On this episode of Protect Your Retirement, we are going to be discussing the New Year and some resolutions you can make as you plan for or begin your retirement. With President-elect Trump going into office soon, we are going to discuss how his new administration could affect your retirement.
MIKE: Good morning, and thank you for listening to Decker Talk Radio’s “Protect Your Retirement”, a radio program brought to you by Decker Retirement Planning.
MIKE: This week we’re going over financial news to kick off the new year, plus New Years resolutions for your retirement plan.
MIKE: The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone, this is Mike Decker and Brian Decker with Decker Talk Radio’s “Protect Your Retirement”. Now, we’re excited to have a great show lined up today kicking off the New Year. We’re going over new things overall, but I wanted to introduce Brian Decker who is from Decker Retirement Planning out of Kirkland, Washington. He’s a licensed fiduciary, a retirement planner. And, Brian, why don’t you take it away with what we’ve got lined up for today?
BRIAN: All right. 2017 has a lot of forecasts for the stock market, SNP returns, estimated returns for large cap, mid cap, small cap, international and emerging markets, and GDP numbers, so that’s what we’ll start with, because GDP and the economy is what generates the earnings, which is what generates stocks. Stocks go up for two basic reasons. One is expected higher returns.
BRIAN: That’s what drives earnings stocks and… earnings in stocks. I’m sorry, that’s what drives stocks is earnings. And, the second thing is lower interest rates. When you have low interest rates, or lower interest rates, all other things being equal, you have what’s called “PE expansion”, price earnings expansion. In price earnings expansion, that means that people are more willing to take risk in the stock market to get any type of a return, because the returns they’re getting from CD’s and fixed income are so low.
BRIAN: So, we’ve had price earnings expansion as interest rates have come down. Now we’ve got interest rates actually starting to head up again. The ten-year treasury in October was 1.4 percent, now it’s 2.4 percent. So, we have a very… Those are headwinds to the stock market. But, with Trump being elected, the expectation is that that will be a business-friendly administration, so the expectation is Trump got his run up here and his Santa Clause rally at [year end?].
BRIAN: The 2017 U.S. GDP, gross domestic product, forecast form Citigroup and Morgan Stanley represent the mean median expectation, it’s 2.7 percent. It’s an increase from 2.5 to 2.7 percent. The mean is around two and a half to 2.7 percent. Now, an expansionary economy for a country is, by definition, anything above 3 percent.
BRIAN: So, we’re still in the mediocre, slowly-but-surely, moving along, muddle through type of economy expected for 2017. Advance country GDP estimates for 2017, 18, 19, and 20, I found this very, very interesting: The United States, the estimates are around two and a half, 2.7, followed by 2018, 2.3 percent, followed by 2019, 1.9 percent, followed by 2020, 1.8 percent.
BRIAN: Now, estimates are just that, they’re estimates, but that is for slower growth for the next four years. There is something—Decker Talk Radio listeners—there is something called the “presidential cycle” that is very interesting. The presidential cycle has a new incoming administration pour down the tough medicine in the beginning years and window dress the economy for reelection four years from now.
BRIAN: So, the tough sledding part of the administration’s fixes to the economy are expected to be in the first parts of the years, but that’s not what we’re seeing from Citigroup, Credit Suisse, Morgan Stanley and some of the other estimates for 2017 GDP being at two and a half next year, 2018, 2.3, 2019, 1.9, and 2020 GDP estimate at 1.8 percent.
BRIAN: But, those estimates are far above Japan at 0.8 for this year, 0.7 next year, 0.8 in 2019, 0.8 in 2020. Those are flat line no growth or extremely slow growth economies. We also have Germany for 2017 at 1.6 percent, next year 1.5, 2019, 1.3, 2020, 1.3. Those are very slow growth world economies.
BRIAN: France, 1.5, followed by 1.6, followed by 1.7, followed by 1.9. The people that are estimating France’s growth for their GDP are seeing slightly higher growth each year, unlike the United States where it’s slightly lower each year. Italy, 1.3, followed by 1.2, followed by 1.1, followed by 1.1 GDP growth.
BRIAN: Spain, which is part of the PIGS, Portugal, Italy, Greece and Spain, surprisingly is very strong, right up there with the United States, 2.5 percent GDP growth estimated for this year, followed by 2.2, then 2.0, then 1.9 for the next four years of GDP growth. The United Kingdom, 1.4, 1.3, 1.6, 1.7. They’re expected to have a small dip because of Brexit followed by slightly expanding economy for the following three years.
BRIAN: I thought that was interesting. Australia, very much a resources type of country, Australia and Canada both, they’re going in different directions. I thought that was interesting. Australia is expected to have a GDP growth of 1.9 percent this year, followed by 2.7, that’s a big jump, followed by 2.8 in 2019, and then settling back at 2.5 in 2020. Canada, in contrast, 1.6, 1.6, 1.4, 1.4.
BRIAN: It’s interesting that Canada is the United States’ largest trading partner, and it’s supposed to see flattening growth with more of a protectionist, nationalist agenda for world trade. South Korea, the strongest of all the advanced countries, 2.9, 2.7, 2.6, 2.6. Of those 10 countries, combined average international growth of the bigger countries, 2.0 this year, 1.9, 1.7, 1.6.
BRIAN: The reason this is important, and by the way, I’m gonna get to that. It has a lot to do with the expectations of your stock portfolio returns. I’ll get to that in a second. I want to hit emerging markets for GDP growth. These are estimates again from several of the big banks and brokerage firms. In emerging markets, Brazil, last year, was in contraction, a recession, losing 3.0 percent GDP.
BRIAN: It’s expected to lose 1.0 this year, and then pull out of recession in 2018 next year with a 2.3, 2.4, and 2.5 percent growing economy. Mexico, surprisingly strong. Mexico, I don’t know why people are leaving Mexico to come to the United States. Listen to this: Their GDP estimates for this year are 2.8, followed by 3.1, 3.2, and 3.3 percent GDP. That, my friends, is a growing economy.
BRIAN: That’s what the United States should be doing. Another resources-rich economy is Russia. Russia is heavily into oil and energy. They lost 3.8 percent in GDP in their economy last year. They’re expected to lose 0.6 continuing recession this year, pulling out next year with a flat economy growth of 1.0 next year, 1.5, 1.5 the next three years. Turkey, the strongest…
BRIAN: No. These next three are the three strongest economies in the world. Turkey, 2.9, 3.7, 3.5, 3.5. Why am I telling you this Decker Retirement Planning-Decker Talk Radio listeners? It’s because there are ETF’s, exchange traded funds, that you can buy that are country-focused and add them to your portfolio every year for diversification. According to the expected GDP growth, you should have some exposure to…
BRIAN: You may want to—let me rephrase that, these are our opinions—You may want to have exposure to Turkey, India, and China’s… Based on the GDP estimates. Now, Turkey is at 2.9 expected GDP this year, 3.7 next year, 3.5, 3.5. India is 7.1 this year, 7.7, 7.5, and 7.5.
BRIAN: In my opinion—this is just my opinion, check with your financial advisor—my opinion, India is estimated to be the strongest growth, even stronger than China. We can’t trust the numbers from China, but the best guess, one hand over the eyes, I guess, is 6.5 this year, 6.0, 6.0, 6.0.
BRIAN: Now, by the way, China goes by a different set of rules, because if they don’t have at least six, seven percent GDP growth, they are in fact seen to be negative because of their state-run economy. So, they operate under a different set of rules. They don’t have free markets. India is expected to be, over the next four years, the go to ETF, exchange traded funds, as far as growth. They don’t have the debt that China does, they don’t have the spending issues, and…
BRIAN: So, anyhow, that’s… Start of the program, wanted to spend a few minutes on the GDP estimates for 2017. Now, the reason those are important is because if GDP’s growth is under three percent for the United States, how are you gonna get expected average returns of seven or eight percent from your portfolio when we’re already starting the year with a price earnings ratio, price of the SNP divided by the earnings, is above 25.
BRIAN: That’s on the high end of the range, plus you have interest rates that are going up. How can you expect a seven or eight plus percent returns from your portfolio? Well, you better be very specific. I gave you one big hint by talking about country-specific international diversification having some ETF exposure to India.
BRIAN: The next is Credit Suisse’s estimates for the SNP targets for this year is only three percent for this year, and three percent international, but six percent for emerging markets. They target a year end ten-year treasury yield of 2.4 percent, which is about where it is now, so they’re not expecting interest rates to move higher. And, I’m gonna tie this in in a second. Deutsche Bank is the outlier, they expect a ten-year treasury estimate going to near four and a half percent in the next three years due to quantitative easing, Trump stimulus, the European Central Bank tapering, and the Fed portfolio roll off.
BRIAN: All those things are stimulus, but we’re already pretty close to two point… I’m sorry, I said 2.4 is where we are about now. The ten-year treasury from Deutsche Bank is expected to go to near four—you didn’t mishear that—4.5 percent, four and a half percent. Again, they’re the outlier. They are the only ones saying that interest rates are gonna continue to trend higher over the next three years.
BRIAN: Now, so let’s tie all this in. On the two parts of your portfolio, you have liquidity—and I’m talking the typical portfolio—you have liquidity, which you should… That’s very subjective. You should have some money that you set aside that is just sitting there earning nothing. This is what we call “emergency cash”. You set it aside, this cash, for emergencies such as roof repair, water heater, college educa-… Well, that’s a separate category.
BRIAN: A car going bad, whatever, but you have some emergency cash set aside. For large purchases that you know are going to happen this year, that’s a second set aside of cash. For example, your child’s university education, or any large purchases that you know, those funds should be set aside, too. So, that’s what we’ll call “cash”, that’s one part of your portfolio. You shouldn’t expect to pull that out of a fluctuating portfolio, because when the markets are going up, it’ll really bother you to pull it out thinking that you’re compromising your gains.
BRIAN: And, when the markets are going down, it really is a killer to pull money out to pay for large purchase items, because you would’ve been better off just to keep it in cash. So, we recommend those two components being in your cash. Then, you have the larger picture of bonds, or your safe money, and then you have your stock portfolio. I want to talk about the bond portfolio, because if Deutsche Bank is right and we have interest rates going up to four and a half percent, that’s gonna be a heavy weight on the stock market because a lot of people will say, “I’d rather lock in four and a half percent or five percent on a two or three…”
BRIAN: I’m sorry, “On a five-year CD than taking risk in the stock market.” So, higher interest rates, all other things being equal, pull money out of the stock market. But, let’s talk about this for a second. I’m gonna make a statement, and then, Mike, let’s make an offer to have people come in to check this out. Your safe money, according to banks and brokers should be in bonds and bond funds.
BRIAN: Let me just tell you that mathematically, logically, that makes absolutely no sense. When interest rates are going up, or are expected to go up, and you have your money in bond funds that safe money is gonna lose money every year that interest rates go up. Mathematically, when interest rates go up, bond prices go down and bond funds lose money, period. So, if any one of you Decker Talk Radio listeners are getting advice from your bank or broker to put your safe money in bond funds, we hope you come in and check out many good alternatives that we, as fiduciaries, are using with our clients.
BRIAN: We’re using, for our safe money, principle guaranteed accounts that in the last 16 years are averaging around six and a half, seven percent. There was one that we used for a little while this year, or last year, 2016, that, for the year, was up over nine percent. These are principle guaranteed accounts. This is something that you got to see; we would love to show you.
BRIAN: All right. This is Decker Talk Radio, “Decker Retirement Planning” in Kirkland, and want to talk more about your safe money. If you go to our website, DeckerRetirementPlanning.com, we’ve written many articles about how banks and brokers can hurt you. This is one huge area, and that is we just started talking about it telling you that you should put your safe money in bonds or bond funds. Interest rates cycle. From 19… Oh, gosh—1950 to 1980, that 30 year period, interest rates generally trended higher.
BRIAN: Imagine banks and brokers telling you to put 30, 40, 50, 60 percent of your money for that 30 year period into bond funds, and every year you lose money on your safe money. When interest rates trend higher, you lose money in bonds and bond funds. So, there’s something that bankers and brokers use to tell you how much money you should have in bond funds, it’s called the “Rule of 100”. Says that if you’re 60 years old, you should have 60 percent of your money in bonds or bond funds. If you’re 65 years old, you should have 65 percent of your investable funds in bonds or bond funds, etcetera.
BRIAN: It doesn’t make any sense, because when interest rates are as low as they are now, that means that you have 60 or 65 percent of your money earning almost nothing, but the bigger problem is interest rate risk. Interest rate risk is the amount of principle, or the amount of money that you lose in principle as interest rates go higher. So, to tell you in a low interest rate environment that you should put your safe money in bonds and bond funds is financial malpractice.
BRIAN: At Decker Retirement Planning in Kirkland we want to warn you that that’s bad advice. There’s other things out there that are better. Now, there’s good, better, best. Good is right now using guaranteed investment contracts, for example Boeing has a great one in their retirement plan, it’s yielding over two percent, it does not lose money when interest rates go up. So, that would be good. Problem is those are not widely available.
BRIAN: Better is to ladder your portfolio with CD’s, treasuries, corporate bonds, so that if you 100,000 to invest you ladder that portfolio with maturities that go out seven years. So, one seventh of that 100,000 is invested with a one year maturity. Same amount for a two year, three year, four year, five… That’s called “bond laddering”.
BRIAN: That means you have money coming due every year so that as interest rates go higher, you’re capturing, you’re reinvesting that money out seven years every time money comes due. The problem with that is once you retire it’s not going to generate a lot of income. It’s a problem. Interest rates are low, I told you this was good, better, best, that’s better than a guaranteed investment contract, because, all other things being equal, you get higher interest rates even if interest rates are flat because you’re reinvesting a one year out seven years.
BRIAN: Why seven years? Because, the difference between a seven year maturity and a 30 year maturity is not very much. That’s called the “yield curve”, and when the yield curve doesn’t give you much additional return between a seven year maturity and a 30 year, why would you lock up money 23 more years, especially when interest rates are starting to trend higher? You want to be on the front end of that curve with a bond ladder.
BRIAN: So, good is to use a guaranteed investment contract, better is to ladder your portfolio, best is to use what we call “equity index to counts”. This is where you capture historically around 60 percent of the SNP growth as the markets go up, but as the markets go down, you lose nothing. These are principle guaranteed accounts, and let’s… Before 2008, we used mostly CD’s.
BRIAN: We could get five percent on a five year CD, seven percent on a 10 year. We did those all day long. The reason that right now when interest rates are so low, we are fiduciaries, that’s a big, very important term, we are fiduciaries to our clients. That means that we got to, by law, by state law, we have to put our clients’ best interests before our company’s best interests. Right now, mathematically, factually, objectively, the highest returns you’re getting on principle guaranteed accounts are in equity index space.
BRIAN: So, that’s what we do for our clients with principle guaranteed money, we ladder those with five, 10, and 15 year, and 20 year money so that as the markets—this is very important. As a matter of fact, I would say, Decker Talk Radio listeners, what I’m gonna tell you right now is the heart and soul of the planning we do. What’s gonna happen to your portfolio when the markets crash every seven or eight years? You’re going to have a reset.
BRIAN: You’re going to have a lifestyle change. You’re gonna have a situation where your broker calls up and says, “Hey, John and Jane, markets are down 37 percent, but good thing you’re with us. You only lost 27 percent of your investable funds that you’ve saved up all your life, and you know that idea we had about you drawing four percent of your portfolio for the rest of your life? No, you can’t do that anymore. You got to pull one and a half percent, ‘cause it’s gonna take four years for your to make up the money that you lost.”
BRIAN: That doesn’t make sense to us, Decker Talk Radio listeners, that makes no sense. That’s using a risk portfolio in retirement. That’s okay to use a risk portfolio in your 20’s, 30’s and 40’s where everything’s at risk with the pie chart where you have diversified large cap, mid cap, small cap growth value, international emerging in your bond funds, all diversified in a nice, pretty pie chart where you have all of your money at risk.
BRIAN: If you do that in your 20’s, 30’s, and 40’s, you can take a hit because you’ve got a pay check coming in.
BRIAN: You need to see, visually see, the difference between the pie chart and a distribution plan. The pie chart is an aggressive accumulation vehicle. That strategy, using football ‘cause we’re getting closer to the playoff, Seahawks are in the playoffs, that’s like having your offense. What coach out there has just offense and plays just offense? That makes no sense. It makes no sense in any sport.
BRIAN: You have an offense, and you have a defense. Once you’ve taken a lifetime to grow your portfolio, then you switch to a defensive, keep-what-you-have, and change from accumulation and aggressive growth where everything’s at risk to a distribution strategy where you have—and I’m just gonna describe it, Mike, and then let’s make this offer—where you have a spreadsheet, that’s what a distribution plan is. Imagine, Decker Talk Radio listeners, that you have a spreadsheet that tells you all your sources of income.
BRIAN: Your income that you can draw from your portfolio, the income that you’re drawing from rental real estate, the income you’re drawing from pension and social security where we total it all up minus taxes is annual and monthly income with a COLA, cost of living adjustment, where every year for the rest of your life to age 100 we plan on you getting more money every year to fight inflation. Imagine that you could see how much money you could draw. This has been around for years, folks, this is not new.
BRIAN: Distribution planning, if you’re over 55 years old, and you are not using distribution planning, you are putting your retirement at risk, and you’re risking probably hundreds of thousands of dollars.
MIKE: We want you to have a logical approach to how you’re investing and managing your retirement. All right. Well, Brian, let’s keep going here.
BRIAN: All right. So, we talked about the estimates for this year, the Credit Suisse, the Morgan Stanley, the other Deutsche Bank. The estimates for the ten-year treasury going forward. Most are calling for flat yields, which is kind of rough when interest rates are this low. It’s a big difference from last year, but still when interest rates are this low, you can’t live on CD’s at two and a half percent. So, that makes it very difficult.
BRIAN: We talked, also, in this part of the show about your safe money. And, I hope, if you missed it, that you go back and you listen to it, because we covered some key, critical points about good, better, best. The worst thing you can do is to put your safe money in bond funds. Better is to use the guaranteed investment contracts, that would be good. Better is to ladder your portfolio over seven years.
BRIAN: And, best is to use right now the equity index to counts where you capture historically around 60 percent of the SNP as the markets go up, and when the markets go down you lose nothing. So, that’s a recap of the first half of this show. Now, let’s get into the second half. We talked about, in the first part of the show, the estimates for the SNP.
BRIAN: The SNP 500 is an index where we’re already trading at 25 times earnings, which is a way to value how cheap or how expensive the market is. The market’s only been higher two other market cycles. In all the history of the SNP 500, two other market cycles went higher than the SNP. One was 1929, remember how that turned out, and the other was 1999 right before the tech bubble burst and people lost 50 percent or greater on their stock portfolio.
BRIAN: So, we want to make sure, Decker Talk Radio listeners, that you have a downside protection strategy with your equity portfolio. So, here let’s talk about what the banks and brokers trod out. The banks and brokers will tell you, “Hey, you’re over 50 years old, you’re over 60 years old, you’re over 70 years old…” They have the same cookie cutter approach: Buy and hold. Why do they want you to buy and hold? Well, they’ll tell you, “No one can time the market, we’re long term investors.”
BRIAN: “Sound logical, so yeah, I’ll just buy and hold.” So, let me give you the flip side of that. That means that typically—this goes on for many, many decades—every seven or eight years the markets get creamed. 2008, seven years before that was 2001, Twin Towers went down, middle of a three-year bare market of 50 plus percent. Seven years before that was 1994, that was a recession, higher interest rates, horrible bond market, Iraq had just invaded Kuwait.
BRIAN: Seven years before that was 1987, Black Monday, October 19th, 30 percent one day drop. Seven years before that was 1980, that was a two-year bare market, interest rates were sky high, economy was in recession. Seven years before that was ’73-’74, two-year bare market of over 40 percent. Seven years before that was ’66-’67, bare market of over 40 percent, and it keeps going.
BRIAN: Decker Talk Radio listeners, if you think that it makes sense to just buy and hold, and you’ve accumulated, over 40 years, several hundred thousand or the typical million five, two million dollars that we see all the time, and you’re gonna lose a third of that and take four years to earn it back just to break even, that makes no sense to us. You have to know that for decades, for decades, there is other alternatives.
BRIAN: Before we talk about the alternatives, and we’re going to, I want to have you understand why banks and brokers want to keep all your money at risk. I was trained in this model. It’s because that’s how they get paid. If you have your money at risk, and your financial advisor keeps you at risk, it’s not because it’s in your best interest, ‘cause it’s not, it’s how they get paid. They don’t get paid unless they keep your money at risk.
BRIAN: So, please, please, please know that there’s alternatives out there. So, what do you think you’re gonna do? We already talked about buy and hold. That makes no mathematical sense, that makes no common sense, so let’s talk about how you’re gonna sit there and if the markets go down 10 percent, your stop losses are gonna take place, and you’re gonna get out. Well, every year, typically, historically, there is one, at least one, 10 percent drop.
BRIAN: There’s a 20 percent drop, typically, every seven or eight years. We’re due, but if you think that you’re gonna time the market and get out, good luck with that. Here’s how typically it goes. Typically, 2015 happens [COUGH] where in August of 2015, markets drop 10 percent just like that. Boom, markets are down, and so you get out, and then the markets turn on a dime and make new highs. That’s what happened in 2015.
BRIAN: Then, in January of 2016 it happened again. So, you get back in, and then the markets lose 10 percent, and then they turn on a dime and run to new highs. That’s what happened in 2016. That is called “whipsaw”. So, you’ve been stopped out enough times, the markets leave you behind both as a market and sector and individual stock investor.
BRIAN: So, after seven years of trying to be logical, protecting assets, what you’ve taken a lifetime to accumulate, you know that stop losses, even trailing stop losses, as logical and as responsible as they sound, hasn’t worked for you. So, you’re going to forget about the actual stop losses, you’re gonna put in mental stop losses.
BRIAN: So, let me explain what is going to happen when the markets go down in this next big cycle drop. By the way, market cycles typically go seven or eight years, they have in the past gone 10 years. So, we don’t know if 2017 is it. It could be, since 2008, it could 2018, it could be 10 years. It could be this year, next year, we don’t know. But, what we do know is that the markets are already rich.
BRIAN: They’re highly priced, and in a flat estimate of GDP’s of below three percent growth, it’s gonna be very difficult to get any double digit returns like we got last year in the SNP. So, I’m just gonna tell you: Human nature, we have, as human beings, we have two emotions that make it very difficult to be successful in the stock market.
BRIAN: One is called “fear”, and the other is called “greed”. Fear keeps you from investing when you should, greed keeps you from selling when you should. Here’s how it works: Markets go to new highs, everything is fine, everyone’s happy, then the markets go down and just like that it’s down 10 percent. And, you tell yourself that when the markets go back to where they were you’re gonna lighten up, because you know that you’re too overinvested at this point, you’re taking too much risk.
BRIAN: By the way, I don’t lay that blame on you, I lay that very much on the feet of the bankers and brokers that on a regular basis keep you in way too much risk. Chances are you’re taking way too much risk if you’ve got a banker or broker as your advisor. But, here’s how it works: Markets are down 10 percent, you tell yourself that you’re gonna lighten up when the markets rebound, this time they don’t, this is the down cycle, now you’re down 15 percent, and you have a plan that once the markets get back to a certain level that you’ll lighten up, but the markets don’t get there.
BRIAN: Now, you’re down 20 percent, and you’re sick to your stomach because you’ve already lost a lot of money. Markets rebound a little bit, but then next thing you know you’re down 25 percent. Now, you’re not sleeping at night, you know that you’ve made a horrible mistake, you’re furious with your broker, but it doesn’t change anything, it’s too late. You tell yourself to try to make you feel better that you’re a long-term investor, and you’re gonna ride it out.
BRIAN: Well, of course you do. Now, the markets are down 30 percent, and then 35 percent, and then it’s down 40 percent, the news is horrible, it’s out there telling you that things are just gonna get worse, so you finally cave and you sell and guess what? That’s the bottom of the market, markets go up from there for the next seven or eight years. I just explained what, in my 30 years of being in the business, I’ve seen all the time, all the time. Why do you do this? Why do you listen to your banker?
BRIAN: Why do you listen to your broker, who keep you fully invested, all your money at risk, it’s not in your best interest, and give you these strategies that make no common sense at all? There are strategies that have been around for decades that are called “trend following models”, that’s what we use. When the trend is higher, you’re invested, you’re fully invested. When the trend starts to flatten out, you carry more cash. When the trend is down, these trends following models, they’re also called “two sided models”, are able to make money as the markets go down.
BRIAN: I’m going to explain this, and I expect, Decker Talk Radio listeners, that you’re gonna be frustrated. Maybe you think that maybe it’s not even believable. Mike, after I explain this, I would love to have an offer to Decker Talk Radio Listeners so that they can come in and see how much these models, on average, make. So, the market’s a two-sided market, it goes up and it goes down.
BRIAN: And, yet, you’ve got a one-sided strategy. By the way, not just you, 90 percent of the country has a one-sided strategy in a two-sided market, they just know that they’re gonna get nailed when the markets go down. But, when the markets do go down, you will take that full hit and you’ll take three or four years to get your money back. Not with these models. Now, this is risk money, so there’s no guarantees here. Past performance is no indication of future results, but there are definitely advantages to having quant models, quantitative computer driven algorithms that do the same thing when the markets trend higher and then when the markets go lower.
BRIAN: I’m gonna give you more details on this. By the way, the SNP 500, in the last 16 years you put 100,000 in the SNP 500, and by the way, every year, according to Vanguard and Fidelity, 85 percent of money managers in mutual funds don’t keep up with the SNP every year. So, 100,000 invested January 1 of 2000 and sold 12/31/16. 100,000 invested in the last 16 years with dividends reinvested is worth just over 200,000 dollars.
BRIAN: Average annual return is about four and a half percent net of all fees. 100,000—with the six managers we’re using—100,000 net of fees grows to over 900,000 dollars. Average annual return is 16 percent net of fees, and these models have made money in 2000, ’01, ’02, when people lost 50 percent, they doubled when the markets doubled from ’03 to ’07, they collectively made money in ’08, and then from ’09 to present, when the markets have more than doubled, so have they.
BRIAN: These models are two sided strategies.
MIKE: That sounds good
BRIAN: Go ahead, Mike.
MIKE: I was gonna say, Brian, we’ve got about, oh, 17 more minutes. No, 15 more minutes or so. So, just wanted to give you that warning.
BRIAN: Yeah, I see it. Yeah. I’m gonna give three types of two sided models so that you can see how these models work. One type of a model is called a “sector rotator”. Imagine a computer algorithm that buys whatever goes up, period. Whatever goes up. In 2000, ’01, and ’02, the things that went up were, um, real estate. Real estate was very strong in 2000, ’01, and ’02. Same with the materials sector; copper, steel, aluminum, cement, timber.
BRIAN: Healthcare was strong all three years, precious metals, gold and silver, was strong, biotech was strong, healthcare, energy was strong. Hundreds of stocks, Decker Talk Radio listeners, hundreds of stocks in 2000, ’01, and ’02 made money as most people lost 50 plus percent of theirs. These models bought whatever was going up. Then, from ’03 to ’07, totally different portfolio, went up beautifully.
BRIAN: This is called the “risk on portfolio” where you can throw a dart and make money from ’03 to ’07. Then, in ’08, there were only three things, basically, as categories that made money, four things actually, in 2008. One was gold, the other was treasury bonds, the third was U.S. dollar, and the fourth was something called the “VIX”, the “volatility index”. That’s an ETF, and exchange traded fund, that goes up as the markets go down.
BRIAN: Are sector rotators shorting the market? No, they’re just buying whatever is going up, and in a down market, there are things that are going up. So, that is one type of a model that we use at Decker Retirement Planning in Kirkland. These are algorithms; this brings the risk of your portfolio down tremendously. So, let’s mathematically define risk. Risk is volatility, but there’s two types of volatility. Upside volatility, you want all of that you can get.
BRIAN: It’s downside volatility that we describe and define as risk, which is losing money. It’s just plain losing money. So, do these models, these algorithms, have more risk than a buy and hold strategy? Mathematically, we can prove that that’s not true at all. That’s not true, because downside losses in 2000, ’01, and ’02, and in ’08, these models, collectively, for the last 16 years, didn’t have any losses.
BRIAN: So, that’s very, very powerful. The second type of model that is a two-sided strategy is… It’s trend following. Trend following models will go with an uptrend as the markets go up, and they will go to cash when the markets are dropping. Those we don’t use because they don’t produce the higher returns of the next group, the third group, which is basically a long/short strategy.
BRIAN: Imagine this, and these are terms that, Decker Talk Radio listeners, you guys will be familiar with: There is market externals and market internals. Market externals you see every day, it’s the closing price of the DOW, SNP and NASDAQ. Is it going up or down? Those are external numbers. Internals are the advance/decline line, number of new highs, number of new lows, those are market internals, percentage of stocks trading above their 200-day moving average.
BRIAN: Imagine—and we do use these models—imagine that you’ve got a model, a computer algorithm that tells you when to be invested on the long side, making money as markets go up, when to be in cash, and when to be invested on the short side. So, let’s just use some of those market internals that I just talked to you about. When the number of new highs is expanding, getting bigger, and the number of new lows is getting smaller, and the percentage of stocks trading above their 200-day moving average is going up, the market internals are strong, and these algorithms will have us fully invested.
BRIAN: When the markets are showing that the number of new highs is getting smaller or dramatically falling, and the number of new lows is dramatically increasing, and the percentage of stocks trading above the 200-day moving average is falling like a rock, in those periods when the trend is definitely down, these models will be short and will allow you to make money as the markets are trending down.
BRIAN: It’s a two-sided strategy, and when there’s conflicts between the market internals where there’s no definite uptrend or downtrend, these algorithms will have you in cash where you’re safe. So, you’re only invested when there’s a clear, defined uptrend or downtrend. These models have done extremely well as a group, these models have been around for over 30 years, there’s nothing new. Why…
BRIAN: Why isn’t everyone doing this? If this is so great, why isn’t everyone invested this way? This is a very important question, Decker Talk Radio listeners. It’s four reasons why not everyone’s doing this. Number one, the biggest reason why not everyone is doing this is because bankers and brokers use the pie chart. They require their people to use the pie chart, not because it’s in your best interest, because it’s clearly not, it’s the way that they keep from getting sued. It’s liability protection.
BRIAN: Remember how before you started the process you were given a risk questionnaire, which, based on how you answered the risk questionnaire, you were diversified into large cap, mid cap, small cap, and your bond components in your portfolio, and then it spit out an investment policy statement that you signed and dated. Now, you can’t sue that bank or broker, you created that. It gives them an ironclad protection for liability and litigation.
BRIAN: So, that’s the biggest reason, number one. Number two is some of our models are no load mutual funds. Who do you know that’s a banker or a broker that’s gonna tell you about no load mutual funds that they don’t get paid on? So, that’s number two. Number three is bankers and brokers put their career at risk by telling you about models that tell you what to buy, when to buy, and when to sell. Now, you, in fact, don’t need them anymore. And, I guess there’s a number four.
BRIAN: The big mutual fund companies like Vanguard and Fidelity, their business model is to create hundreds of mutual funds to gather billions in assets. They are not going to bring it down to 12 or 15 mutual funds that you actually need. So, for all four reasons, the reason not everyone is doing this is because they are not fiduciaries. You will not see these funds.
BRIAN: In fact, Decker Retirement Planning in Kirkland is the only financial planning company that I know of, and we know of many practices across the country, that have two-sided risk models along with distribution planning. Nobody else has what we do that we know of, so we consider ourselves, we have no competition in the financial planning/money management side for retirees, that’s our niche. We are very good at what we do. Mike, let’s make one final offer to have people come in, and then I want to just have a minute to close with some recommended New Years resolutions for our listeners.
MIKE: Sounds good. We’re going to extend this offer to have an hour long one-on-one visit with Brian to where you can go over the two-sided models that we’re talking about today, that we were going over the principle guaranteed strategy that we’re talking about, and how to pull income in a better way than pulling from a fluctuating account, which can destroy your retirement.
MIKE: Then, also to go over your current portfolio with all that’s going on in the world, the economy, and see how you’re geared if it’s set up correctly, if there’s recommendations we can make. So, Brian, you got the last minute. Take it away.
BRIAN: Okay. Your New Years resolutions, Decker Talk Radio listeners, number one: Only deal with a fiduciary. Number two: Make sure you know how much income that you can draw for the rest of your life from your portfolio. Number three: Make sure you have a comprehensive tax minimization plan. Number four: Make sure your portfolio and your plan has comprehensive risk reduction. And, finally, number five: Make sure it gives you the liquidity that you need so that you put aside money for emergencies. Those are the five.
MIKE: Excellent. So, for all those tuning in, thank you so much. We’ll talk to you next week. Also, subscribe to our podcast via iTunes or Google Play, and for more information, feel free to go to our website, www.DeckerRetirementPlanning.com. Take care.
