Paul Merriman Ultimate Buy and Hold Portfolio Review & ETFs (2024) (2024)

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 ETFs to use in its implementation in 2024.

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Ultimate Buy and Hold Portfolio Review Video

Prefer video? Watch it 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.

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.

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 2024, 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.

Bonds

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 for most investors, 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.

Stocks

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

Using live fund data going back to 1999, here's the Ultimate Buy and Hold Portfolio's performance vs. a traditional 60/40 portfolio (using interm. treasuries) and an through 2022:

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. Notice how its volatility was roughly 1/3 less than that of the S&P 500 and its max drawdown was much smaller.

Looking at the 5-year rolling returns, we can see how the UB&H portfolio's factor exposure and international diversification shined in the early 2000's and suffered during the latter years of the backtest:

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 Financeis 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 2024 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 theUltimate Buy and Hold Portfoliofor 2024 like this:

• AVUS – 6%
• RPV – 6%
• IJR – 6%
• AVUV – 6%
• VNQ – 6%
• AVDE – 6%
• DFIV – 6%
• FNDC – 6%
• AVDV – 6%
• AVEM – 6%
• VGSH – 12%
• SPTI – 20%
• VTIP – 8%

You can add the Ultimate Buy and Hold 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.

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 just use long-term treasury bonds on the fixed income side. I delved into the reasoning for this here.

Using the same backtest above, I've added my modified version as “UBH-80/20” Note that the colors below may be different from the earlier backtest.

The 80/20 would have yielded a 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%
• DFIV – 8%
• FNDC – 8%
• AVDV – 8%
• AVEM – 8%
• VGLT – 20%

To add this pie to your portfolio on M1 Finance, click this link and then click “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.

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. This one is actually sometimes specifically referred to as the “Paul Merriman 10 Fund Portfolio.”

Here's what Merriman's Aggressive Ultimate Buy & Hold Portfolio looks like:

• AVUS – 10%
• RPV – 10%
• IJR – 10%
• AVUV – 10%
• VNQ – 10%
• AVDE – 10%
• DFIV – 10%
• FNDC – 10%
• AVDV – 10%
• AVEM – 10%

And in the interest of full disclosure, here's the backtest for this aggressive version versus the original 60/40 version and the S&P 500:

As we would expect, this aggressive 100% stocks version of the Ultimate Buy & Hold Portfolio beat the S&P 500 on both a general and risk adjusted basis, but had a lower risk-adjusted return than the UB&H versions including bonds.

To add this pie to your portfolio on M1 Finance, click this link and then click “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.

Are you nearing or in retirement? Use my link here to get a free holistic financial plan from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.

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 AVUV and AVDV 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.