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BRIAN: Welcome to Safer Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in finance and investing, we help you stay up to date on market news and retirement strategies. I’m Brian James Decker, owner and founder of Decker Retirement Planning and host of Safer Retirement Radio. With me is my co-host and one of the advisors here at Decker Retirement planning, Clayton Bradshaw.
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CLAYTON: Welcome back. We’re excited to be here today. If you caught our last couple of shows, we’ve been talking about some of the risks that retirees face when approaching retirement. And those decisions that they have to make when planning for retirement and building their plan. Today we’re gonna be talking about one of the approaches that can help mitigate some of those risks. And it’s in the form of what we call two-sided models, or risk models, or momentum models.
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CLAYTON: So, today we’re gonna dive into that. And we’re gonna talk about how these… this is one of the most important things they do, these managers can help client accounts, and did for us. Kept our client accounts positive through the first quarter of 2020, which is huge. So, we’re gonna talk about how they operate, what the approach is, and give you a way to get some more information on them later on in the show. So, Brian, I’m glad to be here. It’s been kind of a smoky time for everyone on the West Coast, it seems. Between California and Washington and Utah, where we are, we’ve been dealing with a lot of smoke.
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BRIAN: Yeah, the Rocky Mountains just suck it all in from California and it just parks it.
CLAYTON: Well, we talked to somebody earlier today who lives in Minnesota, and even he said that it’s getting hazy out there. So, I know that it’s blowing across the country. So, we’re all kind of along for the ride at this point.
BRIAN: I heard that Portland is worse than Shanghai, right now.
CLAYTON: We have an employee whose parents live out in Portland, and they shut their airport down. They couldn’t get in.
BRIAN: Wow.
CLAYTON: And so, his parents got stranded out here in Utah with us and it’s been interesting. It’s been, on top of all the COVID stuff, we’ve been dealing now with wildfires, and it seems like 2020 can’t end soon enough. That being said, we’ve had some crazy things happen in the market, as well, this year. Earlier this year, we saw the fastest 30 percent drop.
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BRIAN: Ever.
CLAYTON: Ever in the history of the stock market.
BRIAN: Five weeks.
CLAYTON: Five weeks. And then, just a couple weeks ago, the NASDAQ did another crazy thing to us.
BRIAN: Went up 50 percent in the quickest period of time ever in the history.
CLAYTON: So, that was from March to end of August.
BRIAN: Right.
CLAYTON: And then, beginning of September to now, it…
BRIAN: Yeah. So, let’s talk about those risks. The number one reason that people get blown out of their retirement, are these market crashes, like 2008. Now, if February and March of this year would have continued to go down, there would have been a lot of people that had to have gone back to work. We read an article, I shared with you just recently, the 60-40 portfolio, how it doesn’t work.
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CLAYTON: Sure.
BRIAN: And the author didn’t have a solution. So, the 60-40 portfolio, we hadn’t planned on talking about this, but we’ll just talk about it.
CLAYTON: Well, and I think the article, it’s kind of an anti-climactic article, because it says, all right, here’s all this information on something that doesn’t work, and…
BRIAN: Then there’s no solution.
CLAYTON: He couldn’t come up with a solution.
BRIAN: We’re gonna do a solution here.
CLAYTON: Yeah.
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BRIAN: We’re gonna provide a solution. Okay, the 60-40 portfolio is where you’re retired, and you have 60 percent of your money in stocks and 40 percent in bonds. Here’s the problem. When interest rates are in the 80s and 90s, where the ten-year treasury is at 8 or 9 percent, the 60-40 portfolio works.
CLAYTON: Sure.
BRIAN: When the ten-year treasury is at point 6 and you have…
CLAYTON: So, let me, real quick, I’m gonna hit the time-out button here. Let’s pause. So, when we’re talking 60-40, you’re talking about an allocation split in your portfolio that 60 percent is on the equity side, the stock market side. It’s invested, it’s going up, it’s going down. The other 40 percent is on the fixed income side.
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BRIAN: Right.
CLAYTON: Which is bond funds typically seems to be one of the easier approaches for a lot of… for some of the other advisors out there. So, fixed income, that’s bond funds. These are things that are gonna track with the treasury, with some very [OVERLAP] municipals, CDs, that kind of stuff.
BRIAN: CDs, things like that. Right. So, when interest rates are at or near all-time record lows, like zero, how’s it going if 40 percent of your portfolio is earning zero? So, I just want to state the obvious. Second problem is the market’s valuation, right now, is so high, it’s second only, in the history of the US stock market, second only to one time, and that was 1999.
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BRIAN: Now, when valuations, there’s a lot more valuations than price-to-earnings ratio, price-to-book, price-to-GDP. There’s more than a dozen different valuations to the stock market. When you look at all of them, you’re second only to 1999. So, let’s put those together. How would you like to retire today, where all that you’ve worked for… Now, yes, granted, you have social security, but let’s say that that’s it. So, you get four grand a month ‘cause you’re married. Ah, your wife didn’t work. So, you have three grand a month.
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CLAYTON: Sure.
BRIAN: Okay. So, three grand a month coming in. You’re used to spending at least twice that. So, you’re gonna make up the difference with your portfolio.
CLAYTON: Right.
BRIAN: So, your portfolio, you’re 65-years-old, so you’re on Medicare. Medicare helps supplement your health care costs, social security supplements your retirement income, but now, at 65, you’re probably gonna need 25 to 30 years of income from your portfolio, whatever that’s worth. First of all, how do you know how much money you can pull from that account? Looking at a pie chart? You’re a smart guy.
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CLAYTON: Yeah, well, I think the approach for a lot of people is, well, I’ve got x number of dollars, a half a million, a million, two million in my portfolio.
BRIAN: Most people don’t.
CLAYTON: But they don’t. Right. Most people don’t. I mean, I think the average I saw was, like 70 thousand, is what people have in their retirement accounts.
BRIAN: Okay. So, the average American doesn’t have much savings at 65. Let’s just make an assumption.
CLAYTON: Sure.
BRIAN: Let’s leave average and say, the typical planning that we do for people, they have, I don’t know, 900 to one point two. So, let’s say 900 thousand.
CLAYTON: Yeah.
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BRIAN: How do you make 900 thousand last 25 to 30 years?
CLAYTON: Well, I think, the approach for a lot of people, is they walk in and they say, all right, well, this was my lifestyle, here’s how much extra I need, so I’m gonna draw that and, fingers-crossed, it outlasts me.
BRIAN: Yeah. Okay. So, you’re gonna do a buy-and-hold, hoping that… Now, historically, when you have market valuations that high, Clayton, 1929, ten years later, markets had a negative return. 1999, ten years later, the markets had a negative return. Every time the market historically has gotten this high, ten years forward, there’s been a negative return.
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BRIAN: Couple that, now that’s 60 percent of your portfolio. Couple that with zero, or close to zero interest rates. So, you have a scenario where you’re living longer than ever before, interest rates are almost zero. The market valuation is high. That’s a triple-whammy.
CLAYTON: Right.
BRIAN: And so, what we’re gonna talk about today, is solutions to that. At the very least, in their portfolio, there’s three parts. There’s cash, safe money, and risk. On the cash side, there’s seven or eight banks that are earning more than the seven to ten-year treasury bond. No, higher than the seven to ten-year CD yield.
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CLAYTON: Yeah.
BRIAN: Seven to ten-year CDs, right now, are yielding point eight.
CLAYTON: Right.
BRIAN: So, it’s valuable information and we, as fiduciaries, use the database. We go to the database that allows us to see the highest returns for banks and insurance companies for cash, which we’ll talk about right now.
CLAYTON: Right.
BRIAN: Let’s just throw it out there.
CLAYTON: Well, I think it’s important to note, as well, that it’s not only that we just go to a database, and log in, and click what’s the highest. We have to spend a fair amount of time and money researching all of this as well. ‘Cause there’s one database for a certain type of investment. There’s another database for another type of investment. So, we’re going through several databases.
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BRIAN: Okay. Good point. So, as fiduciaries, where the client’s best interest is got to be above the company’s best interest. This is case-in-point. How much fees do we get on the money markets that we farm out for clients?
CLAYTON: On the money markets? Zero.
BRIAN: Right. There’s zero fees. And we help our clients go from their commercial banks, zero point zero something, credit unions, zero point three. We more than, we almost triple that. So, we give them…
CLAYTON: Well, on the cash, what we’re seeing is that it’s closer to ten times the national average of savings accounts that we’re helping our clients find.
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BRIAN: Okay. Good. So, we do, like you said, a check to make sure that the institution has foundational strength. So, we look at ratios where assets-to-liabilities are, at least, two x.
CLAYTON: Sure.
BRIAN: And then we take those banks, and then we see which ones are paying the highest.
CLAYTON: Right.
BRIAN: All the banks that are paying the highest are FDIC insured. And they’re mostly e-banks. Now, I have an e-bike.
CLAYTON: Totally different things. But, yes.
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BRIAN: But this is an e-bank. [LAUGH] And it’s online. So, you don’t get the teller, you don’t get the drive-through. It’s all online.
CLAYTON: Right.
BRIAN: You take a picture, and you make a deposit of your check, and you do all your online stuff. You can ACH money to pay your bills and all that kind of stuff.
CLAYTON: Yeah. And I use one of these as well. And so, I’ve got my checking account, that I use for my everyday stuff, that pays me nothing. And then, I’ve got, on the other side, one of these high-yield savings accounts. And I can transfer money seamlessly between the two.
BRIAN: That’s what we’re talking about.
CLAYTON: Right. And it’s great. But you’ve gotta be comfortable with technology.
BRIAN: Right. Do you wanna give the seven or eight names? Or do you want me to?
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CLAYTON: Yeah, why don’t you go ahead and give ‘em.
BRIAN: Okay. So, there’s Ally. A-L-L-Y. There’s CIT. There’s Capital One. There’s Synchrony. S-Y-N-C-H-R-O-N-Y. There is Goldman Sachs. There’s Nationwide. There’s two more.
CLAYTON: Did you say American Express and Discover?
BRIAN: American Express and Discover. Nailed it. Okay. So, those are the eight banks, FDIC, we’ve checked them out. They’re paying between point seven and one.
CLAYTON: Right.
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BRIAN: So, we are acting as fiduciaries, we’re math-based, we’re giving our clients that information on one part of their portfolio, cash. Now, another radio program is needed to describe the safe money. We’re not gonna go there today. But we use laddered, principal-guaranteed accounts to draw income from those accounts. When the markets crash every seven or eight years, it does not affect our clients.
CLAYTON: Right.
BRIAN: They don’t have to go back to work. They have peace of mind. We’re gonna talk today about the risk money. So, if we’re math-based, and we’re fiduciaries, we are gonna go through the databases. The largest database in the world, for mutual funds, is Morningstar.
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CLAYTON: Sure.
BRIAN: The largest database for money managers is the Wilshire database.
CLAYTON: Right.
BRIAN: And we also throw in a couple more that we look at. So, we want to know who, and we have four qualifiers. One, they have to have gone through a down-market, like 2008. We’re not gonna hire a money manager that’s never been tested.
CLAYTON: Right. And tested, not theoretically, but actually, their model was in existence.
BRIAN: Yeah.
CLAYTON: And they actually went through it, managing money using their model.
BRIAN: Isn’t it sad that you had to say that?
CLAYTON: There are so many illustrations out there of people that are, like, well, here’s how it would have done, had it been around.
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BRIAN: Yeah. Hypothetical? No. Back test? No. So, have to have been tested, have to be actual numbers. Three, net of fees. And four, their numbers have to be third-party verified. So, those are the four qualifiers. So, then we bring in all those, and then we sort through them, and we get rid of four other groups. We get rid of the groups that are closed to new investors.
CLAYTON: Sure.
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BRIAN: We get rid of the hedge funds. Can you imagine, as a fiduciary, saying that you’re gonna have your clients put their risk money in a hedge fund? And, by the way, you’ve gotta open up a commodity account, an options account, a futures account, and a margin? No, we don’t do that. Too much volatility. So, we get rid of those. The third thing is, we get rid of the per account minimums of three, four, or five million bucks.
BRIAN: And then we get rid of the high-volatility, high beta, pedal-to-the-metal, two, three x, QQQ NASDAQ funds that just explode to the upside when the markets do well, and just crater when the markets go down.
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CLAYTON: They’re the roller-coaster funds.
BRIAN: Right.
CLAYTON: Yup.
BRIAN: So, what is left, we have six money managers that we use for clients, that are mathematically the highest returning net of fee managers that we can find. And they have one characteristic in common. They’re all computer trend-following models. And this technology’s been around for over 20 years.
CLAYTON: Sure.
BRIAN: And it’s unbelievable that, even today, when we show clients these returns, and talk about these managers, that they have never heard of them before. So, at this point, someone will say, oh, if this is so great, why isn’t everybody doing it?
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CLAYTON: Yeah. And I see this a lot. Meeting with clients is that’s, well, why isn’t this strategy out there?
BRIAN: Yeah. Well, let’s tackle it right now. So, why isn’t everybody doing this? Banks and brokers, and now we’re guessing, right?
CLAYTON: Sure.
BRIAN: We don’t know. We haven’t interviewed someone, but we’re guessing that the number one reason that banks and brokers will never venture out of their pie chart, is for liability reasons. So, for example, Clayton, if you were a client, and you were to come into Decker Retirement Planning, the first thing you would do if you were a banker or broker, is you would fill out a risk questionnaire. And based on how you filled that out, how much risk that you would take, that would produce an asset-allocation pie chart that would be populated with diversified mutual funds. And, boom. There you go.
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BRIAN: Now, when the markets crater and you lose 30, 40 percent, and you hire an attorney to sue us, the banks and brokers have never lost. Because they’ll go back and say that you created that fund. You created that portfolio. You solely are responsible because of how you answered those risk questionnaires. They’ve never lost. So, I doubt that banks and brokers will ever venture out of that pie chart, for that one reason all by itself.
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CLAYTON: Sure.
BRIAN: But let’s talk about why everyone wouldn’t want to do this. Or would want to do this. It’s because, the market’s a two-sided market. It goes up and it goes down. The buy-and-hold strategy is a one-sided strategy in a two-sided market. Meaning that, yeah, you make money when the markets go up. But you’re gonna take that hit when the markets go down.
CLAYTON: Right.
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BRIAN: It’s a one-sided strategy. Now, I’ll just pause right here and say, anyone who has a mutual fund, or a money manager, or active management, and is paying a fee for that, is ignorant and uninformed. Because you can go to Vanguard and index for almost free. And there’s three reasons for this. One is, you buy the S&P, and you put all your money in there. Number one, you’re diversified among five hundred of some of the best companies in the world.
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CLAYTON: Yup.
BRIAN: Number two, you’re owning the index that, according to Vanguard, is beating 85 percent of money managers and mutual funds ever year anyhow.
CLAYTON: Right.
BRIAN: And number three, it’s almost free. The cost of the SPY is, like, four basis points. But there’s one problem. It’s a one-sided strategy in a two-sided market. So, guess what happens in February and March when, in five weeks this year, the market loses 30 percent? What happens to SPY?
CLAYTON: You lose 30 percent, just like that.
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BRIAN: In five weeks.
CLAYTON: Yup.
BRIAN: And you’re retired. And you take that hit.
CLAYTON: Right. Somebody that’s working in their twenties, thirties, and forties, that’s saving money and not depending on that as income, it’s…
BRIAN: Devastating.
CLAYTON: Well, for somebody who’s working, it’s uncomfortable.
BRIAN: Oh, right.
CLAYTON: But for somebody who’s retired, that’s where it’s devastating. Because now, you were drawing income out of that, and you needed a certain amount of income to live every month. And if, all of a sudden, your income takes that same hit, along with your portfolio, that’s going back to work. You’re retiring from retirement at that point.
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BRIAN: Correct. Now, thankfully, for most people in the United States, the retirees, markets bounce right back.
CLAYTON: Right.
BRIAN: Next time, it might not. Historically, we’re on borrowed time anyhow. With these levels of valuations. So, what these computer trend-following models do, is they are designed to make money as the market’s trending up. Number one, keeping up with the S&P as the markets go up.
CLAYTON: Yup.
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BRIAN: And number two, protect principal when the markets go down. So, they’re able to make money when the market changes trend and starts down, like it did in February of this year. We had our managers, they can either go to cash or they can buy inverse funds. Allowing you to make money as the markets drop. So, that’ a little technical for some people.
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CLAYTON: Sure.
BRIAN: But it’s a two-sided, trend-following computer model. Why are computer models important? It’s because they’re not humanoids with fear and greed.
CLAYTON: Yup. The fear and greed, when you’ve got that emotion, it’s amazing how many people just… You flinch, and you panic, and you make the wrong choice, and typically you’re…
BRIAN: Oh, it’s too late to sell.
CLAYTON: Yeah.
BRIAN: I’ll wait till… no.
CLAYTON: Yeah.
BRIAN: And, oh, I can’t buy now. The headlines are horrible. No. There’s no emotion. There’s no fear and greed. They’re computer models and they do the right thing. They make you do the right thing.
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CLAYTON: Well, this was evidenced earlier this year. As I mentioned earlier in the show, that the first quarter of 2020, these managers, collectively, were positive through that first quarter.
BRIAN: Let’s go through some of the managers. So, we purposely have divided these six. Three equity, three non-equity. Three are in the markets. Three have nothing to do with the stock markets. They’re non-correlated, diversified managers. Non-correlated means that what makes the markets do well doesn’t make these three do well.
CLAYTON: Right.
BRIAN: They’re inversely related. Which will…
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CLAYTON: Having something that’s non-correlated, if you’ve got all five, you’ve got five and they go in one direction. That doesn’t mean that one of them, that takes a bad turn, because they’re not perfect and they can. It doesn’t mean that all five or all six are gonna go the same direction at the same time.
BRIAN: Right. So, we have three equity and then we have gold, silver, and energy. All of them are computer, all of them are two-sided trend-following.
CLAYTON: Right.
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BRIAN: So, here’s what happened. Three of our equity managers and help me with this. One’s been around since 2005. A thousand dollars in the S&P rose to 4 thousand today. A thousand with him rose to 18 thousand today. Average annual returns are over 21 percent, net of all fees for the first manager. The second manager has been around since 2000, so 20 years. Average annual returns, net of fees are over 20 percent.
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BRIAN: And he made money in 2000, ‘01… Oh, in 2000, ‘01, and ‘02, the S&P was down 50 percent. The NASDAQ was down 70 percent.
CLAYTON: The NASDAQ got hammered that period.
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BRIAN: And in those three years, he lost, like, two percent in 2000. He made over 100 percent in 2001, and he made over 15 percent in ’02. He made money in ’08. But the average annual returns are over 20 percent. The third manager is relative strength based. He uses cash. He never goes short.
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BRIAN: And since 2007, he has outperformed the S&P every single year. He lost less than 1 percent in 2008. But last year, made over 40 percent. Average annual returns for him are the highest of the three equity managers. His average is over 30 percent, net of all fees. Those are our three equity managers.
CLAYTON: Right.
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BRIAN: Gold and silver. Gold started in ’05, silver started in ’06. It was ’13, and ’14, and ’15, gold lost 45 percent, silver lost 65 percent. When you put a two-sided strategy together for gold, average annual returns go from seven percent to over 26 percent.
CLAYTON: Sure.
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BRIAN: Silver goes from nine percent to over 45 percent. So, these are average annual returns and then our energy manager has, since 2015, averaged well over 25 percent. Now, at that point, when we show those fact sheets, that’s when people say, why isn’t everybody doing this?
CLAYTON: Right.
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BRIAN: With the remaining time, and with returns like that, a lot of people, their first reaction, they’ll say, ooh, that sounds risky. But if we’re math-based, and we are. And we’re fiduciaries, and we are. Then we say, wait a second. Who has more risk? And by the way, risk is measured two ways. One is by standard deviation. And two is by volatility. So, and three, I guess is, common sense, the risk of loss.
BRIAN: So, who has more risk? The S&P, that in the last 20 year, lost 50 percent twice? Or these six managers that, when combined, have never had a losing year? Not once.
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CLAYTON: Right. Well, obviously, it’s those that don’t take those massive hits.
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BRIAN: Right.
CLAYTON: Because in ’08, we saw this with retirees that, folks, market took 18 months, was it about, to bottom out? And then, that’s where retirees were going back to work. They started showing up at, I mean, fast-food, and Walmart, and places like that. So, yeah. Well, for somebody that’s using a strategy like this, for a portion of their portfolio, and they’ve got their income coming from a stable source, that’s where you wanna be in retirement.
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BRIAN: Right. So, when it comes to the risk managers, the second thing that we… So, we lower risk by using a two-sided strategy in a two-sided market. But numerically, we lower the risk for our clients because, when they come in, they usually have 60 plus percent of their portfolio at risk. And we cut it down, typically, to 20 to 25 percent. Typically.
CLAYTON: Yeah. And it kind of depends on the person, but it’s roughly in that area.
BRIAN: And so, 75 to 80 percent of their money has no risk. Laddered, principal-guaranteed accounts.
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CLAYTON: Can’t lose principal.
BRIAN: Can’t lose money and funds the first 20 years of their retirement.
CLAYTON: Right.
BRIAN: They start with x. Call it 1.2 million. They burn through 75 percent of their money in the first 20 years. And because of how we set up 25 percent, 20 to 25 percent of their risk money, guess what happens in 20 years of leaving that risk bucket alone? It grows.
CLAYTON: It grows.
BRIAN: And it replaces your starting value.
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CLAYTON: Just like someone who’s in their mid-thirties to mid-forties, that’s got about 20 to 25 to 30 years left of their working career, they’ve got income coming from someplace that they can depend on. It’s their sweat and blood and tears, so to speak, with work. That’s their income. They can depend on it. But then they’ve got money that’s in the stock market that they don’t need that money for a long time. It’s the same way with the distribution plan.
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BRIAN: Right. So, in the distribution plan, I just love this. I’m gonna say this one last time and then I’ll cut it. They start with 75 to 80 percent of their money, no risk. Draw income from that for the first 20 years, leaving 20 to 25 percent of their risk money. If they start with 1.2 million, in 20 year, they have 1.2 million left. For the rest of their lives. It’s genius how we… that’s not very humble. But it’s genius what we do with the distribution plan.
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BRIAN: It’s math-based. It’s an income plan. It’s a spreadsheet that allows us to see for our clients, how much money to put in each bucket, depending on their age, and their other sources of income. And we have our clients live to age 100, not because we think that they will live that long, but we want to make sure their money outlives them.
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CLAYTON: Right. Well, and I think when you say that it’s genius, I think that comes from, I mean, you’ve been in finance for 35 plus years, and having seen, when you first started, the other side of the strategy. And now for the last 15 to 20 years that you’ve been doing distribution planning and seeing the effect that it has on people’s lives, I think, yeah, you’ve got confidence. And we all have that here, to be able to say, yes, this has worked for our clients and it’s been great to see them enjoy retirement the way they want to.
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CLAYTON: And for anybody that wants to learn more about this, we’ve got some great resources on our website, DeckerRetirementPlanning.com. We’ve got some books that you can download for free that just come in the PDF form. If you want to schedule an appointment with us, you can do that on there as well. But please, let us know if you have any questions, you can get ahold of us. All of our information’s on our website. DeckerRetirementPlanning.com. A lot of great resources there. If you haven’t signed up for our newsletter, I encourage you to do so, as well. Again, go to DeckerRetirementPlanning.com. We look forward to joining you next week. Thanks for being with us today.
