lazy portfolio designed by Paul Merriman for a buy-and-hold investing strategy. It probably has the longest name of all the lazy portfolios, but that’s okay with me.
To design the portfolio, Merriman looked historically at the very specific market segments that had the greatest and most consistent historical outperformance across stocks of all cap sizes globally. Specifically, he maintains that the term “ultimate” must describe a portfolio that has consistently outperformed the S&P 500 with no additional risk.
Merriman himself updates the performance of the Ultimate Buy and Hold Portfolio annually and occasionally swaps out his “best-in-class” ETF recommendations based on tracking, factor exposure, and fees. He is constantly attempting to further optimize the portfolio at the margin. I can get behind that. This post has been updated to reflect Merriman’s best-in-class ETF recommendations for 2021, which satisfyingly rely heavily on offerings from Avantis.
Consistent with investing wisdom of a 60/40 portfolio being the “center of gravity” between risk and return, the Ultimate Buy and Hold Portfolio allocates 60% to stocks and 40% to bonds. As I’ve covered before, this provides long-term growth from stocks combined with volatility and risk reduction from bonds. However, Merriman acknowledges that this asset allocation may not be appropriate for everyone, and suggests that investors should choose their own allocation based on their own personal risk tolerance. I discussed how to do that here.
Let’s look at the specific asset choices.
The bond side of the Ultimate Buy and Hold Portfolio is easier to cover than the stocks side. Merriman advocates for strictly using treasury bonds over corporate bonds. I agree with this wholeheartedly. He specifically suggests using 50% intermediate-term treasury bonds, 30% short-term treasury bonds, and 20% inflation-protected bonds (TIPS).
I personally feel the average bond duration of those allocations is much too conservative, and that investors should aim to roughly match bond duration to their investing horizon, but for the sake of this post, I’m going to leave Merriman’s recommendations unchanged. Again, he suggests that a 60/40 allocation may not be appropriate for everyone.
Merriman explicitly acknowledges that “the Ultimate Buy and Hold Strategy takes calculated risks in stocks while being very conservative on the bond side.” It keeps 12% of the total portfolio in short-term bonds, considered a cash equivalent.
The equities side of the Merriman Ultimate Buy and Hold Portfolio is much more complex and nuanced. Merriman walks us through these steps of construction:
- Start with a basis of large-cap U.S. stocks, accessible via the S&P 500 index.
- Diversify with REITs, as they have historically had a low correlation to the stock market.
- Small stocks have historically outperformed large stocks, so small-caps are overweighted. This is known as the Size premium.
- Value stocks – companies that are believed to be underpriced – have historically outperformed Growth stocks, so Value stocks are overweighted. This is known as the Value premium.
- A truly diversified equities portfolio must incorporate international stocks, so half of the equities side is put in international stocks, again specifically overweighting small-cap and value stocks, as well as Emerging Markets.
My own portfolio draws heavily from the analysis and recommendations by Merriman, specifically as it relates to tilting toward the Size and Value factor premia and overweighting Emerging Markets.
Paul Merriman Ultimate Buy and Hold Portfolio Asset Allocation
Combining all these steps, the Paul Merriman Ultimate Buy and Hold Portfolio asset allocation is as follows:
- 6% U.S. Total Stock Market
- 6% U.S. Large Cap Value
- 6% U.S. Small Cap Stocks
- 6% U.S. Small Cap Value
- 6% U.S. REITs
- 6% International Developed Markets Stocks
- 6% International Value
- 6% International Small Cap Stocks
- 6% International Small Cap Value
- 6% Emerging Markets Stocks
- 12% Short-Term Treasury Bonds
- 20% Intermediate-Term Treasury Bonds
- 8% TIPS
Paul Merriman Ultimate Buy and Hold Portfolio Performance vs. the S&P 500 and 60/40
Over that time period, the Merriman Ultimate Buy and Hold Portfolio has delivered a slightly higher return with similar risk metrics to a traditional 60/40. Below are the results from 1970 from Merriman’s website corresponding to each step of the portfolio’s construction:
Paul Merriman Ultimate Buy and Hold Portfolio ETF Pie for M1 Finance
M1 Finance is a great choice of broker to implement the Ultimate Buy and Hold Portfolio because it makes regular rebalancing seamless and easy, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.
Merriman’s best-in-class ETF recommendations for 2021 rely heavily on fund offerings from Avantis, a relatively new ETF provider founded by former Dimensional employees. The important takeaway is that we would expect Avantis funds to provide reliable factor targeting (e.g. Size, Value, etc.), and indeed they have in their short lifespan so far. We can construct the Ultimate Buy and Hold Portfolio for 2021 like this:
- AVUS – 6%
- RPV – 6%
- IJR – 6%
- AVUV – 6%
- VNQ – 6%
- AVDE – 6%
- EFV – 6%
- FNDC – 6%
- AVDV – 6%
- AVEM – 6%
- VGSH – 12%
- VGIT – 20%
- SCHP – 8%
Going More Aggressive with 80/20 and Longer Duration Bonds
If you’re like me, you might want to use a one-size-fits-most 80/20 allocation instead of 60/40 and use long-term treasury bonds on the fixed income side. I delved into the reasoning for this here.
Using the same backtest above (starting in 2001), I’ve added my modified version as Portfolio 3. Note that the colors below are different from the earlier backtest.
My version would have yielded a slightly higher return with a slightly lower risk-adjusted return (Sharpe ratio).
This 80/20 modified Ultimate Buy and Hold Portfolio then becomes:
- AVUS – 8%
- RPV – 8%
- IJR – 8%
- AVUV – 8%
- VNQ – 8%
- AVDE – 8%
- EFV – 8%
- FNDC – 8%
- AVDV – 8%
- AVEM – 8%
- VGLT – 20%
Aggressive Ultimate Buy & Hold Portfolio – 100/0
Young investors with a long time horizon and/or a high tolerance for risk may desire to go 100% stocks and zero bonds. Removing the bonds knocks it down to 10 funds. Here’s what Merriman’s Aggressive Ultimate Buy & Hold Portfolio looks like:
- AVUS – 10%
- RPV – 10%
- IJR – 10%
- AVUV – 10%
- VNQ – 10%
- AVDE – 10%
- EFV – 10%
- FNDC – 10%
- AVDV – 10%
- AVEM – 10%
Disclosure: I am long AVUV and AVDV in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.