This holiday season, we want to talk about the end of the year market, bonds and home ownership. All of these things are huge around the end of the year it’s good to know where you stand with the current market volatility. We are also going to briefly touch on having extra money during retirement and how we plan for it!
MIKE: Good morning, thank you for listening to Decker Talk Radio’s Protect Your Retirement a radio program brought to you by Decker Retirement planning. This week is jam packed with financial news and current events as well as market predictions a to-do’s before the year ends. The comments on Decker Talk radio are the opinions or Brian Decker and Mike Decker.
MIKE: Good morning everyone. This is Mike Decker and Brian Decker from Decker Talk Radio’s Protect Your Retirement. And Brian Decker who is from Decker Retirement Planning is a fiduciary, a retirement planner out of Kirkland, Washington. We’re excited to have him on the show today. And Brian, we’ve got a lot of things to talk about, can you give us a brief summary of what’s on the agenda today?
BRIAN: Yes, in the beginning for the program, we’re gonna talk about lots of odds and ends; about how long the S&P has run without a stock market correction of over 20 percent. We’re gonna talk about where it is year to date. We’re gonna talk about some of the new things of the new elected president. We’re gonna talk about home ownership. We’re gonna talk about bonds with interest rates going up. We’re gonna talk about Italy and its spot with the Euro. We’re gonna talk about the extra money that some people have in retirement, money that they can’t spend, how we plan for that.
BRIAN: That’s kind of interesting. But the bulk of the show is gonna be about real estate, emerging markets large cap, mid cap, small cap, partnerships, commodities, options, futures. All the different investment vehicles in retirement, we’ll probably cover most of the show with those.
MIKE: All right, well let’s get started.
BRIAN: S&P is up over 12 percent year to date, with dividend invested, and we only have a couple more weeks to go through the year. Some things to expect Decker Talk Radio listeners, is that year end you’re gonna see some of your mutual funds drop.
BRIAN: Why is that? Because there’s year end distributions where short and long term capital gains, dividends are distributed and let’s say a mutual fund price is at $30.00 a share. They have distributions of about, I’ll just make the math easy, 10 percent. So they’re gonna distribute dividends. On one day, you’re gonna see the stock or the price of the mutual fund drop by 10 percent. Did it go down 10 percent?
BRIAN: No, it distributed three dollars a share in dividends and capital gains that will show up on your 1099 if you have a taxable account and will be re-invested as shares, If you take those dividends and distributions and re-invest those shares. If you take it in cash, then there’ll be a large yearend, much to be appreciated, I bet distribution of cash. Back to the stock market.
BRIAN: The ongoing bull market is in its 94th month. Only the 1990 to 2000 bull market that went into 114 months, before it peaked on March, 24 of 2000, lasted longer. So in the history of our United States Stock markets, there’s only been 11 bull markets in the last 70 years, and this is the second longest running one. And it has 10 more months to go before… nope 20 more months to go before it surpasses the 1990 to 2000 bull market.
BRIAN: President Elect Trump has proposed term limits for congress, restricting senators, check this out, to a maximum of two terms of six years each, 12 years max and limiting house members to three terms each of two years each, six years max. A plan, which if applied retroactively this, is very important, would remove 258 of the 535 members of congress in the next in the next election two years from now. And maybe it’s time for new blood.
BRIAN: John Connyers, a Michigan Democrat, has served in the house since January of 1965, just short of 52 years. Patrick Leahy, Democrat, Vermont, has served in the senate since January, 1985, just short of 42 years. I don’t think our founders ever intended our representatives and senators to make a career out of it. And I definitely know they didn’t expect them to use the office to enrich themselves.
BRIAN: Okay home ownership, national home ownership rate in the United States, as of September 30 of 2016, was 63 and a half percent, down from the peak ownership of 69.2 percent of December 31, 2004. Every one percent reduction in home ownership represents 1.2 million households that have changed from being a home owner to a renter. So home ownership is going down or has gone down. I want to switch over to bonds.
BRIAN: Interest rates are just starting to go up, we’ve talked about this for… oh gosh, for years. There’s a very tight relationship between the CPI, the Consumer Price Index and the monetary base of the money supply or what the Fed prints and puts in circulation. From 1960 to 1975, the fed printed what used to be a lot of money. At first, interest rates just kind of wandered.
BRIAN: But then they just took off, exploding to the upside in the ‘70’s. Until 1980 to 82 Paul Broker took over got in front of interest rates and proactively raised rates more than they should to slow down the rate of inflation and got back in to parity, the relationship between the CPI, Consumer Price Index and the monetary base of the money supply until 2008 where we see tarp QE1, QE2 explode the monetary base to the upside. And we haven’t seen interest rates go up yet, but now we’re just starting to.
BRIAN: Interest rates just six weeks ago, on the 10 year treasury was at 1.6 percent. Now they’re at 2.5 percent. That’s a huge percentage increase. And in the last six weeks, municipal bond, high yield ETF’s, have dropped 10 percent in the last 60 days. Lower taxes under Republican controlled governments are expected to make tax free investments less attractive. You don’t make much money with municipal bonds when tax rates are falling.
BRIAN: Historically, stock markets in the United States rally after presidential elections, like we’re seeing now, until, key point here, inauguration day. January 20th is inauguration day, so we will see. But just to finish up bonds, it’ll be interesting to see how much follow through there is with interest rates going up. But percentagewise, bankers and brokers will use the rule 100 to put your quote, un-quote safe money in bonds and bond funds. So if you’re 60 years old the rule of thumb is to put 60 percent of your money in bonds or bond funds.
BRIAN: If you’re 65, then 65 percent, et cetera. We at Decker Retirement Planning in Kirkland have warned people that rates will go up and that your safe money shouldn’t be in bond funds. Check out, Decker Talk Radio listeners, check out your statements and see in the month of November, check out and see how much your bond funds have lost since September, October, November, that three-month period.
BRIAN: Many bond funds are down five and six percent if they’re high quality and double digits if they’re high yield bonds. All right, last thing before we jump into the main part of the radio show. Update on Italy, Italy’s economy is a tale of two exchange rate systems and two distinct economic eras. To get anything done in the Italian government is almost impossible.
BRIAN: So Renzi’s attempt, Matteo Renzi, to trim down the government and make it possible to get things done. He was voted out. So now, the adoption of the Euro, this all started with the adoption of the Euro. And when Italy’s currency switched from the Lira to the Euro, years ago, it immediately made the very competitive Italian economy, it rendered it uncompetitive.
BRIAN: Because the currency was paying too much for materials, too much for labor and it rendered the economy uncompetitive. So… and it’s done that also to Spain, Portugal as well. An uncompetitive economy in Italy always end ups with big banking problems. And those are on the horizon right now. So it’s now a question of when, not if, Italy ends up with some kind of Sovereign default with its banks.
BRIAN: So watch that, that’s coming. All right, now I want to spend, gosh probably 10 to 15 minutes on retirees that we see in our practice that come in and they have X amount of money. Let’s say they have three or four million dollars and have a pension, they have social security, and they have rental real estate. And really all they need is 9 or 10,000 a month net of tax, and they see that they can get 14 or 15,000 a month net of tax. We look at them, we question them hey we’re fiduciaries, we’re loyal to you, we hope you spend the money.
BRIAN: They say, gosh we can’t, we can’t think of anything we can spend it on, what are we going to do? On money that is unspent, we create what’s called a legacy column, in our planning. By the way, Mike, I’m gonna describe our planning document for, Decker Talk Radio listeners. And then we should offer to have people come in and see it.
MIKE: I was thinking the same thing.
BRAIN: We’re you? Okay. Imagine Deck…
MIKE: Oh, yeah.
BRAIN: Imagine Decker Talk Radio listeners, instead of a pie chart, guiding you through retirement.
BRAIN: Imagine a spreadsheet that documents your Social Security for you and your spouse. It document rental real estate, it documents income from your pension money and income from assets.
BRIAN: It grosses all that up, minus taxes, and it tells you the monthly and annual income that you could have for the rest of your life. And there’s a cola, three percent cola every year where you make a little more money every year for the rest of your life to age 100. Imagine seeing that. And then on the portfolio side, we have buckets one, two and three that are principal guaranteed.
BRIAN: Bucket one’s responsible for the first five years of income bucket two is responsible for your six through 10, bucket three is responsible for years 11 to 20. And then you have a risk bucket. And we have a total account value of how much assets you’ve saved for retirement or in retirement and how old you are and how much income you can draw for the rest of your life.
BRIAN: Priceless. This is called distribution planning, this is what we do. Your banker doesn’t do it, your broker doesn’t do it, most financial planners don’t do it. We do it. We’re fiduciaries to our clients which means that we need to do the right thing by law, we put our client’s best interest before our company’s best interest. And we made a decision years ago to avoid the nonsense of using an accumulation plan, which is what a pie chart is. It’s totally fine in your 20’s, 30’s and 40’s.
BRIAN: But if you use a pie chart, in your retirement, you’ll have no clue how much you can spend, number one. You’re taking way too much risk, number three. You have no idea how much Roth money to convert. And our practice is mathematical. We know to the dollar, how much money should be in each bucket. We know how much Roth money you should convert. And anyhow, people have got to see this Mike, so go ahead with offer.
MIKE: And you owe it to yourself and the lifetime you spent saving to mathematically calculate how your retirement should be so there’s not guessing, like the allocation does.
MIKE: So for the next 10 callers that are 55 years or older, and have at least 300,000 of investable assets, we are going to extend this offer at no cost to you. That number is 1-800-261-9446. Again, that’s 1-800-261-9446. And that will be a one-on-one visit with Brian, so you can go through your finances and make this as customized and applicable to you and your needs. All right Brian, I know we’ve got a packed show, so let’s just keep going here.
MIKE: Okay, so imagine on this spread sheet, there’s money that can’t be spent.
BRIAN: Or at least you can’t think of anything at the time. So, we create a legacy column where our clients control that money all their life, they have access to that money all their life. It’s invested with the intent that if they need it, they can, it’s liquid to them. But the majority of it’s probably gonna pass to the children or to other beneficiaries.
BRIAN: That’s called legacy money. We have clients that have legacy money where they can’t even with elaborate vacations and all that they just can’t figure out how to spend that. So, we help them brainstorm with developing trusts that are dynasty trusts to send money down generationally, these are per stirpes accounts meaning bloodline only and so that if a grandchild or great grandchild marries he or she has access to the trust funds, but it cannot be a part of the divorce to the non-bloodline spouse.
BRIAN: So it’s protected per stirpes. It, depends on the state, but, imagine that it’s a 100-year trust that is funded upon your death and it’s usually used for education. But that’s one idea that a lot of clients use is if they can’t spend the money and their kids don’t need the money, then we do a generation skipping trust called the Dynasty Trust and it’s fantastic. So that’s idea number one to what to do with extra money.
BRAIN: Create wonderful family reunions and spend a lot of money to create memories while you’re still alive. We flew our family to Hawaii, couple years ago. And we have a big family, and their spouses. Mike, remember that?
MIKE: Yeah that was a great trip.
BRIAN: And remember the chickens waking us up on the north shore of Hawaii every morning at 3:30 in the morning?
MIKE: At 3:30, that was a rude awakening, I don’t know how the locals did it, but I guess they just get used to it.
BRIAN: Yeah, that’s what they said, they got used to it. Anyhow, we created memories that are just priceless precious. So that’s number two, was it expensive? Yes, will it spend extra money? Yes.
BRIAN: So that’s number two. Number three, if you have extra money and your children don’t need your money, then think of the different charities that are out there that you can benefit. So for example, Children’s Hospital, Fred Hutch, Cancer Research, there’s many great causes, and one that one that we are passion about, is the Make a Wish, were you can get involved with a bunch of causes and make it very personal.
BRIAN: Where you can fund a child’s wish, where they are terminal, so it’s a heart breaker, but you can make their dreams come true. So, charitable giving to churches, to hospitals, to children’s hospitals, to cancer research. By the way, of all the different ways that we die, I just read this this morning, there’s only one that we got less of it last year than the others and that was cancer.
BRIAN: Fewer people died in 2015 than they did in years before. So the cancer numbers have started to go back, at least last year. Stroke, no, drug over dose, no, multiple sclerosis, Alzheimer’s, all those are growing, but cancer pulled back last year for the first time. Okay, what other things to do with the extra money in retirement? The legacy money, we talked about dynasty trust, we talked about charitable giving.
BRIAN: We talked about giving your college as an alumni.
We talked about family reunions, whatever your passion is, you have a chance to go out and pursue that passion. Is it politics? Is it sports? Is it travel? We try to talk people through in our planning to see what’s available, what’s out there and how they want to pursue that. Because people can make a difference.
MIKE: Well Brian, real quick.
MIKE: I want to chime in here and say that some people have worked their whole life and they’re so used to working that relaxing is something so foreign to them, it’s almost uncomfortable. And so some people will create what is a small business to them. And they’re not looking to make a profit, it just allows them to enjoy a hobby or way to give and also receive some tax benefit, which is another bonus. And so there’s a lot of things that people can do in their retirement to stay busy and be beneficial.
BRAIN: Yup, Mike, now let’s talk about what the bulk of the program’s gonna be about and that’s the different investments that are offered in retirement.
BRIAN: Investors can invest in real estate. They can invest in emerging markets, large cap, mid cap, small cap, growth value type investments, partnerships, commodities, options, futures. All kinds of different investments out there and want to make sure that our clients and Decker Talk Radio listeners are aware of the advantages and disadvantages of all of them. So let’s start with the basics, stocks, bonds, mutual funds. Mutual funds, most everyone knows about because they’ve owned them in their 401K and retirement for years.
BRIAN: And these are common portfolios where you buy shares because you like the manager. And when the manager does well, and the shares of the fund go up, you share in that appreciation. But you’re choosing a mutual fund with a specialty. For example, there are mutual funds that are domestic only, large cap, mid cap, small cap. There’s ones that focus on growth, there’s ones that focus on value and type investing.
BRIAN: And by the way, the difference between growth and value, growth is where you’ve got a company, like a technology company where earnings ratios don’t matter, I guess, and they continue to grow and do well. But value is where you’ve got a lot of assets, a low price earnings ratio and try to seek low debt. And you’re looking for balance sheet type decisions where you’re making that decision with fundamental analysis.
BRIAN: And those are the cases where value investing comes into play. So I want to talk about value versus growth for just a second before we continue on value investing is buy low, sell high. I was shocked in my early years as a broker, to read an article where some guy in New York hired a broker who bought low sold high. And the guy started with a million dollars, and he lost 30 percent in a year, just almost immediately. And the guy called his broker and said, Hey I want to switch strategies here.
BRIAN: I don’t want you to buy low because the things that are down on the new low list, there’s a reason they’re on the new low list and what is low, seems to continue to go lower. So now, we’re gonna switch it to where now, the only stocks that you can buy for my portfolio are on the all time new high list. I want you to buy high and sell higher instead of buy low and sell high. And his portfolio tripled over the next few years buy low sell high is a dangerous game.
BRIAN: There’s many sayings in our industry, you don’t catch a falling knife, which means you can get hurt unless you grab that knife just perfectly. But buy low sell high means you would have bough Washington Mutual, which was a screaming buy at 15 ‘cause it was at 40, and this was in 2008 and it was a screaming buy at 10 because it was at 15. And it was surely a screaming buy in the single digits because it was much higher. But it keeps going down, and Washington Mutual went to zero.
BRIAN: AT&T in the last 16 years, is down 40 percent. Lucent, when technology changes like what cell phones did to AT&T and Lucent, those industries got hammered. Were they big, were they widely owned? Yes. Were they sterling names? Yes, AT&T and Lucent were sterling names.
BRIAN: But if your banker or broker is buying low, selling high, here’s what happens, in the buy low sell high mentality, if you have any stocks in your portfolio that eventually do go up 20 or 30 percent, very quickly, the banker or broker will sell those off and what you have left are dogs. Very soon, you hold the stuff that is not moving and is going lower. You hold your losers until you have more of them.
BRIAN: I’m just saying that statistically, typically, the banks and brokers who have representatives that buy low sell high will lose you a ton of money because what is down typically stays down. Lucent never came back, AT&T has struggled. For 16 years, those two have lost a tremendous amount of money. So buy low sell high keeps you from owning the best companies in the world and the best companies in the United States, think about that.
BRIAN: All right, the opposite of buy low and sell high is to buy high and sell higher. That’s what we are a proponent of. We have trend following models for our risk clients where we buy up trends whether they’re indexes or sectors and we follow those as long as they’re trending higher. And when those up trends are broken, computer programs automatically take our clients out and then go to cash if the market trend starts down.
BRIAN: The six managers we’re using today, made money collectively in 2008. Who do you know that made money in 2008? They also made money in 2000, ’01 and ’02, when the markets got creamed. Mike, this is a good time to make an offer. I would love to show anyone who wants to come in. The six managers that we have, these are trend following models where if the market trends higher, like it did in ’03 to ’07 when the markets doubled, our models did too.
BRIAN: And when the markets got creamed in ’08, these models went into protection of capital mode, collectively, the six of them together made money. And then, as the markets have more than doubled from ‘09 to present, so did these models. And then in 2000, ’01 and ’02 when there was a tech wreck and the tech bubble burst and people lost 50 percent, these models made money every year. So, Mike, let’s extend an offer so that Decker Talk radio listeners can come in and see the models that they should be using in retirement.
MIKE: Absolutely, so for the next 10 callers that call in that are at least 55 years or older and have at least 300,000 of investable assets, we will extend this offer to you and chances are you’re taking too much risk. So this is a very critically timed offer that we’re extending to you right now. That number is 1-800-261-9446 again that number is 1-800-261—9446 and when you call in, they will gather your information and I will personally call you back, get to know you one-on-one over the phone and schedule a time for you to visit with Brian so you can go over these models, these trend following models.
MIKE: It’s brilliant, Brian, anything else with that?
BRIAN: Yeah, I want to keep talking about the different types of investments that retirees are being shown by their banker, broker, by their friends, their neighbors, et cetera, what they’re up against. So now we’ve talked about buy low, sell high, we’ve talked in other shows about dividend type investments, the high dividend strategies. Mike should we go over that again? I think we just covered that just a couple weeks ago. I can mention it quickly, what should we do here?
MIKE: Well mention it quickly, but if you want more details, go to our website at www.deckerretiremetplaning.com and you can catch that show. Or you could subscribe to our podcast via iTunes or Google Play and catch that and all of our previous shows so you can listen to it on your own time and on your own schedule, so it’s more flexible.
BRIAN: Okay, so when it comes to the dividend type investing, people think that, gosh if the riskless rate for investing is oh let’s say three percent.
BRIAN: If you can get a three percent riskless rate, then surely four percent is better than three percent, and six percent, actually mathematically is better than four percent and eight percent surely is better than six and 10 percent is… you see where I’m going. So at some point when I talk through this with clients, at some point the client says around 10 or 12 or 15 percent, no, that sounds risky, I’m not doing that. Well, when it comes to the dividend type investments, you’re only getting half the information if you’re looking at the dividend yield.
BRIAN: The other half that’s very important is the default risk. Default risk can be calculated by looking at the dividend coverage. For example, let’s give you the statistics. Would you be interested in a three percent dividend rate with a zero percent default rate? Or would you be interested in a five percent dividend rate with a 20 percent default rate? Or how about a seven percent dividend with a 40 percent default rate?
BRIAN: Or how would you like a nine percent dividend with a two thirds, 66 percent default risk? Or how about a 10 percent dividend with a 75 percent chance of default? So Decker Talk Radio listeners make sure you get all the information when it comes to your investments and don’t just go off dividend yield, but study and find out the default risk. And the way you can find out the default risk is look at the dividend, let’s say it’s a dollar, a dollar a share for the year and dividend payout, but let’s also uncover how much cash flow per share they have.
BRIAN: If they have a $1.20 in cash flow per share and they’re paying a dollar then the dividend is safe. But if they have 80 cents per share of cash flow, net cash flow, before they payout the dividend, then that means that they have to borrow to pay the dividend. And the dividend is at risk. At risk dividends are going to yield higher than the safer dividends. So we’re gonna say the same thing three different ways.
BRIAN: A lot of retirees boast, a lot of very smart people boast that they’re getting seven percent dividend yields, with a 10 year treasury at two point five percent right now, and you’re getting seven percent, that sounds good number one, until you add the default risk number two which is seven percent, I’m just guessing is probably 45, 50 percent. And then you want to see the dividend coverage. If it’s paying a dollar and they’ve only got 80 cents of net cash flow before they pay the dividend, then they’re borrowing to pay the dividend and your risk of having that dividend get cut is very high.
BRIAN: By the way, whoever buys a dividend type portfolio has probably been heavy in the energy sector because energy limited partnerships and energy stocks have paid out high dividends for decades. But what you want to look at is total return because the price of gasoline per barrel or the price per barrel of oil had dropped from 120 plus to 20 and then back up to 50 or where it is now.
BRIAN: And so those energy stocks have gotten creamed. So even though you’re getting seven or eight percent on your dividend, your underlying investment is down 40 percent over the last 18 months. So is that a good deal to lose 40 percent on your underlying investment even though you’re getting seven percent? No, not the best combination because now your total return is at minus plus seven. Hey, you’re doing great, you’re only down 33 percent for the year.
BRIAN: So we want to make sure that you have a heads up, Decker Talk Radio listeners, that when it comes to a dividend type portfolio, that you know how to properly construct one. All right, let’s talk about real estate. Real estate is a very important part of a client’s retirement portfolio. If they have seasoned rental real estate where they’ve owned it for a number of years, the mortgage has been paid down and the cash flow is pretty good.
BRIAN: But if you put new money today into new rental properties today at high rental real estate prices today, your net rate of return, net of taxes and maintenance, net of mortgage, is going to be almost zero for a few years. Now the real estate market cycles, we’re expecting because of a figure called affordability index.
BRIAN: The affordability index is, at least at our company, the best gauge, monitor of whether real estate is cycling higher and is worth waiting to invest in or it’s low and it’s time to get involved. In King County, in the affordability index, here’s how it works, I’m gonna just make up some numbers. So for King county, let’s say that the average home price is, I’ll just make up a number, $400,000, $450,000.
BRIAN: If that’s the average home price in King County, then they look at the average wage in King 2County and I’ll just make up a number, let’s say that it’s 60,000. If the average wage is 60,000 how much home would that buy? That would buy a home price of X, actually the average salary is nowhere near 60,000, it’s probably 45. So you’d look at what the average wage can buy and the gap with the average home price. And that gap is a negative affordability index number.
BRIAN: When the number is that negative, that means that when wages are not going up, you can’t have a continuation of real estate prices going up because it can’t be supported with the average wages in the area. Does this make sense? So it’s an average gap. Right now, the gap for residential real estate and commercial real estate is at record highs. The affordability index would tell you to wait on new real estate purchases. Now you can purchase real estate in a number of different ways.
BRIAN: We don’t include your home… by the way, any financial planner that puts your home in your plan and ends your life with a reverse mortgage to kick in extra income for you during your lifetime, we don’t do that. We think that that’s wrong and that your home is sacred and you should keep it separate from your plan and from your cash flow and it should be used as a downsize investment when you get into your late 70’s early 80’s when you no longer want to walk up and down the stairs, when you’re not interested in gardening.
BRIAN: You’ll downsize by selling your home for X, buy a condo for Y, usually Y is less than X and there’s an infusion of capital, that’s very important, into your plan for inflation protection and to help you fund the last decade or so of your life. So that’s how we do it. We have a mathematical practice at Decker Retirement Planning in Kirkland. That’s one way to invest in real estate. We talked about the residence. The second is rental real estate.
BRAIN: We talked about how it’s probably a good time to wait for new rental real estate purchases because rental properties right now are very, very high as measured by the affordability index. Just like the stock market cycles, real estate cycles too and every seven or eight years, at least for stocks, the markets get creamed and you can buy some great companies very cheaply. Same thing with real estate, real estate cycles, not the same as the stock market, but right now’s probably not the best time to buy into rental real estate.
BRIAN: The third is to look at commercial properties. Commercial properties can be invested into, and again, I am absolutely not the expert on commercial real estate, I’m just saying that’s an option. I don’t know the timing, but I do know that when the best time to buy is towards the end of a recession where you can buy commercial properties a lot cheaper than right now. So when the economy’s been on an expansion mode for eight years, it’s not the best, I would think to buy commercial real estate. The last is what we do.
BRIAN: What we do is we use the REITs, and ETF’s, Exchange Traded Funds to own real estate of all kinds throughout the country. We owned a heavily diversified portfolio of real estate as long as real estate is trending higher. When real estate is trending higher, we own post office REITs, we own hospital REITs, we own ETF’s with real estate in the north and the south west and all different geographies.
BRIAN: So this is a diversified portfolio that as long as real estate is doing well like it did in 2000, ’01 and ’02, it allows our portfolios to make money when other sectors are not making money like in 200,’01 and ’02. But real estate continued to do well from ’03 to ’07. October of ’07 real estate started to go down and the up trends were broken, the computer models, trend following models that we use, got rid of real estate by the end of ‘07 and was saved from the disaster of real estate in 2008.
BRIAN: I saw several real estate funds losing 75 percent or more in 2008 when the markets got creamed. So what we do is we use ETF’s Exchange Traded Funds to own real estate and we also use REITs. They’re easily bought and sold, they’re liquid, they’re easy to invest and get the benefit of a real estate market when it’s trending higher. Okay, so we talked about real estate, now let’s talk about commodities. Commodities are something that we use in our trend following model. Anyone who’s owned commodities in the last, gosh, in a deflation area economy like we’ve had in the last several years, people who own commodities haven’t been very happy with their returns. Now there’s some selected food type of commodities that have gone up and done well.
BRIAN: In the last, gosh, couple of months, copper, steal, rebar, industrial metals have just screamed to the upside. We’re seeing huge gains in those and do we own commodities in our trend following models and the answer is yes through Exchange Traded Funds, ETF’s. The commodity market is the biggest market in the world, it’s agricultural, it’s industrial metals, it’s precious metals, it’s the energy markets. It includes even the currencies and the bonds and stocks world.
BRAIN: It is huge, it’s vast. Do we own commodities in our portfolios? The answer is yes through Exchange Traded Funds, but that means that we own them only when they’re screaming to the upside. That’ not gonna happen until we see an inflationary type economy. We don’t have that yet, but it’s coming. We don’t have it yet. Because we have computer driven models, those will automatically switch in to a heavy commodity type portfolio, yours won’t.
BRIAN: If you have a banker, broker type of model, it’s really not automatically going to switch in to an inflationary type of portfolio unless you have a computer that automatically does that. I suppose human beings can get in, but typically human beings and human run portfolio, they deal with fear and greed, two emotions that cause human driven portfolios and mutual funds to lag a computer driven model by a lot. Okay we talked about commodities.
BRIAN: We talked about bonds. We talked about bond funds. We talked about real estate, now let’s talk about partnerships. The important thing to know about partnerships is how you get paid. So let’s say Decker Talk Radio listeners, that we have a wildcatting partnership in Texas and our job is to look for oil. So you and me, we get together, we establish what our salaries are, let’s say we make a hundred thousand each as partners.
BRIAN: We go raise a bunch of money, 15, 20 million dollars and we go out in the first crunch and for the years of exploration, we can’t find anything and we send out the apologize letter, sorry we lost all your money. Then we raise tranche number two. Tranche number two, we go out and raise 15, 20 million, we still make 100,000 each and this time we strike oil and when we know the proven reserves of oil. The first thing we do is, you get paid 750,000, I get paid 750 and do we need homes in the south of France, do we want a company plane?
BRIAN: We spend internally because we pay out net to shareholders. Or we pay out net to partnership shareholders. So we want to make sure you know that there’s no downside protect. The two requirements that we have for our risk client money is upside participation when we try to track the S&P, which by the way is no small easy task, 85 percent of money managers of mutual funds don’t do that every year. They don’t. They don’t keep up with the S&P, so that’s a high bar. Second thing is to protect principal when the markets go down.
BRIAN: So the market models that we have are trend following. If the trend changes from up to down, these models will go into protection of capital mode and they will help you. When it comes to partnerships, there’s no downside protection, you get paid net, we don’t like how they work, we don’t recommend them. So, Decker Talk Radio listeners, the coverage on the dividend is usually tied to how well that sector is doing. For example, energy partnerships will do well as long as the energy market is trending higher.
BRIAN: But when energy’s trending lower like it was, then your coverage of that dividend is shaky and you have the risk of having the dividend cut. All right we talked about partnerships, we’ve talked about stocks with buy low sell high type of strategies. We’ve talked about how we do it with buy high, sell higher. And I want to tell a weakness of the models that we use.
BRIAN: There is one Achilles heel of the models that we use and it has to do with Whip Saw there’s four parts to a market cycle, uptrend number one, topping process two, downtrend number three, bottom process number four. There’s four parts to a market cycle. Trend following models kill it in three of the four parts of the market cycle. The one weakness they have is the topping process where trend following models can’t do well when they trend is choppy and flat like the last couple years. Now this year, calendar year 2016 is shaping up to be a double digit year.
BRIAN: I don’t want to jinx it, but the S&P’s up a little over 12 percent for the day. So the models got with that and if the year ended today, we’d have a double digit year this year. But the couple years have been flatter because when markets are in the topping process, usually it lasts six to nine months and they just shatter. And that’s called whip saw where one big burst to the upside is followed by a big dramatic sell off to the downside.
BRIAN: And the models that we use can be whipped back and forth and it’s just frustrating. So that’s the one weakness of a trend following model. I want to talk about variable annuities as a risk potential investment. We hope you stay the heck away. Variable annuities, we can’t say enough bad things about them, it’s where the broker makes eight percent right up front. 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.
BRIAN: Three layers of fees that add up to five to seven percent a year before you make a die. At Decker Retirement planning, we’ve never bought one, we never will buy one. They don’t participate when the markets go up, they don’t track with the S&P. I should say because of their huge fees that usually add up to five to seven percent before you make anything and then they go lower than the markets when the markets go down because of all their fees.
BRIAN: The way that they are sold and this is very deceptive, is they say, John and Jane, how would you like to invest in stock market and have a guarantee underneath that? Well what they’re not telling you is about all the fees that are going to the banker, broker or insurance company and they’re not telling you that you have to die to get that insurance. You have to die. It doesn’t benefit you in your life time. So we don’t like them, we don’t use them and we want to warn people to stay the heck away.
BRIAN: Another no brainer, probably easily the worst risk investment that you can make in your risk part of your portfolio or bond funds. We talked about those, beginning of the show, cross them off. As far as risk money goes, they offer very little return and potential for very large, double digit losses when interest rates go up. Okay, we talked about variable annuities, bond funds, commodities, we talked about stocks, exchange traded funds, we talked about mutual funds.
BRIAN: Now I want to talk about the last three which is foreign currency, options and futures. Foreign currency, how much time do we have left Mike?
MIKE: We’ve got about five to six minutes left.
BRIAN: Oh my gosh. Okay.
MIKE: Can you do it in that time?
BRIAN: I’m gonna say things really quickly. Foreign currencies are the different currencies of the world. This is your Euro, the Japanese Yen, the Mexican Peso, the Canadian Loon. These are the different currencies around the world. Do we own them in our momentum based trend following models? The answer is yes, through exchange traded funds.
BRAIN: If the dollar where to plummet, then the models that we have would be attracted to the screaming high foreign currencies. That hasn’t happened, so we haven’t needed to own or have much exposure to foreign currency in the past. Okay now let’s talk about futures. Foreign currency and futures, five percent approximately are speculation, 95 percent are hedging.
BRIAN: When Boeing sells some planes to Japan, JAL, Japanese Airlines, in two years they’re gonna deliver 14 billion of airplanes. Boeing has to lock in and hedge the materials through the commodities markets and the currency through the foreign exchange markets. I don’t have time to go into how they do that. But the majority of the foreign exchange market and the commodity market and the futures markets are used for hedging.
BRIAN: Do we own, manage futures? With the futures prices going up and down and swinging wildly the answer is no, we don’t because mathematically there’s potential for them to have tremendous returns, but they haven’t figured it out yet. We know because every quarter I personally go through the Morning Star database for mutual funds and the Wilshire database for money managers as well as timer tracking data. If there’s better managers out there than what we have, we would switch our six managers.
BRIAN: But every quarter, we track to find out, to see if there’s better than what we have. And by the way, when I say better, I mean higher net of fee return since January one of 2000 who’s beating the six managers that we have? Every quarter, we get around, oh sixty or seventy that legitimately beat us. But the fall into four categories: Number one, yes they’re beating us, but their closed to new investors. I can’t work with that, they’re not taking any new client money.
BRIAN: Number two, yes they’re beating us, but they’re hedge funds and we’re not gonna put any retirement money in a hedge fund. And the reason is because the mentality that a hedge fund has. A hedge fund gets paid two different ways, they get paid their one percent fee that kind of keeps the lights on. What put Ferraris in their garages is the two and 20. The two and 20 goes like this, it says that all the returns above 2 percent are split 80/20, 80 to the client, 20 to the manager. That’s where we make our money.
BRIAN: So let’s say that today, that it’s November first of 2016, our portfolios are down five percent, what are we gonna do? So predictably, we know that what’s gonna happen. We’re gonna goose the portfolio with options, futures, derivatives and leverage to get that portfolio up there because we don’t get paid unless we get that thing up there. And if we blow the portfolio up, ah doesn’t matter, we could always start another one. We can’t have retired client money in that type of an environment. So pass on the hedge funds.
BRIAN: Number three, yes we find some that beat our managers, but their per account minimum is three million or more. And then number four, there are managers who beat our managers, but they have volatility issues. In other words, in the good markets, they go way up. But in the bad markets, they go way down. There’s two managers in fact, the Bruce Fund and CGM Focus that should be on our list, that deserve to be on our list mathematically based on net of fee performance, but we can’t use them because in 2008, they both lost over 40, four zero, 40 percent in 2008.
BRIAN: So what’s left are mathematically, statistically, factually and objectively the best managers we can find for our clients. We’re acting as fiduciaries to do this homework to find out what the best risk managers are for our clients so that we can participate in the upside, in the upside of the markets, but have protection when the markets get creamed. Unlike the bankers and brokers that tell you to ride it out and take the full hit and take three to four years to get your money back. That makes absolutely no sense.
BRIAN: Mike, let’s do one last offer for clients to come in or listeners to come in. I’d love to show them how the risk models work that we use.
MIKE: Absolutely, so and chances are you’re taking too much risk. Now Brian that about wraps up our show as well.
MIKE: To listen to this show, or any previous show, go to our website at www.dececkerretirementplanning.com to the radio show, you can listen to this or any previous recording. Or you can go to iTunes or Google Play and subscribe to the show via podcasts. Also on our website are a number of different articles that go over the topics that we’ve gone over today as well as many other topics that are absolutely critically timed and important for you to be aware of in the volatile market that we’re in today. So for all those listening, thank you so much and we’ll tune in next week. Take care.
