Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind

Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind

by Paul Merriman, Richard Buck

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What kind of shape is your portfolio in?

The financial fallout of recent years was a game changer for anyone and everyone preparing to retire in the near future. In order to build and maintain a solid portfolio in today’s roller-coaster investing climate, you have to be more alert, increasingly proactive, and better educated on the markets

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What kind of shape is your portfolio in?

The financial fallout of recent years was a game changer for anyone and everyone preparing to retire in the near future. In order to build and maintain a solid portfolio in today’s roller-coaster investing climate, you have to be more alert, increasingly proactive, and better educated on the markets than ever before.

In Financial Fitness Forever, Paul Merriman gives you a framework guaranteed to return even the most struggling portfolio to prime health. One of the nation’s most popular investment advisors, Merriman has you focus on five critical questions:

  • Should I use a financial advisor or go it alone?
  • Should I try to beat the market or accept market returns?
  • How should I manage risk?
  • How should I diversify my investments?
  • How should I separate my investments from my emotions?

If you don’t have solid, well-developed answers based on sound investing principles, you need to review your current strategy. Financial Fitness Forever leads you through the process step-by step. Merriman provides detailed answers to each question, all of which combine to form a powerful strategy that will ensure the kind of retirement you’re hoping for.

Merriman doesn’t claim to have the “magic bullet” answer to supercharging profits in unpredictable markets. Instead, he provides a commonsense strategy anyone can use to secure his or her fi nances now and in the future.

The economy is racing forward at breakneck speed, and no one knows where it will end up. By applying the lessons learned in Financial Fitness Forever, you can design a portfolio that will thrive in the long run.

"Paul Merriman is one really smart guy, but more than that, he is wise. And in investment counseling, I'll take wise over smart any day. He has spent a lifetime learning the techniques that make him an outstanding teacher of investing. Now it's your turn to benefit from his knowledge. Make the most of it."
—KNIGHT KIPLINGER, Editor in Chief, Kiplinger Publications

“No one understands what it takes to be a successful investor better than Paul Merriman. If you want to build a winning portfolio for life, this is the book to read.”
—BILL SCHULTHEIS, author, The Coffeehouse Investor

“This is the ultimate strategy for America’s Main Street investors. If your goal is to beat guys like Buffett, avoid future pitfalls, and retire comfortably, this is a must-read.”
—PAUL B. FARRELL, columnist, Dow Jones/, and author, The Winning Portfolio and The Millionaire Code

“A wonderful book! Paul explains simply and clearly how each of us can take personal responsibility for our financial futures by creating a comprehensive plan based on discipline and diversification.”
—ALAN MULALLY, president and CEO, Ford Motor Company

“Using stories and analogies drawn from his decades of experience, Merriman provides a road map with simple but sound advice for a financially fit future.”
—LARRY SWEDROE, principal, The Buckingham Family of Financial Services, and author, The Quest for Alpha

“Paul Merriman is a competitor of mine, and I can think of no finer compliment than that, after forty years in the business, I have learned to be a better investor and manager from reading Paul’s work.”
—JOE SHAEFER, president, Stanford Wealth Management, and publisher, Investor’s Edge newsletter

Financial Fitness Forever shows just how simple it can be to invest successfully and enjoy the future of your dreams.”
—ALLAN ROTH, CBS MoneyWatch, and author, How a Second Grader Beats Wall Street

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McGraw-Hill Professional Publishing
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5 Steps to More Money, Less Risk, and More Peace of Mind


Copyright © 2012 Paul Merriman and Richard Buck
All right reserved.

ISBN: 978-0-07-178699-7

Chapter One


"The future ain't what it used to be." —Yogi Berra

It feels very strange to me to begin a book with a chapter of bad news. I'm a positive guy, an optimist who looks forward to the future. I believe we can have a future that's filled with interesting and fulfilling possibilities. But for reasons I'm going to outline in this chapter, that future belongs increasingly only to those of us who make the right choices and take care of ourselves.

We're in an emotional and financial fix, and in order to know how to get out of it, we should look at how we got into it. In a nutshell, we don't have enough money. Unlike our parents and grandparents, we probably don't have pensions. We have more debt than we can handle. Inflation invisibly and unrelentingly erodes our paychecks and our savings. We are trying to fix things the wrong ways.

It's easy to find financial advice to save more money and work longer. Those are both good pieces of advice, but not everybody can save more. And, most of us simply can't work for the rest of our lives.

What is less common is advice to be smarter investors. But for the rest of our lives, whatever our age and whatever our assets, the single most important thing we can do for the financial future of our families is to make better choices, which, in turn, will make us better investors. If we invest more intelligently, we can keep more of what we have saved and make the most of our savings.

A couple of generations ago, our society took better care of us in some ways. But now in the second decade of the 21st century, the security that our parents and grandparents took for granted has eroded. Millions of Americans are retired or on the brink of retirement without enough resources to continue the lifestyles they enjoyed for years.

Years ago, it was not unusual for multiple family generations to share households. This still is common in many less-developed countries. But in the United States, the practice waned as gradually rising wealth allowed younger people to move out and their parents to stay where they were. But now? The Pew Research Center and AARP reported in 2011 that multigenerational housing is returning. In 2000, about 4.8 percent of all households included multiple generations. A decade later, the number had increased to 6.1 percent, an addition of about 1.8 million such households.

I think it's safe to say that much of this increase was dictated by economic distress.

The Rand Corporation Center for the Study of Aging reported that, since the housing and financial markets began to collapse in 2007, approximately 39 percent of all Americans fell into one or more of the following traps. They had their homes foreclosed, had no job, owed more on their mortgages than their homes were worth, or were two or more months behind on their mortgages.

The center did a study focusing on how people were helping each other, mostly family and friends, get through the economic crisis that extended from 2007 through 2010. One thing it found was that the vast majority of the economic help went from parents to their grown children. More than 40 percent of the households headed by people age 50 to 69 reported giving financial help to younger households.

If you're a parent, that might not surprise you. But maybe it should.

Many of the trends that have been brewing in this country over the past 40 years were aptly summed up by a 69-year-old woman from Vermont. In a letter to her U.S. senator, she observed: "We are the first generation to leave our kids worse off than we were."

Practically forever, Americans have looked forward to enjoying more prosperity than their parents had. This became an article of faith, something so obvious that few people questioned it. What happened to reverse this very long trend?

The Way It Used to Be

I became an adult in the 1960s, and that has shaped my perspective. So I want to briefly paint the picture of financial life back then, when I joined Wall Street as a broker-in-training.

Most people expected to retire with pensions and Social Security to augment their modest savings. By today's standards, the tools and information available to investors of the 1960s were primitive. There were no 401(k) plans, no individual retirement accounts (IRAs), no discount brokers, very few no-load mutual funds, and no money-market funds. Exchange-traded funds (ETFs) and index funds, two low-cost products that are good for investors, didn't exist.

Sales commissions on stocks and bonds were regulated, at high rates that were conveniently favorable to Wall Street. Mutual funds were sold with sales loads of 8.5 percent, and brokers generally shunned the few fund families that dared to pay lower commissions. Fund commissions weren't applied only to purchases but were charged on reinvestments of dividends and capital gains distributions. In fact, when money-market funds were introduced, Wall Street tried to impose 8.5 percent sales commissions on them.

Ticker-tape machines were very common, many of them sounding like the tote boards at racetracks where odds were posted on horses. In a way, that was appropriate, as many people regarded investing as a game that required one to pick winning stocks.

Many brokers took home easy money not from being smart, helpful advisors but from the profits they could make on huge spreads between bid and ask prices. It wasn't uncommon for an illiquid stock to trade with a bid price of $9 and an ask price of $10, on each trade.

With no Internet or other electronic communications, information and knowledge moved slowly, making it easy for some investors to gain an advantage over others. Investing advice for the average American was available only in Sylvia Porter's newspaper column and monthly issues of Kiplinger's magazine, Changing Times. There was no Money Magazine. There was no Morningstar, no widely known academic research about investment returns. Almost nobody was teaching what is obvious today and was just as true then: If you pay more in expenses or taxes or sales commissions, you earn less on your investments. This is elementary-school math!

This lack of information made it easy for brokers to make money because most of their clients didn't have a clue. Now we investors know a lot more, so we should be much better off, right? Yes and no. Careful investors can easily tap into knowledge and tools to make their money work hard for them—and by that I don't necessarily mean an aggressive equity portfolio. Your money works hard for you only when it works for you, which means a portfolio that fits your needs and keeps your costs low.

On the other hand, Wall Street knows that many people aren't careful enough to protect themselves. As financial products have become ever more complex, the industry has developed new ways to take advantage of investors who are easily swayed by improbable promises of high returns and low risks.

In the 1960s, the prevailing investment advice was centered around picking individual stocks and, sometimes, buying individual bonds. Nobody had much understanding about the benefits, risks, and limits of diversification. Owning 15 to 20 stocks (most likely all of them U.S. companies) was considered ample diversification.

There was no talk of asset classes, and only a few investment firms followed strategies even slightly similar to what we think of today as value investing. Young brokers like me were trained to "sell to the path of least resistance," recommending what customers wanted to own. That meant stocks of well-known blue-chip companies. The most popular ones back then included old-time industrials like Sears and AT&T, up-and-coming technology stocks like Xerox and Digital Equipment—and an energy company called King Resources, which wound up in many portfolios mostly because so many brokers had been heavily wined and dined at the company's Sun Belt facilities.

If customers wanted to buy something out of the ordinary, turning them away would just give the commission to somebody else. For many people in the financial industry, this was a comfortable era in which to make money. Bankers almost never worked on weekends, and many of them could plan on easy lives that let them hit the golf course by 4 P.M. on many weekdays.

Everything Started to Change

The 1960s saw the start of a multifaceted upheaval in our society. Our president, his brother, and Martin Luther King Jr. were all assassinated within a half dozen years. Congress passed major civil rights legislation, and the Great Society was born, bringing new federal benefits to young (Head Start) and old (Medicare) alike. Major cities burned in riots. The war in Vietnam toppled another president, and the nightly television news brought images of dying soldiers and protests led by strangely dressed hippies into American living rooms—in color—for the first time.

Inflation, barely an issue at 2.4 percent for the 1960s, heated up, along with energy prices, in the 1970s. By the late 1970s and early 1980s, many Americans could only scratch their heads as they made payments on their 7 percent mortgages while the same banks offered 17 percent interest on 30-month CDs and wrote new home loans at 18 percent.

By the mid-1980s, inflation and interest rates started a long downward slide that kept going, to nearly everybody's astonishment, almost all the way to zero. Because bond prices rise when interest rates fall, many people acquired the mistaken belief that fixed-income funds were a form of growth investment.

In the 1960s, income tax rates dropped to 70 percent on taxable income more than $200,000. This seemed terribly high to me, though I didn't make anything close to that much money. But some of my firm's wealthy clients were quite pleased that they were no longer paying a top rate of 91 percent.

Later, tax rates kept coming down, and in the 1980s U.S. stock dividends and capital gains were taxed at preferred rates. This was supposed to reward the rich (officially for being rich and unofficially for being good political contributors) and at the same time encourage the rest of us to save and invest.

Simultaneously, the government introduced the 401(k) plan and the IRA, designed to let Americans defer taxes on their retirement savings while many of their employers unburdened themselves from the obligations of providing pensions. On the one hand, this was a great benefit, giving us incentives to automatically save money every payday. But on the other hand, it transferred the risks of investing away from employers and into the hands of employees.

Under the old model, a defined-benefit plan, the employer promises a monthly pension after so many years of service. The employer takes the risk that the pension fund's investments may produce a shortfall. This long-standing paternalistic model rewarded long service and let people know what they could count on. The best plans promised benefits adjusted to keep up with inflation.

But in the heavy inflation of the 1970s, that became quite a burden on pension funds.

Under the new model, the defined-contribution plan, the risks, rewards, and responsibilities of retirement investing belong to the employee. We didn't get raises to help us with this, but many employers offered to match part of whatever we contributed from our paychecks. These matching contributions may look like generous encouragement, but there's more going on than pure generosity. The laws governing 401(k) and similar retirement plans won't let highly paid executives take advantage of this tax deferral unless employees choose to do so as well.

While this was happening, a new world of investment opportunities opened up to investors.

• Despite fierce opposition from the Old Wall Street, discount brokerages began letting investors trade at deeply discounted commissions.

• The index fund was invented, letting investors bypass active management and participate directly in stock and bond indexes.

• Money-market funds were introduced with prices fixed at $1 a share, giving us alternatives to putting our money in individual bonds and bank savings accounts.

• The number of mutual funds exploded. In 1965, there were 170, with total assets of $35 billion in about 6.7 million accounts. Now there are more than 7,500, a number that's much higher if you count all the variations in share classes and ways you can purchase essentially the same fund. In 2009, mutual funds held roughly $11 trillion in 271 million accounts.

• Most mutual funds reduced their sales loads, and many had no loads at all, making it much more efficient for investors to own part of their portfolios. Old Wall Street didn't like this change.

• A wealth of new information available—first through newsletters, then by fax machines, and then online—took away Old Wall Street's monopoly on knowledge. With nearly instantaneous (and inexpensive) communications linking markets around the globe, today's investors can buy and sell securities any time they choose.

The Way It Has Become

The changes continue, of course. Now we have target-date retirement funds, many variations of variable annuities, ETFs, and 529 plans for college savings. With all these innovations, you might expect investors to be in relative heaven. We should be saving more money, doing a better job of investing it, and taking a more active and successful role in planning our retirements.

Lower taxes, lower commissions, and better investment options should have led us to save more. However, we are doing just the opposite. In 1981, U.S. households collectively saved about 12 percent of their income. By 2005, our savings rate was a negative 0.5 percent as we piled on more debt.

Instead of saving more, we were spending more. Easy credit, mass advertising, sophisticated marketing research, and fancy new products all competed very successfully to attract our money.

Commercial interests, fanned by a rapidly growing media, worked hard to teach us to equate money—especially the spending of it—with happiness. And they did a pretty good job.

Falling mortgage rates, looser regulations, and a thriving re-fi industry combined to induce us to start seeing our houses as piggybanks. Everybody "knew" housing prices would keep going up as our population expanded. Home equity came to be regarded as a "stagnant asset" that, if we could unlock it, would let us have new boats, destination weddings, remodeled kitchens, fancy cars, plastic surgery, home theaters, and personal computers—the list could go on and on. To the rescue came the home equity line of credit, complete with a checkbook.

However, the burden of all this spending caught up with many people, and the two-income household, once an anomaly, has become the norm. The results are starting to catch up with the baby boom generation.

For most financial planners trying to help people in their late 50s and early 60s, the pivotal question comes down to some variation of this: Are you ready to retire? In plain English, that means: Do you (or will you) have enough money to last the rest of your life if you stop working?

For many people, the best measure of retirement savings is the balance in the 401(k) or similar plan that is owned by approximately 60 percent of households nearing retirement age.

In 2011, the Wall Street Journal reported the median household headed by a 401(k) participant age 60 to 62 had less than one-quarter of the savings necessary to maintain its standard of living in retirement. This was based on estimates of 401(k) balances at the end of 2010 and salaries in 2009, all analyzed for the Journal by Boston College's Center for Retirement Research.

Even when Social Security, pensions, and estimated other savings were taken into account, at the end of 2010 most 401(k) participants didn't have enough to provide 85 percent of their 2009 incomes.

There are lots of reasons for this shortfall. Some people lose their jobs or have bona fide emergencies that rob them of their ability to save and force them to tap into savings prematurely. Others wait too long to start saving or underestimate the amount they'll need to save. Some borrow against their 401(k) plans, not realizing how difficult it will be to catch up later.

Some people invest their retirement savings unwisely, taking much too much risk or no risk at all. When 401(k) plans were relatively new in the late 1980s and early 1990s, it was not uncommon for employees to sign up using default investment choices that were the equivalent of money-market funds. By the time some boomers figured out what they had done, they had already thrown away half a decade or more of potential growth—time they could never get back.

The Center for Retirement Research, according to the Journal, found that the median household headed by people age 60 to 62 had 401(k) plan balances of $149,400. In order to retire with 85 percent of their preretirement income, they needed that money to generate income of $39,465 a year. That is a withdrawal rate of 26.4 percent, more than five times the rate that most financial planners consider prudent for people retiring at age 65.


Excerpted from FINANCIAL FITNESS FOREVER by PAUL A. MERRIMAN RICHARD BUCK Copyright © 2012 by Paul Merriman and Richard Buck. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

Paul Merriman is a nationally recognized authority on mutual funds, index investing, asset allocation, and both buy-and-hold and active management strategies. He founded the investment advisory firm Merriman, Inc., which manages more than $1.5 billion for more than 2,000 U.S. households.

The author of four personal investing books, including Live It Up Without Outliving Your Money!, and numerous online articles for, Merriman has led more than 1,000 investor workshops, hosted a weekly radio program, and has been a featured guest on local, regional, and national television shows. Money magazine named his weekly podcast “Sound Investing” as “the best money podcast.” Twice he has been a featured guest speaker at Harvard University’s investor psychology conference.

Merriman is the recipient of a distinguished alumni award from Western Washington University’s School of Economics and is a founding member of the board of directors of Global HELP, a Seattle-based non-profit producer of medical publications distributed free of charge to healthcare workers in developing nations.

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