What Two Investing Giants Agree (and Disagree) On

I recently tuned into a fascinating talk on the "Catching Up To FI" podcast – a debate between two notable figures in the personal finance and investing world: Rick Ferri and Paul Merriman. Both are well-known members of the Bogleheads community, and their conversation offered some truly compelling insights.

Who Are Rick Ferri and Paul Merriman?

Before we dive into their debate, let's briefly introduce these two influential voices:

• Rick Ferri: A long-time investment advisor who has managed over a billion dollars for clients. He's worked on Wall Street, flown fighter jets, and today hosts the popular "Bogleheads on Investing Podcast." He is also an hourly financial planner.

• Paul Merriman: Also a long-time financial advisor and a highly respected member of the Bogleheads community, known for his advocacy of specific investment strategies.

Where They Agree: The Pillars of Sound Investing

Despite their key differences, Ferri and Merriman share fundamental beliefs that align with core Bogleheads principles. These are universal truths for long-term investors:

1. Stay the Course: Both are huge advocates of having a well-thought-out investment plan and, crucially, sticking to it through market ups and downs. I wholeheartedly agree with this. In my career, I've consistently seen that significant losses often occur when people deviate from their original intentions and plans due to short-term market fluctuations.

2. Stay Diversified: They emphasize the importance of broad diversification across various asset classes. They both suggest that younger investors should generally hold less in bonds because they don't need the immediate stability; for younger people with lower account balances, stability often comes from consistent new contributions rather than asset allocation. For older investors with larger portfolios, more bonds can provide necessary stability since new contributions have less impact.

3. Keep Costs Low: As prominent figures in the Bogleheads community (which champions low-cost investing), it's no surprise that both Ferri and Merriman are strong advocates for minimizing investment costs.

Where They Disagree: The Small-Cap Value Debate

This is where the fascinating divergence in their philosophies comes into sharp focus.

• Paul Merriman's Stance: Paul is a strong advocate for heavily investing in small-cap and value-type companies. His argument stems from the belief that these companies are often riskier, and therefore, should inherently have a higher expected return over long periods of time. He also contends that if investors truly understand this strategy and can commit to it, it is a viable path to enhanced returns.

• Rick Ferri's Counterpoint: Rick makes the compelling argument that pursuing a small-cap value tilt is an active decision and should be approached with great caution. He generally advocates for simply buying the entire market, much like Vanguard founder Jack Bogle did.

Rick's reasons for disagreeing with a deliberate small-cap value tilt are rooted in practicality and potential pitfalls:

1. Increased Costs: Implementing a tilt often involves higher expense ratios or trading costs compared to broad market index funds.

2. Added Complexity: It adds a layer of complexity to a portfolio that might not be necessary or beneficial for most investors.

3. No Guarantee of Outperformance: While small-cap and value stocks have historically outperformed the broader market in the past, there is no guarantee that this outperformance will continue indefinitely into the future.

This debate between the two men has been ongoing for many years, often taking the stage at Bogleheads conferences. It highlights the difference between theoretical long-term outperformance factors and practical, low-cost, simplified investing.

What Do You Think?

The discussion between Rick Ferri and Paul Merriman is a fantastic illustration of how even highly respected experts can have different approaches to optimizing long-term portfolios. It underscores the point that real life is often much messier than spreadsheets, and personal biases and comfort levels play a significant role.

What do you think about this debate? What's your approach to these investment considerations? Let me know in the comments below!

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you build a disciplined investment plan and see if we're a good fit.