The Math an the History of Investing

WATCH THE VIDEOWant to build a multi-million-dollar retirement portfolio without gambling on single stocks? This is the first session of the four-part series I recorded for the teachers of Next Gen Personal Finance — and I’m sharing it here with you. In it, I break down the timeless principles, the math and the market history every long-term investor needs to know.WHAT YOU’LL LEARN IN THIS EPISODE• The Math of Compounding [01:43] — how finding an extra 0.5% to 1% in returns — or starting just five years earlier — can add millions to your lifetime wealth.• The Power of Starting Early [09:48] — why your initial investment years build your foundation, and how both bull and bear markets work in favor of young, disciplined savers.• Budgeting Strategy [19:43] — applying the “Pay Yourself First” rule and the 50/30/20 framework to establish sustainable saving habits.• Stocks vs. Bonds [22:44] — understanding why stocks are low-risk for long-term growth, while bonds carry inflation risk over decades.• Market Diversification [30:08] — why 4% of companies generate nearly all stock-market gains, and how owning total-market index funds ensures you don’t miss out on them.• Equity Asset Classes [37:59] — comparing large-cap blend, large-cap value, small-cap blend and small-cap value to reduce volatility and boost returns.• Target-Date Funds [49:38] — why automated, age-tailored allocation helps investors stay the course and avoid emotional mistakes.Tune in to discover how staying the course, keeping expenses low, and letting history guide your strategy can transform your financial future.Join us next week for The #1 Reason to Invest in Index Funds.

Paul opens with news of a new opportunity to reach young investors: a five-part series for Next Generation Personal Finance (NGPF.org), available to some 150,000 teachers who use NGPF's free curriculum. Topics include the math and history of investing, the case for index funds, the inside story on diversification, the $5 million payoff for a financially literate high school graduate, and a teacher Q&A session. Each presentation will be shared with Sound Investing listeners the following week.Then Paul turns to two listener questions that go to the heart of how people actually experience the market.The first asks whether broad diversification really produces the best returns, or whether a more focused portfolio would do better. He walks through the Bessembinder research showing that roughly 4% of companies drove most of the market's long-term return, Fama and French data on small cap value going back almost 100 years, and Vanguard's own real time returns since 1998 comparing $10,000 invested in the S&P 500, mid cap, small cap blend and small cap value asset classes.The second is a letter from an investor who put his first real savings, earned at $7 an hour, into Fidelity Magellan in 1985, lost 30% on Black Monday in October 1987, and pulled everything out. Forty years later he still fears the next crash and asks whether Paul's Ultimate Buy and Hold portfolio could leave him waking up with half his money gone.Paul closes with a story about five 24-year-old engineers he met on Bainbridge Island, and an offer to anyone who can gather a group that would benefit from a conversation about investing.LINKSFine-Tuning Your Asset Allocation tablesNGPF: ngpf.org

WATCH THE VIDEOIt was a pleasure to be invited back on System Trader with Jack Lempart. Here is a list of the main topics we covered:CHAPTERS0:53 • My own biggest mistake3:15 • Why “the stock market is a casino” is exactly backwards6:48 • “I don’t have enough money to start” — what $100 a month actually becomes9:33 • A $20 bet with my 13-year-old grandson13:04 • How much intelligence does successful investing really require?15:31 • The Mensa Investment Club: buy low, sell lower16:24 • Three books for the psychological hurdles17:38 • “It’s a bad time to invest right now” — the myth that never dies20:00 • Why a falling market is the best thing that can happen to a young investor24:21 • Can a star manager do it for you? SPIVA and Bill Miller30:21 • An ETF is only a wrapper — how do you grade what’s inside it?33:01 • Traditional vs. non-traditional index funds35:49 • Home bias: half U.S., half international, and the lost decade44:04 • Cap-weighted vs. asset-class weighted funds46:26 • Finding your right level of risk before the market tests you55:20 • Is the small-cap value premium dead?62:52 • Financial literacy in high school — and who’s teaching on TikTok64:21 • Where the biggest premium comes from: size, value, quality and momentum69:29 • The one thing to do tomorrow morning: control what you can, then automate

Paul and Chris reflect on Paul’s recent discussion with Rick Ferri. Paul adds information he wished he’d included, and Chris reacts to Paul and Rick’s positions. Together, they discuss the behavioral, trust, and performance benefits and trade-offs of seeking meaningful diversification by adding Small-Cap Value to a portfolio.CHAPTERS00:00:00 – Intro00:02:50 – Chris’ 30k Foot View00:06:16 – Mid-caps?00:10:40 – Tot. Mkt. vs. S&P 50000:20:15 – Trust and Change00:25:45 – Table G1b00:28:50 – VT vs. AVGE00:42:20 – Dollar-Cost-Averaging00:52:00 – Paul’s Grandson’s Question00:53:08 – Gold funds00:59:40 – Travel plans01:02:20 – OutroWatch the video on YouTubeTable G1b — Fine Tuning Table: S&P 500 vs. US Small Cap Value

Watch the video here.Paul sits down with Rick Ferri — not for a debate, but for the kind of honest conversation two people can only have after spending their careers chasing the same goal from different directions.Rick makes the case against tilting: the small cap premium largely disappeared once the research went public around 1980, and he believes value stopped working around 2006. Paul counters with Table G1b, which shows the results of blending small cap value and the S&P 500 in 10% increments from 1970 through 2025 — returns alongside the worst drawdowns each combination had to survive. Then Rick does something unexpected — he crosses to Paul's side of the table and builds a strong argument for small cap value, framing it as a way to capture the return of private companies that represent half of the economy.Where they land is less about who's right than what it costs to be wrong. If you go down the factor road, Rick says, it's a lifetime commitment — not three years.Also covered: lump sum versus dollar cost averaging, what an hourly advisor can do to help do-it-yourself investors implement their new portfolio, the new Trump accounts for newborns, and why VT may not be your best choice in a taxable account.Both Paul and Rick will be at the Bogleheads Conference, November 13–15 at Green Valley Ranch Resort and Spa in Henderson, NV, near Las Vegas. Registration: boglecenter.net/2026conferenceTable G1b — Fine Tuning Table: S&P 500 vs. US Small Cap Value: View the tableStay tuned for next week's podcast, a discussion with Chris Pedersen about this interview with Rick.

This Friday I'm sitting down with my friend Rick Ferri for a debate that I think matters a great deal, even though — or maybe because — Rick and I agree on almost everything. We both believe in diversification, low costs, index funds, ignoring predictions, and staying the course. Where we part ways is what happens after that.Rick's case is that you should simply own the whole market. A total stock market index fund gives you thousands of companies at an extraordinarily low cost, and adding complexity rarely pays. My case is that the academic research — Fama, French, and decades of market history — shows that greater exposure to small and value companies may raise long-term expected returns. Rick calls that factor tilting. I call it better diversification. He'll argue I'm not adding diversification at all, just changing the weights, and he's right that this is exactly what we're doing. The question is whether it's worth doing.We also take on a second question that gets far too little attention: if you do want small and value exposure, where should you get it? Vanguard, Fidelity, DFA or Avantis — traditional indexing or systematic portfolio management? Differences that look trivial today can compound into very large ones over 40 or 50 years.Neither of us is trying to win. Rick may be right. I may be right. Ask us again in 50 years. What I hope you take away is the process — examining evidence, understanding the alternatives, admitting what nobody knows, and committing to a strategy you can stick with. Because every strategy disappoints you eventually, and what you do in that moment matters more than which one you chose.The podcast and video of my conversation with Rick will be available Wednesday, August 19, 2026. If you have any questions for Rick, send them to [email protected].

Paul returns from three days at the Garrett Planning Network retreat with a lesson that has almost nothing to do with investments — and everything to do with getting your money's worth from professional advice.Garrett advisors work by the hour, a business model Paul believes eliminates the conflicts of interest built into assets-under-management relationships. For $1,000 to $8,000, he's convinced most families can get extraordinary value from five to ten hours with a thoughtful, trained hourly planner. But there's a catch: the value of those hours depends almost entirely on your willingness to tell the truth. Inspired by a Seth Godin observation — people lie in focus groups, on surveys, and to themselves — Paul explains why the most valuable planning meeting isn't the one where you look financially successful. It's the one where you're completely honest. Paul and his wife are putting this to the test with an hourly planner of their own, and he'll report back in the weeks ahead.Next, Paul shares a private conversation with his longtime friend Rick Ferri, who challenged an idea Paul has taught for decades: that small cap value, large cap value, and international are equity asset classes at all. Rick argues there's only one equity asset class — the total market — and everything else is a segment or style. Paul takes the challenge seriously, does some digging, and explains why the answer matters far more than a debate over definitions. How you think about asset classes shapes the portfolio you'll live with for the next 60 or 70 years.Finally, Paul digs into AVGE, the Avantis globally diversified all-equity ETF, and how it compares to Vanguard's total market approach (VT and VTI). He walks through the meaningful differences: 70/30 U.S./international at Avantis versus 60/40 at Vanguard, and substantially larger positions in mid cap value, small cap value, and small cap blend. He looks at what those tilts have meant historically — including Vanguard's own mid cap value fund turning $10,000 into roughly $160,000 versus $102,000 for the S&P 500 — and why he believes the extra 0.17% in expenses may be money well spent. For investors who don't want to go all-in, Paul offers simple combinations, like a third VT, a third AVGE, and a third AVUV.CHAPTERS00:00 – Introduction: three topics from the Garrett retreat01:56 – Why hourly advisors have fewer conflicts of interest05:52 – The catch: your willingness to tell the truth06:38 – Seth Godin: "People lie... and they lie to themselves"08:04 – What planners can't fix if they don't know about it13:00 – Paul's debate with Rick Ferri: what is an equity asset class?18:05 – Why the definition shapes your lifetime portfolio21:34 – AVGE vs. VT: U.S./international balance23:07 – Comparing value, blend, and growth exposure25:00 – Mid cap and small cap: what history shows30:15 – Expense ratios and what you're paying for31:35 – Simple combinations: VT + AVGE + AVUV33:15 – Stay the course: closing thoughtsLearn more about the Garrett Planning Network

Paul discusses his upcoming trip to Minneapolis to address almost 100 hourly financial planners at the Garrett Planning Network annual retreat — then shows, in real time, how he uses AI alongside the Truth Tellers. This example is prompted by a Ben Felix video arguing that most people save without knowing their real “why.” Paul asked ChatGPT to explore the question and shares the full AI response, which includes the six steps to creating your “why” — from “dream before you calculate” to purpose → plan → portfolio.In the second part of this podcast he responds to the many listeners who have asked: build the worldwide all-value portfolio with five Avantis ETFs, or simply buy AVGV, a single ETF that owns the same ETFs but in different percentages? Over three years, AVGV compounded at 21.1% (up 77.4%), while the five-fund do-it-yourself version compounded at 22.2% (up 82.6%) with no rebalancing. Doing the work likely earns a better return — but a Morningstar study suggests most investors do better buying the single ETF, because it takes care of all the rebalancing and overcomes the tendency to chase returns as money is added.Paul would appreciate your feedback on this podcast: [email protected]• Ben Felix video on investor myths• Morningstar “Mind the Gap 2025” study• Garrett Planning Network — find an hourly advisor• Meet the Truth Tellers

The hardest part of investing isn't choosing funds — it's building a set of beliefs strong enough to keep you disciplined when the market, the news, and your own emotions all conspire to pull you off course.In this episode, Paul sets aside the usual fine-tuning tables and turns to one of his favorite books, Ben Carlson's Risk and Reward. Table by table, Ben makes the same point in a dozen different ways: the bad stuff is normal, it's happened before, and it will happen again. The goal isn't to avoid it — it's to expect it, so you can stay the course.Along the way, Paul walks through:• The 10 worst days, months, and years in market history — and how the market behaved 1, 5, and 10 years later• Why bonds turn a 43% stock loss into something far gentler, and why a simple 60/40 has never had a losing 20-year period• How stocks actually perform before, during, and after a recession (the average is a gain)• The "dead cat bounces" of 2000–2002 and why three years of false hope wear investors down• What a century of international returns says about putting all your eggs in one basket• The most quietly important number in investing: the market's average daily return of 0.03% — a lifetime of baby stepsThe theme underneath it all: future returns will likely look a lot like the past. We simply have no way to know the sequence — and that's exactly why realistic expectations, low costs, and broad diversification matter more than any forecast.The biggest enemy of the investor, as the data keeps showing, isn't the market. It's the investor.BRINGING FINANCIAL FREEDOM TO NEW AUDIENCESLast week I spent more than three hours with 89 graduating nurses at Texas A&M University, exploring one life-changing idea: how a handful of smart financial decisions can add millions of dollars to your lifetime financial security. Many of you asked to see what these presentations look like, so we're making this one available to watch (link below).LINKS• Ben Carlson, Risk and Reward (Foundation earns when you use this link)• Texas A&M nursing school presentation (3+ hour video)• Texas A&M student feedback• Mike Piper, Social Security Made Simple / other titles• Personal Finance in Your 20s & 30s For Dummies• Free books from Paul Merriman• Boot Camp series & tables

A longtime listener wrote in after watching a Ben Felix video making the point that factor investing may not beat the S&P 500 by the end of an investor’s lifetime — and could even do worse. His question was simple: is factor investing really worth the effort?Paul’s answer turned out to be two answers, so he’s splitting it into two episodes. This week is about the thinking. Next week is about the evidence — including new data Daryl Bahls just sent over.Paul also tries something new: using AI to canvas the writings of the Truth Tellers and surface what they would say about this exact question. What emerges is a point they all agree on — good decisions do not guarantee good outcomes, and bad decisions sometimes produce wonderful ones. Bill Bernstein, Larry Swedroe, Ben Felix, Mike Piper, Christine Benz, Rob Berger, Jim Dahle and Jack Bogle each frame the same distinction: expected returns are not realized returns, and probability is not certainty.Investing is one long series of forks in the road — save or spend, stocks or bonds, index or active, buy-and-hold or market timing — and none of them come with a guarantee. What they come with is a probability. The job is to choose thoughtfully, accept the uncertainty, and have the courage to stay the course while the evidence still supports the plan.LINKS• Meet the Truth Tellers: paulmerriman.com/truth-tellers