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 finishing our discussion on principal guaranteed options and then transitioning into investment options, qualified as risk. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day everyone, this is Mike Decker and Brian Decker, on another edition of Decker Talk Radio’s Protect Your Retirement. KVI 570, the greater Seattle Radio, and KNRS 105.9 FM radio, in the greater Salt Lake area, we’re glad to have you today. We’re going to be wrapping up our conversation on principal guaranteed options from last week and then transition into risk investment options, but before we dive in, Brian, a licensed fiduciary joining us from Decker Retirement Planning, is going to be talking to us about current market news. Brian, what’s going on?
BRIAN: All right, current markets are very interesting. We’ve got new records being set almost on a daily basis. How do you know if this market is expensive or not? There’s something called a price earnings ratio. Take the price of the S&P 500, for example, divided by the earnings, and you can get a very good read of how cheap or expensive the stock market is. There’s only been three times that the stock market has traded above 25 times earnings.
BRIAN: Ever. Let me say that again. There’s only been three times that the stock market has ever traded above 25 times earnings; 1929, 1999, and right now. 10 years after the stock markets have hit 25 times earnings, there’s never been a time, not in 1929, not in 1999, there’s never been a time once the markets hit 25 times earnings that the market has made money.
BRIAN: So, people in the United States that are retired, or any investors, are expecting something that’s never happened before. Will we, 10 years from now, be positive in our returns 10 years from now? There’s two, I’m going to generalize, there’s two very important parts of what makes the stock market trade higher. And that is earnings, higher earnings, all other things being equal, will drive the stock market higher.
BRIAN: The second thing is lower interest rates. Now, interest rates are very low, and now we’re starting to go up. Lower interest rates mean it forces people to take risk to get some kind of return on their money. Low interest rates are seen by a lot of people as a tax on the retiree. Retirees used to be able to invest in CDs, municipal bonds, and get four, five, six, seven percent on their money. Now that’s not true.
BRIAN: Many European countries, and other countries around the world, have negative rates on their five and 10 year rates. One canary in the coal mine that we’re watching very closely is the inverted yield curve. Inverted yield curve has been a predecessor before every recession and stock market crash. An inverted yield curve is when rates are higher in the near term than in the long term.
BRIAN: In other words, one and two year rates are higher than the 10 year. Or the five year rate is higher than the 10 year. That’d be an inverted yield curve. So, we’re watching for that, it’s very flat right now, the yield curve is flattening. So we’re watching for that. But it looks like things are hitting in all cylinders, why are we talking about the market being high. The definition of a market top, think of this, is when things can’t get any better. Let me say that again. The definition of a stock market top is when things can’t get any better.
BRIAN: Okay, I’m going to… yeah.
MIKE: Hey, Brian, Brian, real quick, I just I’m a visual person, and it kind of feels like what you’re saying is like that moment when you’re on the rollercoaster, and you feel that it’s just going up and up and up, and then it starts to slow down a little bit, right before you then take that big drop, and the ride starts. Would that be a proper depiction of what seems like might be happening with the market?
BRIAN: Yeah. We’ve had market cycles, markets do cycle, ever since stock markets were created here in the United States.
BRIAN: Usually their markets are seven, eight-year market cycles; 2008, 2001, 1994, 1987, 1980, ’73, ’74, ’66, ’67. These are all market recessions-economic recessions in market cycles. So we are in year 10 now, we’ve started year 10, of what historically is a seven, eight year market cycle. So, we want to make sure, at Decker Talk Radio, the listeners have some downside protection in ways that in a low-interest rate environment, can also benefit them.
BRIAN: And that’s in fact, what we’re going to talk about today. Last show, we talked about how, in any retiree’s portfolio, there’s three parts. One is cash, and we talked about how we as fiduciaries to our clients have done the homework to try and find the highest return on money markets. And so, CIT, Goldman Sachs, Capital One, Synchrony, and Ally, all offer money markets at 1.45 to 1.5 percent.
BRIAN: They’re guaranteed money markets, and these are what we would recommend our clients look at for their cash, savings, checking, things like that. Second thing is we talked about last week, we’re going to finish up today, and that is how do you get any kind of a return out of a principal guaranteed account. My safe money, how can I get some kind of a return? Well, before 2008, you could get a great return out of CDs, treasuries, corporates, agencies, and municipal bonds.
BRIAN: Fixed-rate investments were giving pretty good rates. Five percent on a five-year CD, seven percent on a 10-year CD. Not anymore. After ’08, fixed rates dropped. Since 2008, the highest returning principal guaranteed accounts, taxable, are coming from equity indexed accounts. Equity indexed accounts, if they’re from insurance companies, or equity-linked CDs, if they’re from a bank. We are fiduciaries, and most all of them, and this is very, very important, hundreds of them are out there, we wouldn’t recommend any of them except for three.
BRIAN: There’s only three that have average annual returns above six percent. Because of high fees, and because of low caps, many of the options are rendered non-competitive. Let me give you an example. XYZ Company, I don’t want to name the company, but they’re very, very popular. Why? Because they pay their advisors and brokers the highest commissions.
BRIAN: Is that how your retirement money should- how that choice should be made? No. It should be based on the highest return, net of all fees. And there’s only three that are out, that are returning over six percent. Also, low caps. Watch out for where an advisor tells you, oh, you should get this one, you get all of the upside of the S&P up to five percent.
BRIAN: Well, geez, that’s no good. Last year the S&P, with dividends, was up 20 percent. Five percent, not so great. So we want to make sure that our clients at Decker Retirement Planning, we want to make sure that our clients are getting the highest returns possible. We have a relationship with a separate company, a third party, where we pay them, on a weekly basis, go through all of the different offers that are out there that are principal guaranteed.
BRIAN: And each week, Wednesday at 8AM, we have a conference call, and they tell us what the highest-returning principal guaranteed accounts are. Right now, there’s three equity indexed accounts where, when the markets go up, you capture around 60 percent of the S&P. When the markets go down, you lose nothing. So, when you factor that in, you get very good returns, because, for example, since 2000, there’s two times that the S&P has lost 50 percent in the last 18 years.
BRIAN: If you don’t lose 50 percent, if you don’t lose and factor those in, your average annual returns go way up. So, in retirement, it’s about return of your money, less than return on your money. We don’t want our clients to take those hits. So we’re in year 10 of a seven, eight year market cycle, here’s a way to get around six percent or better average on your money for principal guaranteed accounts.
BRIAN: All right, so, now let’s talk about tax-free. Where can you get great tax-free returns? Again, we’re fiduciaries, and we’re a math-based firm. The highest-returning principal-guaranteed tax-free returns are coming from a vehicle called an IUL, Index Universal Life. How does this work? It’s funded over three years, three or four years, and the agreement between the IRS and insurance companies is, if you fund it, not lump sum, but over three to four years, then when you pull money out, it’s pulled out as a loan, and it’s not taxable.
BRIAN: The way this works is, while you’re funding the account over three or four years, it has a high death benefit, so the costs are higher, averaging two and a half percent per year. But on year four, or year five, you go down to a more manageable level of about one percent. And you’re able to capture the S&P, or the S&P composite indexes, with a cap of 17 percent.
BRIAN: It enables you, in the history of these indexes, to average around eight, above eight percent before fees. So take out one percent, you’re netting seven percent after fees. There’s no higher-earning principal-guaranteed tax-free revenue option open than this one. Now, there’s many insurance companies out there that offer IULs, Index Universal Life, but there’s only one that we would recommend.
BRIAN: Remember, we are math-based, so we use IRR, internal rate of returns, to judge who can get us over seven percent. There’s only one company that we would recommend, and there’s only one product within this company that produces that return. So that’s how specific we are. At Decker Talk Radio, we want you to know that this option is out there. This is the highest-returning of all principal-guaranteed accounts, number one, but you have to qualify for it.
BRIAN: It is insurance. So, what do you do if your health is not very good? There’s options. There’s options of, you combining it with your spouse if you’re married. If you’re not married, because two lives have less risk than one. In other words, a longer term. Or, you can change your death benefit, where instead of an immediate payout it can be over five years. That allows the company to have your money longer and increases your rate of return.
BRIAN: There’s ways that we can, net of fees, keep your return right in that target level of about seven percent, tax-free. This is something that you should know about. Why haven’t you heard about equity indexed accounts or equity linked CDs? It’s because your advisor doesn’t get paid any security commissions to offer these products. So there’s no incentive for them to run these by you. Or, if they do run these by you, the good news is, they’re giving you these types of products.
BRIAN: The bad news is, they’re giving you the wrong ones. The wrong ones that are laden with fees and caps. We are very, very specific at Decker Talk Radio, or Decker Retirement Planning, we want to make sure that our clients are getting exactly the right product for that fit. So, Mike, when it comes to tax-free, our clients have access to seven-percent tax-free revenue that is principal-guaranteed. And when it comes to taxable, it’s 6.2, is the highest average annual taxable returns that are available for our clients.
BRIAN: So we want our clients to know about these, and we want Decker Talk Radio listeners to know about these. Mike, I’m going to move off of principal guaranteed accounts, talk more about risk accounts, but if someone says, ah, no, I call bogus on that, I think, I got to see it to believe it, we can give them more information and have them talk to a planner.
MIKE: Absolutely.
MIKE: And, again, we’re here to help. That’s our bottom line. As fiduciaries, we want to help people make the right choices.
BRIAN: All right, so now we’re going to talk about risk. I mentioned that all portfolios, no matter how old you are, have three parts to it. Cash, safe money, and risk money. When you’re in your 20s, 30s, and 40s, you might have all your money at risk. Probably smart to do that. But when you’re in retirement, you should have some cash set aside, we talked about that at the front of the program.
BRIAN: You should have some safe money. And the tough thing is that right now, bankers and brokers tell you to put your safe money in bond funds. That’s ridiculous, because interest rates are so low you’re hardly getting any return on your bond funds, and when interest rates go up, guess what, you lose money, you lose principal, when interest rates go up. Interest rates on the 10-year treasury in the last three months have gone from 2.4 to 2.6 percent. Not a big move. And yet people in bond funds have lost money over the last three months because interest rates are starting to go up.
RIAN: Just like two plus two is four, higher interest rates produce lower bond prices. So, this is called interest rate risk. If any advisor is telling you to put your safe money in bond funds when interest rates are at or near all-time record lows, they are like a math teacher telling you that two plus two is 20. It’s ridiculous, it makes no sense, and in our opinion, this is financial malpractice on the part of your advisor.
BRIAN: You should never have bond funds when interest rates are this low because interest rate risk is so high. So, we talked about cash, and options for cash, to maximize your yield there. We talked about safe money, between the front of the program and last week’s program. We’re going to spend the rest of today’s program talking about risk and risk options. Should you have risk?
BRIAN: Well, some of our clients don’t want to have any risk, and we would say, because we’re math-based, what we do at Decker Retirement Planning is we have a spreadsheet, and we put all of your sources of income together. We show you, with your social security, any pensions, any rental real estate, and then we show the assets, the investable assets you’ve got, and the amount of income that that generates for the rest of your life. Our clients at Decker Retirement Planning have a spreadsheet that shows them how much money, net of tax, they can draw with a CoLA, cost of living adjustment, for the rest of their life.
BRIAN: If you haven’t done these calculations, you’re guessing. And there’s got to be high anxiety with guessing on how much money you can draw for the rest of your life. Most people have the pie chart, because that’s what benefits the bankers and brokers. It doesn’t benefit you. And most people have this anxiety and fear of drawing too much money and running out of money before you die. Our clients don’t. We have a spreadsheet, an income plan, that shows how much money you can draw.
BRIAN: Now let me give you two scenarios. Client A. Client A, 65 years old. They have assets of 1.5 million, they’ve got social security. They’ve got income streams from pension and rental real estate. They have a paid-off home, they’re married, they’re in their golden years, they’re retired. They only need five or six thousand dollars a month. But their portfolio can produce three times that. So what are they going to do?
BRIAN: Well, um, they don’t need to have any risk. One option for them is that they don’t need to have any stock market risk if they don’t want to. Or, we have risk, but it’s in legacy money. It’s in money that they will probably will never use, but they have access to for the rest of their life. It’s liquid to them. So we’d, at Decker Retirement Planning, we give the clients options. Some people, some of our clients, mathematically, logically, don’t need to take any risk.
BRIAN: But, I will tell you that most clients come to us taking far too much risk. Mike, you’ve seen this. How many clients come in where most all of their money is at risk?
MIKE: Oh my gosh. I mean, that’s the most common probably portfolio we see.
BRIAN: We see that all the time, right?
MIKE: More than I would like to admit. And that’s-it’s an uncomfortably high amount of people that come in like that.
BRIAN: Right. So in retirement, why do you think most all of their money is at risk?
MIKE: It’s a broken model. I mean, it’s how the people that they’re visiting with, their quote-unquote financial advisors, or their bankers and brokers, were trained. It’s how they make money. And it’s all they’re going to be told about.
BRIAN: Exactly right. That’s how they were trained, and that’s how they get paid. I had a manager walk by my office in the morning and say Brian we’re paid to keep money at risk. That’s how the banker broker model works. Mike, you’ve seen hundreds of income plans, what is the average percent of risk exposure that our clients have at Decker Retirement Planning?
MIKE: About 20, 25 percent or so.
BRIAN: That’s right. 20 to 25 percent. So, when clients come to us, whether they have 300,000 or eight million dollars, most of our clients have only 20, 25 percent of their money at risk. Why is that? Because that’s all they need. The purpose of the risk money for someone 60, 65 years old is to grow for 20 years, and then we touch it for their end-of-life income.
BRIAN: For the last 20, 25 years of their life. So, we don’t need all their money at risk. Let me say that another way. 75 to 80 percent of our clients’ money in retirement at age 65 is typically principal-guaranteed. And then you say, oh, but principal-guaranteed are CDs at two and a half percent for 10 years, you can’t live on that. Well no, not ours. We’re using accounts that are averaging above six percent on taxable and seven percent tax-free.
BRIAN: Those are the returns that we’re getting for our clients, principal-guaranteed accounts. We would never use bond funds, and on the subject of risk, point number one, how much risk should you have. It’s a math issue. It’s not Brian’s or Mike’s opinion. It’s what the clients need as far as rate of return to produce the income they need and want for the rest of their life.
BRIAN: Okay, so what are the options? Um, now, with the exception of esoteric options like ostrich farms, we’re going to stick to the following list. Variable annuities, which I can’t scratch out fast enough. Variable annuities are where the banker-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 before you make a dime. We don’t like variable annuities because of the fees, they lag the markets when the markets are going up, and because of fees, and no downside protection, you lose more than the markets when the markets go down. We don’t like them, we don’t use them, and we warn people to stay away from them. If you have a variable annuity, jot a note, call our planners, you have options.
BRIAN: But we want to warn you, at Decker Talk Radio, to stay away from variable annuities. How about bond funds? We talked about bond funds seven minutes ago. Bond funds, when interest rates are this low, are a horrible investment. They don’t have any downside protection, so when interest rates went up from 1965 to 1980, Mike, imagine that your quote, unquote safe money in bond funds, imagine that you were, I don’t know, 85 years old, and you had bond funds from 1965 to 1980.
BRIAN: Do you know you lost money in those bond funds almost every year for 15 years? How’d you like that?
MIKE: Aw, that’s terrible.
BRIAN: Yeah. So now we are in the end, Bill Gross, who’s one of the premier minds in bond funds around the world, Bill Gross of-used to be PIMCO, now he’s at Janus, he said that this week we’re entering a bond bear market.
BRIAN: And so if rates go up for the next 10 or 15 years, which they could easily do, then we have major losses for people that are following the advice of their banker and broker and put their safe money in bond funds, only to lose money every year for 10 or 15 years. What about real estate? To buy commercial real estate, some people are born and raised with real estate. We don’t get in the way of that, we’re fiduciaries to our clients, some people love real estate, and they’ve made a fortune in real estate.
BRIAN: My brother, out of Seattle, is one of those guys. I would never counsel my brother to get into something he’s uncomfortable with. He’s doing great with his real estate. But if you want diversification, real estate is something that we do recommend, but we recommend them using REITs, R-E-I-Ts, real estate investment trusts, or E-T-Fs, exchange traded funds. Let me tell you the difference. The bottom line net of fee return of a brand-new rental is very low.
BRIAN: It has to take years for that real estate to season and for you to get a good return net of insurance and maintenance, to have that be a good cash flow. Some people can afford to buy and not have any mortgage at all, and those people are the ones that have the best cash flow on their real estate.
BRIAN: So it’s all based on cash flow, when you’re in retirement, and particularly in real estate. If you can cash flow, then you can handle a big downturn in price, and it doesn’t wipe you out. So be very careful in real estate, if you can get higher than six, seven percent returns in your cash flow, then that’s a competitive product. But it takes years, once you attach a mortgage to it, now you’ve got three layers of costs that come out of your cash flow.
BRIAN: Your payment of your mortgage, your maintenance, and your taxes. So, taxes and insurance. Real estate we recommend as a much easier way. If real estate is hot, it can be in your portfolio through a REIT, real estate investment trust. There’s all kinds. There’s kinds of real estate REITs that are commercial properties, residential properties. There’s REITs that are post offices or government buildings. There’s mall-shopping malls in the northeast, in the southwest, and different geographical areas.
BRIAN: And the same thing is true with ETFs, exchange traded funds. You can buy- there’s a time to be in real estate, and a time to be out of real estate. Two examples of times to be out of real estate was from October of ’07 to March of ’09, real estate took a beating across the country. The average real estate investment trusts were down more than 60 percent during that period. Time to be in real estate? From March of ’09 to about summer of last year.
BRIAN: Summer of ’17. Since summer of ’17, interest rates have started to go up. When interest rates go up, that’s poison to real estate and REIT types of investments, and they have been going down while the markets have been going up. So, do we like real estate? The answer is yes, as long as we can easily have a two-sided strategy with real estate. Now, I should have led with this. What we are looking for in the three parts of our clients’ investments.
BRIAN: Cash. We’re looking for principal-guaranteed, and we’re looking for best rate. For our safe money, we’re looking for three things. Principal-guaranteed, able to distribute on a monthly basis, and best rate. When it comes to risk, we’re looking for two things, and these are two very high bars. One, tracked with the S&P when the markets go up. That’s a very high bar because 85 percent of money managers and mutual funds don’t do that.
BRIAN: 85 percent of money managers and mutual funds, year in and year out, cannot keep up with the S&P, which is why a lot of people just buy the index. We’ll talk about that in a minute. Second, we need downside protections. When the markets tank, you are able to make, not lose, money. Now, who does that? Who do you know that made money in 2008 on their stocks? Mike, would it surprise you, this is rhetorical, because I know you know the answer, I’ll just ask the question.
BRIAN: Would it surprise you that for the last 20 years, computers and computer algorithms, specifically trend-following models, have beat all other portfolio managers when it comes to net-of-fee returns, would that surprise you?
MIKE: No. Not at all. Not even a little bit.
BRIAN: Okay. So the stock market’s a two-sided market, it goes up and down. 95 plus percent of the United States have a one-sided strategy in a two-sided market, that makes no sense.
BRIAN: You are told to buy and hold, to hang in there, don’t time the market, be a long-term investor. You’re told all of this stuff. I was trained in this. Mike, why do you think bankers and brokers want to keep you at-risk and fully-invested?
MIKE: It’s because how they get paid. I mean, it’s quite frankly. But, something else, Brian, if I might add, all these sayings, they have a little truth in them, but they’re covered-up and rationalized to be able to sell you a product that they get paid.
MIKE: Right? Don’t time the market. Right? You shouldn’t emotionally try and time a market, which a lot of people think that they might be able to do. So they can take these little truths, and make it an absolutes, to try and sell you their product, wouldn’t you agree?
BRIAN: Yeah, that’s a good point. So let’s describe these trend-following algorithms that have beat the money managers for the last 20 years. There’s external and internal market information. External market information, an example of that is how the Dow, S&P and NASDAQ did today. Those are external.
BRIAN: Internal market informations, four examples of that would be, the number of new highs. Stocks making new 52-week highs. Number of new lows, the number of stocks making new 52-week lows. The advanced decline line, is it going up or down. The percentage of stocks trading above the 200-day moving average. Now, a lot of us have been feet wet in the ocean on a seashore.
BRIAN: The tide comes in, there’s a shift and the tide goes out. Same thing with the markets. There’s a tide, and there’s a trend in the markets, and it can be followed based on market internals, which is what our managers do. We’re fiduciaries to our clients, here’s what we do. Actually, Mike, let me contrast this, what we don’t do. Here’s what we don’t do. If I work for XYZ bank, guess what mutual funds you’re going to have, Mike?
MIKE: XYZ?
BRIAN: XYZ. If I work for ABC brokerage, guess what kind of mutual funds you get at ABC?
MIKE: You’re going to get the ABC funds. I mean, they sell in-house, all day long.
BRIAN: Right. So we are fiduciaries for our clients, I go through the Wilshire database on a quarterly basis, largest database of money managers in the world and I go through the Morningstar database, largest database of mutual funds in the world. Plus Timertrac and Theta, and I want to know who has the highest returns out there.
BRIAN: In other words, who’s beating the six managers that we have in place? And every quarter, I get the same 60 or 70 that legitimately are beating our six managers. But they fall into four categories. Number one, yes, they’re beating us, but they’re closed to new investors. They’re not allowing any new money in, so, I can’t work with that. But I know who they are. Second are hedge funds. Hedge funds. Mike, do we put any of our clients in hedge funds?
MIKE: No. [LAUGH] And if you don’t understand what a hedge fund is, I mean, Brian, what typically happens with a hedge fund?
BRIAN: Hedge funds is where they use options, futures, derivatives, leverage, to create the highest return possible. They are two-directional, which is good, but it’s the incentive that causes us to stay away. So let’s say, Mike, that you and I are New York hedge fund managers, and we are paid a one-percent management fee. Now, that keeps the lights on.
BRIAN: But what puts Ferraris in our garages is the two and 20. The two and 20 says that all returns above two percent are split 80-20, and we get the 20. So guess what? Let’s say that it’s October of 2017, and we’re down four percent in the portfolio. Well, guess what we’re going to do. Predictably, we’re going to goose that portfolio with options, futures, derivatives, and leverage, and go for broke, because if we can’t get the accounts above two percent, and if we blow up the fund in trying it, ah, we can always start another one.
BRIAN: That type of mentality keeps us from using hedge funds for a retired portfolio. So that’s number two. Number three. And this is the biggest group, by the way, of the 60 or 70. Number three is, yeah, they’re beating us, but their per-account minimum is four or five million dollars. And I can’t diversify that. And then number four is high beta. Where, these are funds where in the good years, they go way up, in the bad years, they go way down.
BRIAN: Two mutual funds fall into this category. Legitimately, and mathematically, CGM Focus and the Bruce Fund are two funds that qualify to be on our platform. We should be using them. The problem is, in 2008, they both lost over 40 percent. Four-zero. They have no downside protection. So what’s left? The six managers we are using are the highest-returning, net-of-fee, two-sided risk models that are out there.
BRIAN: There’s six of them. Five of the six made money in 2008. Five of the six. Combined, they have made money every year back to 2001. Every year. 2000, ’01 to ’02, was a 50 percent drop, these made money. ’03 to ’07, markets doubled, these did more than that. ’08, when the markets tanked, these, combined, made, not lost money, and from ’09 to present, the markets are up 180 percent, these are up more than twice that.
BRIAN: So, if you put a hundred thousand in the S&P, January 1 of 2000, dividends reinvested, you’ve got over 300,000 now. Average annual returns about, closing in on five percent. If you put a hundred thousand in these six managers that we use, your hundred thousand net of all fees grows to over 900 thousand average annual return is 16 and a half percent. How do we do that? It’s by not losing money. It’s by not losing 50 percent twice in the last 17 years.
BRIAN: So, do we use, and we’ll cover this also, do we use mutual funds? In the past we have. But we don’t right now, because they’re not competitive. Most of the mutual funds are buy and hold. Now, I want to give you a big tip. If you’re a buy and hold guy, and you’re paying a manager? That doesn’t make any sense. This is very, very important. If you want to buy and hold, you should contact Vanguard, Fidelity, Schwab, or TD Ameritrade, and ask for the roboinvesting platform where, for free, no management fee, you buy the indexes and they’re rebalanced on a daily basis.
BRIAN: If you are paying a manager to buy and hold, I don’t know why because you can do that yourself and save the management fee. Plus you’re buying the indexes, which beat your manager most every time anyhow. So, that’s very important information. And then, when it comes to mutual funds, we want to warn you to look and see what kind of mutual funds you have. This is my opinion, Mike, let me tell you, your- well, tell me if you agree with me, Mike.
MIKE: All right.
BRIAN: Why would anyone buy a loaded commission fund when the no-load funds are spectacular in return? Why would anyone buy a front-end or a back-end or a 12B-1 fee fund?
MIKE: Oh, I know why. I can legitimately- I have an opinion on this.
BRIAN: Okay.
MIKE: Someone talked them into it.
BRIAN: Yeah, and that’s how they get paid. You’re…
MIKE: Because, if you have all the information there, it doesn’t make sense. But if you’re talked into it, or you don’t know something, then you might end up with one of those.
BRIAN: Yeah, and so I hope, Decker Talk Radio listeners, that you look at your statement and see what kind of funds that you have. Are they A, as in apple, A shares, or I shares, as in institutional? Those are two investment classes that are good. Do you have C as in Charlie shares, that’s bad, that’s toxic. That’s where the banker or broker, your advisor, they tell you there’s no front-end or back-end fee, what they don’t tell you is they’ve attached a one-percent fee on top of the management fee of your mutual funds, which is already one, one and a half.
BRIAN: Now you’re paying two and a half percent and they never told you. There was no disclosure on that. We see this all the time and C shares are so toxic that Schwab, Fidelity, Vanguard, and TD Ameritrade won’t even have them in their system. They require you sell them before you transfer funds in. So, that’s mutual funds. Do we own commodities? Commodities are the biggest market in the world. This is agricultural, it’s energy, it’s precious metals.
BRIAN: Okay. On commodities, do we own commodities?
BRIAN: Remember, we are math-based. There are certain asset groups that 100 percent of the time go up when the markets get creamed. They are treasury bonds, flight-to-safety; gold, flight-to-safety; silver, flight-to-safety; oil, flight-to-safety. So Mike, guess what our three other managers… we have six managers, three deal with the stock market indexes, S&P and NASDAQ. Two-sided strategies, when the markets go up, you’re long the markets, when the markets go down, you’re short the markets.
BRIAN: You’re able to make money with a two-sided strategy in a two-sided market. We do the same thing with trend-following models with gold, silver, energy, and treasury bonds. Average annual return for treasury bonds is actually higher than the average annual return for our stock, our S&P and NASDAQ. Average annual return for the oil two-sided model is twice what the Treasury bond manager is, and the average returns for gold and silver, they were our best performers last year. They did almost twice what the S&P did last year.
BRIAN: So, these are very high-returning investments. But the risk is very low. When you have a two-sided strategy in a two-sided market, your risk goes down. How do we know that? How do we define-how do we mathematically define risk? Let me boil this down so this is very, very simple. There’s something called, well, I’ll use common sense, first. Mike, what’s more risky? The S&P that’s lost 50 percent twice in the last 17 years, or these six managers that combined have never lost money in any of those years?
BRIAN: What’s more risky?
MIKE: I mean, on a mathemetical term, and risk is a mathematical term, it seems like the S&P is more risky.
BRIAN: Okay, so now let’s go mathematical. Standard deviation is a measurement of volatility, and a measurement of risk. But there’s two types of volatility. Upside volatility, you want all of that you can get. Downside volatility is a fancy way of saying losing money. So now we’ve circled back to the common sense. What do you want? Do you want downside protection?
BRIAN: And so, we purposely use these commodities as part of our money management because they are non-correlated. In other words, Mike, if you and I are playing golf in a golf tournament, and we’re a team, and I have a bad hole, and you have your best hole. And then you have a bad hole, and I have my best hole. That’s called non-correlation, and there’s a huge advantage of using non-correlated investments as long as you don’t give up performance.
BRIAN: You still want to have high performance. But, you want to make sure that one is not correlated with the other. Now let me give you another example. Let’s say, Mike, you and I are non-correlated in our golf game. And we play another team, call them John and Ben. We play another team, and those guys are perfectly correlated. In other words, when they have a bad hole, they both have a bad hole. When they have a good hole, they both have a good hole. Now, easy, easy question, are we going to beat them?
MIKE: Yeah.
BRIAN: We’ll beat them every time. Because you and I, non-correlated, we’ll never have a bad hole. Those guys will have two or three bad holes. And we’ll beat them every single time. All right, so we talked about mutual funds, real estate, variable annuities, bond funds, commodities, now let’s talk about futures. Managed futures are an option that we look at every quarter. I know who the big players are.
BRIAN: But right now, today, they’re not beating the six managers that we have. There’s enough fluctuation and volatility in the managed futures sector, but right now today, net of fees, they’re not producing returns that are beating the six managers that we have. Same thing is true with foreign exchange, foreign exchange are the different currencies of the world markets. So, you’ve got the Mexican peso, the Canadian loonie, the US dollar, the Chinese yuan, the euro, et cetera.
BRIAN: Two-sided strategies on foreign exchange are out there, they’re just not competitive yet. Let’s talk about ETFs, exchange traded funds. ETFs are a brilliant way of buying and selling indexes like the Dow, S&P, NASDAQ, the Russell, the different indexes as well as sectors of the markets. So if you like gold right now you don’t have to be a stock picker, you can buy the whole sector under G-L-D.
BRIAN: G-L-D is the symbol for the gold ETF. Silver, S-L-V. Social media. If you don’t know how to get involved in social media, you can buy the whole sector. Ticker S-O-C. How about solar? T-A-N. All these are brilliant creations, and they keep coming up. By the way, Bitcoin is going to have some kind of an ETF produced soon, I think in the next few weeks. But ETFs…
MIKE: Wait, wait, wait, wait, hold up, pause real quick.
MIKE: Really? because Bitcoin’s unregulated by the SEC, and they’re going to have an ETF under the SEC umbrella about something that’s not regulated?
BRIAN: Yes, that’s what I read.
MIKE: I mean… Oh my goodness, okay. Well, buckle up, everyone.
BRIAN: By the way, Bitcoin hit 20 thousand it’s now at 11, so it’s taken a big pullback. But ETFs we’re a big proponent of and that’s what four of our six managers use on sectors, commodities, and indexes.
BRIAN: So we are big users, of ETFs. It’s a way to keep costs down and buy whole sectors and be very efficiently moving in and out of markets. What about stocks? That’s how we buy stocks, so let’s talk about stocks for a second. Stocks, all of them have three parts to their lifecycle. There’s a growth phase, a maturation phase, and a phase of decline. The growth phase, let’s look at Microsoft, because it’s done both so far.
BRIAN: There’s a growth phase, where since 1984, anyone who sold Microsoft shares, to 1984 to October of 1999, from 1984 to actually November of 1999, whoever sold a share of Microsoft was an idiot. From November…
MIKE: [LAUGH] You didn’t soften that blow at all.
BRIAN: Yeah. From November of ’99 to November of 2000 and 16, Microsoft shares were flat.
BRIAN: For 16 years. So there’s a growth phase, and a maturation phase. Why is that? Because in November of ’99 Microsoft stocks’ capitalization, which is shares outstanding, number of shares outstanding, times share price, was 800 billion dollars. Now, for them to grow 20 percent in the next year, they had to create a new IBM. They had to create… it’s so difficult, because of scale, for these stocks to continue to grow at 20 percent.
BRIAN: Apple is there right now. Apple, is a stock that is gone past the 800 billion mark, and they have to create a new product every year, and have most everyone in the world buy it, for them to maintain 180 dollar stock price and evaluation, or a capitalization, of over 800 billion dollars. So, these stocks, you might like them and their products. But their ability to grow from here is weighted down by sheer size and scale.
BRIAN: So now let’s talk about decline. We had a client, Mike, that in the year 2000, became a new client, she, and I just met with her in Sun Valley two weeks ago, she transferred in her entire IRA, and it was 500 thousand, half a million dollars, in Sears holding stock. Sears.
MIKE: That’s not a stock you hear about.
BRIAN: Yeah. We diversified that, and that 500 thousand if she would have bought and held it, do you know what that 500 thousand is worth today?
MIKE: Isn’t it less?
BRIAN: Oh my gosh. Sears, because of Amazon, Amazon is destroying most of retail, so Sears, that 500 thousand would be worth less than 30 thousand dollars today. Buying and holding makes no sense to us, because of the increased risk that you take through the process of growth, maturation, and decline.
BRIAN: So here’s an example of decline. AT&T was a stock that was, we call it the grandmother stock. It goes up every year. They increased their dividend every year. But in 2000, with the creation and the mass production of the cellphone, guess what happened to AT&T’s stock.
MIKE: Oh my gosh, it got hurt. Well in 2000 it got hurt. Then the iPhone helped it a little bit. Then it went down even more, significantly more, right? And then…
BRIAN: They’re down 70 percent since 2000.
BRIAN: 70.
MIKE: And they’re trying to still recover.
BRIAN: Yeah. General Electric. How has that done in the last 18 months? Down 65 percent. That’s a blue chip stock. Any broker, banker, advisor, telling you in your retirement years to buy and hold, I don’t have strong enough language to tell you that that is not in your best interest. Not logically, not mathematically. We can show you that trends, it’s called creative destruction, there’s things coming out all the time that will wipe out yesterday’s companies, and there’ll be new ones coming up.
BRIAN: So, I hope this makes sense. How do we avoid stock cycle risk? We use ETFs. We buy the indexes. The indexes are changed on a regular basis. So we talked about foreign exchange, we talked about commodities, talked about ETFs. Mike, I want to end on options, but there’s a couple more things that we’re not going to have time to talk about that we’ll pick up next week. I guarantee that people that are in retirement will have some friend that they know and respect get all excited about stock options.
BRIAN: Calls, and puts, and cover calls. And we’ll tell them, gosh, Mike, my five thousand is worth 50 thousand. You’ve got to talk to this guy, he knows what he’s doing, he’s online, or he’s got a newsletter. Options are a deteriorating asset. I’ll never forget in 1986. So 32 years ago, my trainer in Twin Cities, in Minneapolis, said to a class of 40 of us, all right, class, we’re going to talk about stock options now.
BRIAN: He took his right foot, he flipped open the plate, the plug-in plate on the floor, he said imagine that that’s a plug-in. Imagine that that’s a rat hole. He took off his hat, his glasses, his car keys, his tie, he’s taking off his shirt, we said, no, no, no, no. We got it. He said that’s a rat hole. Options are a rat hole. I’ve been in the business 30 years, I’ve never seen somebody make money in a 12 month period in the options market. If any of your clients want to do options, have them write you a check for 25 hundred dollars, that’s your commission, and you’ve saved them 250 thousand dollars.
BRIAN: And he was really pent-up. He was passionate about keeping us away from getting in the stock options market. I will tell you now that I’ve been in business 32 years I have never once seen somebody in a 12-month period make money in the stock options market. I have had seen people like Wade Cook in Seattle, tell people that anyone can do it. He went to prison. I have seen people that are on for a short period on TV and radio saying that they can do it, they go to jail.
BRIAN: I just hope people remember to stay away from options, because it’s not investing, it’s not even speculating, it’s gambling. And I hope people will stay away. Some people will say, no, I’ve got this figured out, Mike, we only have two minutes left, I think, right, so you cut me off when you need to do the tail end.
MIKE: All right.
BRIAN: Okay.
MIKE: Just keep going, though, this is good.
BRIAN: All right. Some people will be sophisticated and say, no, I don’t do calls or puts, I do covered calls.
BRIAN: Where I buy the stock and then I sell the option, and I credit myself with a dividend of 15 percent. So even if the stock is called away, I’m happy with my return. Well, let’s talk about this. Markets are three kinds. Up, down, or flat. If the markets go up, you give away all that stock, and all the upside, makes no sense. If the markets go down, you have no downside protection, you take the full hit. If the markets trade flat, covered calls are genius. We just need a genie out of the bottle to come and tell us when we have flat markets, and those are perfect.
BRIAN: We don’t have a genie. Mike, you want to finish up? You’ve got one minute.
MIKE: Yeah, we’ll wrap this up. We’ll continue the conversation next week. Same time, KVI 570, greater Seattle area, or KNRS 105.9 FM in the greater Salt Lake area, this is Mike and Brian Decker on Decker Talk Radio’s Protect Your Retirement.
MIKE: Until next week, have a great time, everyone. Talk to you then.
