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. This week we’re talking about stocks, markets, and conditions, and how they compare to our historical data. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: We’re featuring Brian Decker from Decker Retirement Planning, out of Kirkland, Washington, Seattle, Washington, and the newest office as well, in Salt Lake City, downtown at the Wells Fargo building. Brian’s a fiduciary planner and, Brian, today, glad to have you on the show here, we’re going to be talking specifically about stocks. Now, Brian, correct me if I’m wrong, but stocks have never been higher, including when technology was booming. Is that correct?
BRIAN: That’s correct. Now, when we talk about higher, not just based on price, right now the large cap U.S. stocks that’s represented by the S&P 500 index are trading at a higher level than any other time in history, except for during the huge tech bubble of 2000. Stocks are valued in different ways. There’s price to earnings, price to sales, there’s different ways to measure how expensive or how cheap stocks are, historically.
BRIAN: So, the price to sales ratios is one of the best ways to measure the real value, or lack thereof, in the stock market, because there are ways to inflate the other measures, like book value ratios, price to earnings ratios. The dot com bubble peaked at a Shiller P-E ratio of 44. So, the 1929 crash was preceded by the second-highest Shiller price-earnings ratio of 30. Now, remember, the dot com bubble peaked at 44, the 1929 crash was 30.
BRIAN: Today, the Shiller price-earnings ratio is 29.4, making this the third-most expensive moment in U.S. market history. March 3rd of 2000 was the only other time besides right now that the S&P 500 rose above two times sales. From the day’s close, 1527.35, the index fell 49 percent. Mike, that’s almost half, right?
MIKE: Yeah, that’s ridiculous. I mean, the market’s tanked three years in a row, lose almost half, that’s just a disaster right there.
BRIAN: So, people lost about half their money, from March 23rd of 2000, in the next three years, almost 50 percent. From October of ’07 to March of ’09, that was another 55 percent drop. So, and actually, no, no, no, here it is, the bottom of the market in the tech wreck was October 9th, 2002. The S&P didn’t get back to its 2000 price level until mid-2007.
MIKE: Now…
BRIAN: The S&P 500…
MIKE: Yeah.
BRIAN: Hold on. The S&P 500 didn’t collapse, or I’m sorry, didn’t eclipse it’s October of ’07 peak until the first quarter of 2013. So, let me say this differently. Stocks went nowhere for 13 years. From March 23rd of 2000 to the first quarter of 2013, 13 years and stocks went nowhere. So, Mike, you were going to say?
MIKE: Yeah, that’s, first off, ridiculous, but I wanted to ask you about, we call it the tech wreck because it’s easy to blame something, and we blame the dot com boost and all. But, September 11th happened right in the middle of all that, as well.
MIKE: So, I mean, do you think this, I know this is your opinion and all, but do you think the political environment, September 11th, all of that, contributed to it getting worse, or do you think that may have helped a little bit? I mean, how did that play into all of this? I’m sure that was a factor.
BRIAN: Well, there’s different bubbles. So, there was definitely a bubble in technology stocks, that’s why the tech bubble is the bubble that it was, and it burst. There was a mortgage bubble in 2007 and 2008 that burst.
BRIAN: Right now, we don’t have one bubble, we have four. Four bubbles.
MIKE: Let’s go through all four. Shall we?
BRIAN: Okay, and they’re all caused by interest rates being held artificially low from the Federal Reserve Bank. The central banks around the world have kept interest rates artificially low for one very important reason. What do you think it is, Mike?
MIKE: Ooh, that’s a tough one. If it’s…
BRIAN: Actually, there’s two reasons.
MIKE: Isn’t it trying to feed the economy? Trying to make it go a little bit better?
BRIAN: Yeah. Yep, monetary policy, lower rates and you try to stimulate economic growth in your country. Everyone does it.
MIKE: [LAUGH]
BRIAN: It also destroys your currency, and with a low currency, export nations like Japan can sell widgets a lot cheaper than anyone else, because their currency has gone down. The third benefit of lower interest rates is, the debt that you owe as a country, you can inflate your way out of the debt by paying it with cheaper dollars. So, you get a three for one by lowering interest rates. Well, interest rates have been kept low now for a long time, and it’s created several bubbles.
BRIAN: The first bubble is the debt, itself.
MIKE: Mm-hmm.
BRIAN: The debt of the countries right now has never been higher, and the measure that we use to look and see how much debt a country has is debt to GDP. If you have more debt than you have in GDP, that is typically a line in the sand that makes it very difficult for a country to ever repay its debt, ever.
MIKE: Mm-hmm.
BRIAN: Now, Argentina’s good at this. They collapse every dozen years. Once every 12, 15 years, Argentina collapses, and it’s expected.
MIKE: Well, what about…?
BRIAN: However, for the first…
MIKE: What about Italy?
BRIAN: What?
MIKE: Does Italy, or Greece does that too, don’t they?
BRIAN: I don’t remember that happening.
MIKE: Well, they’ve been forgiven by the Euro a number of times, or of different banks. It seems like they’re up and down with their economy and what they’re doing with lending.
BRIAN: In 1998, Russia collapsed their currency. Anyhow, right now we have for the first time the G7 nations around the world, the biggest economies around the world, most all of them have debt more than GDP.
BRIAN: The biggest debtor country, take a guess, Mike.
MIKE: The biggest debtor country? Is anyone…?
BRIAN: It rhymes with yapan.
MIKE: Really? Japan is the worst?
BRIAN: Japan is the worst. 230 percent of GDP, debt to GDP.
MIKE: That’s outrageous.
BRIAN: Plus, they have demographic issues. Anyhow, the reason we’re about this, Decker Talk Radio listeners, is we’re talking about the four bubbles that can cause the next stock decline. We’re in year nine of typically a seven, eight-year market cycle.
BRIAN: Every seven or eight years, the stock market crashes, like clockwork. 2008, seven years before, and that was a 55 percent drop from October of ’07 to March of ’09. Seven years before that was 2001, twin towers go down. Middle of a three-year tech wreck, 50 percent drop. Seven years before that was 1994, Iraq invades Kuwait, interest rates spike, the economy goes in recession and stocks struggle. Seven years before that was 1987, Black Monday, October 19th. 30 percent in a day.
BRIAN: Seven years before that was 1980. Interest rates were sky high, two-year recession, two-year market drop of over40 percent.
MIKE: Jeez.
BRIAN: Seven years before that was 1973-74 bear market, 44 percent drop. Seven years before that was 1966-67, that was a two-year bear market of over 40 percent, and it keeps going. So, this cycle has been around for many, many decades. We’re in year nine of a seven, eight-year market cycle. In the history of the stock market, we’ve only had one time where the stock market went ten years without a 20 percent or greater drop. Only one time.
BRIAN: So, here we are, it’s like playing musical chairs. Mike, have you ever played musical chairs, where the music has been going on for a long time, and you’re just itching to take a seat?
MIKE: [LAUGH] Is that what the economy’s kinda doing right now? Because I’ve been there and, usually in those situations there’s a couple bruises that come afterwards, because you get antsy, you get nervous.
BRIAN: Yeah. It’s like people have forgotten, investors have forgotten that the stock market goes down. They think that a down market day like a couple weeks ago, where the market went down 400 points in a day, they’ve forgotten that it can do that.
BRIAN: But, let’s keep goin’. I want to go back to these four bubbles, so that Decker Talk Radio listeners can watch to see what causes the market to crash this next time. By the way, in my opinion, there is one pin and there’s four bubbles, that this time will burst. It won’t be, well, I’ll get to that in a second. So, the first bubble is country debt.
MIKE: Now…
BRIAN: And it’s kept, the debt gain is being played right now.
MIKE: Now…
BRIAN: And the pin that can burst the country debt bubble is when interest rates detach from the central banks and they start to go up by themselves. So, there’s two different interest rates that are very important to watch and be aware of. One is the artificially held low interest rates from the central banks around the world. The second rate is the free market rate of bonds, in general. So, that free market rate of Greece is a barometer of the confidence the investors have in that country.
BRIAN: So, when you see the ten-year treasury of Greece going up above 15, 20 percent, that’s what happened to Puerto Rico debt right before they went broke. So, it’s a good barometer. We’re giving good information out, Decker Talk Radio listeners, for you to watch for your portfolio. The first bubble is country debt. The second bubble to watch to see if it breaks or not is, when interest rates are kept artificially low, investments in real estate go artificially high.
BRIAN: Real estate can mathematically be shown to be in bubble levels by a statistic called the affordability index. In Seattle, there’s King county. The average wage for King county is X, let’s say that it’s 60,000 a year. In today’s prevailing rates, with mortgages, how much would a 60,000 dollar a year income buy as far as homes? Let’s call that Y.
BRIAN: So, let’s say that Y is a 60,000 dollar a year home with today’s mortgage rates could purchase a home with a value of 420,000 dollars, okay. Then, let’s look at the number Z. Z is the average home price in King county. Right now, Z is much higher than Y, the 420,000. So, that’s called the affordability gap in real estate, and when you have that gap be higher, or as high as it is now, and making new records, that creates a problem, because real estate there in that market is at an unsustainable level.
BRIAN: So, let’s go back to this, why are we calling it a bubble in our country? It’s not just true in King county, in Seattle, it’s true in Vancouver, British Columbia. It’s true in Los Angeles, New York, it’s true in a lot of the major metropolitan areas around the country. Real estate is in bubble territory in other major countries around the world, because interest rates are extremely low. What’s the pin that causes the bubble to burst on real estate?
MIKE: It’s interest rates going up. Right?
BRIAN: It’s it, it’s the same thing.
MIKE: Well, and…
BRIAN: When interest rates go up, you create massive problems for borrowers, that are hugely in debt, like the countries, number one, and like real estate, number two.
MIKE: Brian, did you hear that in Redmond, January this year, it appreciated, this is your neck of the woods, the homes appreciated about 10 percent in a month. It’s just ridiculous, too. I mean, that’s gotta play into a factor, as well.
MIKE: The price is going up, the different market cycles [INAUDIBLE] stay on top of interest rates, right. Or is that just a side thing?
BRIAN: Well, it’s unsustainable, that’s the thing. Now, I’m not arguing that the trend in interest rates isn’t going to be higher as we go forward. I’m not arguing that, but I am saying that in that upward trend, that real estate cycles, and right now it’s not a good time to buy real estate, when the affordability index is at a record gap in those markets.
MIKE: Makes sense.
BRIAN: I think that’s a historical fact.
MIKE: Makes sense.
BRIAN: Okay, the third bubble that’s being created with artificially low interest rates is the stock market. We just talked about at the open of the show how the stock market has never been priced higher based on a Shiller price-earnings ratio, or at a price to sales ratio, it’s never been priced higher than it is now, with one exception, and that is the dot com bubble of 2000 to 2002.
BRIAN: We’re right at 1929 crash levels, we’re tied with that.
MIKE: Mm-hmm.
BRIAN: The moral of the story is, whenever you buy the S&P 500 and it trades above two times sales, historically, it’s produced bad financial results. So, if history is your guide, we’re entering into one of the worst times ever to buy U.S. stocks. It’s a different, [CLEARS THROAT] right now it’s different in other countries.
BRIAN: So, China and Europe. Europe has lagged the U.S. bull market that we’ve had for the last nine years, and China has been all over the map. By the way, Moody’s just downgraded China because of their debt situation, and their ability to pay that debt. So, they’ve taken them down to A, A+ from, or A1 from triple-A status.
MIKE: That’s a pretty big deal. That’s a pretty big deal, especially for China being such a big player in the world’s economy.
BRIAN: Yep. Okay, so there’s three bubbles right there. Real estate, stocks, and debt itself. The fourth and final bubble that’s being produced by artificially held low interest rates is consumer debt. The consumer right now is a paycheck or two away from disaster, and because of low interest rates, that’s the equivalent of free money, particularly in other forms of debt that are hitting the consumer, such as auto loans and student loans.
BRIAN: Auto loans and student loans, plus overall consumer debt, is at or near record levels. It is at record levels for student loans, it’s at record lows for not only auto loans but also loans that are going into default.
MIKE: Really? Going into default, that’s a big deal?
BRIAN: When you get…
MIKE: A lotta loans are defaulting right now? Do you think it’s because the interest rates are so low, and people are almost getting free money, and they’re getting greedy, or…?
BRIAN: No, the default, when the default rate goes above five percent for auto loans, it’s the canary in the coal mine. It lets you know that things are not going well. By the way, you would expect after 2008, that countries would have pulled back and consumers would have pulled back their debt. That didn’t happen. It did happen for the first 18 months, 24 months, but then we went to record levels of debt, both for the consumer and for the countries, and now we’re at all-time, we’ve almost doubled debts in most cases, since 2008, when things got ugly.
BRIAN: So, let’s talk about how to protect yourself. That’s the purpose of today’s radio show. We want to talk about how to protect your stocks. We’ve had many radio shows about making sure that you’re drawing income from non-fluctuating accounts. If you’ve got an advisor that has all of your money at risk, we would recommend that that’ a huge mistake, because that advisor is buttering his own bread and not looking out for you.
BRIAN: The bankers and brokers keep all your money at risk, because that’s how they get paid. What’s in your best interest isn’t always what’s in the best interest of the broker. So, we want to pull the curtains back and let you see clearly that any broker that takes you all at risk, especially in retirement, and tells you to buy and hold, is looking out for their own interest, not yours. This is mathematical and it’s common sense. When you take a hit like you did in 2008, and you take a 30 percent hit in your stocks, and you’re drawing money from that while the markets go down, you’re pulling out 130 cent dollars.
BRIAN: It’s hurting you. And then it takes four years to get back to even, and then once you are even, you’re not even, because you’ve been pulling money out of that account that whole time. It is financial suicide, we hope this is common sense. I want to talk, Mike and I, [CLEARS THROAT] we’ll talk right now about the choices you have in the stock market to protect the downside. One of the options you have is to hold cash and just wait it out.
BRIAN: Not what I would recommend, because how are you going to know that this market may not continue to go higher for another two years? It might. Nobody on the planet knows when this market’s going to roll over. So, holding cash and waiting is not an option for a lot of people who need their money to be working for them. Second one is stop losses. Stop loss is where, let’s say you own XYZ stock, you bought it at 30, it’s now at 40, you’ve holding to a good gain, so you put your stop loss, you snug it under ten percent.
BRIAN: So, you put it in at 36. If the stock ever hits 36, you’re out of it, and you’ve preserved a 20 percent gain from 30 to 36. Sounds mathematically smart, right, Mike?
MIKE: That’s makes sense, yeah. [LAUGH]
BRIAN: Okay. Well, here’s what happens all the time. Your stock, your XYZ stock goes from 40 to 36, and then goes to 50. When are you going to get back in, Mike?
MIKE: This is such a trap question. I mean, you’re, it’s hook, line, and sinker.
BRIAN: You’re not going to get back in.
MIKE: You…
BRIAN: You sold it at 36, why are you going to buy it at 37?
MIKE: Well, yeah.
BRIAN: You think that it’s going to go lower. Human…
MIKE: Well, there’s a saying, yeah, there’s a saying that you said, it’s, or I think you said it, and that’s, it goes like, fear, help me with this, fear keeps you from being in the market when you should be in there, and greed keeps you in the market longer than you should be, because it’s all about emotion, and you’re emotionally hurting yourself with the market’s ups and downs. Did I say that right?
BRIAN: Right.
MIKE: You say it best.
BRIAN: There’s two reasons why human beings don’t make money in the stock market. One is fear and the other’s greed. Human emotion keeps you out of the market, fear, when you should be in, and in the market when you should be out, greed.
BRIAN: So, right now we’re in greed territory, nosebleed territory, as far as valuation for the stock market, particularly the S&P. All right, so the options on protecting yourself, one s to just go to cash, not smart. Second is to use stop losses, but I can’t tell you how many times people have thought that stop losses are brilliant, but then they get stopped out and then the stock goes to a new high. It’s very frustrating.
BRIAN: So, then what people do is they say, they’re going to create mental stop losses. Ah, that’s good. So, let me tell you, I’ve seen this so many times. 32 years in the business, I can’t tell you how many times I’ve seen the following. So, Mike, let me…
MIKE: Am I your guinea pig here?
BRIAN: Let me, yeah, let me use you, the guinea pig. I’m going to use your fear and greed and tell you how you’re going to lose 30 percent in your stocks in the next go around.
BRIAN: Because you’ve tried to use stop losses and you’ve lost a lot of money by watching stocks go down and hit your stop, and then go to new highs, you’re going to say, mentally, market’s right now at Dow 21,000. If the markets go down ten percent, so that’d be a couple thousand, that’d be 18,000, or I’m sorry, 19,000.
MIKE: Mm-hmm.
BRIAN: IF the markets go down 10 percent, you’re going to get out. So, guess what, markets go down 10 percent, and you don’t. You think that this time it’s going to go back like…
MIKE: They’ll turn around.
BRIAN: It’ll come back around like you thought.
BRIAN: Now it’s down 15 percent, and this is where human nature, mark my words, I wish we could record this and put this on everyone’s website, [LAUGH] or we could put this somewhere where everyone could see it. Because, this is what will happen, you can take this to the bank. Markets are down 15 percent, and you will tell yourself, every investor in the United Sates, I hate to use superlatives like this, they will emotionally tell themselves markets are down 15 percent, once the markets get back to a certain amount, that’s when you’ll sell.
BRIAN: But this time, because every seven or eight years the markets get creamed, this time the markets don’t come back. Now you’re down 20 percent, and you’re sick to your stomach, you’re losing sleep at night, but to put lipstick on the pig, and make yourself feel better, you tell yourself you’re really smart, and you’ve decided that you’ve become a, quote, long-term investor. Well, at 65 or 70 years old, you’re trying to make yourself feel good, and justify the fact that you totally missed it.
BRIAN: You didn’t get out when you should have, but now it gets worse. Now you’re down 25 percent. Now you’re down 30 percent, and you can’t stand it, and you realize in retirement that you can’t lose much more, and historically the markets lost 50 percent twice just in the last 17 years. So, at 35, 40 percent, you’re going to sell. Markets go down 40 percent, you sell. Markets bottom around 50, 55 percent, and then go up 40 percent the next two years without you.
BRIAN: I can’t tell you how many times I’ve seen this happen. Human nature has your fear and greed working against you.
MIKE: We’ve talked about enough problems here. What’s the solution?
BRIAN: We strongly recommend that you use algorithms.
BRIAN: If you come in to see us, we’ll show six models that collectively made money in 2000, ’01, and ’02, and then doubled when the market did from ’03 to ’07, made money in ’08, and more than doubled while the market did from ’09 to present. In fact, 100,000 invested in these models, or I’m sorry, in the S&P from January 1 of 2000 to present, 100,000 with dividends reinvested in the S&P, grossed to around 220,000, average annual returns four and a half percent.
MIKE: Mm-hmm.
BRIAN: 100,000 invested in these models, net of fees, grossed over 900,000. Why the difference? Because, well, we didn’t take two 50 percent hits. Average annual return net of fees is over 16 and a half percent.
MIKE: [LAUGH] So…
BRIAN: We invite people to come in and see, mathematically, what’s been out there for decades, to protect your principal when the markets go down.
MIKE: Yes. Can you explain how they work?
MIKE: I feel like that was a good segue in, but you didn’t say much more besides that, and I, Brian, I know you, you’re a very transparent person, you want to educate people on how these things work.
BRIAN: Okay, I’m going to finish up the nonsense that’s out there, because I just want to talk about the other things that people do, thinking that they’re going to protect their downside with other things that don’t work, and then let’s go more into detail on the two-sided models that we recommend and use.
MIKE: Sounds good.
BRIAN: Okay, so riding it out, using stop losses, holding cash and waiting, are three recipes for disaster in retirement. But, your financial planner at the bank and brokerage firm will tell you to ride it out. They’ll tell you that you gotta be a buy and hold investor, and that you can’t time the markets, and that you should buy and hold. If that’s true, then why are you paying your guy when you could use, and this is very important information, if your banker and broker is just buying and holding, why don’t you do that and save the fee?
BRIAN: Why don’t you, you should know about robo-investing. Robo-investing is where you go to Schwab, Fidelity, or Vanguard, you fill out a risk questionnaire, and it gives you ETFS, exchange-traded funds, that are low-cost indexes, and you hold ’em. Why do you need an advisor and pay them one and a half, two percent, when you can do this yourself? How hard is it to do that?
BRIAN: So, robo-investing has commoditized the investment portfolio’s buy and hold strategy. So, if you are going to ride it out, why not save fees? ‘Kay, the next one, Mike, is called the dividend portfolio. Here’s how the dividend portfolio works. You’re going to buy high dividend investments, and have a portfolio of high dividend investments, because even if the markets go down, you’re collecting that interest rate, or that dividend from your stock, or your ETF, or your MLP, or your limited partnership.
BRIAN: So, let me tell you how dividend [LAUGH] portfolio works. I’m sorry to laugh, this isn’t funny, but Mike, let’s keep using you as a guinea pig. Do you mind?
MIKE: Nope, you can throw me under the bus all day long. It’s like the video games, I just kind of reappear and keep going. So… [LAUGH]
BRIAN: Well, I’m not going to throw you under the bus, I’m going to show that you’re a typical investor if you respond naturally to what I’m going to ask you.
MIKE: Mm-kay.
BRIAN: So, Mike, in a dividend portfolio, right now the ten-year treasury is at, is yielding around 2.3 percent.
MIKE: ‘Kay.
BRIAN: That’s what we call the riskless rate.
MIKE: 2.3 percent.
BRIAN: The riskless rate right now is 2.3.
MIKE: Got it.
BRIAN: So, Mike, if you could find a dividend that’s at three and a half percent, isn’t three and a half better than 2.3?
MIKE: Yeah, and it seems close enough. That’s fine, that seems safe.
BRIAN: Okay. But, what if you have a friend across the street who told you about a dividend that’s yielding five and a half percent? Five and a half is better than three, three and a half.
MIKE: They’d have my attention. I’d like to hear ’em out.
BRIAN: Okay. And then what if you could get seven percent? Seven percent’s better than five and a half, and you see where this is going. Isn’t nine percent better than seven? Isn’t 12 percent…?
MIKE: Mm-hmm.
BRIAN: So, very smart people are caught up into this, and at Decker Talk Radio, our listeners are smarter than that, because they’ve heard us say that you’re only getting half the story, half the facts, by looking at the dividend rate.
BRIAN: You need the other side of the story, which is the coverage. How strongly is the dividend covered? Because the coverage of that dividend will determine your default risk. So, let’s go back. Now, let me give you the, and by the way, XYZ company is paying a four percent dividend, and let’s say that its dividend is one dollar a share per year, and the cash flow, EBITDA, earnings before interest, dividends, taxes, let’s say that it’s a dollar and 20 cents.
BRIAN: So, you have 20 percent coverage of that dividend. That’s good. It’d be better if it was 100 percent, if EBITDA was two dollars. But, let’s say that it’s one dollar and twenty cents. Then your dividend is probably going to be around four percent, three and a half, four percent, with that kinda coverage. When your coverage is over 100 percent, you’ve got a very strong, low-risk portfolio, and your dividend is going to go, your dividend yield is going to go down.
BRIAN: When you’ve got coverage that’s negative, let’s say that they’re just covering the dividend at a dollar, so there’s no coverage, they’re just meeting the dividend with cash flow right now. Now, that dividend is five and a half, five percent, somewhere in there. But, let’s say that there’s 80 cents on the dollar, so they’re borrowing to pay the dividend. Well, that’s when you get a seven and a half, eight percent dividend. But, let’s say now that it’s sixty cents on the dollar, that’s where you get these 12 percent dividend yields, because the default risk is very high.
BRIAN: So, now Mike, let me ask you the question again with all the cards turned up, all the facts on the table.
MIKE: Mm-hmm.
BRIAN: In putting your dividend portfolio together, would you like, if the riskless rate is 2.2 percent, and [CLEARS THROAT] you have no risk, would you like four percent with ten percent default risk? Or would you like six percent with 25 percent default risk? Or would you like…
MIKE: Oh my gosh, well you can just stop right there. 25 percent default risk, I mean, if I were a retiree, that seems a bit high for me, but I’m a pretty conservative person.
BRIAN: Oh, come on, it’s only, you’ve to 75 percent chances of it workin’ out. Or would you like…?
MIKE: Well, but something here, I don’t know if you’re going to shoot with or put out there, is the rule of 100. So, these are, you know, bonds or dividends are supposed to be safe money, right, paying dividends on it. If 70 percent of my portfolio, if I’m 70 years old, has a 25 percent default risk, that means I could theoretically lose 70 percent of my portfolio, if it defaults. I mean, I hope I’m saying that math right, but that just, it just seems ridiculous.
BRIAN: Oh, they’ll just cut the dividend, and you’ll lose 30 percent on your safe money. That’s what typically happens. So, I’m being…
MIKE: And that’s not the conversation that’s happening, though, with a lot of bankers and brokers that are out there, which is why we’re really trying to hit this home. It’s really like, I mean, puttin’ lipstick on the pig. These are some terrible investments that are driven by greed, and it just doesn’t make any sense.
BRIAN: Wait, it’s a, but it’s a very common strategy. A high dividend portfolio, there’s a lotta very smart people that do this, and they’re only getting half the information. The dividend yield is half.
BRIAN: Let me give you an example. In the last three years, a lot of very smart people have put together their retirement portfolio with a high dividend yielding portfolio that is concentrated in energy, oil, and gas. Well, in 2015, oil was over 100 dollars a barrel, now it’s at 50, and those energy stocks that are paying seven or eight percent are still paying seven or eight percent, but they’ve been cut almost in half.
BRIAN: So, here you’re holding something that’s paying you seven or eight percent, but you’re sitting on a 40 or 50 percent principal loss, and some people, again, try to justify what they’ve done in saying, well, I don’t care, I live off the dividends. Well, you just lost 50 percent of your money.
MIKE: [LAUGH] That’s like a half, a 50 percent pay cut. I mean, oh my goodness. That’s a lifestyle change.
BRIAN: Yeah, there’s a right and wrong way to do this. Plus, if you’re putting together a dividend portfolio, call it what it is.
BRIAN: You’re pulling money out of risky investments. That’s not smart. We don’t do that at Decker Retirement Planning, we don’t put our clients all at risk. 75 percent of their money has no risk, and the 25 percent that does have risk, are in two-sided models that we’ll talk about in a second. So, Mike, you brought up, gosh, we’re over halfway through the show already, you brought up the rule of 100. Bankers and brokers will tell you that if you’re 65 years old, you should have 65 percent of your money in safe money, which they call bonds or bond funds.
BRIAN: To finish off this dividend portfolio, and we check out everything mathematically, the people who think that they’re not going to take major hits in their underlying principal, because they’re in a dividend portfolio, are ignorant. They’re not looking at the facts of what history has done when the economy slows down, when interest rates go up, or when that individual stock falls on hard times, they cut the dividend. And when they cut the dividend, or when the underlying commodity, like oil prices, go down, the ability to pay that dividend is compromised and you’ve got a risky situation in retirement.
BRIAN: At Decker Retirement Planning, we are against all of this stuff. The last thing I want to mention, Mike, is, before we talk about the two-sided models, is some people say, well, I’m diversified. I’ve got stocks that are domestic, I’ve got stocks that are international, I’ve got large, mid, and small-cap stocks, I’ve got emerging market stocks, I’ve got different sectors. I am well-diversified. Mike, what I’m going to tell you right now I did my own self, and anyone can do the math if they want to.
BRIAN: I went back to 2008, calendar year 2008, January 1, and I looked at large-cap, mid-cap, small-cap, I looked at growth and value, international and emerging market ETFs, ran ’em through 12 months to see how well that kind of diversification would have helped.
MIKE: What’d it do?
BRIAN: Do you know that when you’re in a panic waterfall decline, the benefit of diversification goes out the window. Doesn’t help you at all.
BRIAN: The portfolio I put together to show for some clients, showed that when the S&P was down 37 percent in 2008, an equally diversified portfolio of large, mid, and small-cap, growth and value, international and emerging market ETFs lost 37 percent. There was no benefit of diversification. Now, some will say, well, what about bonds? What about gold? Okay, well, bonds are at or near all-time record lows. You’re not getting paid much for that.
BRIAN: So, that’s not smart in our opinion, and we’ve had radio shows, in fact, the last radio show we did, we talked about safe money options that last year we got over nine percent on a principal-guaranteed account.
MIKE: Yeah, and if I can interject there real quick, because I’m sure listeners want to hear about that. Just go to, I mean, Brian, you put it on your company’s website, www.deckerretirementplanning.com, click on the radio tab, and on there you can get the last radio show and hear that. But, that was a three-part segment to that show, too, about problems in retirement.
MIKE: So, feel free to check it out, deckerretirementplanning.com. You can hear that radio show, or other ones. Sorry to interrupt you there, but I mean, the…
BRIAN: That’s all right. So, Mike, we got about 16 minutes to talk about what we recommend that people do, which is a two-sided model.
MIKE: Let’s hear it.
BRIAN: Gosh, Mike, I got more material here than 16 minutes. Okay, I’m going to have to go over to the next segment on this. If your banker or broker is a fiduciary, they, step one, are going to be looking out for you.
BRIAN: We have a mathematical approach in how we deal with our clients’ risk money by, step one, deciding how much they need at risk. How much money do you think you need at risk? We have a mathematical approach, in-house, that lets us know how much that is. That’s step one. Step two is, once we’ve decided how much we need at risk, and for our clients most of the time it’s between 20, 25 percent, and 30, 35 percent, somewhere in there. Two thirds of your money doesn’t need to be at risk, in our planning. That’s to produce the income for the first 20 years.
MIKE: Mm-hmm.
BRIAN: But, step one is to cut the risk. Now, let’s look at the risk money and talk about a two-fold mission statement at Decker Retirement Planning, and that is, number one, track with the S&P when the markets go up, and number two, protect principal when the markets go down. Now, let’s talk about these two-fold mission statements. Number one, 85 percent of money managers and mutual funds underperform the S&P every year. That’s a Vanguard statistic, I think it’s accurate. 85 percent of money managers don’t beat the S&P every single year.
BRIAN: So, to beat it over two or three years is a statistical anomaly. Our managers have a mountain chart that puts a huge gap between the S&P and their own returns. When people come in and check us out, Mike, they can come in, we’ll show these mountain charts. There’s a huge difference between the managers we use and the S&P return, so that’s point number one. Point number two, protect principal when the markets go down. How are you going to do that?
BRIAN: Who do you know that made money in 2008? The managers that we’re using now made money in 2008.
MIKE: No one made money in 2008. I mean, everyone lost money.
BRIAN: The, yeah, these managers made money in 2008. So, with that two-fold mission statement, what do we do? If your guy or gal is a fiduciary and looking out for you, they will have a mathematical approach like we do. I know they don’t, but let me tell you what we do. We go to the biggest databases such as the Morningstar database for mutual funds, and we use the Wilshire database for money managers.
BRIAN: We also go to Theta and Timer Track, and other databases. In other words, we cast our net out extremely wide, to find out who has better returns than the six that we’re using right now. And every time we do this, we do this a couple times a year, when we do this, we get around 60 or 70 that legitimately beat us, but they fall into four categories. Number one, yes, they’re beating us, but they’re closed to new investors. I can’t work with that.
BRIAN: They’re not taking any new client money. Number two, yes, they’re beating us, but they’re per account minimum is, like, two or three million per account, and I can’t diversify that. Number three is, they’re hedge funds, and we’ll never put client retirement money in a hedge fund. And number four, the fourth reason, yes, they’re beating us, but they’re high-beta funds. In other words, in the good years, they go way up, and in the bad years they go way down.
BRIAN: A couple examples of that is the CGM Focus Fund and the Bruce Fund. Those are two funds that legitimately deserve to mathematically be on our platform, but we can’t use ’em, because they both lost over 40 percent in 2008. We’re not going to do that. So, what’s left are the six funds, the six managers that have, all of them, have algorithms that help track the market when the market’s going up, and go to cash, or go short.
BRIAN: There’s three, generally, there’s several ways, but there’s, generally, three ways to protect principal when the markets go down. One is to go to cash. So, these are, an example of this would be trend following models that, when the market breaks an uptrend, they go to cash.
MIKE: Mm-hmm.
BRIAN: Another example would be a long-short account. Where, when the market’s going up, and the trend is higher, you’re long the market, you’re making money as it goes up, but when the market trend changes, and trends become, start to go down, now they make money as the markets go down.
BRIAN: This is a two-sided strategy in a two-sided market. These are called long-short accounts. [CLEARS THROAT] We like them, we use them. It allows risk to go down. Now, risk is a measure of volatility. It’s a mathematical number, volatility. There’s two kinds of volatility. Upside volatility, you want all of that you can get. It’s the downside volatility, called losing money, that we measure risk. When you have these models that made money in 2008, collectively, and have made money every year since 2000, who’s got more risk?
BRIAN: The buy and hold guy who’s taken two 50 percent hits in the S&P holdings following his banker and broker recommendations to buy and hold, or us where these models have made money every year? Who’s taking more risk? Let me ask it differently. The stock market is a two-sided market. It goes up and it goes down. It’s a two-sided market. There’s no common sense in using a one-sided strategy in a two-sided market.
BRIAN: It lacks common sense. So, we dramatically lower risk by having a two-sided strategy in a two-sided market.
MIKE: Well…
BRIAN: All right, so back to these models. These two-sided algorithms we have, and we diversify, we have them in gold and silver, we have them in bonds, we have them in energy, we have them on the NASDAQ 100 index, the QQQ, and we use them on the S&P.
BRIAN: So, let me give you some examples. In 2000, the one that we used in 2000, the one that we used for the S&P is a ten-day moving average overlay on the VIX, the volatility index. Meaning that if the markets are going up you’re long, and if the market’s going down, you are short. This model loves volatility. The most volatile time in its history since 2007 was calendar year 2008. Tremendous volatility that year.
MIKE: Mm-hmm.
BRIAN: What did it do, net of fees, in 2008? This manager was up over 100 percent in 2008, and then they doubled the S&P return the next year. The S&P’s up 26, they were up over 50 percent. So, these are very high returns, and since 2007, did lose money one time, it was down four percent in 2015, because of whipsaw, where the markets were going up and down.
BRIAN: By the way, let’s don’t just talk about the good, let’s talk about the bad part of these models. These models, there’s four parts to a market cycle. Upmarket, topping process, down trending market, and a bottom process. Four parts to a market cycle. These models to very well in an up trending, a down trending, or a bottoming market. Where they struggle, these are trend following models, where they struggle is the topping process.
BRIAN: We’re in the topping process now, and when the markets, like 2015, 2014 and 15, just kinda chop, these models will have flatter returns. Last year was a pretty good year. These models did, collectively, did double-digits, and so they can do very well in a flat, they can do well when the markets are trending higher.
MIKE: Mm-hmm.
BRIAN: Mike, I want to go back to, there was another thing I missed here. Another example of a two-sided model are called, there’s models that are called sector rotators. It’s kinda interesting.
MIKE: Oh, this is important.
BRIAN: In two…
MIKE: Yeah.
BRIAN: Yeah. In 2000, ’01 and ’02, when the markets lost 50 percent, there were many sectors that did well while the stock market was getting hammered. For example, real estate did well all three years, 2000, ’01 and ’02. So did energy, so did gold and precious metals, so did health care and biotech, and the materials sector was strong. Copper, steel, aluminum, cement, and timber.
BRIAN: Hundreds of stocks kept going higher, allowing these models to make, not lose, money. Now, why isn’t your banker or broker finding these models? I know why. They’re limited, they’re, first of all, they’re not fiduciaries like we are. A fiduciary is someone who’s required by law to put your best interest before our company’s best interest. It cracks me up, actually it shouldn’t make me laugh, but it’s so predictable, let’s say that, Mike, you’re a big brokerage firm called the Mike Decker Brokerage Firm.
BRIAN: You’ve got offices around the country and around the world, major company. Guess what kind of mutual funds that your brokers are going to have. Are they going to all have the Mike Decker Mutual Funds?
MIKE: Well, yeah, I’m going to promote stuff in-house, because it makes me the most money. I mean, that…
BRIAN: That’s right. You’re going to incent them with more commissions to buy your stuff. That’s what happens, tragically, we see this all the time. So, it’s at your expense to have your banker and broker not be a fiduciary, they will do nonsense like that.
BRIAN: Okay, we’re runnin’ out of time. We got five minutes left, Mike, or four minutes?
MIKE: Yeah, five minutes left. If you can wrap up the two-sided models.
BRIAN: Okay.
BRIAN: Here’s a write-up on one of our managers. [CLEARS THROAT] Quote, it’s been over two years since we last looked and saw that this model outperformed all mutual funds, ETFs and worldwide market indexes, except one leveraged biotech fund during a ten-year period, it just got better.
BRIAN: This model now has beat every single one of these securities and indexes from a universe of 12,614, with ten years of history over the last ten years, ending September 30th, 2016, with an annualized return of 18.36 percent. We have gold. Gosh, I would love to, if you bought and held gold, since 2005, your average annual return is 9.64 percent. You would have lost 45 percent during the big dump in 2013, ’14, and ’15.
BRIAN: If you would have bought silver for, since January 1 of 2006, and held it, you would have got a 7.98 percent average annual return, but you would have lost 65 percent in 2013, ’14, and ’15. So, remember that, 9.6, buy and hold on gold, 7.98 buy and hold on silver. If you put a two-sided model on gold, now there’s no losses, and your average annual return is over 29 percent with this model that we’re using, and the average annual return for silver is over 40 percent, and there’s only one year of loss for silver, that was four percent loss in 2015.
BRIAN: All the other years are gains. Similar type returns in treasury bonds, in energy, and then we haven’t talked about the NASDAQ 100 index. There are better ways out there to manage your risk money, that shrinks the risk, increases the return, and you should be questioning your banker, broker, your advisor that’s not been telling you about these.
BRIAN: Because, these are out there, they’re publicly available.
MIKE: If you’d like you can schedule a time to visit us, either in Seattle, Downtown Seattle, at 2 Union Square, or Kirkland, at Carillon Point, right on the waterfront there. Or if you’re listening to us via podcast, on iTunes or Google Play, or SoundCloud, feel free to let us know, and we do have our office in the Wells Fargo building in Downtown Salt Lake. So, besides that, Brian, I just want to recommend people as well for all the great information that you can find on deckerretirementplanning.com.
MIKE: There’s articles, great information that will further your research in helping protect your retirement, because that’s the bottom line, and chances are, Decker Talk Radio listeners, you’re taking too much risk, and we want to help, as a public service, to alleviate that. So, Brian, in the last minute, would you like a little sneak peek of next week? What we’ll be talking about.
BRIAN: Yes. I’m glad you brought that up, Mike. I’m going to grab my sheet here. Here’s what we’re going to cover next week, we didn’t have time to get to this week. We’re going to talk about all the risk stuff, all of it.
BRIAN: We’re going to talk about mutual funds, real estate, commodities, futures, options, bond funds, ETFs, oil and gas partnerships, stocks, foreign exchange. Oh, we’re going to hammer variable annuities. Mike, we forgot to tell people what the answer was to the previous week.
MIKE: Well, we got just a couple seconds right now. The question was, what stock from…?
BRIAN: What stock is up 49,000 percent since its IPO? And the answer is… Amazon.
MIKE: All right everyone, that about wraps up our show today. Thank you for listening to Decker Talk Radio’s Protect Your Retirement. For more information, feel free to go to www.deckerretirementplanning.com [MUSIC] for a rerun of this show, previous shows, articles, and more information about how to help protect your retirement. This is Mike Decker and Brian Decker signing off. Have a wonderful week.
