Paul Merriman 4 Fund Portfolio Review & M1 Finance ETF Pie (2024) (2024)

The Paul Merriman 4 Fund Portfolio is a simple, equal-weighted equities portfolio that tilts toward small caps and Value stocks. Here we’ll take a look at its components, performance, and the best ETFs to use in its implementation.

Interested in more Lazy Portfolios? See the full list here.

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Paul Merriman 4 Fund Portfolio Video

Prefer video? Watch it here:

Who Is Paul Merriman?

Paul Merriman is a financial advisor and educator who is referenced often in the financial blogosphere for his impactful and approachable analyses 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.

Merriman has written a number of highly-rated books that you can find on Amazon here. His newest one from November, 2020 is We're Talking Millions!: 12 Simple Ways to Supercharge Your Retirement. You can read more about him on his website here.

What Is the Paul Merriman 4 Fund Portfolio?

The Paul Merriman 4 Fund Portfolio, as the name suggests, is a lazy portfolio designed by Paul Merriman that utilizes equal weightings of 4 assets. The portfolio is 100% stocks and is thus considered more risky than his Ultimate Buy and Hold Portfolio.

To design the portfolio, Merriman looked within stocks at the styles and cap sizes that have paid a risk premium historically. Basically, the portfolio places large bets on the well-established Size and Value factor premia, tilting heavily to small cap stocks and Value stocks, to hopefully deliver market outperformance over the long term. The research is sound and the concept is simple.

Unfortunately the Size and Value factors suffered for the decade 2010-2020, lagging the market. I don't employ or advise market timing, butAQR maintainsthat Value is basically the cheapest it's ever been right now relative to history, suggesting that now may actually be theworsttime to give up on the factor, and that it's due for a comeback. We would alsoexpectfactors to have negative premiums from time to time, even for extended time periods. Value stocks beat Growth stocks and small stocks beat large stocks in 2021 and 2022, so that comeback may be happening.

Merriman suggests that this 4 fund portfolio can indeed provide a “comeback” after all the recent market volatility. Note again though that this is a high-risk portfolio that is likely better suited for investors with a high risk tolerance and a long time horizon.

The Paul Merriman 4 Fund Portfolio looks like this:

25% S&P 500
25% Large Cap Value
25% Small Cap Blend
25% Small Cap Value

Just as with his Ultimate Buy and Hold Portfolio, Merriman walks us through each “building block” of the portfolio.

1. The is considered to be a sufficient proxy for the U.S. stock market and is a good, diversified “work horse.” It provides a solid foundation for the portfolio across large-cap Growth and Value stocks.
2. Large cap Value stocks have beaten large cap Growth stocks historically, so the 2nd building block is to tilt large-cap Value with 25%. This is again known as the Value factor premium.
3. Small stocks have beaten large stocks historically, presumably because investors demand higher returns for riskier, more volatile small-cap stocks compared to large-cap stocks. This is known as the Size factor premium.
4. Small cap Value stocks have beaten small cap Growth stocks historically, so we're tilting small cap Value with 25%. This enhances exposure to both the Size and Value factor premia.

My own personal portfolio tilts toward both of these factors.

Paul Merriman 4 Fund Portfolio Performance vs. the S&P 500

Going back to 1928, the S&P 500 index (U.S. large cap blend) has had a compound annualized return of 10.2% through 2022.

Large cap Value: 11.2%
Small cap stocks: 12.1%
Small cap Value: 13.4%

These 4 combined: 11.9%.

Here's a performance backtest of the Merriman 4 Fund Portfolio from 1972 through 2022:

It has smoked the S&P 500 historically, which again we would expect over the long term, even on a risk-adjusted basis despite its greater volatility.

Paul Merriman 4 Fund Portfolio ETF Pie for M1 Finance

M1 Financeis a great choice of broker to implement the Paul Merriman 4 Fund 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.

Using Merriman's “best-in-class” ETFs, we can construct the Paul Merriman 4 Fund Portfolio like this:

• VOO – 25%
• RPV – 25%
• IJR – 25%
• AVUV – 25%

You can add the Paul Merriman 4 Fund Portfolio pie to your portfolio on M1 Finance by clickingthis linkand then clicking “Save to my account.”

Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.

Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.

Disclosure:I am long VOO and AVUV in my own portfolio.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment 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. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.