I have enjoyed listening to Paul Merriman’s investment podcasts and his ‘Ultimate Buy-and-Hold Strategy‘ workshop was recently broadcast online. I am attempting to figure out how to allocate my investments and Merriman’s presentation spells out what he thinks is the best way to earn a superior, yet safe, return.

In my previous post looking at Portfolio 2, Merriman details the type of bonds that should be a part of our investment portfolio. Now he turns his attention to the equity portion of the portfolio. He begins by reminding us that large companies like General Electric, Citigroup, Microsoft, etc, which make up the standard pension fund’s equity portfolio, were all small companies at one time, and each grew rapidly and paid their early investors handsomely.

Small companies can grow much faster than huge ones, the first and most fundamental way to diversify a stock portfolio is to invest some of your money in stocks of small companies.

Merriman recommends weighting your portfolio heavy on the small cap stocks by splitting the equity portion of your investment portfolio in two, half in large-cap stocks and the other half in small-cap stocks. Now we have Portfolio 3, a pie with three slices. According to Merriman, from 1970 through 2005 this combination would have returned 11.2 percent annually, much better than the 10.4 percent return from Portfolio 1. The concentration of the small-cap stocks has, however, raised the standard deviation to 12 percent from 11.6, a small, but acceptable, increase in volatility.

Merriman says:

I think it’s interesting to note that in this hypothetical scenario, Portfolio 3 adds $1,042,078 to the long-term investment results of Portfolio 1, with very little additional risk. This difference is roughly 10 times the entire initial investment of $100,000.

Merriman does have suggested portfolios available on this web site depending on where you have your investments. Since mine are at Schwab, I have used their fund screener to find out what is available. The following small-cap equity index funds are available:

And for the large-cap portion of the portfolio Schwab has the following funds available:

Next in the series we will be looking at the place of “value” stocks in our portfolio.

Rick Warren, best-selling author of The Purpose Driven Life, was quoted by the Sydney Morning Herald about being a Christian and being rich:

“I don’t think it is a sin to be rich, it’s a sin to die rich, I want people to make as much money as they can as long as they give it away as much as they can.”

I think he is wrong. It is not a sin to either to be or to die rich. It is the same problem people have with the passage “The love of money is the root of all evil” (1 Tim 6:10) - It is not the money that is the problem. That is too simple. Poor people can love money just as much or more than the rich.

“Where your treasure is, there your heart is also.” I am working hard to provide for my family. By most of the world’s standard we are rich. But at this point I am sure that I will not have enough saved for retirement. What am I to do?

Warren Buffet just gave away a wad of cash — and will continue giving it away. But when he dies he will still be rich. Same goes for Bill Gates. As a matter of fact, Buffet had to hire Gates to help him give away his money! But back to the point. The amount of money they have, you have, or I have has nothing to do with our spirituality. The amount of money they give away, you give away, or I give away has nothing to do with our spirituality.

I am working on loving God with all my heart, soul, strength, and mind. I am working on loving my neighbor as myself. But I am also working on providing for my family as best I can. The two do not conflict. I just need to remember that the more money I have, the more opportunity I have to be a blessing to my neighbor.

MSN Money reports that your ATM card and checking account are much easier for someone to target than your credit card and you have much less protection. According to the article “checking-account fraud appears to be rising, and some banks are playing hardball to try to stem their losses.”

Here are the reasons the article gives for checking-account fraud to be

• Banks typically don’t use software to spot suspicious trends like they do for credit cards.
• ATM machines often don’t verify a card’s magnetic strip is real.
• Banks can blame the victim especially if the person has your PIN.

The article goes on to give a number of ways that thieves get your account information as well as ways you can be smart and protect your account.

What is really scary is the story the starts the article. I cannot imagine watching the money drain out of my account, being hit for overdraft charges, and having the bank not allow me to close out the account and hold me responsible for all the fees.

I always enjoy seeing what different web sites submit each week to the various finance carnivals and this week is no exception. What is different is that Dogberry Patch participated in 2 carnivals.

raising4boys.com is hosting Carnival of Personal Finance #55. There are a number of interesting looking articles besides the one from this site.

Mighty Bargain Hunter is hosting Carnival of Investing #29 with almost 2 dozen submissions.

The great thing about the various carnivals is not only the exposure you get for your own blog but I have found a number of blogs that I now visit often or have added to my Newsgator RSS reading list.

Andrew Tobias’ The Only Investment Guide You will Ever Need begins by promising that this book will not make you rich. He gives a number of examples of types of investment guides to avoid. He apologizes for the immodest title of the book but says you do not need most investment guides that are available, and of the few good ones, you probably only need one.

Anyone who steers you to commodities, collectibles, chain letters disguised as cosmetic companies, or is full of enthusiasm at the prospect of making you rich, should be avoided like the plague. He claims there are very few ways to get rich quick, and even fewer that are legal. Placing a bet on number 22 on a roulette wheel carries the same risk as most of these so-called investments, they just have a better story, or pitch.

In the next chapter the author will guide us towards reducing our spending in order to increase our savings.