By SHEFALI ANAND

Trying to time when to get into and out of the stock market erodes investors’ long-term returns, says reformed market-timer Jeff Merriman-Cohen.

His Seattle investment advisory firm, Merriman Inc., was a market-timing money-management firm and newsletter publisher when launched by his father, Paul Merriman, in 1983.

Mr. Merriman used quantitative models to frequently buy and sell stock mutual funds, with the goal of catching the upside while avoiding downturns.

For nearly two decades, Mr. Merriman, and later his son, Mr. Merriman-Cohen, used market timing to manage their clients’ money, and they defended the strategy against criticism that it could not be done successfully.

But over time, father and son have become increasingly convinced by academic research which states that in the long run, most investors are best off in stock funds that trade less by buying the broad market and that charge low expense ratios. The lower costs boost investors’ returns.

Daniel J. Gregory

Jeff Merriman-Cohen

In recent years, Merriman’s financial advisers have been putting new clients’ money primarily into buy-and-hold portfolios with little annual trading.

“We learned, and we grew,” says Mr. Merriman-Cohen.

In this column, we feature model portfolios from large financial-advisory firms that invest in mutual funds and exchange-traded funds. Merriman manages nearly $1.5 billion in assets, primarily for individuals.

The move away from market timing began in the early ’90s, shortly after Mr. Merriman-Cohen joined his father’s business.

Mr. Merriman-Cohen had been impressed by a presentation on passive investing by money-management firm Dimensional Fund Advisors Inc. In 1991, Merriman started offering a portfolio with little trading, and over the years, more clients signed up for this option.

By 2002-03, “we really became more of a buy-and-hold organization that still offers timing,” says Mr. Merriman-Cohen.

Now, more than 80% of Merriman’s clients are in buy-and-hold portfolios, he says. “We really encouraged clients to go to buy-and-hold if they could, because [timing] was much more pricey,” says Mr. Merriman-Cohen. Frequent trading results in higher transactions costs, higher taxes, and the fee for managing such a portfolio is also higher.

Mr. Merriman-Cohen says that market-timing systems can do well in the short term, especially during a downturn by avoiding sharp losses. But they lose out in rising markets, he says, because they likely will miss out on the initial recovery.

“I disagree with the advisers that think they have magical systems that can reliably beat the markets,” Mr. Merriman-Cohen says. “The more complicated [the systems] are, the less likely they are to be effective,” he says.

Merriman still manages some portfolios with a market-timing approach, for clients who get nervous during market downturns, Mr. Merriman-Cohen says. “If you’re going to make changes anyway,” then the firm wants to do it in a structured way to prevent sharp losses, he says.

Both he and his father are no longer actively involved in the day-to-day running of their investment advisory firm.

Daniel J. Gregory

Larry Katz

Here, Merriman’s director of research, Larry Katz, shares a model portfolio used by the firm’s clients who have a moderate-risk profile. The portfolio is for individuals investing in a taxable and buy-and-hold account.

It gained 0.83% annualized over the five years through 2011, according to Mr. Katz. This is net of the firm’s asset management fee of 1% per year or lower, depending on assets under management. The Standard & Poor’s 500-stock index had an annualized return of minus 0.25% over that period.

U.S. STOCKS: The portfolio is primarily invested through funds from Dimensional Fund Advisors, which uses computer models to buy lots of stocks that meet certain risk-and-return criteria and holds them for years.

DFA believes that over the long run, small-company stocks and “value,” or inexpensive, stocks will provide better returns than the broad stock market. DFA’s funds are sold primarily through investment advisers.

When Mr. Merriman-Cohen first approached DFA to buy its funds for clients, he was turned down. “They really didn’t want us as part of their community because we were timers,” he says. DFA relented later as it became convinced that the advisers would not be switching in and out of DFA funds for their timing strategies, says Mr. Merriman-Cohen.

The current model portfolio’s U.S.-stock allocation of 30% is invested in three DFA funds. “They all try to avoid realizing short-term gains” and use other strategies to lower taxes for investors, Mr. Katz says.

There is a 17% allocation to DFA T.A. U.S. Core Equity 2, which buys the broad market but has a tilt toward small and value stocks. T.A. stands for tax-advantaged; the fund aims to minimize federal income-tax implications of investment decisions.

Six percent of the portfolio is in DFA Tax-Managed U.S. Marketwide Value, which buys stocks across all market capitalizations. Seven percent is invested in DFA Tax-Managed U.S. Targeted Value, which owns stocks of small and midsize value companies.

FOREIGN STOCKS: Half of the portfolio’s total stock allocation of 60% is in foreign stocks. “We want massive global diversification,” Mr. Katz says.

He allocates 8% each to DFA Tax-Managed International Value, which owns large-company stocks in developed countries, and DFA International Core Equity, which buys stocks of all sizes but tilts toward small-cap and value stocks.

Another 8% goes to DFA International Small Cap Value.

Despite Europe’s deteriorating economic condition and poor markets, Mr. Katz doesn’t advise cutting back on foreign stocks.

On the contrary, for several clients, the firm’s advisers have been adding to foreign-stock funds to bring them back to their targeted allocation, says Elaine Scoggins, Merriman’s client-experience director, who manages the firm’s advisers. She says that any rebalancing of clients’ investments is done keeping in mind their cash needs “to try and keep trading costs low.”

The portfolio has a 6% allocation to DFA Emerging Markets Core Equity, which invests in stocks of developing countries.

BONDS AND CASH: The 40% allocation is mainly in municipal bonds, which are issued by municipalities and other agencies and are exempt from federal income tax. For many clients, Mr. Katz uses two funds that buy munis from around the country. Vanguard Limited-Term Tax-Exempt, which invests in short-term municipal bonds, gets a 15% allocation, and 18% is in Vanguard Intermediate-Term Tax-Exempt, which buys bonds with five- to six-year durations.

Munis are generally free from state tax in the state of issue. So for clients who live in states with a state income tax, Mr. Katz allocates part of the portfolio to a Vanguard fund that invests in bonds from that state.

The portfolio has a 6% allocation to DFA Intermediate Government Fixed Income, which buys government and government-agency bonds maturing in five to 15 years. One percent of the portfolio is in cash to cover Merriman’s management fee.

Ms. Anand is a personal-finance columnist for The Wall Street Journal, based in New Delhi. Email: shefali.anand@wsj.com.

By JESS BRAVIN AND VANESSA O’CONNELL

The Supreme Court said today that oral arguments over President Barack Obama’s health-care overhaul would begin March 26, and stretch over three days.

The lawsuit, brought by 26 states and joined by the National Federation of Independent Business, a small-business lobby group, relies in part on claims by Mary Brown, an auto-repair-shop owner who argued in court filings she would have had to divert funds from her business to comply with the law’s requirement that, beginning in 2014, most Americans obtain coverage or pay a penalty.

The Wall Street Journal reported on Dec. 5 that Ms. Brown, an individual plaintiff in the case, filed for bankruptcy in September after her business failed.

Because she no longer can claim the insurance requirement would interfere with her business, some legal scholars believe her standing to bring the lawsuit could be jeopardized.

NFIB lawyer Gregory Katsas––who told the Journal he learned of the bankruptcy filing around Oct. 6––notified the court of Ms. Brown’s changed circumstances in writing on Dec. 7.

In this letter, Mr. Katsas, of the Jones Day law firm, said that Ms. Brown’s lawyers would argue in their opening brief, due in early January, why her bankruptcy “does not affect her standing as a plaintiff in this case.”

Ms. Brown is still an NFIB member.

The suit names another plaintiff, retired investment banker Kaj Ahlburg. The government has contested his standing.

The parties challenging the health-care law are deciding now how they will divide up their time, NFIB spokeswoman Cynthia Magnuson said Monday. The states are represented by former Solicitor General Paul Clement, a partner at Bancroft PLLC.

A typical case is allotted an hour for argument, but the court scheduled five and a half hours for the health-care case, reflecting how novel some of the questions are and the importance of a dispute that could define the limits of federal power for decades to come.

The main part of the oral arguments will take place on Tuesday, March 27, with a two-hour argument over the minimum-coverage provision, which starting in 2014 will require most Americans to carry health insurance or pay a penalty.

Challengers assert that Congress lacks authority to require individuals to maintain health coverage. The Obama administration maintains that Congress’s constitutional power to regulate interstate commerce, levy taxes and enact “necessary and proper” laws covers health care financing mechanisms, such as the insurance mandate.

To date, three federal appeals courts have rejected challenges to the health care overhaul, formally known as the Patient Protection and Affordable Care Act, while one has found the insurance mandate unconstitutional.

The challengers, including the 26 Republican-controlled states, contend that if the individual mandate goes, the entire Affordable Care Act must also be thrown out.

Write to Jess Bravin at jess.bravin@wsj.com.

By JENNIFER CORBETT DOOREN

We’ve long known that the Mediterranean diet is good for the heart. Now, it may be good for the brain as well. Jennifer Corbett Dooren has details on Lunch Break.

We’ve long known that the Mediterranean diet is good for the heart. Now, it may be good for the brain as well.

A study published in this month’s issue of the Archives of Neurology found that the diet might protect against blood-vessel damage in the brain, reducing the risks of stroke and memory loss.

It’s the first study to specifically examine the effects of the diet centered around vegetables, fruits, fish, whole grains, nuts, olive oil and a moderate amount of alcohol, with limited consumption of red meat, sweets and refined grains like white bread or white rice—on the brain’s small blood vessels.

Previous studies have suggested adhering to a Mediterranean-style diet is associated with a lower risk of heart disease, stroke and cognitive disorders like Alzheimer’s disease.

In the latest study, researchers, led by a group at the University of Miami in Florida and Columbia University in New York, analyzed food questionnaires filled out by nearly 1,000 people participating in a larger, ongoing Northern Manhattan Study. These participants were categorized into groups based on how closely they adhered to an ideal Mediterranean-style diet, said Clinton Wright, one of the researchers and an associate professor of neurology at Miami’s Miller School of Medicine.

Researchers then used magnetic resonance imaging, or MRI, scans of the brain to look for what are called white matter hyperintensities, which show up as small lesions on the scan and indicate damage to small blood vessels. The damaged blood vessels can cause small so-called silent strokes with no immediate symptoms but which over time can affect cognitive performance.

Broadly, the study showed that people with the highest Mediterranean diet scores had the lowest white-matter volume burden.

Researchers also found that the type of fat appeared to matter. Those who consumed more monounsaturated fat, which is found in olive oil, had lower white-matter hyperintensity volumes on their brain scans.

Dr. Wright cautioned that the study doesn’t prove that a Mediterranean-style diet causes less brain damage and said more study is needed. But he said it indicates that the diet might be protective of small blood vessels in the brain.

Write to Jennifer Corbett Dooren at jennifer.corbett-dooren@dowjones.com

By EMILY MALTBY

Small-business owners are more optimistic about conditions at their firms, but that’s not translating into a hiring surge.

Businesses with fewer than 50 employees added an estimated 95,000 jobs nationwide in January, according to a report released Wednesday by Automatic Data Processing Inc., a payroll processor based in Roseland, N.J.

That’s down from the 136,000 jobs they added in December and the 111,000 jobs in November, though fairly consistent with the overall hiring trends of the last year. Small businesses added an average 82,000 jobs in each of the last 12 months.

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Such increases may help to curb unemployment, but are not rapid enough to regain the previous peak in employment for years, says Joel Prakken, chairman of Macroeconomic Advisors LLC, a research firm that works with ADP to prepare the monthly report. The private sector as a whole – including mid-size and large businesses, added 170,000 jobs in January.

These are “slow and steady gains,” he says. “Not spectacular.”

The ADP data, released Wednesday, reflects the sentiment of business owners surveyed in the 2011 Year-End Economic Report from the National Small Business Association, a lobbying group in Washington, D.C. That report, also released Wednesday, shows major improvements in current conditions and future outlook among small businesses, but little change in job growth.

“They’re still cautious,” says Todd McCracken, president of the NSBA, which releases its member survey twice a year. “Many folks are still in a position where they need to shore up their businesses, get by on the employees they can for a while, and get in a better cash position before they hire.”

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Some 22% of business owners added employees to their payrolls in the last 12 months, according to the report, which compiled responses from 450 business owners, averaging 15 employees. That’s unchanged from six months ago. And 30% anticipate adding employees in the coming year – about the same as the 29% that reported such plans in July.

Meanwhile, revenue growth hit its highest point in more than three years, with 46% of firms showing increases, up from 39% six months ago. Three out of four businesses are confident about the future of their businesses, up from 64%. Some 70% have been able to secure adequate financing, also the highest in at least four years. And only 14% anticipate another recession, down from 30%.

Despite the positive outlook, adding employees is “a long-term decision,” says Mr. McCracken. “You don’t want to hire and then let them go in six to nine months. You want to feel confident that you will be a bigger business than you were before.”

In order for owners to feel more secure that their growth is sustainable, they need more confidence in the broader economy, which is based partly on the political climate, he adds. The report shows that economic uncertainty is the top challenge to the future growth and survival of the respondents’ businesses.

Mr. Prakken of Macroeconomic Advisors also suggested that the hiring conditions today are tied in part to the uncertainty in Washington. Businesses are waiting for updates on certain tax provisions, such as the Bush tax cuts and the payroll tax, as well as regulatory changes. Combined with worries about the country’s deficit, he says, “it’s not a happy mix.”

Write to Emily Maltby at emily.maltby@wsj.com

By LESLIE SCISM

For years, teachers in Albany, Ga., invested in tax-advantaged savings programs known as 403(b)s just as many educators elsewhere do: Instead of getting a menu of stock funds or other investment choices from their employer, like those offered in corporate 401(k) plans, the teachers listened to pitches from insurance agents pushing their various companies’ programs.

Now, the district, Dougherty County School System, has done something that counts as revolutionary in this corner of the investing world: Over resistance from many commission-paid agents, administrators have created a single district 403(b) that is similar to a 401(k).

In 2010, they used competitive bidding to select an exclusive provider, a unit of American International Group Inc. Then, advisory firm Invest-N-U put together a menu of low-cost stock and bond funds, along with a retirement-income annuity.

“What we had was a multitude of vendors, maybe 13, and everyone was coming in saying, ‘Mine is the best,’ ” says Robert Lloyd, the district’s executive director of finance and operations. “My concern is to give our staff the best possible tools” to maximize retirement income, and narrowing investment options and cutting out agents was deemed the way to go, he says.

The move puts Dougherty County in the vanguard of what consultants say is a massive wave of change for 403(b)s.

Stirring the Pot

When 403(b) plans were introduced in the 1950s, federal law restricted participants to insurance products. Congress later authorized mutual funds, but annuities remained popular because insurance agents make sales calls at schools much more frequently than mutual-fund providers, a 2009 Government Accountability Office report found. Annuities typically include minimum-income guarantees or other downside protections, plus a death benefit. While these features are valued by many teachers, they make the products pricier than low-cost mutual funds and reduce upside potential.

Ray Bartkus

Most districts, meanwhile, have taken a hands-off approach; in essence, the 403(b)s in many places are akin to individual retirement accounts.

Much of the current change is being driven by Internal Revenue Service rules that began taking effect in 2009 and that give plan sponsors administrative and compliance responsibilities for employees’ 403(b) investments.

Change also is coming as growing numbers of teachers face cuts to their traditional pensions, giving them more incentive to sock away money in 403(b)s, consultants and school officials say.

With pension cutbacks, 403(b) plans are becoming a greater part of assets necessary to fund retirement and thus “need to be far more robust than, ‘Let’s have a bunch of insurance agents show up in the cafeteria’ ” to sell annuity contracts after school, says Kent Novell, principal at consulting firm Retirement Research Inc.

Some three million elementary- and secondary-school employees across the U.S. had about $109 billion in 403(b)s as of 2010, according to estimates from consulting firms. The 403(b) category also includes some nonprofit, governmental and religious organizations, as well as colleges, though many of these other employers already are running their plans like 401(k)s, consultants say.

Low-cost insurer and fund firm TIAA-CREF, which has long dominated the higher-education sector, sought to stir the pot of change in elementary and secondary schools with a report in late 2010 that concluded an educator in a 403(b) that screens providers to hold down fees can potentially accumulate tens of thousands of dollars more in retirement wealth over a career than a colleague in a plan that doesn’t screen and has high fees.

Insurance agents noted that TIAA-CREF has a vested interest in the matter: It would like to expand in the K-12 market.

To which Bruce Corcoran, a TIAA-CREF executive, responds: “TIAA-CREF’s interest in increasing access to lower-cost retirement-plan options is well-aligned with teachers and can help provide them with thousands and thousands of dollars of additional retirement savings.”

Agents Push Back

With thousands of school districts across the U.S. taking different approaches, it remains far from certain what kind of 403(b) will evolve as the standard, consultants say.

An average school district now has five to 10 providers seeking the business of its employees, down from 40 before the IRS rules took effect, according to Boston-based consulting firm Cerulli Associates.

Some of that reduction has taken place as districts band together and use their combined buying power to get lower prices in request-for-proposal processes that shrink the number of providers eligible to offer products to educators. In Michigan, for example, more than 200 districts formed a consortium that operates with a half-dozen “core” providers, each with its own menu of investment options.

Some statewide 403(b)s also are similarly stressing low costs, including one being set up in North Carolina.

But change isn’t always easy. Dougherty County’s conversion effort dragged out over three years, Mr. Lloyd says. Agents sent letters criticizing the concept to teachers and school-board members, and one agency hired a lawyer who questioned the process on multiple grounds, prompting the district to retrace some steps, according to Mr. Lloyd and public documents.

“You’ve got teachers trying to retire with a reasonable standard of living, and people, probably making a lot more money than they are, trying to push them into inferior products” to earn high commissions, Mr. Lloyd says.

Ken Love, an agent in Georgia for Life Insurance Co. of the Southwest, defends his role, saying “participation will drop without representatives educating employees on the need and importance of a 403(b) plan. Our mission is educating the educators on 403(b)s.”

In some states, longstanding laws are holding up change. In May, a senior official with the Los Angeles Unified School District asked California’s insurance commissioner to support revision of a law that essentially allows “any willing provider” to sell 403(b) investments there, according to The Wall Street Journal’s review of the official’s letter. The letter said that the plan’s oversight committee wanted to reduce the list of 27 vendors to “a more manageable number,” but that insurers had warned litigation “would likely ensue.”

A spokesman for the commissioner says the matter is among issues under consideration for the 2012 legislative calendar.

To be sure, not all school officials are in favor of limiting choice, saying teachers like the financial advice that commissions make possible. Some support an effort under way by the American Society for Pension Professionals and Actuaries and the National Education Association, among others, to create a model disclosure form to allow apples-to-apples comparisons of products’ costs and benefits.

In some cases, teachers say the changes are raising their costs instead of lowering them because the firms their districts hired to oversee the 403(b)s charge fees.

“I’m a big advocate of low fees, and the new regulations have caused an extra layer of fees,” says Richard Nichols, a high-school teacher in suburban Chicago. But he says he understands the need for strengthened monitoring of 403(b)s because “I do not think a lot of the other teachers search out the low-cost providers.”

Ms. Scism is a news editor for The Wall Street Journal in New York. She can be reached at leslie.scism@wsj.com.