The Ultimate Buy-and-Hold Strategy - Portfolio 1

Paul Merriman of Merriman Capital Management recently presented his ‘The Ultimate Buy-and-Hold Strategy’ workshop online. The presentation makes a very good argument for using no-load mutual funds to create an asset allocation plan that will beat the market over the long haul and with less risk. Merriman’s article on this subject has been updated, giving the same details as the workshop and showing how investors can implement this strategy.

The first portfolio that Merriman presents is the industry standard 60/40 ratio of equities and bonds; providing growth from the equities while the providing stability and income from the bonds. This is the way most pension funds, insurance companies, and other large institutional investors traditionally allocate their assets.

According to the author, this portfolio produced a compound annual return of 10.4 percent between January 1970 through December 2005, a period which included three major bear markets and had a standard deviation of 11.6. Standard deviation is a statistical way to measure risk. The lower the standard deviation, the more predictable and less volatile the investment. This long-term return of 10.4 percent with a standard deviation of 11.6 will be used by the author as the benchmark against which he measures the Ultimate Buy-and-Hold Strategy.

Hundreds of thousands of investors would be better off with Portfolio 1 than they are with their current investments, which offer too little diversification and too much risk. If they did nothing more than adopt this simple mix of assets, which is easily duplicated using a couple of no-load index funds, these investors would be more likely to achieve their long-term investment goals than they are now.

Therefore, I believe Portfolio 1 is a relatively high standard from which to start. In my view, anything worthy of being called the Ultimate Buy-and-Hold Strategy must beat Portfolio 1 in two ways. It must be expected to produce a return higher than 10.4 percent and have a standard deviation lower than 11.6.

The next article will look at the make up of the bond portion of the investment portfolio before looking at how to allocate the equity portion to attain “The Ultimate Buy-and-Hold Strategy”.