All that glitters is not gold

Merriman does not include a specific allocation to gold in our standard portfolios. This article, by Bryan Harris of Dimensional Fund Advisors, discusses why gold has not been an ideal long-term investment. It includes the following key concepts:

  • Gold has done well since the year 2000 and in the 1970s, and can potentially be a safe haven during times of political and economic stress. However, for the entire period of 1971 – 2011 gold performed worse than the S&P 500, U.S. small-cap stocks and non-U.S. stocks on an inflation-adjusted basis.
  • From 1980 – 1999, gold experienced a negative return after inflation of -6.5%, vs. strong positive returns for stocks.
  • While gold has held its value against long-term inflation, there have been extensive periods when gold did worse than inflation. Gold is also much more volatile than inflation, and can add substantial volatility to a portfolio.
  • Unlike stocks, which are productive assets which generate growing levels of income and dividends over time, gold has no cash flow and costs money to own.

For more detail and some illuminating graphs, please see the article.

The gap between fund returns and investor returns

We advocate that investors choose a diversified portfolio of stocks and bonds, with the percentage in each depending, to a large degree, on their overall risk tolerance (the higher the risk tolerance, the higher the allocation to stocks). When the markets move and the actual weights deviate from the target weights, investors should then periodically rebalance by trimming those asset classes which have done best and buying those assets classes which have not done as well. This simple rebalancing technique removes much of the emotion from investing.

Emotions can have a negative impact on investment returns. Many investors respond to short-term market moves by buying assets after they have gone up and selling assets after they have declined in price. This is just the opposite of what we do when rebalancing our client accounts. (more…)

Performance: Time Weighted Return vs. Internal Rate of Return

If you happen to ask me, “what is my rate of return?”   I’ll probably answer your question with another question, “which return and why?”  This response usually results in a very cross look shot in my direction.  But, actually there are different measures of return and many investors are unaware of their subtle, and some times not so subtle, differences. Understanding what each of these returns is designed to measure and how they differ will help you make better informed financial decisions.

In the financial industry today there are three measures of return that are frequently used; Simple Rate of Return (SRR), Internal Rate of Return (IRR) and Time Weighted Return (TWR). These measures of return may sound interchangeable but they are actually very different in how they calculate performance. (more…)

Should I make peer-to-peer loans?

I’m a young investor and want your thoughts on peer-to-peer lending. Sites like are pretty open about returns, default rates, etc. Based on the past three years, this has been a pretty reliable way to get an approximately 10% compound return. I realize that peer-to-peer lending doesn’t have the 70-year history of stocks and bonds, but what do you think about making it a small part of my portfolio?

Over the last several years, peer-to-peer lending (P2P) has been growing in popularity. One P2P Web site,, has nearly a million members. Popularity does not necessarily mean an investment is worthy of your consideration.

P2P is an alternative means for individuals to borrow and lend directly from and to each other, supposedly cutting out financial intermediaries such as banks. The activity is arranged through Web sites as and The sites typically charge loan servicing fees averaging 1% annually.

So what’s not to like? (more…)