June Q&A with Paul, Chris an Daryl

·57 min·5 clips

Chris argues mid-cap funds are 'weak sauce' that increase trading costs and emotional decisions in your portfolio.

This episode features Paul Merriman hosting a Q&A session with his research team, Chris Pedersen and Daryl Balls, who volunteer their expertise in portfolio construction and data analysis. They answer listener questions about practical investment strategies and portfolio management. The discussion centers on applying academic principles to real-world investing decisions. One question asks why mid-cap funds are excluded from the "Ultimate Buy and Hold" portfolio recommendation. Chris explains the original academic sources from the mid-1990s did not include mid-caps as a distinct premium asset class. Daryl presents data showing a mid-cap blend fund returned 904% over a specific 25-year period, compared to 745% for the S&P 500 and 1,208% for a small-cap value fund. The team argues mid-caps create unnecessary overlap with large and small-cap holdings, complicating rebalancing without enhancing returns. They note a two-fund strategy of S&P 500 and small-cap value achieved an 11.9% compound annual growth rate, nearly identical to a more complex four-fund portfolio. The team analyzes a sample portfolio from a young investor containing both a Schwab large-cap growth ETF and an S&P 500 ETF. Daryl uses an overlap tool to show these funds share 59% of their holdings, making them redundant. Chris empathizes with investors who use milder tilts toward small and value factors to reduce tracking error and maintain discipline. Paul highlights the historical underperformance of small-cap growth stocks, which averaged under 9% returns since 1928 compared to over 13% for small-cap value. He describes small growth companies as risky due to high valuations based on narratives rather than fundamentals. Another listener, a physician, requests a comparison of Dimensional (DFA) and Avantis ETFs. Chris states both firms use similar academically rooted methodologies, leading to very close expected returns in categories like small-cap value. He suggests the differences in their specific holdings are less important than their shared exposure to factors like size and value. Paul speculates that holding both fund families could increase diversification without harming returns. Paul shares his personal strategy for his granddaughter's account, invested 50/50 in Avantis U.S. Small Cap Value (AVUV) and Avantis U.S. Equity (AVUS). He chose this over a single, more diversified global fund (AVGE) to provide a clearer lesson on how different asset classes perform over time. Chris supports this approach for its educational value and stronger tilt toward factors with higher expected returns. The team also discusses why investors often mistakenly want to add "growth" ETFs, confusing the label with the desired outcome of portfolio growth. The tone is collegial and educational, with the hosts offering clear explanations grounded in long-term data. They maintain a supportive stance toward investors making personal choices, even when they deviate from the team's specific recommendations. Listeners interested in evidence-based, factor-focused portfolio construction will find concrete analysis and historical context. Those seeking specific tax advice or guaranteed performance predictions should look elsewhere.

As heard by us

A careful look at advice fees, simple portfolios, and the hard part of following through.

This Q&A focuses on a practical question: how to choose an investing path that holds up in real life. It spends real time on advisor fees, including the math behind a 1% charge on a $2.5 million portfolio, and on the gap between smart ideas and what people actually do.

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Why you'd press play

You want the fee math before anyone talks you into portfolio complexity.

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