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 doing a market recap as well as different ways to make sure that you are doing your retirement right. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day everyone, and welcome to another edition of Decker Talk Radio’s Protect Your Retirement. This is Mike Decker and you’re listening to Brian Decker today, our guest from Decker Retirement Planning, a licensed fiduciary retirement planner. We’re glad to have him today. Today we’re talking about retirement planning and some important points you need to know as you prepare for retirement or a great checklist to make sure that you are doing well in retirement. But before we get started, we had a bit of a crazy market this past week. Brian, what do you think? What happened?
BRIAN: I want to give the Decker Talk Radio listeners some background of what happened. There’s a contingent of investors out there that made three, four, and 500 percent per year for the last two years by doing something called shorting volatility. Shorting volatility is where you short the VIX, the Volatility Index. The Volatility Index goes up when the markets go down, it’s a contraindicator. There are… There’s been so much success in shorting volatility for the last two years.
BRIAN: That there are products out there that were created that are futures-like products called exchange traded products, like XIV and SVXY. Those are the two big boys, and the short volatility trade was a crowded trade, but the problem is when the markets would go down in the last two years, people would buy the dip. And that’s fine, you put more money to work every chance the markets take a step back. No problem.
BRIAN: But when you short volatility, you are shorting the VIX and as the as the markets drop say 100 or 150, 200 points, the VIX goes from ten to about 13. And then when you short it from 13 to ten again and you do that three, four, five times a year, you’re making a lot of money. There’s a lot of people doing that. And so, what happened was, there’s a group of people that that’s all they did.
BRIAN: And, the problem with shorting volatility is after making three, four, or 500 percent a year for two years, they gave it all back in one day. The small print says that if you lose 80 percent ever in a day then they shut these down. So, XIV and SVXY that were short volatility futures, they lost over 80 percent, and they were shut down, and so people lost 100 percent of their funds.
BRIAN: The reason that that pertains to the stock market is because to take the other side of that closing trade, they had to buy volatility, the opposite of short, to close it out, and that was many hundreds of billions of dol-, not hundreds of millions of dollars that had to go into buy volatility. When you buy the VIX, you’re selling the market and that fed on itself and escalated and extended the losses that happened on Monday.
BRIAN: So, on Monday, the Dow was down four point six percent. That’s a far cry from 22 percent on Black Monday on October 19th, 1987. It’s only four point six percent, but it rung the bell as far as the end of the last 14 months of market gains. What you’ve experienced in the last 14 months will probably never happen again in your lifetime.
BRIAN: The reason I say that is, 14 months of uninterrupted, back to back monthly gains in the market has never happened before. In over 150 years our stock markets never seen back to back gains like that, and probably never will again. Is the economy good? Yes. But, there are problems. Now, I’m going to go into the second point. We talked first about what fed the market declines, and that was futures that had to be unwound and reversed in the short volatility trade.
BRIAN: Next thing I wanted to talk about is what’s happened in the last 14 months probably will never happen again. And that is where the markets go up every month back to back for 14 months. Now that we’re seeing some of the problems, we have a saying that it doesn’t matter until it matters. Let me give you some examples. The debt of the U. S. government. And not only the U. S. government, but all the G seven nations, for the first time ever, have taken on more than 100 percent of their GDP in debt.
BRIAN: Well it doesn’t matter until it matters. Interest rates have been going down since 1980. For 37 years, declining interest rates have helped the stock market, because you have a price earnings multiple expansion with lower interest rates, which is just a fancy way of saying, that when interest rates go down, more people are forced into the stock market to get a better return.
BRIAN: The opposite is true. When interest rates go up, some people say I’m not interested in taking stock market risk. I’d like to lock in ten-year CD rate of three percent and I’m happy with that. So, as rates have been going up, the tailwind now becomes the headwind. It doesn’t matter until it matters. Last week it started to matter. Third thing, real estate.
BRIAN: Real estate has been on fire for 37 years because of declining interest rates. Once interest rates start going back up, interest rate, or I’m sorry, interest rate sensitive sectors, such as real estate, are expected to at least make a correction. We know that real estate is a bubble right now because of the affordability index. In any county, there’s average wages. Wages have to support increasing home prices to be sustainable.
BRIAN: The gap between wages and what the house price those wages can buy, and what the average home price is in counties across the country, is called the affordability gap. And it’s more negative right now than it’s been ever. Even since 2008. The third where it doesn’t matter until it matters is the stock market.
BRIAN: Trading in 25 times trailing earnings, it’s only happened three times, 1929, 1999, and now. Ten years from that point, there’s never been a time where the stock market has made money, and so people are hoping that this time is different. And then the last thing is the bond market. High yield bonds, put it in your memory banks that high yield bonds is a bubble.
BRIAN: These are high risk investments, like for example, Greek treasury debt is trading at four percent when our ten-year treasury debt for the United States is trading at two point eight. There’s no way that Greece should be trading at four percent on their ten-year treasury. They have tremendous risk. But, this is an example worldwide of the insatiable demand for yield and why covenant light high yield debt is going to be a problem in the future.
BRIAN: There’s an example that’s happening right now, where it doesn’t matter until it matters, and that is General Electric. Easily one of the bluest chip stocks for the last many many years. GE is starting to unravel. It’s down over 70 percent in the last year, because the books have been cooked very similar to the way Enron cooked their books. So, right now, there was a state, I think it was the state of Oklahoma.
BRIAN: They challenged that GE didn’t have the backing of their assets, and it’s coming to find out that that’s true. That their assets are not there to back the debt that they have outstanding. So, for all things, are we bullish? The economy is strong right now, the market internals are good. There’s two types of market declines. One is a market decline in an uptrend. This is what we just had.
BRIAN: Those are things where we would buy the dips. But, once the market does turn and start lowering, the devastating downdrafts, like what happened on Monday of last week are continuations of the market downtrend. We’re not there yet. So, unless we have an event like nine eleven, and that’s an event where the market turns from an uptrend to a downtrend then that’s called event risk. Geopolitical risk falls into that category. If North Korea launched or something happened like that, that would be event risk, geopolitical events.
BRIAN: Typically, the markets have a top through a rounding process. Our indicators that we use are market internals like the advance decline line, the percentage of stocks trading above the 200-day moving average. The number of new highs. The number of new lows on a daily basis. If the number of new highs are going up, the number of new lows are going down, the advance decline line is pointed higher, and the percentage of stocks trading above the 200 day moving average is continue to go up, the market is healthy. Right now, the market is healthy. The market internals are healthy.
BRIAN: So, this is a buy the dip, add to your investment opportunity. However, we are in year ten of what typically is a seven, eight-year market cycle. And again, what used to be tailwinds of lower interest rates and quantitative easing, have now become headwinds because of tapering, not QE anymore. But the government’s buying back the debt. That’s now a headwind to the market, and higher interest rates are also a headwind.
BRIAN: So, Mike, with all that being said, I’m going to end this part and start our regular segment with this. I’m so proud of this. Monday of last week the Dow was down four point six percent. Our risk accounts were down zero point six percent. We missed 85 percent of the market decline. On top of that, because our clients only have about 25 percent of their entire portfolio at risk, that means that our clients hit to their total portfolio last week with the Dow down four point six percent in one day.
BRIAN: That hit to our clients was zero point one five. Now, one more thing.
MIKE: [LAUGHS} Let that sink in.
BRIAN: Our clients in retirement. I remember working at the banks, at the brokerage firms, their phones were ringing off the hook with worried clients. Guess how many clients called in here in the Salt Lake office worried?
MIKE: I don’t remember a single one calling in.
BRIAN: Not one. Not one. Out of our many hundreds of clients, not one call. And the reason is because our clients know that the number one disaster that hurts people in retirement and in fact, takes them out of retirement and puts them in a situation where they have to go back to work is not inflation, it’s these stock market crashes.
BRIAN: Our clients, because their income is coming from laddered principal guaranteed accounts that are averaging over six percent per year, they’re happy with those. And when the markets… When they have their money at risk, we use two-sided models, that when the markets go down, they’re designed to make, not lose money. The six managers that we’re using for our clients’ risk portfolio made money collectively in 2008. They made money collectively in 2001, 2002 where the markets got hammered.
BRIAN: The S and P from January one of 2000 to 12 31 17, the S and P is up about 300 percent, average January returns about four and a half, almost five percent net of fees on the S and P. Our managers, our six managers, without having a losing year in the last 17 years, is up where 100,000 grossed over 900,000 dollars. Average annual return is 16 and a half percent.
BRIAN: If people out there at Decker Talk Radio are being told by their advisor to buy and hold in this kind of a market that’s so long in the tooth where they have hundreds of thousands of dollars where they will probably lose when the market turns, they should call us, because we can talk about a plan that’s solid.
BRIAN: Yeah, we’ll go through all the details, and have people understand, that not only recently, but for 20 years, the best performing equity managers are computer algorithms. And of that group, the best performers are trend following models. That means, that when the trend is higher, you’re long in the market, you’re making money as the markets go up. But when the markets go down, these computer programs are designed to make money not lose. And if your bank or broker is not telling you about these models, it’s because of one of four reasons.
BRIAN: One, is some of these models are no load mutual funds, and they’re not going to tell you about a no load mutual fund that they don’t get paid on. Second, is that some of these, some of these models put the put your bank or broker or your advisor at risk because why do you need him or her if these models tell you what to buy, when to buy, and when to sell. So, they have career risk. The third reason is by far the biggest. As a matter of fact, I’ll just end with this.
BRIAN: This is the biggest reason why your banker and broker won’t tell you about two-sided models in a two sided market that have much less risk and much higher return, and that is because the bankers and brokers are required to use the asset allocation pie chart, that keeps all your money at risk. That’s how they get paid, and it also keeps them from liability from you suing them.
BRIAN: So, if you think about how you put together the asset allocation pie chart, they gave you a risk questionnaire which you filled out. And once you filled it out, you submitted it, you got your draft one of your asset allocation pie chart of a diversified group of mutual funds or money managers. And then they gave you an investment policy statement to sign. Now you can’t sue them. You created that.
BRIAN: So, they have an iron wall of legal protection by using a strategy that keeps all your money at risk and you and your later retirement years having gathered successfully a very large nest egg are against all common sense putting that at risk because it’s not in your best interest, but it’s in their best interest. So, we are fiduciaries like Mike said.
BRIAN: We are required to put our clients’ best interests before our own best interests. And we have regular audits from state examiners to make sure that that happens. Bankers and brokers don’t have those regular audits like we do as fiduciaries. Okay.
MIKE: All right. Well that about wraps it up. You’re listening to Decker talk radio’s Protect Your Safer Retirement Radio program brought to you by Decker Retirement Planning. Offices in Kirkland, Washington, Seattle, Washington, and Salt Lake City. More information. Now let’s get to the bulk of our show. You ready, Brian?
BRIAN: Yeah, let’s start the show.
MIKE: Can I ask two big questions here?
BRIAN: Yep
MIKE: To kind of set the premise? The big questions retirees face are can I retire? And if so, how much can I draw without running out of money? Is there a more important question?
BRIAN: No, those are the two biggies. And, Mike, I want to talk about… I want to actually go back a step and spend some time on the importance of a fiduciary. A fiduciary is someone who is required by state law to put our client’s best interest before our company’s best interest. Elizabeth Warren, two years ago, started a push to have all financial advisors become fiduciaries.
BRIAN: Sadly, the bankers and brokers fought it tooth and nail because they didn’t want to be held to a higher standard, the fiduciary standard. And in fact, it was successfully killed last year, in 2017. So, when your banker and broker tells you that they’re a fiduciary, we want to give you a three point test to see if they’re telling you the truth or not.
BRIAN: Many bankers and brokers will tell you that they are a fiduciary, but that fails the law of common sense. Step one. If someone is a fiduciary, they have to be independent. This is common sense. You can’t work for a big bank or a big brokerage firm where the people in the ivory tower tell their sales people what they can and can’t sell. That kind of lack of independence keeps them from being fiduciaries. That’s number one. Number two, and this is the biggest.
BRIAN: If your banker or broker is series seven licensed and they can accept commissions, they are not a fiduciary. We are fiduciaries at Decker Retirement Planning. We have series 65 securities licenses which means we cannot charge a commission, we are fee based only. We are fully transparent, everything is above board, and on the security side, you cannot as a fiduciary, take a commission. Here’s how important that is.
BRIAN: That means, that I want to warn you here, the big three that caused Elizabeth Warren to roll out the fiduciary standard for bankers and brokers that were hurting people. Financially devastating people with hidden fees and commissions. Here are some examples. I’m going to save the worst for last. Near the top of the list, number three, is probably variable annuities. This is where the banker or broker makes eight percent right up front.
BRIAN: He gets paid every year you own it. The insurance companies get paid every year you own it. And the mutual fund companies get paid every year you own it. Three layers of fees that usually add up to five to seven percent before you make a dime. We don’t like these. Because of the fees, they lag the market when the markets goes up. And you get hammered more than the market when the markets goes down. There’s no downside protection. There’s no place in our planning for variable annuities.
BRIAN: We don’t like them, we don’t use them. We call them a scam. We warn you to stay away from them. If you have them, that’s one of the big reasons that people come in and see our planners. Now the heads up I want to warn you, we have a saying that variable annuities aren’t bought they’re sold.
BRIAN: And what we mean sarcastically there, is that a banker or broker will tell you that here’s a way for you to invest in the stock market and have a principal guarantee underneath you. Well, here’s what they don’t tell you. That guarantee is a high level, high watermark based on your lifetime. In other words, you have to die to get the benefit of the guarantee. It doesn’t reward you in your lifetime. We don’t like variable annuities. Please please please stay away from them.
BRIAN: Second, the second highest commission product are called non-traded REITs. This is where the banker or broker sells you a real estate investment trust that’s not liquid. He or she makes eight to 12 percent right off the top. You don’t get the updated price on your statements because it’s not traded. There’s no liquidity so the price is whatever the company wants to put down. Real estate cycles.
BRIAN: Real estate cycles like in 2008 the average real estate investment trust was down over 70 percent. Imagine that the market cycle down over the next four or five years and you’re stuck with something you can’t sell and you see the value of it just drop month after month after month. It makes no sense to us why people have or use non-traded REITs.
BRIAN: It’s there in your portfolio because the banker or broker just made a huge commission, and so that’s why these products are out there. The highest… The most… I don’t know what the right adjective is. The most toxic, disgusting financial product out there, in my opinion, are called C share mutual funds. C share mutual funds are where, if you look on your statement, it says the name of your fund and it says the class. C-L-A-S-S. The class of funds.
BRIAN: We hope you have A shares or I shares. Those are the type of mutual funds that typically have low fees. C share mutual funds are where your banker or broker tells you that there’s no front end or back end fees. But what he or she doesn’t tell you is they’ve attached a one percent fee, called a 12 B one fee, to pay them every year and they don’t even tell you about it. There’s no disclosure. You didn’t sign anything, they don’t tell you.
BRIAN: C share mutual funds are so toxic that Schwab, Fidelity, and TD Ameritrade will not even allow them in their system. They require them to be sold before funds are transferred into those companies. So, we hope that you check your statements. If you have any of these, you are the victim of someone who is a commission salesperson, wanting to sell you the latest product that was in the best interest of the banker or broker, not in the best interest of you the investor.
BRIAN: I’m giving you examples of how non-fiduciary roles are played out between the banker and broker and the investor. At Decker Retirement Planning, we are a fiduciary. We cannot, will not, have not, nor have we ever used C share mutual funds, non-traded REITs, or variable annuities with any of our clients. We cannot do that. We are held to a much higher standard. Now there… Let me give you another example of fiduciaries.
BRIAN: And Mike, if you can remember those quotes, there’s some great quotes from past SEC chairmen and also the best quotes always come from Warren Buffett. But, there is some disclosure that’s on the banks’ and the brokerage statements that’s required to start about three years ago. And it warns you that the way that your banker or broker gets paid may differ depend on the product.
BRIAN: And warns you, that their best interests may not be in the same as yours. And that’s required. And in typically in seminars, in Salt Lake, Kirkland, Washington, and in Seattle, when we ask a room of 30 or 40 people if they’ve ever seen that disclosure on their bank and brokerage statement. Mike, how many people typically raise their hand?
MIKE: At most, like, like, one person. It’s stunning.
BRIAN: Right. Right. It’s on purpose. The bankers and brokers typically bury that information in the small print so that people can’t see it. That’s another thing that can’t be done by a fiduciary. We have to be fully transparent and give disclosure. Now, what are some great quotes, Mike, about the importance of a fiduciary?
MIKE: Yeah, well, Art Levitt, he said if you have more than 50,000 dollars of investable assets you need to fire your broker and hire an investment advisor or a fiduciary.
BRIAN: Now, Art Levitt was a past SEC chairman, he was in a position to see it all.
MIKE: Yeah, SEC, it’s kind of a big deal. You know, just the nation, and all the securities going on there. But, like Brian said earlier, Warren Buffett has the best quotes. [LAUGHS] And my favorite of his about the brokers. It says the broker is not your friend. He’s more like a doctor who charges patients on how often they’ve changed medicines. And he gets paid far more for the stuff the house is promoting than the stuff that will make you better.
MIKE: Now, it is a bit humorous, but wouldn’t that just frustrate you to realize that your financial professional, banker, broker, whoever it is, is holding out on better investments because they get paid more, or because they can just keep changing it, or whatever their strategy is? That’s got to be infuriating.
BRIAN: There’s a word called suitability. We are held to a higher standard. We have regular audits to make sure that the plans that we have in place for our clients are suitable for our clients. So back to the three point check for your fiduciary.
BRIAN: Number one, they’ve got to be independent. They can’t be a part of a big bank or brokerage firm who tells them what they can or cannot sell to you the client. Number two, they cannot be series seven licensed and say that they’re fiduciary. They must be a series 65 license.
And number three is that they’ve got to be an RIA, a registered investment advisory structure in their firm.
BRIAN: We didn’t accidentally become an RIA, we purposely chose to be an RIA. An RIA allows us to operate as a fiduciary.
MIKE: Can I say something? Just we want to pull the curtains back and give you the transparency you deserve. I’m going to use the auto industry. I love Toyota. I think Toyota’s a great vehicle, right? I don’t personally drive one, but I love them. They’re great and reliable. If you want to buy a Toyota, you can just go to a Toyota dealership and have their selection. If you want to look at all the cars, do you think it makes sense to go to a Toyota dealership to try and get a selection of all the other brands?
MIKE: No, you wouldn’t do that. To think that you’re going to get a selection of all the investments and all the options and the best things that are for you from a broker, you are mistaken. And that’s what we want to do here. It’s kind of like, what’s that website, is it AutoTrader? I think that it’s called AutoSource, AutoTrader something like that, where it just has this massive database of all the cars, new, used, whatever you want. Then you see all your options, but it can get overwhelming. A fiduciary can show you all your options and then help you find the best one for you.
BRIAN: That’s right.
MIKE: Is that a good analogy?
BRIAN: Yep. That’s a good analogy. Okay, so that’s all I want to say about fiduciary. Now, I want to set the table, Mike, for our Decker Talk Radio listeners about why it’s so hard to be retired right now. We’ll talk about the problems and then we’ll spend the rest of the radio show talking about solutions to the problem. But the first part of these problems is low interest rates. And I’m not saying just low interest rates, I’m talking all time historic low interest rates. In over 100 years, the ten-year treasury yield has only hit two percent twice.
BRIAN: Once was in 1940 and the second time was recently, in the last 18 months, we actually went below two percent. Right now, the ten-year treasury’s around two point eight and it’s gone up dramatically in just the last couple of months. So, the problem of low interest rates, is anything that’s safe, doesn’t pay you much. And when you’re in retirement, the good old days of getting five percent on a five-year CD and seven percent on a ten year, those days are gone.
BRIAN: So, now that the ten-year CD rate is barely three percent, now it makes it very difficult to get much of any return on your safe money. And so, a lot of retirees are forced to go into the stock market, the risk money in order to get any type of return. That’s another problem, because every seven or eight years the markets get creamed, and when they do, and you’re in retirement, and you lose 30 percent, that creates a major problem, where, like, 2008 a lot of people had to sell their home, move in with the kids, go back to work, because they took that hit.
BRIAN: So, when we talk about low interest rates there’s a problem where the bankers and brokers use something called an asset allocation pie chart. By the way, this is something that you at Decker Talk Radio listeners have grown up with. It’s the pie chart of diversification that’s called an accumulation plan.
BRIAN: And it’s totally fine in your 20s, 30s, and 40s, where you buy and hold, you’re aggressive, you ride out the markets, you’re diversified among large cap, mid cap, small cap, growth value, international, emerging markets, indexes, ETFs, you have different sectors, and you’re diversified and you ride the market up and down. And you’re getting your paychecks from work, you’re getting your paychecks from work, you can handle those kinds of big drops, but it’s not something that really affects you or bothers you.
BRIAN: It’s something that you can ride out when you have a paycheck coming in. When you have that last paycheck you’re ever going to take, and you’re in retirement, you can’t do that anymore. There’s … This part is such common sense. But, I’m going to go back and to keep all of your money at risk is fine in your 20s, 30s, and 40s. But once you’re 55 or older, you’ve got to transition to a distribution plan, and I’ll talk about that in a minute.
BRIAN: But we don’t like the asset allocation pie chart in retirement for many many reasons. One of them is called the rule of 100. The rule of 100 says that depending on your age, that’s the percentage amount that you should have in safe money. So, if you’re 65 years old you should have 65 percent of your money in bonds, or bond funds. If you’re 70 you should have 70 percent of your money in bonds or bond funds et cetera.
BRIAN: So, tell me if this makes sense. In light of record low interest rates does it make any sense to say according to the rule of 100 that you should have 65 percent of your money earning almost nothing. That doesn’t make sense. But the big problem isn’t the rule of 100 it’s called interest rate risk. Interest rate risk is the amount of money you lose on your bond funds when interest rates go up. Bond funds and interest rates are inversely related, which means that when interest rates go up bond prices go down.
BRIAN: Bond funds lose money when interest rates go up, and yet, and now think about this, this makes no sense, your bankers and brokers are committing financial malpractice by telling you to put your safe money in bond funds when interest rates are at or near record lows. So, I’m going to say the same thing two different ways to talk about interest rate risk. Interest rate risk is at or near all-time record lows right now.
BRIAN: Interest rates, I’m sorry, interest rates are at or near all-time record lows right now. Interest rate risk is at or near all-time record highs right now, and for anyone to tell you to put your safe money in bonds or bond funds is committing financial malpractice in our opinion. Okay, so we talked about interest rates, low interest rates, and interest rate risk. Now let’s talk about credit risk. Credit risk is specific risk to municipal bonds.
BRIAN: Municipal, or tax-free bonds. By the way, Mike, we stump the audiences on a regular basis with this question. After 2008, there are 49 out of 50 states that have taken on pension obligations they cannot possibly pay back. They cannot. That’s not news to any Decker Retirement Planning listeners here. But there’s one state that’s in the black. What’s the one exception to the 50, 49 other states that are swimming in red ink?
MIKE: The other 49 states, the one state that’s the exception, the one that’s succeeding this, drumroll, [MAKES NOISE] that’s a terrible drumroll, it’s North Dakota.
BRIAN: North Dakota is correct.
MIKE: Because?
BRIAN: Because of fracking. So, we have one exception to this rule.
MIKE: Didn’t they just get rid of their state income tax?
BRIAN: No. Two years ago, they had a vote, a referendum, to vote it out, but it didn’t pass. But, they just didn’t need the state income tax money.
MIKE: Well the fact that they had the thought that they could do it shows how well they’re doing.
BRIAN: All right. The other 49 states have taken on pension obligations they cannot possibly pay back. And they’re bringing the municipalities into this train wreck that eventually has to happen. Now, Mike, you and I, when any human being takes on debt that they cannot possibly pay back, there’s an eventual day of reckoning. It’s a restructuring that happens, usually called bankruptcy.
MIKE: Yeah.
BRIAN: Chapter 11. Chapter seven. Different types of bankruptcy. But there’s a train wreck that is going to happen with the states and the debt and the obligations they have taken on. We at Decker Retirement Planning, we are fiduciaries to our clients and we have steered our clients away from municipal bonds since 2008. There’s going to be a day of reckoning with those bonds, and we want to give you very important information on how to make sure your bonds are safe. You get a monthly statement from your bank or your brokerage firm and it tells you the price of your bonds.
BRIAN: In light of low interest rate environment if you’ve got a three, four, or five percent coupon bond for your tax-free municipals, they should be trading around 109 to 112 depending on the maturity. If you have a bond in light of low interest rates that we’re in right now, that’s three, four, or five percent, and it’s trading below par which is 100 point zero zero. If it’s trading below par, we hope you sell it. Don’t call your banker or broker. We’ve been giving this advice for ten years now.
BRIAN: If your banker or broker you call them and ask them, you say you’re concerned about the bond, they’ll justify why they sold it to you. They will not give you the helpful information which the bond price is telling you which is that the ability to pay back principal is being compromised. Now, four years ago, the issues of Puerto Rico started to break par. Anyone listening to us sold right away. Now remember this is your safe money. Now we know four years later that Puerto Rico is broke.
BRIAN: And anyone who sold saved many hundreds of thousands of dollars by getting rid of bonds that were going down in price. Today, now that we know Puerto Rico is broke, those bonds are trading around 20 cents on the dollar, and we see this a lot. Now, right now, today, there are municipalities that have bonds that are breaking par, and they are New Jersey issues. There are issues up in New York, there’s issues in Chicago, and greater Illinois. There’s issues in California.
BRIAN: Check your bonds to make sure that those bond prices are staying above par. 100 point zero zero. All right. We’ve talked about interest rate risk, we’ve talked about credit risk. What if someone has some of these issues or concerns about bond funds, or their municipal bonds breaking par?
MIKE: Yeah, if you’re concerned about your safe money or just bond funds in general, and want to come in and get a second opinion, absolutely. We’ll review your portfolio, especially your bonds.
MIKE: You got to be working with a fiduciary. That’s just common sense. All right, Brian, we’ve got a little time here to wrap up with the show. And then we will see you next week, right? We’ve got to couple more things going on.
BRIAN: All right, I want to talk about now, the stock market. A lot of people when they come in and talk to our planners, we’ll ask them what their plan is with their stocks, and they’ll say their plan is to buy and hold because stocks trend higher. I want to be crystal clear that that’s not true.
BRIAN: Stocks do not trend higher. They cycle. And it’s not semantics. Stocks cycle, typically in seven to eight-year market cycles. Let me give you some dates. October of oh seven to March of oh nine was a 50 percent market drop. Most of that was in 2008. Seven years before that was 2001, the twin towers went down, middle of a three-year tech bubble bursting, 50 percent drop again.
BRIAN: Seven years before that was 1994 Iraq had invaded Kuwait, interest rates spiked, recessions in the markets and the market struggled. Seven years before that was 1987, Black Monday, October 19th, 22 percent drop in a day, 30 percent drop peak to trough. Seven years before that was 1980. The 80 to 82 bear market was a 46 percent drop. Seven years before that was 73, 74, that was a 42 percent drop.
DECKERTALK 2.11.18 [00:46:19]
BRIAN: Seven years before that was the 66, 67 bear market. That was a 40 plus percent drop, and it keeps going. So, the market’s bottom, March of 2009. We are in year ten of what we’re on track to show as the longest market expansion ever. Now, when we talk about markets cycling, they typically cycle in 18-year market segments. So, from 1946 to 64 there’s a nice bull market.
BRIAN: 64 to 82, 18 years of flat. 82 to 2000 the biggest bull market we’ve ever had. 2000 to present to 2018 we have yet to have what typically is going to be a market correction that gives back the market or the majority of the market gains since 2009. And then we should start the next move up in the markets, starting in 2018.
So, markets don’t trend higher, they typically cycle, and now, if you retire at 60, 65 years old, you’ve got 30 years of retirement ahead of you. And in 30 years, you’re going to have two or three market cycles and you’re also going to have every seven or eight years another four 2008s. Are you ready for that? Do you have downside protection for that?
BRIAN: That’s one of the biggest reasons that people get destroyed in retirement is they don’t have downside protection and they listen to their banker or broker telling them to buy and hold their different stocks. By the way, buying and holding stocks, let’s talk about that for a second. That makes no sense to us, because technology and creative destruction is destroying companies that have been out there quite a while. Imagine that you’ve held General Electric. One of the bluest of the blue chips.
BRIAN: And you’ve made all kinds of money. So, you’ve made seven, eight, 900 percent over the last 20, 25 years. You’ve just given most all of it back in the last year because GE like any other stock has three cycles to it. A growth phase, a maturation phase, and a decline phase. GE is in decline right now. It’s down 70 percent. AT&T is another example. Raising the dividend every year for 50 years.
BRIAN: People who owned AT&T, owned it, was so proud of it, and then we created the cell phone. The cell phone destroyed AT&T. Those investors lost 70 percent over about a ten-year period, and they’ve never recovered it. Right now, if you own the retailers like Nordstrom’s and Macy’s and Sears, guess what? Amazon is destroying those businesses.
BRIAN: So, it makes no sense to just wait until a competitor has new technology that destroys your investment. Buying and holding makes no sense on market cycle basis. And it makes no sense that every seven or eight years you’re going to get nailed, and you just can’t afford a 50 percent hit every seven or eight years. That doesn’t make any sense. So that’s why we use two sided strategies. Then in the last 17 years, these are computer driven models.
BRIAN: They’ve averaged 16 percent net of fees, 16 and a half percent net of fees per year, and collectively, they have not lost money one time in the last 17 years. Okay. Mike, we’re 45 minutes into the show. I want to get back to the two biggest questions that people ask in retirement. One, can we retire? And two, if we can retire, how much money can we draw, so we don’t run out of money before we retire? You’ve already brought those up, I just wanted to say them again.
MIKE: It’s huge.
BRIAN: Those are the two biggies.
MIKE: I challenge our listeners to think of a bigger question than that, because that sums up the biggest stress in retirement.
BRIAN: Right.
MIKE: Cash flow, liquidity, income in retirement. Because once, Brian, we’ve talked about this before, once you’ve received your last paycheck that’s it. Right? You’re retired. Now, you have to manage your funds and investments accordingly. You can’t handle these market crashes. So, what’s the answer? What do you talk about with your clients?
BRIAN: Okay, before we give our answer, I want to just hammer the bankers and brokers one more time for their answer because it’s toxic. So, if you ask a banker or broker how much do I need. How much, well, the two big questions again. How much money can I draw, so that I don’t run out. And how do I…
MIKE: Well, the way the industry does it, most bankers and brokers is they use the four percent…
BRIAN: No, no, no, before that.
MIKE: Oh.
BRIAN: If you say to a banker or broker that you want 100,000 dollars, they take out their calculator and they divide it by the riskless rate, which right now is about three percent. So, 100,000 divided by three, three percent, is three point three million dollars. And they will look up and tell you that you need between three to four million dollars for you to retire. That’s false. We mathematically will show you that that’s false.
BRIAN: Many of our clients have plenty of cash flow in retirement income for the rest of their lives and they have about half that. So, that’s false. But the second piece of this banker broker model where they say how to distribute your income for the rest of your life so that you don’t run out of money. They use what’s called the four percent rule. In our opinion, the four percent rule has destroyed more people’s retirement than any other piece of financial advice ever.
BRIAN: And let me take you through, for those that don’t know what the four percent rule is, let me show you how it works. Four percent rule says that if stocks have averaged around eight and a half percent for the last hundred years, and that’s true, bonds have averaged around four and a half percent for the last 37 years. That’s also true. So, let’s be really conservative and just draw four percent from your assets for the rest of your life and you should be fine.
BRIAN: The problem with that is that that works if you have a forever up market cycle. But, markets cycle in up in flat markets, 18-year market cycles. When you get into a flat market cycle, ladies and gentlemen, not only doesn’t it work, it actually destroys your retirement. Let me give you an example. We’re a math-based firm at Decker Retirement Planning, let’s say that you all, this is the good news, you all retire January one of 2000 with plenty of money, the bankers and brokers say that you need three or four million dollars.
BRIAN: Let’s give you all four million dollars, retire you January one of 2000 which just happens to be the latest flat market cycle. So that’s the good news, you’re all retired. The bad news is the tech bubble burst and you just lost 50 percent on the equity portion of your portfolio. But, actually you’re worse off than that because you’re drawing four percent per year. Four four and four, you’re down 62 percent going into 2003. The good news is, in 2003 to 2007 the markets double.
BRIAN: The bad news is you don’t get all that, again, because you’re drawing four percent every year. Oh three, oh four, oh five, oh six, oh seven, you’re drawing four percent per year. And then you take that hit in oh eight, 37 percent plus the four percent that you draw. Now, you’re no longer able to stay retired. You’re getting your statements, you see that you’re way down. You have to go back to work. You have to sell your home, move in with the kids, whatever. You cannot stay retired.
BRIAN: Now, proof of what I’m telling you is true, is the millions of gray haired people that could not stay retired. We saw them coming back in banks, fast food, retail. They had to go back to work. The guy who invented the four percent rule, his name is William Bengen. He came out and you can see his quotes on our website at Decker Retirement Planning dot com. William Bengen came out and said in 2009 that his four percent rule does not work when interest rates are this low. He called it dangerous.
BRIAN: He said that he does not use it. And what bothers me the most, is that bankers and brokers have not skipped a beat. They still use today, the publicly discredited four percent rule even though it was discredited in 2009. So that’s how they distribute assets for the rest of their lives. We hope that you, at this point, Mike, this is a good point to actually remind people that we use a distribution plan that mathematically calculates how much money they can draw for the rest of their lives.
BRIAN: And they can see on a spreadsheet how much they can draw, net of tax, for the rest of their life and where it’s coming from.
MIKE: Thanks so much for tuning in everyone. We’ll talk to you next week.
