Paul Merriman Ultimate Buy And Hold Portfolio: Backtest, Allocations, and Performance Analysis

The Merriman Ultimate Buy And Hold Portfolio by Paul Merriman aims to diversify investments as widely as possible across asset classes (bonds & stocks), countries, company size, and valuation. The goal is to have aa portfolio that achieves good risk-adjusted returns.

You implement Paul Merriman Ultimate Buy and Hold Portfolio strategy by using ETFs only. The good part is that you do not need to pick individual stocks and bonds, it’s all “passive” and an rebalancing now and then. It’s simple, exactly as the way it was meant to be by Paul Merriman.

According to our backtests over the past 16 years, Paul Merriman’s ultimate portfolio has generated a compound annual return of 3.95% with a maximum drawdown of -37.10%. The annual return is low, but it’s partially explained by lower risk.

Let’s look at the portfolio in more detail:

Who Is Paul Merriman

Paul Merriman is a nationally recognized authority on mutual funds, index investing, and asset allocation.

After retiring in 2012 from Merriman Wealth Management, which he founded in 1983, Paul created The Merriman Financial Education Foundation, dedicated to providing investors of all ages with free information and tools to make informed decisions in their own best interest and successfully implement their retirement savings program.

Paul is the author of eight books, including, We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement; Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind; Live It Up Without Outliving Your Money and the “How To Invest” series.

He writes a regular column for The WSJ’s MarketWatch.com and produces a multi-award-winning weekly podcast, “Sound Investing,” named by Money magazine as the best money podcast. Subscribers to his free twice-monthly newsletter numbered more than 30,000 in 2021.

What Is The Merriman Ultimate Buy And Hold Portfolio

Paul Merriman’s Ultimate Buy and Hold Portfolio is a passive portfolio designed by Paul Merriman and is a buy and hold investment strategy. It’s meant to be simple and understandable for every novice retail investor.

Merriman analyzed the individual market segments with the highest and most stable historical performances among stocks of all capitalization sizes and stock classes (growth, value, and both) worldwide to develop the portfolio.

Merriman himself updates the Ultimate Buy and Hold Portfolio figures annually and changes his “best-in-class” ETF recommendations based on tracking, factor exposure, and fees from time to time.

The final buy-and-hold portfolio allocates 60% stocks and 40% bonds to balance risk and return. This distribution provides long-term growth from stocks, combined with volatility and risk reduction from bonds.

However, this asset allocation may not be suitable for all investors, which is why Merriman advises investors to choose their own allocation based on their personal risk tolerance.

Merriman argues that the term “ultimate” should describe a portfolio that consistently outperforms the S&P 500 without additional risk. Did it the portfolio accomplish that? Below we have backtested the portfolio and you can judge yourself.

Why Paul Merriman Ultimate Buy And Hold Portfolio has bonds

The main purpose of bonds in a portfolio is to get uncorrelated return, lower risk, and smooth returns – bonds are used to minimizing portfolio volatility and drawdowns. Merriman suggests using US Treasuries in the following proportions:

• 50% medium-term treasury bonds;

• 30% short-term treasury bonds;

• 20% inflation protected bonds (TIPS).

Using corporate bonds instead of treasuries is not recommended because corporate bonds are more risky and volatile than treasuries and, in many cases, behave like stocks, especially lower grade bonds.

Merriman suggests using short-term and medium-term Treasury bonds, however, investors can use longer-term bonds, which traditionally show higher returns than short-term ones, while remaining low risk and volatility.

Stocks is the cornerstone in Merriman Ultimate Buy And Hold Portfolio

Stocks have been the best asset in terms of returns over the last century. Thus, stocks are used as high-return securities that increase portfolio returns, but stocks are more volatile than bonds – hence, more risk and potential for behavioral mistakes.

Merriman suggests using the following types of stocks:

• Stocks of companies with large capitalization, which are included in the S&P 500 index;
• Real estate fund stocks (REITs), which historically have a low correlation with the S&P 500 stock index;
• Small-cap stocks have historically outperformed large stocks. These stocks carry more weight in the portfolio to compensate for their small caps;
• Value stocks that are traditionally considered undervalued and have historically outperformed growth stocks. Value stocks carry more weight in the portfolio in the form of an undervaluation premium;
• International stocks, which must be half of the portfolio. The second half of the portfolio consists of domestic stocks of the country in which you live. Your domestic stocks will be US stocks if you live in the US.

Asset Allocation In The Merriman Ultimate Buy And Hold Portfolio

The 60/40 asset allocation of Paul Merriman’s buy and hold portfolio 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.

That’s a lot of different assets and we would need to have many ETFs to replicate his ideas:

Paul Merriman Best in Class ETFs

There are potentially many ETFs that are suitable for inclusion in the portfolio.

Let’s look at some of the potential US ETFs that are suitable for Merriman’s portfolio:

Market Segment	Best-in-Class ETF	Alternative Recommendations
U.S. Large Cap Blend	AVUS	VOO, VTI, IVV, SPLG, SCHX
U.S. Large Cap Value	RPV	VONV, IUSV, SCHV, SPYV
U.S. Small Cap Blend	IJR	VIOO, IWC, SCHA, SPSM
U.S. Small Cap Value	AVUV	VIOV, SLYV, IJS, RZV
U.S. REIT	VNQ	FREL, USRT, SCHH
Int’l Large Cap Blend	AVDE	VEA, IEFA, SPDW, SCHF
Int’l Large Cap Value	DFIV	EFV, VYMI, FIVA, DWX
Int’l Small Cap Blend	FNDC	VSS, SCZ, GWX, SCHC
Int’l Small Cap Value	AVDV	DLS
Emerging Markets	AVEM	VWO, IEMG, SPEM, SCHE
EM Large Cap Value	AVES	DFEV
EM Small Cap Blend	EEMS	DGS, EWX
Int’l REIT	—	VNQI, IFGL
Short-Term Bonds	VGSH	SHY, SPTS, SCHO
Int’l Term Bonds	SPTI	IEF, VGIT, SCHR
TIPS	VTIP	STIP, SCHP

Backtesting The Merriman Ultimate Buy And Hold Portfolio

We will test a conservative portfolio with 60% stocks and 40% bonds. (We have backtested the 60/40 portfolio historical returns before.)

We picked alternative ETFs with the longest history to test the portfolio over a long historical period, including the financial crisis in 2008.

We picked the following ETFs:

Market Segment	Alternative ETF
U.S. Large Cap Blend	VTI
U.S. Large Cap Value	RPV
U.S. Small Cap Blend	IJR
U.S. Small Cap Value	SLYV
U.S. REIT	VNQ
Int’l Large Cap Blend	VEA
Int’l Large Cap Value	EFV
Int’l Small Cap Blend	SCZ
Int’l Small Cap Value	DLS
Emerging Markets	VWO
EM Large Cap Value	AVES
EM Small Cap Blend	DGS
Int’l REIT	IFGL
Short-Term Bonds	VGSH
Int.-Term Bonds	SPTI
TIPS	STIP

Paul Merriman Ultimate Buy And Hold Portfolio performance

When we backtested the above-mentioned ETFs, we got the following performance, return, and equity curve:

We started with 10 000 in 2007 and ended up with 18 817 after 16 years. Considering how S&P 500 have performed in that period, the result is not very aspiring.

Let’s look at the risk and drawdowns:

Risk and drawdowns Paul Merriman Ultimate Buy And Hold Portfolio

The chart below simulates the drawdowns from an equity peak. Compared to buy and hold S&P 500, the drawdowns are smaller – as expected because of the large bond component:

Monthly and annual returns

If we break the performance down to each year we get the following table:

The bond allocation makes the portfolio more recession resistant, but it also limits stellar years in the stock market. Worth noting is the modest drops in 2008 and 2022.

Performance statistics

Let’s break down the performance metrics and statistics of the portfolio:

Statistical Metric	Portfolio	S&P 500
Annual Return % (CAGR)	3.95%	8.91%
Exposure % (time in the market)	79.14%	100.00%
Risk-Adjusted Return %	111.41%	302.12%
Max. drawdown	-37.10%	-55.19%
CAR/MaxDD	0.11	0.16

Conclusion

The portfolio lost out to the S&P 500 in terms of returns but outperformed in terms of risk.

The portfolio’s drawdown is significantly lower than that of the index because a significant portion of the portfolio (40%) is in Treasury bonds.

In general, this portfolio may interest conservative investors who are primarily concerned about preserving capital and not so much about increasing it.

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FAQ:

What is the Merriman Ultimate Buy And Hold Portfolio by Paul Merriman?

The Merriman Ultimate Buy And Hold Portfolio is an investment strategy designed by Paul Merriman to achieve diversified and risk-adjusted returns. It spans various asset classes, including stocks and bonds, and is implemented using ETFs for simplicity.

What are the key features of Paul Merriman’s Ultimate Buy And Hold Portfolio?

The portfolio diversifies across different market segments, countries, company sizes, and valuation classes. The portfolio consists of a 60/40 allocation between stocks and bonds. It includes a mix of U.S. and international stocks, REITs, and various types of bonds, providing a broad and diversified exposure to different market segments.

How is the Merriman Ultimate Buy And Hold Portfolio implemented using ETFs?

The portfolio is implemented passively, utilizing ETFs to represent different asset classes. This approach eliminates the need to pick individual stocks and bonds, making it a straightforward and passive investment strategy. Over the past 16 years, the portfolio has generated a compound annual return of 3.95% with a maximum drawdown of -37.10%. The strategy aims for a balance between risk and return, leading to a lower annual return but with lower risk.