# Paul Merriman Discusses the 4-Fund Strategy That Surpasses the S&P 500
Effective investing relies on choosing the appropriate strategies that balance growth, risk, and diversification. A significant figure in the investment education sector, **Paul Merriman**, has promoted a simple yet powerful method: the **4-Fund Strategy**. Merriman asserts that this strategy, which prioritizes diversification across four essential asset classes, has the potential to exceed the performance of the S&P 500 in the long run when taking into account risk, stability, and returns.
This article will explore the specifics of Merriman’s 4-Fund Strategy and examine why it has attracted attention in the investing community as a formidable alternative to conventional indices like the **S&P 500**.
## Who is Paul Merriman?
Paul Merriman is a seasoned financial advisor, author, and educator with extensive experience in assisting investors navigate the intricacies of the stock market. His investment philosophy champions portfolio diversification, low-cost investing, and comprehensive financial planning. Through his publications, seminars, and website **(paulmerriman.com)**, he disseminates the importance of financial literacy to empower individuals towards financial independence.
Merriman is a strong proponent of **passive index investing** by utilizing low-fee asset class funds, and his 4-Fund Strategy embodies this method.
## Grasping the 4-Fund Strategy
Central to the strategy is the principle of building a portfolio composed of four diverse funds instead of depending solely on traditional large-cap weighted indices like the S&P 500. By integrating various asset classes with distinct risk-return profiles, investors may attain **greater long-term returns** with reduced risk.
### The Four Funds in the Strategy
1. **U.S. Large-Cap Blend**:
These large enterprises signify financial stability and are included in broader indices like the S&P 500. The U.S. large-cap blend category encompasses well-established firms with substantial market capitalization that exhibit a blend of both growth and value traits. This segment of the portfolio provides fundamental U.S. equity market exposure.
2. **U.S. Small-Cap Value**:
This segment focuses on investing in smaller businesses that are often seen as undervalued, meaning their stock prices lag behind the intrinsic worth of the companies. Historically, **small-cap value stocks** have offered superior returns due to their higher volatility, which is balanced by a risk premium that long-term investors can capitalize on.
3. **International Large-Cap Blend**:
To mitigate potential home-country bias and open the portfolio to global possibilities, Merriman recommends including **international large-cap blend stocks**. These firms are financially stable and function in developed markets beyond the U.S., distributing risk across various economic cycles and geographical locations.
4. **International Small-Cap Value**:
The concluding component of the 4-Fund Strategy is **international small-cap value stocks**. These consist of smaller entities in international markets, which, akin to their U.S. equivalents, tend to generate higher long-term returns due to their undervaluation and the elevated risks tied to less established firms. By diversifying among international small-cap value stocks, investors can benefit from global economic progress in both emerging and developed markets.
### Why These Four Funds?
Merriman’s method is grounded in decades of scholarly research, particularly in studies related to **Fama and French’s Three-Factor Model**, demonstrating that small-cap and value stocks have historically outperformed their large-cap and growth counterparts over prolonged periods. Each category within the 4-Fund Strategy has a distinct risk-return profile that plays a role in various market cycles.
– **U.S. Large-Cap Blend**: Delivers stability and exposure to the growth of major companies.
– **U.S. Small-Cap Value**: Provides enhanced potential returns (with increased risk) via small, underappreciated U.S. firms.
– **International Large-Cap Blend**: Mitigates geographic risk by allocating funds in non-U.S. markets.
– **International Small-Cap Value**: Introduces an extra layer of global small-cap exposure, possibly boosting returns considering the “small-cap premium.”
By distributing investments across these four categories, Merriman posits that investors can create a **diversified portfolio** with sufficient volatility to stimulate long-term growth while having enough global diversification to lessen total risk.
## How the 4-Fund Strategy Stacks Up Against the S&P 500
The **S&P 500 index** is frequently regarded as one of the key metrics for U.S. stock market performance. Comprising the 500 largest publicly traded companies in the U.S., it is weighted according to market capitalization. Although the S&P 500 has historically generated robust returns for investors, it remains heavily focused on large-cap stocks from a single country — the U.S.
Conversely, Merriman’s 4-Fund Strategy employs a **multi-dimensional** approach by prioritizing