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. Social Security and longevity are the important topics we’ll be discussing today on Decker Talk Radio. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
BRIAN: Good morning, Decker Talk Radio listeners. This is Brian Decker and I’ve got a special guest, Clayton Bradshaw with me. We are with Decker Talk Radio with one hour of commercial free uninterrupted information for financial planning and money management from Decker Retirement Planning. We are licensed fiduciaries and Clayton, I want to start the radio broadcast today with some interesting facts. Did you know that the average stock today is trading at 73 percent above its historic average valuation? Did you know that?
CLAYTON: I didn’t.
BRIAN: And did you know that there were only two other times in history that stocks were more expensive than they are today? Guess what those were?
CLAYTON: The great Depression.
BRIAN: Yep. And the other one?
CLAYTON: The late ’90s, the ’99?
BRIAN: Yep, right before the dot com bubble burst. Those are the only two times in the history of our stock market that we’ve been higher than 73 percent above the historic average valuation for each stock. All right, now, do you want to live a long life?
CLAYTON: I’d like to, yeah.
BRIAN: Okay. Is that hard on the pocket book if you’re retired?
CLAYTON: Well, of course.
BRIAN: Okay. This is interesting because for the first time, life expectancy is now above 100 for babies born starting in 1997. People born in 1947, their average life expectancy… and by the way, the definition of average life expectancy is that 50 percent of the babies born are going to live beyond age 85, for example, in 1947.
BRIAN: For the first time ever, in 1997, those babies born will have an average life expectancy of 100 years old. That means several things. First of all, it means that they’re going to be working a lot longer. When Social Security kicked in for the first time, the average life expectancy was around 70 and people could start taking their Social Security about eight years before they died.
BRIAN: It was set up to kind of help for those final years. It was never meant to produce and fund a retirement lifestyle where people lived longer in retirement than they did during their working years. So, obviously that’s putting a strain on Social Security. But it’ll be interesting to watch how the forces that be pushed the average retirement age out so that there’s a number… there’s fewer years left to strain the system. By the way, this is kind of interesting, Clayton.
BRIAN: There’s a few things that are happening today that are bringing the strain on Social Security down. One of them is called… and by the way, pushing the retirement age out is one, that’s going to help quite a bit. How much do you get from your Social Security if you die before you take it?
CLAYTON: You don’t get anything.
BRIAN: Right. How much do you get if you paid into it all of your life and you started at age 62 and you’ve taken it for a few years and then you die, how much do you get?
CLAYTON: Still nothing.
BRIAN: Right. So, you mean you pay for it all your life and there’s no guarantee of that money coming back, right?
CLAYTON: Right.
BRIAN: Okay. So, one of the ways that the system strengthens itself is by pushing the retirement age out. The other is they’ve cut the program called file and suspend. If you’re not age 66 by April 30 of last year, the file and suspend strategy which was extremely lucrative, it allowed people to draw from their Social Security spousal benefit while…
BRIAN: And then drew their own Social Security at age 70. It was a great deal. Now there’s file and restrict where you can draw spousal benefit only if your spouse is drawing his or her Social Security. It doesn’t allow that float period for you. So, that’s another way is cutting off the lucrative strategies like file and suspend. The third is not… it’s kind of on the chalkboard still, it’s called means testing. Have you heard of this?
CLAYTON: I haven’t.
BRIAN: Okay. Means testing is where the government decides and, by the way, don’t get us started but the government has called Social Security, which by the way, is your money that you’ve paid in all your life, they’re calling it a government benefit but it’s your money coming back to you and they’re calling it a government benefit. But the government will decide if we do means testing that anyone making over whatever, 800,000 dollars, that they really don’t need that money and they just won’t pay it.
BRIAN: So, if your adjusted gross income, your AGI, is over a certain amount, then this floated idea of means testing will be further away to strengthen the system by having people that the government decide don’t need it not receive any Social Security benefits. Obviously the way the system works is it’ll start at 800,000 and then it’ll come down, right?
BRIAN: All right, the last thing that’s very important to Social Security is demographics and demographics are where you have seven workers supporting one, and this is how it started, seven workers paying into the system supporting one worker or one retiree. Now that the baby boomer generation is retiring, those demographics aren’t the same at all. As a matter of fact, we don’t even have two workers supporting one retiree. So, there’s a strain on Social Security.
BRIAN: I personally don’t believe that Social Security will be allowed to crumble. I think the government knows that that’s a system that’s relied on by too many millions and millions of Americans to let that crumble. Is that… do you agree with that?
CLAYTON: Yeah, I definitely agree. I have always wondered. I’m on the younger side of the working generation and I’ve always wondered if it will be there in a few more decades before I retire and so I’m trying to make sure that I can plan a contingency plan in case it’s not there for me.
BRIAN: All right. So, today’s radio show follows last week where Decker Talk Radio listeners, we at Decker Retirement Planning… and by the way, we have offices in Seattle, Kirkland, Washington and Salt Lake City is a new office for us. We’re going to talk today about the different risk accounts, risk investments out there and cover the different options that are available and what our thoughts are pros and cons of advantages and disadvantages of each of these.
BRIAN: I’m going to catch up to last week because last week we talked about how variable annuities, real estate, mutual funds, commodities, futures, options, foreign exchange stocks, oil and gas partnerships, exchange traded funds and bond funds, those are what we believe are the inclusive comprehensive list of all the risk investments that people typically invest in in retirement.
BRIAN: Last radio show last week we talked about how variable annuities are not a good investment because of the fees. The broker gets paid every year you own it, the insurance company gets paid every year you own it and the mutual fund company gets paid every year you own that variable annuity. By the way, Clayton, we had Ben over in Seattle [west-our?], a planner and he had a seminar this week where a guy raised his hand in the crowd and said he loved his variable annuity.
BRIAN: I couldn’t believe it when I heard that because Ben Koval is a smart guy and he said it was indefensible. Indefensible because when the broker or banker sells someone a variable annuity, they typically get eight percent right up front along with the three layers of fees when the markets go up, when those fees average typically five percent to seven percent before you make a dime. That means that you grossly lag the markets when the markets go up.
BRIAN: When the markets go down, you go down faster because every calendar year, you start down minus five percent or six or seven percent. You start with a negative number because of all the fees. So, you lose more in down markets, you don’t make as much in up markets. And then the way that these variable annuities are sold is that they’re sold to you as a guaranteed way to invest in the stock market. The problem is it’s based on your life. So, Clayton, you would have to die to benefit from the guarantee on your variable annuity. Does that benefit you in your life?
CLAYTON: No, not at all.
BRIAN: Yeah. So, we have a hard time recommending, in fact, I’ll make it more clear than that. At Decker Retirement Planning, we never recommended variable annuities. Not once, not ever and we’re trying to perform a community service to ensure that Decker Talk Radio listeners know to stay away from those. So, we cross those out. Bond funds are also quickly crossed out, one of the worst on the list because bond funds make money as interest rates go lower.
BRIAN: Right now we’re at our near all time record low interest rates and when interest rates are this low, you’re not getting paid much and when interest rates go back up, you have what’s called interest rate risk is the amount of principle that you lose when interest rates go up on your bond funds. Any banker or broker telling you that your safe money is in bond funds in our opinion at Decker Retirement Planning, they’re performing financial malpractice because it’s not safe.
BRIAN: When interest rates in the history of our country have only been below at our below two percent twice before and we’re at 2.3 percent right now on the 10 year treasury, interest rates are at our near all time record lows. Interest rate risk is also at all time record highs meaning it’s rarely ever, there’s rarely ever been a time when you have had more risk than right now when it comes to bond funds.
BRIAN: So, we highly recommend that people do not put their safe money in bond funds and know about interest rate risks. In fact, Bill Gross is someone who is widely recognized around the world as someone who knows quite a bit about bonds and bond funds. He said in a morning star interview, no in a barrens interview last year some very important things. Number one, he said that interest rates are being kept artificially low by the central banks around the world. You’ve read about that, that didn’t surprise you, right?
CLAYTON: No, not surprising.
BRIAN: Okay, interest rates eventually have to come back up. It’s non-sustainable, according to Bill Gross. The next point he talks about is that you’re not paid for the risks that you’re currently taking because interest rates, according to Bill Gross will eventually have to go back higher and there will be double digit losses when interest rates do go back to the norm where they should trade without central bank interference.
BRIAN: So, this is something that one of the smartest guys in the world with bonds and bond funds is recommending that you stay away from bonds and bond funds, quite the contrast from what the bankers and brokers are telling people to put their safe money in bonds and bond funds when interest rates are this low. All right, so we’ve cra-we’ve scratched those off. What about commodities? Commodities is the biggest market in the world, it includes agricultural energy, precious metals, it includes food.
BRIAN: It includes… it’s a huge, vast market. Do we invest in the commodity market at Decker Retirement Planning? And the answer is yes through ETF, exchange traded funds. So, if the commodity market is on fire in an inflationary environment, the commodity market acts as a great inflation hedge and the models that we use would take advantage of that because they’re trend following models and would invest in anything that is going higher as long as it stays above its trend line.
BRIAN: So, with commodities, whoever has… by the way, statistically the number is so high, the commodity market, 95 plus percent of the commodity market is used by hedgers and not speculators. So, a very small amount, three percent to five percent of the commodity market is invested by speculators, not hedgers. A hedger is someone like, for example, the Boeing Company. You’re familiar with the Boeing Company, they sell the airplanes around the world?
CLAYTON: Yes.
BRIAN: Out of Seattle, in our backyard.
BRIAN: If you’re Boeing, Clayton, and you sell four billion dollars of airplanes to Japanese airlines, you and your profit margins 15 percent and delivery of those planes is a couple years away. You have major exposure that you have to lock down and you do that by using the hedging market in the commodity market. So, for example, if titanium and the industrial metals used to construct that airplane go up in price between now and delivery, what happens to your profit margin?
CLAYTON: It goes down.
BRIAN: And if it goes down below 15, if the industrial metals go higher than 15 percent, it wipes you out, right? And now you’re working for free. Okay, same thing with the foreign exchange if the yen strengthens against the dollar, that’s also an exposure that you have to lock down and you do that by hedging. Most all the different companies around the world that manufacture or produce or deliver any of the commodities of the world, they hedge that commodity by using the commodity markets and strategies.
BRIAN: Do you know anyone that uses a commodity market as a strong strategy to invest in retirement?
CLAYTON: No, I don’t.
BRIAN: Okay. Retirement usually has a lot less risks and so we at Decker Retirement planning would scratch out the commodity market. It’s an option but we would use it through ETFs only if the markets go from a deflationary market like we have right now to a more inflationary market. Okay, the next is the futures market. Commodities, futures are to commodities what options are to stocks.
BRIAN: The futures market is very volatile and I’m not going to spend much time on this because we covered this last week. But there are two-sided investment models that trade long and short, the futures markets and the reason we don’t invest in them is because the returns aren’t competitive yet. At some point they might be a bit but right now we at Decker Retirement Planning, we can use any of the investment models, the managed futures returns are not coming in as high as the two-sided stock models and the two sided energy precious metals, treasury models that we are using that by the way are averaging above 16.5 percent net of fees.
BRIAN: We’re getting much higher returns from those models than managed futures. Okay, we also last week talked about the options market. Now, Clayton, at some point, and you’ve probably heard this story, we warn people away from the stock options market because it’s a leveraged way to control a large amount of stock. For example, you can pay 1,000 dollars a share.
BRIAN: So, 100 shares of Google at 1,000 dollars or Amazon at 1,000 dollars, you would have to invest one dollar0,000 to control 100 shares of stock. Or you could buy… let’s see, we’re in the month of June, you could buy the August 1,000 calls for Google or Amazon and control 100 shares and only spend 1,000 dollars or 500 dollars.
BRIAN: For a lot less, you can control that entire block. It’s called leverage. It’s speculative, we don’t like it and I’ll never forget my trainer, Clayton, he had 40 of us in the room, this was in 1986, he said all right class, now we’re going to talk about stock options and he took his right foot, he flipped up the plate that opens up the electrical plugs on the floor and he said imagine that’s a rat hole and he takes his hat off, his glasses, his tie, his car keys, his wallet, throwing everything down the rat hole.
BRIAN: He says that’s stock options and class, I’ve been in this business 30 years, whoever… he said I’ve never met someone who’ve made money in the options market in a 12-month period, never, not once and he said that if whoever wants to invest in stock options, have them pay you 5,000 dollars, that’ll be your commissions and you will have saved them 100,000 dollars in losses.
BRIAN: He was passionate about how angry it was for the people that were involved in stock options because of the money that they lost. Now, there’s a guy in Seattle called Wade Cook who went to prison because he duped people into thinking that stock options were easy money. There’s other guys who’ve been on the radio and TV telling you to invest and they’re no longer there because the SEC takes these guys off.
BRIAN: The stock options market, now that I’ve been in the business 32 years, I’ve never seen someone make money in a 12-month period in the stock options market. The reason we’re spending as much time is because invariably, someone that you know in retirement over 55 years old will latch into someone who takes their 10,000 dollars to 40,000 dollars and they’ll insist that they’ve got it all figured out.
BRIAN: We want to make sure, again, that we perform the community service at Decker Retirement Planning in Kirkland, Seattle, and Salt Lake City that you do not… we would strongly advise that you scratch stock options from your list of risk options. All right, foreign exchange. Foreign exchange is on our list. It’s the different currencies around the world, for example, Mexico is the…
CLAYTON: Peso.
BRIAN: And the European countries are the…
CLAYTON: Euro.
BRIAN: And the Japanese is the…
CLAYTON: Yen.
BRIAN: Yen, right. The Canadian is the loonie, is that right?
CLAYTON: I think so, yeah.
BRIAN: All right. And United States…
CLAYTON: The dollar.
BRIAN: The dollar. All right. So, these different currencies have different fluctuations and values. Do we own foreign exchange at Decker Retirement Planning, the answer is yes through ETF, exchange traded funds. So, exchange traded funds help protect our clients such that if the dollar goes into a free fall, the foreign exchange is going to be going the opposite direction, straight up.
BRIAN: So, it allows some protection in our two-sided market strategy which we’ll talk more about in a minute. So, what we… and we also crossed off oil and gas partnerships. Oil and gas partnerships, gosh we’re spending way too much time reviewing what we covered last week. Oil and gas partnerships don’t offer any downside protection.
BRIAN: So, if oil goes like it did from two years ago from 110 dollars a barrel down to 29 dollars and you’re owning it for the dividend of seven percent or eight percent on your master limited partnership or your LP, you’re going to get nailed on your limited partnership, right? I mean, you know that when that sector gets creamed that your principle gets creamed with it, right?
CLAYTON: Right.
BRIAN: Okay. So, there’s a lot of retirees who held energy partnerships in the last couple of years that are sitting on 40 percent losses but they tell us with a straight face, well, I’m still getting the dividend of seven or eight percent.
BRIAN: Well, maybe. Let’s talk about a dividend portfolio and this is a very important review from last week, too, before we go into new positions and by the way, this is Decker Retirement Planning, it’s Brian Decker and Clayton Bradshaw from our Salt Lake office and we’re covering this for our Seattle office, for our Kirkland, Washington office, and we’re talking about the different options that retirees have available to them and whether they are or are not a fit.
BRIAN: And we crossed off commodities, futures, options, foreign exchange, oil and gas partnerships, variable annuities and bond funds. What we have yet to talk about is exchange traded funds, stocks, mutual funds, and real estate, all of which we use and we’ll talk about in a minute. By the way, oil and gas partnerships are part typically of a dividend portfolio that we see retirees use and I want to spend a few minutes on this as just a review of what we talked about last week.
BRIAN: In a dividend portfolio, play along with me Clayton, if the riskless rate is the 10-year treasury yield and that’s yielding 2.3 percent right now, which it is, if you could get four percent, that’s better than 2.3, right?
CLAYTON: Oh, yes.
BRIAN: And if you could get eight percent, that’s better than four percent, right?
CLAYTON: Yes.
BRIAN: How about 12 percent?
CLAYTON: Better.
BRIAN: In retirement, would you put your money in something at 15 percent?
CLAYTON: Yes. Why not? It’s a better rate, of course.
BRIAN: And what about 20?
CLAYTON: Even better.
BRIAN: Okay and you’re playing along. All right, so, obviously, at some point we got to talk about risk. So, there’s two parts to a dividend portfolio and only half is the yield. The other half is the default risk. So, now let me give you the default risk. So, would you like 2.3 percent with zero default risk or would you like four percent with 20 percent default risk or would you like seven percent with 35 percent default risk or would you like nine percent with 50 percent default risk?
CLAYTON: That makes the decision a little bit more difficult.
BRIAN: Now you have more transparency to make a better decision, right?
CLAYTON: Yes.
BRIAN: Okay. So, where do we find out the default risk? What we do at Decker Retirement Planning is we look at your dividend portfolio when you come in and talk to us. And by the way, we’re going to make an offer for you to do that here in just a second. We’ll plug in your dividend portfolio and find out your quote end quote coverage. What is coverage? Coverage looks at the EBITDA cash flow.
BRIAN: Let’s say that your stock X, Y, Z is paying a dividend of one dollar a share. But your EBITDA cash flow is a dollar-twenty. So, you have 20 percent coverage of that dividend which is great. More is better. Anything above that dollar is good. But what if it’s one dollar? What if you’re earning one dollar and paying out one dollar? Now your risk is starting to go up. What if you’re earning 80 cents and paying out one dollar?
BRIAN: Now you’re borrowing to pay the dividend and your default risk has gone significantly higher. So, what we want to do at Decker Retirement Planning, Decker Talk Radio listeners, we want to help you make a full eyes open decision on what your banker and broker sold you as a dividend portfolio or we want to give you the other side of your default risk on the website that you’ve gone to that told you that this is a great dividend portfolio. We do this all the time.
BRIAN: All right, so let’s talk about stocks and mutual funds. Just the general definition of a stock, a publically traded company where if the horizon, if the future looks good for that company, the stock is going to go higher, right?
CLAYTON: Correct.
BRIAN: Okay and if the future… if events happen where the future looks like it’s deteriorating for that individual stock, then it’ll go lower, right?
CLAYTON: Yes.
BRIAN: Now, remember, this is brilliant what we do in our country, in our capitalistic market. Do you remember when you were little, you’d count the beans, the jelly beans in a jar?
CLAYTON: Yeah, you’d play that game and you try to guess how many.
BRIAN: Right. And if you have one person guessing the beans in the jelly beans in a jar, your variance or your statistical accuracy is really low.
BRIAN: But when you increase that number to 1,000 guesses and you show the mean or the median guess, that percentage error is the more guessers that the better the accuracy. Am I making sense, what I’m saying?
CLAYTON: I think so.
BRIAN: Okay. So, the stock market is open to millions of people that are making a bet to invest or not to invest, to buy or sell and are valuing that company.
BRIAN: And when you have that many people valuing that stock, their accuracy is typically very good and new information is coming out every day on those companies to make a better decision. So, as Trump became president, a lot of people felt that regulations would go down, that the fed would maintain a low interest rate environment and the outlook for most stocks were better and so stocks have trended higher, does this make sense?
CLAYTON: It does.
BRIAN: Okay. So, that’s the definition of stocks.
BRIAN: Do we own stocks? Actually, I’m going to get back to that [LAUGHS]. We own it indirectly through ETFs, exchange traded funds. So, now let’s talk about mutual funds. Mutual funds by definition allows investors to own shares of a common pool or portfolio where a manager that you like which is static or also actively traded can invest in a certain strategy.
BRIAN: It could be technology stocks, it can be an index like the S&P, can be whatever. But it allows you shares to invest. That’s the definition of a mutual fund. Do we own mutual funds? We have in the past, we’ve owned no-load mutual funds. Let’s talk about this for a second. Again, community service here, we’re telling you what funds to invest in and what funds to stay away from. There are front-end loaded funds, there are back-end loaded funds, there’s 12b-1 funds and there’s no-load mutual funds and there’s sector funds.
BRIAN: Why in the world… Clayton, could you think of any reason with so many good no-load mutual funds that you would pay a front end load like four percent, five percent, six percent, up to eight percent on a front-end loaded fund? Can you think of any reason?
CLAYTON: I can’t. It seems unreasonable to do that.
BRIAN: Well, what about the broker? He wants you to pay that commission, right?
CLAYTON: Well, of course.
BRIAN: That’s why he’s recommending those front-end loaded funds. So, because we are fiduciaries, we have not ever in our company recommended a front-end loaded fund, nor will we ever, nor can we because we’re not Series 7 licensed.
BRIAN: You can’t be a fiduciary and be a Series 7 licensed commission broker. All our business is done above board and it’s feed based. All right, now, let’s talk about back-end load. The philosophy of a back-end loaded mutual fund, Clayton, is hopefully when you invest in a mutual fund, your one dollar00,000 or one dollar0,000 is going to grow, right?
CLAYTON: Yes.
BRIAN: So, the thinking is what if we put a backend fee instead of an eight percent frontend fee, let’s put it in back end fee of four percent to pay your broker. Now, is that a good deal for you?
CLAYTON: It’s still not. You’re still paying somebody.
BRIAN: Right. And you don’t need to because there’s enough fantastic no-load mutual funds that, in our opinion, at Decker Retirement Planning, you should never pay a front-end or a back-end fee. But here is the community service. There are brokers and I want to say thieves, in this case.
CLAYTON: [LAUGHS]
BRIAN: That will tell you there’s no front-end or back-end fee but they don’t tell you about the 12b-1 fee. These are called C as in Charlie C shares.
BRIAN: C shares are so bad that the Vanguard, Fidelity, Schwab, TD, and Merrick trade system won’t allow them to be transferred in. Did you know this?
CLAYTON: I didn’t know that.
BRIAN: They’re so bad and C shares are where the broker looks you straight in the eye and tells you that there’s no front-end or back-end fee and they forget to tell you about the one percent 12b-1 fee that goes to the broker every year you own it.
BRIAN: We don’t like them, we don’t use them, we just want to warn you that if you own C shares of a mutual fund, we have hope you have a conversation with your broker about honesty and full disclosure because they owed you that discussion and that information before you bought those mutual funds. All right, the kinds of mutual funds that we recommended are typically A shares or I shares. Advisory shares or institutional shares are usually low cost shares.
BRIAN: To bring your fees even lower, instead of having mutual fund management fees, you can bring them even lower by using something called ETFs, exchange traded funds. And by the way, as a company, right now currently all of our investments are in ETFs, it brings the cost way down. We’re the good guys, we’re f-we’re fiduciaries and we want to bring the cost way down. Exchange traded funds, we’re going to talk about these and then we’re going to talk about real estate next.
BRIAN: ETFs are static, not dynamic, they’re static portfolios. So, for example oil ticker OIL has a portfolio of all the major oil companies in the world. Ticker GLD, gold is all the gold companies. SLV is silver, social medias, SOC, etcetera. So, it allows you brilliantly to own a whole sector and to keep the fees way down.
BRIAN: And as soon as you think that sector is going to roll over and start going lower, then you can sell it like you would a stock. But now you’re buying whole sectors instead of individual stocks. Now, one of the risks of investment is to be right on the market, right on the sector and wrong on the stock. So, imagine that you know, you’ve done your homework, Clayton, so you know that the market is going up and you like the oil market the best.
BRIAN: And in 1988, you buy Exxon and you’ve done your homework. But the bad news for you is there was a ship captain up in Valdez, Alaska and grounded a ship, big oil spill, the Valdez, Alaska oil spill, the stock is down 30 percent in the next few weeks. So, you were right on the market, right on the sector, wrong on the stock. You had stock risk. Do you see this?
CLAYTON: I do, yeah.
BRIAN: Okay. So, you lower your stock risk by owning ETFs. And that’s one of the ways that we bring our stock risk down. Now, people… here’s another community service, we just want to tell you that most individual investors have it completely backwards. They spent all their time researching stocks, very little time researching sectors and hardly any time looking at the market.
BRIAN: So, what we would recommend people do is to spend 70 percent of their time knowing where they stand on the stock market and we open the radio show talking about how the stock markets only been valued higher twice ever, 1999 right before the tech bubble burst and by the way, that was a loss of how much?
CLAYTON: 50 percent.
BRIAN: 50 percent. And 1929 which is the loss of how much?
CLAYTON: 75 percent, I want to say.
BRIAN: Good guess, 75 percent. Those were huge losses. So, now, would you be all in in the stock market if you’re a retired investor with what we just told you, would you be all in?
CLAYTON: Seems risky to be all in. I don’t think I would be.
BRIAN: Okay. Bankers and brokers have a buy and hold… how do they call it? Buy and hold philosophy, no one can guess the market and tax efficient investment strategy. Do you know what that’s code for?
CLAYTON: No, what is it?
BRIAN: It’s code for give me your money, I get my fees and don’t bother me. That’s what it’s code for because I grew up in that system. So, we want to warn people that they should have a downside strategy on their stocks and their risk portfolio. We’re going to tell you how we do it here in just a second. All right, so we covered exchange traded funds, mutual funds, stocks, and the last one is real estate. So, when it comes to real estate in the planning we do at Decker Retirement Planning, we want to make sure that our clients don’t put their home in the plan.
BRIAN: I just banged my head against the wall, Clayton, how our competitors will do a reverse mortgage on their home just typical as part of their planning for cash flowing. Do you think that reverse mortgages are good for the client?
CLAYTON: Well, no.
BRIAN: No. Do you think they’re good for the bankers?
CLAYTON: Of course, somebody’s got to make a commission.
BRIAN: There’s huge fees. If people at Decker Retirement… at Decker Talk Radio, you guys look up the fees on a typical reverse mortgage and you’ll see why we never once in our company’s history, never have we recommended a reverse mortgage.
BRIAN: The home is sacred, we keep it out of the planning and that’s very, very important to us. So, when it comes to rental real estate, now let’s talk about that. Actually let’s stay on real estate for a second. Do you think that people should pay off their mortgage or not? Dave Ramsey said you should.
CLAYTON: Yes, there’s pros and cons to doing it. It depends on the rates, I guess.
BRIAN: Okay, let’s say that you’ve got 800,000 dollars saved up for retirement, you’re 65 years old and you’ve got a 200,000 dollars mortgage.
BRIAN: If we invest your 800,000 dollars in distribution planning like we do, it can generate with your Social Security for you and your wife, it can generate the income that you need and want for the rest of your life. That’s plan A, let’s show that, okay? Plan B is for you to follow Dave Ramsey, and by the way, at our company, we’re big Dave Ramsey disciples. We recommend that people have low debt or no debt.
BRIAN: But in this case, Clayton, if you take 200,000 dollars and you take it out from being invested and now it’s paid off to your home, that money is now no longer able to generate income for you and now you can no longer retire. Is that a good thing?
CLAYTON: Well, no, I want to retire.
BRIAN: Okay. So, there’s two approaches that we make sure to bring up when it comes to paying off your mortgage or not. Let’s say that you have a 3.5 percent mortgage and your stocks and your investments are averaging seven percent, okay?
BRIAN: 3.5 percent net of the interest rate reduction you’re getting three percent, you know what I mean when I say that? Your interest that you pay on your mortgage is a deductable expense on your taxes. So, your net cost to you on that mortgage is three percent. Does it make mathematical sense for you to take money that you’re earning seven percent on and pay off a three percent mortgage?
CLAYTON: No.
BRIAN: Okay. So, what we would say is that have the peace of mind that on a ledger basis, you see that you could pay it off but you’re getting the arbitrage benefit of having your money working for you and earning that gap or that arbitrate difference of seven percent minus three, you’re getting a four percent benefit by not paying it off. Does that make sense?
CLAYTON: It does, yes.
BRIAN: Okay. So, we want to bring that up to our people at Decker Retirement Planning that that’s something that they can and should consider before making that decision.
BRIAN: Dave Ramsey would say that forget about mathematics, it’s just about being emotionally free and in most cases we would say that that’s true unless it keeps you from retiring. Let’s talk about rental real estate for a second. Is rental real estate a good deal? There is seasoned and unseasoned real estate when it comes to rental. If you’re taking 250,000 dollars to put down on a rental real estate property and you’re cash flowing… let me grab my calculator here.
BRIAN: So, on 250,000 dollars, let’s say that you’re cash flowing 1,000 dollars a month or 12,000 on 250, you’re getting a 4.8 percent return on that money. Almost a five percent return. That’s typically what we see net of taxes and net of maintenance for seasoned real estate. If your opportunity costs for risk money, what are we getting on our risk money? You know this number. 16…
CLAYTON: 16 percent, that’s right.
BRIAN: All right. Is your money treated better at 16 percent or at 4.8 percent?
CLAYTON: 16 percent, that’s a lot better.
BRIAN: Okay, right. So, if your opportunity cost is to keep the rental, it’s our job as fiduciaries to make sure you know and have this discussion we’re having right now about all the different options. When it comes to rental real estate, the return is stable, consistent but lower, much lower than the returns that we’re getting on our risk money.
BRIAN: So, if you put brand new money into a rental, do you know that your cash flow is typically almost nonexistent for the first five or six years?
CLAYTON: Oh, that’s too bad.
BRIAN: Yeah. So, we want to make sure that you know what your options are when it comes to your real estate. Are we big investors in real estate? The answer is yes, through ETF, exchange traded funds. The trend following models that we use when interest… real estate was hot in 2000, ’01, and ’02 allowed our clients to make money during that period and not get hammered with the tech wreck in those periods.
BRIAN: So, those models were able to make money during 2000, ’01, and ’02 because of sectors like real estate that were going up. Okay, so I’m going to cross this out and now talk about what we do at Decker Retirement Planning for our risk buckets. First off, the first thing we do is decide how much the client should have at risk and typically instead of the banks and brokers that have all of their money at risk, how much money is at risk for us typically in the plans that you’ve seen? Isn’t it around 25 percent or 30 percent?
CLAYTON: About that, yeah.
BRIAN: Okay. So, right off the bat, clients when they come in from bankers and brokers, have their risk significantly reduced, number one. And then we take what isn’t at risk and we use the top managers out there based on what we find in the screening process we use with the Wilshire database which is the largest database in the world for money managers and we use the Morning Star database, the largest database of mutual funds in the world and we also use TimerTrac and [FADA?].
BRIAN: Because we’re an independent company and can work with anyone, we want to make sure that we are able to use the top returning investors, investment models that are out there. If we’re acting as fiduciaries, if I’m acting as a fiduciary to you, Clayton, am I acting as fiduciaries if I say, well, I work for X, Y, Z bank, Clayton, you get X, Y, Z mutual funds.
CLAYTON: No, of course not, you’re trying to make money for your own company.
BRIAN: But that’s a good deal for me.
CLAYTON: Well, yes.
BRIAN: Is that a good deal for you?
CLAYTON: Not necessarily.
BRIAN: I’m never seeing it be a good deal for you. I’ve never seen X, Y, Z bank or brokerage mutual funds in the top 10 percent ever, not one time. So, we are fiduciaries. So, we screen through all the different databases to see what the top managers are and we just use those six. So, for example, let’s use the S&P model and you’re familiar with this, you’ve seen this a number of times. We have one of our six managers. Gosh, we have 10 minutes to go through six managers.
BRIAN: So, this is Decker Retirement [LAUGHS] Planning and we have offices in Seattle, Washington, at Two Union Square with Ben Koval as the planner there. We’ve got a Kirkland, Washington office at Carillon Point and John Switzer is there and then we’ve opened up Salt Lake City this month and Brian Decker and Clayton Bradshaw are there and we’ve got other offices opening up.
BRIAN: So, when we talk about the models that we have, the first model trades the S&P long short. The stock market is a two sided market, right, Clayton? It goes up and down.
CLAYTON: It does.
BRIAN: Does it make sense to you to have a one-sided strategy in a two-sided market?
CLAYTON: No.
BRIAN: Okay because that means if the markets go up, you make money. What happens when the markets go down?
CLAYTON: You’re going to lose money.
BRIAN: Right and in your 20’s, 30’s, and 40’s, would it bother you much if you took a 30 percent hit?
CLAYTON: No, you can take a little more risk.
BRIAN: Yeah. But when you’re over 55 or 60 years old, can you take those 30 percent hits again?
CLAYTON: No, you need to retire.
BRIAN: Okay. So, what we do is we have a two sided strategy and a two sided market. A two sided strategy are mathematical models that are designed to make money in up or down markets. Do you remember, you’ve seen this number before, how much money did our S&P manager make in 2008?
CLAYTON: You’ll have to remind me. I can’t remember.
BRIAN: It was 108 percent.
CLAYTON: That’s right. I couldn’t remember because I was-that number seemed astronomically high. And that seemed odd to me.
BRIAN: Okay, ‘cause it loves volatility. Now what happens to that model when volatility goes down? Returns go…
CLAYTON: Down.
BRIAN: Down, right. So in the last three or four years, it’s been single digit returns in the last three years, ‘16, ‘15, and ‘14. No, ‘16, and ‘15, they’ve been single digit returns when volatility is low.
BRIAN: But the average annual return for that manager is still very high at over 15 percent. The next manager trades the NASDAQ 100 Index. Do you know who I’m talking about?
CLAYTON: Yes, that’s Scarecrow.
BRIAN: Yeah. And then they also have a two-sided model in 2000, no, since 2005, the S&P has doubled. Remember this number? The S&P has doubled, 1,000 dollars grows to 2,000 dollars in the S&P during uh, this model’s management mountain chart.
RIAN: But if you invested that thousand dollars with this manager with the NASDAQ, the two-sided model, it’s gone to 8,000 dollars, not 2,000 dollars. Do you remember this?
CLAYTON: Yeah.
BRIAN: Okay, so this manager has done four times what the S&P has done since 2005. Do you remember?
CLAYTON: Yes.
BRIAN: Okay, the third manager we have um, also trades the S&P a little differently. They have a proprietary model. How much money did they make in 2008? Do you remember?
CLAYTON: I can’t remember now.
BRIAN: 17.8 percent. Do you know of anyone who made money in 2008 before you started working here? Have you even heard of anyone who made money in 2008?
CLAYTON: No, I just remember a lot of people losing money back in 2008.
BRIAN: Right. So because we are fiduciaries to our clients who are retired or within a few years of retiring, doesn’t it make common sense, Clayton, to use a two-sided model for our risk clients?
CLAYTON: Absolutely.
BRIAN: Okay, so just to sum this up, we’ve gone through three managers, two S&P managers and a NASDAQ manager. They trade long cash or short.
BRIAN: And these are mathematical algorithms that are available and we just simply use them. They’re out there. We did our research and we found them and we used them. All right, now the other three managers we used, we diversity into gold, silver, oil, and treasury bonds to diversify our clients. By the way, in 2008, did gold go up or down?
CLAYTON: Gold went up.
BRIAN: Did silver go up or down?
CLAYTON: Up.
BRIAN: Did treasury bonds go up or down?
CLAYTON: Up.
BRIAN: Did oil go up or down?
CLAYTON: Also up.
BRIAN: All of those went up, right?
CLAYTON: Yes.
BRIAN: Aren’t we smart? [LAUGHS]
CLAYTON: [LAUGHS]
BRIAN: To diversify in the sectors that go up and down markets. Now that we’re in year nine of the seven, eight-year market cycle, aren’t we smart?
CLAYTON: Yes [LAUGHS].
BRIAN: [LAUGHS] Just take note of that. So in these models, these are in Decker Retirement Planning models that we use for our clients. These are two-sided models. If you bought and held gold since 2005, your average annual return is around nine percent. Do you remember this?
CLAYTON: Yes.
BRIAN: But you took a 45 percent hit when gold got nailed in 2013, ’14, and ’15. Do you remember?
CLAYTON: Yeah, it was-it was a bad time for gold.
BRIAN: Okay. Now with the two-sided model that we’re using for our clients, going back to 2005, those, that 45 percent drop is gone because now it’s a two-sided model and average annual return is what?
CLAYTON: 29 percent.
BRIAN: 29 percent, so it went from nine percent to 29 percent and you got rid of that loss.
BRIAN: Now what about silver? Since ’06, if you bought and held silver, the average annual return is 7.9 percent almost eight percent. But you took a 65 percent hit in 2014, ’14, and ’15. When you put a two-sided model on it like we’ve got that we’re using for this one manager, since 2006, there’s one loss which is four percent. And your average annual return is a gigantic 49 percent. Do you remember seeing that?
CLAYTON: Yeah, that’s huge.
BRIAN: Yeah. So that’s part of our diversification. Now last year, the energy manager we used long short. Now in ’15, 2015, the oil boiled, the dollars per barrel was over 110 and then it crashed down to 29 and now it’s up to 48, 44, somewhere in there. Oil got hammered. Since May of last year, oil has recovered. In the 12 months of calendar year 2016, the oil manager that we use, do you remember what he’s done net of fees?
CLAYTON: I can’t remember.
BRIAN: 102 percent.
CLAYTON: That’s unbelievable.
BRIAN: And the last manager, we’ve only got two minutes before we close up. The last manager trades treasury bonds, long short, and that manager also went through a very difficult market because last year, May of last year, the 10-year treasury was at 1.4 percent and then by January of this year was at 2.6 percent. Most people lost double digits in their bond funds. Do you know how much this guy made calendar year 2016 for us?
CLAYTON: How much?
BRIAN: 32 percent net of fees.
CLAYTON: Oh, good, good, nice.
BRIAN: So this allows us, Decker Retirement Planning, to diversify you, to bring your risks down, and to bump your returns so that in retirement you have exposure, diversified exposure to the stock market with algorithms, mathematical algorithms that are designed to protect you in a down market. Clayton, what else do we… well, we’ve got one more minute. We got exactly one minute.
CLAYTON: It’s been good to be on the show. I appreciate you having me on today.
BRIAN: Good, good. Well, you were spot on with all your answers. So this is Brian Decker. We’re fiduciaries with Decker Retirement Planning. You can see us online at www.deckerretirementplanning.com.
BRIAN: And we’ll take you through the six different managers and how we, dramatically lower your risk in the financial planning that we do. Have a great rest of your Sunday.
