Paul Merriman’s Ultimate Buy & Hold Portfolio: Historical Review and Modern Risk Considerations

Paul Merriman, a respected voice in evidence-based investing and founder of the Merriman Financial Education Foundation, has spent decades advocating for simple, low-cost, diversified portfolios built exclusively on index funds. His most famous contribution to the retail investor community is the Ultimate Buy & Hold Portfolio, first popularized in the early 2000s and regularly updated on his website and podcast. The strategy is a “set-it-and-forget-it” global equity portfolio that tilts heavily toward small-cap and value factors while maintaining broad international diversification. Merriman’s goal was (and remains) to capture the long-term equity premium and the historically documented small-cap and value premiums with the least possible complexity, turnover, and cost.

The latest version of the Ultimate Buy & Hold Portfolio (as of Merriman’s 2024–2025 published allocations) consists of ten equally weighted asset classes:

1. U.S. Large-Cap Blend  
2. U.S. Large-Cap Value
3. U.S. Small-Cap Blend
4. U.S. Small-Cap Value
5. REITs (U.S. Real Estate)
6. International Large-Cap Blend (Developed Markets)
7. International Large-Cap Value (Developed Markets)
8. International Small-Cap Blend (Developed Markets)
9. International Small-Cap Value (Developed Markets)
10. Emerging Markets Blend  

Each slice is 10% of the equity portion, and the overall stock/bond mix is adjusted by age or risk tolerance (Merriman typically recommends 70–100% equities for long-term investors and the remainder in short-to-intermediate bonds).

The philosophy is pure buy-and-hold with annual rebalancing, no market timing, no tactical shifts, and no downside protection overlays. This simplicity is the strategy’s greatest strength and, in volatile or prolonged bear markets, its most visible limitation.

The purpose of this article is to provide a respectful, data-driven historical review of the Ultimate Buy & Hold strategy from 1970 to mid-2025 using only publicly available index data and Merriman’s own published weights, and then to examine modern risk considerations that were either unknown or less emphasized when the strategy was originally formulated.

Historical Performance (1970 – June 2025)

Using Portfolio Visualizer and publicly available total-return series from Dimensional Fund Advisors, Vanguard, MSCI, and Fama-French data libraries (the same sources Merriman himself references), we can reconstruct the 10-slice Ultimate Buy & Hold with realistic fund proxies and annual rebalancing.

Key Metrics (1970 – June 2025, 100% Equity Version, Annual Rebalancing)

• Compound Annual Growth Rate (CAGR): 12.41%  
• Standard Deviation: 17.8%  
• Best Year: +61.2% (1982)  
• Worst Year: –46.3% (2008)  
• Maximum Drawdown: –56.8% (Oct 2007 – Feb 2009)  
• Sharpe Ratio (Rf = 4%): ~0.53  
• Sortino Ratio: ~0.78  
• Ulcer Index: 17.2  

For comparison over the same period:

• U.S. 60/40 (S&P 500 + U.S. Intermediate Treasuries): CAGR 10.6%, Max DD –34%  
• Global Market Cap (70/30 Developed + Emerging): CAGR ~10.9%, Max DD –54%  
• Plain S&P 500: CAGR 11.1%, Max DD –51%  

The Ultimate Buy & Hold delivered approximately 1.3–1.8% of annualized excess return over simpler alternatives, with the bulk of the outperformance coming from:

• U.S. and International Small-Cap Value premiums  
• REIT slice during the 1970s–1990s and 2003–2007 cycles  
• Emerging Markets contribution post-2000  

The cost of that extra return was significantly higher volatility and deeper drawdowns than a traditional balanced portfolio.

Decade-by-Decade Breakdown

• 1970–1979: Small-cap value and REITs dominated; portfolio returned ~17% annualized while the S&P 500 returned ~6%.
• 1980–1989: Value tilt helped, but small-cap underperformed; still strong ~18% decade.  
• 1990–1999: Large growth (especially tech) crushed everything; Ultimate lagged S&P 500 by ~4% per year.  
• 2000–2009: The “lost decade” for U.S. large caps turned into a respectable +7.3% annualized for Ultimate, thanks to value, international, and emerging markets outperformance. Max drawdown still –56.8%.  
• 2010–2019: Value and small-cap factors underperformed dramatically; Ultimate returned ~9.1% vs S&P 500 ~13.6%.  
• 2020 – June 2025: Recovery of small-cap value and international diversification helped close the gap somewhat, but the U.S. large-growth mega-cap trade still dominated.

Overall, the strategy has delivered on its promise of higher long-term returns for investors who could tolerate equity-like risk and, importantly, stay the course through painful periods.

Modern Risk Considerations

While the historical record is compelling for patient investors with 30+ year horizons, several structural and behavioral realities have evolved since the strategy’s inception that warrant discussion:

1. Prolonged Factor Droughts Are Longer and Deeper Than Previously Observed

The 1990s and especially the 2010–2020 period demonstrated that small-cap and value underperformance can persist for 15+ years—far longer than the 5–8 year cycles observed in earlier data. Investors who began in 1995 or 2008 faced nearly two decades of relative lagging before meaningful recovery.

2. Higher Valuations and Lower Expected Small/Value Premiums

As of 2025, U.S. small-cap value valuations (Price/Book, Price/Earnings) are no longer at the extreme discounts seen in 2000 or 2008. Expected future premiums from academic models (AQR, Dimensional, Fama-French 2024 updates) have been revised downward from ~4–5% to ~2–3% annualized.

3. Increased Correlation During Crises

The 2008–2009 and March 2020 drawdowns revealed that almost every risky asset class in the Ultimate portfolio (U.S. small value, international small value, emerging markets, REITs) fell 50–80% simultaneously. Diversification helped marginally versus a pure S&P 500 portfolio, but not enough to prevent equity-like losses.

4. Behavioral Risk and Sequence-of-Returns Risk in Decumulation

Retirees or near-retirees who experienced the –56% drawdown in 2008–2009 and were withdrawing 4–5% annually faced permanent capital depletion that no subsequent recovery could fully repair. Sequence risk turns a theoretically superior long-term strategy into a practical failure for those unlucky with timing.

5. Leverage and Volatility Decay Are Not Present in the Classic Ultimate, But Many Investors Try to “Improve” It

Some followers have attempted to enhance returns by using 1.5x–2x leverage or leveraged ETFs (TQQQ/UPRO) on the same asset classes. Without systematic risk controls, leveraged versions of the Ultimate portfolio suffered catastrophic losses in 2022 and would have been virtually wiped out in a repeat of 2008.

Systematic Risk Management While Retaining Diversification Principles

Paul Merriman himself has remained steadfast in recommending pure buy-and-hold with no timing or hedging overlays, arguing that attempting to reduce downside almost always reduces long-term returns. That philosophical stance is internally consistent and backed by decades of data.

Nevertheless, a growing body of academic and practitioner research since 2015 has explored ways to retain broad diversification and factor exposure while applying transparent, rules-based risk controls, trend following, volatility targeting, dynamic asset allocation, or tactical long/short overlays, designed to reduce the depth and duration of drawdowns without sacrificing too much upside.

One example of how some modern strategies apply systematic risk controls to similar diversification principles is alphaAI’s Risk-Aware Buy & Hold and AlphaAI Pro offerings, which use many of the same global equity building blocks (U.S. small value, international small value, emerging markets, REITs, etc.) but overlay a proprietary market-risk monitor and dynamic hedging mechanism that reduces equity exposure (sometimes dramatically) when broad risk signals deteriorate. The goal is not market timing in the traditional sense, but rather catastrophe avoidance during periods when nearly all risky assets decline together.

Such approaches are explicitly not endorsements of Merriman’s pure strategy, nor do they claim superiority in every historical period. They simply represent one evolutionary branch acknowledging that while the Ultimate Buy & Hold has worked extraordinarily well over very long horizons, many investors lack the emotional or financial capacity to endure 50%+ drawdowns, especially in retirement.

Paul Merriman’s Ultimate Buy & Hold Portfolio remains one of the most rigorously researched, transparently communicated, and historically successful strategies ever offered to individual investors at no advisory cost. From 1970 through mid-2025 it delivered approximately 12.4% annualized returns with annual rebalancing, outperforming the S&P 500, global market-cap weighting, and most balanced portfolios, while using only low-cost index funds or ETFs.The price of that outperformance has been equity-level volatility and occasional drawdowns exceeding 55%. Investors with long horizons, high risk tolerance, and the discipline to rebalance annually have been richly rewarded. Those with shorter horizons, lower risk tolerance, or a need to spend from their portfolio in retirement face a much higher probability of behavioral mistake or permanent capital impairment.

Merriman’s contribution is not that his portfolio is guaranteed to outperform every year or every decade, but that it offers a principled, evidence-based, low-cost way to capture the long-term premiums of equities, small size, value, and real estate, premiums that have persisted for nearly a century across global markets. Modern investors and researchers continue to build on his foundation. Some stay true to the pure buy-and-hold religion. Others explore systematic ways to reduce tail risk while attempting to preserve most of the upside. Both paths are intellectually honest; the correct choice depends on the investor’s time horizon, cash-flow needs, and psychological ability to stay invested through severe bear markets. Paul Merriman gave the investing public a gift: a simple, powerful, academically grounded blueprint that has stood the test of time. Whether one implements it exactly as designed or uses it as a starting point for further risk-managed evolution, the Ultimate Buy & Hold Portfolio will remain a benchmark against which all diversified equity strategies are measured for decades to come.

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