We’ve had a 10-year bull market since the crashing bear of 2008—10 years of mostly uninterrupted stock market advances. In fact, on Wednesday, August 22, the nation reached a milestone as we are now experiencing the longest-running bull market in U.S. history. 

 

So, is market risk truly a risk to today’s retirees? At Decker Retirement Planning, we believe it is. Brian Decker has been doing retirement planning for more than 30 years, and our retired clients sailed through 2008 because we apply specific strategies to address risk in retirement. Right now, 10,000 people a day in America are turning 65, and this will continue until 2030. The stock market is not a safe place for retirees to have their money, and that includes bond funds, which are also at risk like they were in 2008.

 

Historically, the stock market regularly tanks every seven or eight years—2008, 2001, 1987 (Black Monday)—and pretty much every seven-to-eight year time period prior. It’s been 10 years; we are overdue for another crash. Leaving your money in the market may be okay for the young who can afford to wait for their investments to come back up in value, but it’s a recipe for disaster for retirees who need to withdraw their money to live on.

 

There’s a much better way to handle retirement than leaving your money in a pie chart of risky stocks and bond funds. At Decker, we’ll show you exactly what we mean by that.

 

 

Current Market Indicators

 

Brian Decker, founder of Decker Retirement Planning, sees these issues with the financial markets and economic trends as it stands in early October of 2018:

 

1. Divergence between Stocks and Investment-Grade Corporate Bonds

 

Lately, investment-grade corporate bonds have dropped, but the stock market, judging by the S&P 500’s performance, is still hanging in there. The last time there was a divergence between stocks and investment-grade corporate bonds like we’re seeing now was in 2007. Normally, they go up and down together. This is a pretty good indicator that one of two things has to happen: either corporate bonds will go up in price and match the S&P 500, or the S&P 500 will roll over and track the downward trend of investment-grade corporate bonds.

 

2. Financial Sector Stocks Decline

 

The financial stocks sector has declined in recent months, signaling a yellow light or warning downtrend. These are comprised of banks, credit card companies, and other financial entities. We know what happened to these in 2008.

 

3. The Shiller  Price-to-Earnings (P/E) Ratio

 

The Shiller P/E is a valuation measure usually applied to the S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation. Stocks reached a Shiller P/E all-time high ratio of 44 in 1999 due to the tech bubble, which burst in 2000. Other than 1999, the only time it’s been higher than 30 was in 1929—prior to the Great Depression.

 

It’s at 32 now!

 

4. Recession Prediction

 

  1. There are typically seven signs of a late-market cycle before a crash:
  2. Markets average a 27% decline
  3. Treasury bonds average a 20% increase
  4. The labor market becomes unsustainably tight
  5. The Fed raises rates into restrictive territory
  6. The yield curve flattens
  7. Leading economic indicators start to decline
  8. Consumer spending declines
  9. High-yield bond spreads widen   

 

These signs are monitored by a very prestigious organization, Guggenheim, on their “Recession Dashboard.” Guggenheim Investments’ recession probability model states that the next recession will begin in late 2019 to mid-2020. They believe that risk assets tend to perform well two years out from a recession, but investors should become increasingly defensive in the final year of an expansion, since risk assets typically decline in the last year before recession. According to Guggenheim, everyone should move their assets to safety this fall and winter.

 

At Decker Retirement Planning, we’ll do even more than that for you. We will help create a customized retirement plan on a spreadsheet, which will help spell out exactly how your retirement will be funded up to age 100. Helping to minimize every risk is the goal—be it market risk, longevity risk, long-term care risk, interest rate risk, heath care risk, income tax risk—we have dozens and dozens of risks we address for each client in their personal retirement plan.

 

5. Other Major Market Headwinds

 

The market is facing numerous headwinds—things known to slow potential growth—which did not exist before.

 

  • Many countries are deeply in debt, like Italy, Greece, Spain, and the U.S. We owe $21 trillion dollars, and that number is growing exponentially, mainly in Treasury bond interest.
  • Deutsche Bank, Germany’s largest bank, is a major concern. The value of its stock has gone down by 65% in the last 10 months.
  • The Federal Reserve is raising interest rates and reducing its balance sheet, known as tapering. Lower interest rates tend to stimulate economies, while interest rates which rise too quickly typically cause recessions. As the Fed raises interest rates, that crowds out a lot of discretionary government spending, as we have to pay more in interest debt. The Federal Reserve’s balance sheet has shrunk by more than $110 billion so far this year—part of its calculated tapering program. More than half of this reduction has occurred in just the last few months.
  • Quantitative easing—likened to “printing money”—has been happening since 2008 in an international effort to lift the world out of that disastrous recession. The global central banks have flooded the world with more than $10 trillion, virtually all of it coming from just three central banks: The Federal Reserve of the United States, the ECB (European Central Bank), and the Bank of Japan. We just talked about what the Fed is doing, now, the ECB has started tapering its quantitative easing program—phasing out the amount of debt it had been buying.
  • Short-term interest rates are rising rapidly, not just in the United States, but around the world. Emerging markets interest rates are skyrocketing year-to-date. If you look at the yield curve—the difference between short- and long-term interest rates—it’s usually a nice, normal curve showing increasing interest rates flattening out after 20-30 years. An inverted yield curve, which we have now, is where the difference between two-year and ten-year Treasury notes is very small. This usually indicates dropping economic activity.
  • The second quarter GDP report for the U.S. showed that the U.S. economy grew at an annualized pace of 4.2%, but we need to remember that corporations just had a one-time stimulus with the tax breaks they received. Corporate profits were flat in the first quarter of 2018 and would have been down without the benefit of tax cuts. Expectations are that next year’s earnings will be flat. Meanwhile, global economic growth, especially in Europe, is slowing down. With the U.S. dollar going up and talks of even more tariffs, the emerging markets and the G7 are stalling. China is now officially in a bear market—down 20% year-to-date from its high. 

 

 

Finding the Right Financial Advisor

 

With all of the market risk and uncertainty, it’s imperative that you find a qualified financial advisor who specializes in retirement. Part of assessing who is qualified involves knowing the difference between suitability versus best interest standards when it comes to the recommendations that you receive. Here’s what you should know:

 

Suitability Standard – Sales Commissions

 

“Suitability” relates to brokers and bankers—people who make commissions on securities trades (stocks and bonds), often with a Series 7 license. Suitability, or an investment’s appropriateness for an individual, is ultimately judged by the self-regulatory, not-for-profit organization FINRA (Financial Industry Regulatory Authority), which regulates brokers. From FINRA’s standpoint, age, existing investments, financial situation and goals, annual income, liquid net worth, effective tax rates, marginal tax rates, investment objectives, investment experience, and time horizon to retirement should all factor into an investment’s “suitability” for you.

 

Unfortunately, FINRA standards are vague, and there’s nothing illegal about a broker steering you toward investments which may pay them hidden commissions or higher commissions than other “suitable” investments. Additionally, brokers and bankers are often captive to their big-name-brand wirehouses, and they can only sell investments that their organization provides. So, their comparisons in terms of investment “suitability” often include a very short list!

 

Best Interest Standard – Fiduciary, Net of Fees

 

“Best interest” standards, on the other hand, apply to advisors who are fee-based fiduciaries holding a Series 65 license. These advisors are regulated by the U.S. Securities and Exchange Commission (the SEC), a federal commission created by Congress in 1934 following the Great Depression.

 

Legally, best interest standards require an advisor to recommend only what’s in a client’s best interest, net of fees, compared against a large universe of investments, with only the investor’s personal circumstances foremost in mind. The best fiduciary financial advisors include tax mitigation as a very important part of their plans, especially for retirees with large amounts of money in qualified accounts, like 401(k)s, who will be facing RMDs (Required Minimum Distributions) starting at age 70.5.

 

 

The Three Requirements of a True Fiduciary

 

Many financial people claim to be fiduciaries required to look out for your best financial interests, but they aren’t. Here are the three requirements of a fiduciary. All three must be present:

 

  1. They have a Series 65 license only*, meaning they cannot accept sales commissions on equities or trades. They are fee based.
  2. They are an independent firm and offer a large universe of financial instruments. There is no one telling them what they can or cannot sell.
  3. They are structured as an RIA (Registered Investment Advisory) firm.

 

*Watch out for dual-licensed brokers or bankers who claim to be fiduciaries but aren’t. Financial professionals are legally allowed to hold dual licenses. They are allowed to make commissions on securities based on “suitability” on the one hand, but then turn around and give you advice in your “best interest” on the other. Protect yourself, and avoid this scenario altogether. It’s confusing and can be duplicitous.

 

 

Your “Risk Number”

 

At brokers’ offices, you are required to fill out a questionnaire. This questionnaire is usually not very long, and it usually contains a very vague series of questions that will assign a risk number to you to assess your “risk tolerance.” Beware, because this risk number assignment comes with the understanding that you have chosen your investments based on that number.

 

The risk number is not really about gauging investment suitability, it’s more about avoiding getting sued by you.

 

 

Pie Charts as a Planning Method | Bond Risk

 

Another thing about that “risk number:” Based on your number, brokers and bankers create pie charts of investments—the ones they sell, that is—breaking them up between stocks and bonds, moving a higher percentage of your money into bonds for “safety” as you get older. The trouble is, in a very low-interest rate environment with interest rates rising, bonds are not safe! In fact, they’re disastrous.

 

 

What We Do

 

Fiduciary retirement planners, like Decker Retirement Planning, will take a look at so much more than stocks and bonds and pie charts and investments with way too much risk. We have developed a proprietary retirement planning methodology containing principal-protected investments and products that offer tax advantages working in tandem with your other income, like Social Security (which we will optimize for you), all designed to help create reliable retirement income during the first 20-30 years, up to age 80 or 90.

 

If you need or desire market risk, we plan for that money to be used during your final decades (age 80-90+) or for wealth transfer to your heirs or selected charities. Because we utilize strategies which take advantage of both up and down markets, even this “risk money” is designed to help minimize risk!

 

 

Let’s Talk

 

Decker Retirement Planning offers a safer approach to retirement. Call us at 855-425-4566 to discuss your situation.

 

We have offices in Kirkland, Washington; Seattle, Washington; Renton, Washington; Salt Lake City, Utah; and downtown San Francisco, California. We can serve many other areas and states virtually.