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 looking at fundamental guidelines on how to invest in the market. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: This is Mike Decker and Brian Decker with another edition of Decker Talk Radio’s Protect Your Retirement. Brian Decker from Decker Retirement Planning, with offices in Kirkland, Seattle and Salt Lake City. We’ve got another great show lineup for you today. And just I guess a little bit of background about Brian Decker real quick. He’s a published author. He’s got his new book out, The Decker Approach, which you can buy on Amazon.
MIKE: And Brian, licensed fiduciary, so we’re going to get some wonderful information from someone who’s legally bound to be honest with you. So if you’re not working with a fiduciary, just a quick plug, you should.
BRIAN: I love our Website, Mike. I love that we-we hit the banks and brokers pretty hard on our Website. The articles that we published against the 4 percent Rule, against the Rule of 100, against buy and hold investing, against the pie chart, having all your money at risk, how the brokers get paid. We have a lot of content on our Website, www.deckerretirementplanning.com that talk about this. Mike, I can’t wait to jump into the content we have on the radio show today.
MIKE: Can I introduce us though?
BRIAN: Yes.
MIKE: Because I’m equally excited here. Today we’ve got an exciting segment, two-part segment, I should say, because we’ve quoted the statistic a number of times that 85 percent of money managers underperform the S&P. And so a question we get a lot, and Brian and I can say is why don’t…
BRIAN: Is why don’t we buy the indexes?
MIKE: Yeah, just buy the index and you’re good. And truth be told, sure, you’d beat 85 percent of people, but is that really going to happen? So Brian, can we dive into the reality of people that claim that they’ll do this and what actually happens?
BRIAN: Right. And where I’m coming from is not textbook at all. It’s actual investment experience. I was licensed in 1986, so in simple math, I’m 32 years in the business and I’ve seen enough investment cycles that buy and hold investing, it’s also called passive investing, works until it doesn’t.
MIKE: Emotional investing is what I think it is, because…
BRIAN: Well, no-no-no…
MIKE: You’re riding a rollercoaster. That’s an emotional toll that you might have to deal with.
BRIAN: Let’s honestly set up the narrative where you save money by buying the S&P 500 because the SPYETF is… They only charge you four basis points, 0.04 percent. Instead of paying a banker or broker one to two percent, you cut your fees by 90+ percent. Brilliant. So that’s point number one. Point number two is every year, the S&P 500, like you said, Mike, beats 85 percent of money managers and mutual funds.
BRIAN: So why wouldn’t you pay-why would you pay someone to underperform the index? Why would you pay someone to do that when you can own the index? So that’s brilliant point number two. And point number three is you’re diversified. The S&P is 500 companies. You’re diversified over 500 companies. You don’t have-and anyone who argues that you don’t have international exposure by owning the S&P is ignorant. So hear me out on this. Is Microsoft, they’re in the S&P 500. Is Microsoft an international company?
MIKE: Sure, you could argue that.
BRIAN: Is Amazon?
MIKE: I believe so.
BRIAN: Is GE?
MIKE: GE…
BRIAN: Is Caterpillar? All those companies are US-based companies, but of course they’re international.
MIKE: Can you imagine Amazon Prime in downtown China? [LAUGHS]
BRIAN: Geez. All the drones dropping…
MIKE: Yeah. [LAUGHS]
BRIAN: …packages?
MIKE: It’s like Pink Floyd’s worst nightmare.
BRIAN: Yeah. OK, so let’s build this narrative. What would be wrong with someone in retirement owning the indexes, a diversified index, with a buy and hold strategy? So here’s what cracks me up, Mike. Let’s use history as an example. So Decker Talk Radio listeners, in 1999 there was a media personality who came out and said that all you had to do was buy and hold, and he was very popular in the nineties. In 1999, he got his own radio show, and then 2000, ’01 and ’02…
MIKE: The nineties, everyone made money, it seemed like, or a lot-most people did.
BRIAN: Well, this guy pointed out that all you needed to do was to own the indexes, large, mid, small cap indexes, international indexes, and let her rip. He was very popular until something happened, and it’s called the dot com bust. In 2000, ’01 and ’02, people lost over 50 percent. If you had a technology-concentrated portfolio, you lost 75 percent of everything you owned.
MIKE: That’s a lot.
BRIAN: And that guy, by the way, was off the air.
DECKERTALK 6.18.17 [00:05:44]
MIKE: By then, or kicked off the air?
BRIAN: He was off the air. No one was interested after that. Let’s keep going with this history. In 2007, there was a universe of ETFs that people could pick from, and the media, particularly CNBC were touting buy and hold index’s strategy as a logical way for investors to invest. Guess what happened right after that?
MIKE: Hmm.
BRIAN: That was 2008. From October of ’07 to March of ’09, people lost 55 percent of their money if they were just equal to the index. If they had any exposure to real estate, they lose more ‘cause rates were down over 70 percent.
MIKE: Wooh.
BRIAN: Okay, so now the mantra is, “Why pay for a banker or broker to underperform the S&P 500?” Why? Why would anyone do that? And by the way, today people are coming around and questioning why everyone isn’t doing this. And by the way, Warren Buffett is promoting this. And speaking of…
MIKE: Promoting the buy and hold?
BRIAN: Promoting buy and hold and passive investing.
MIKE: That doesn’t make any sense. That’s not his style it seems like.
BRIAN: This typically happens near the tops of the markets, and there hasn’t been a crash that’s happened yet. And this is the point. People, human nature… Mike, there’s two emotions, you know what they are.
MIKE: Mm-hmm. Well, there’s fear…
BRIAN: And greed.
MIKE: …and greed.
BRIAN: Right. So greed keeps you invested longer than you should. Fear takes you out of the markets at the bottom. Greed has you fully invested and loaded up at the top. It’s so typical. It’s so typical that the average annual return for the S&P 500 in the last, gosh, 50, 60, 70 years is about 8.5 percent. Do you know what the individual investor’s average annual return is?
MIKE: Is it around two?
BRIAN: It’s around two percent, four times less than the indexes.
MIKE: Ooh.
BRIAN: And it’s because of fear and greed. So right now you have someone, and by the way, speaking of Warren Buffett, back to him. Brilliant investor, long-term investor, but people can’t duplicate what Warren Buffett is able to do. They don’t get the deals that come to Warren Buffett. They’re packaged different, they’re offered different. There’s a branding of having Warren Buffett be part of your ownership and on your board, and you and I, Mike, can’t duplicate what Warren Buffett is doing.
BRIAN: We can own those stocks, but I just want to put out guess how much Warren Buffett’s Berkshire Hathaway lost in 2000, ’01 and ’02?
MIKE: It’s got to be single digits. I’m going to guess around three or four percent. Forty percent?
BRIAN: Forty percent. Guess how much Berkshire Hathaway, Class A and B shares, how much they lost in 2008.
MIKE: Well, if they couldn’t do well in the beginning with 2000, 2001, 2002, then it’s got to be a huge amount again. Forty percent?
BRIAN: Around forty percent…
MIKE: Is it the same?
BRIAN: …both times. Now…
MIKE: And Warren Buffett is supposed to be one of the best investors in the world.
BRIAN: Right.
MIKE: And he took a huge hit.
BRIAN: Right. And his mantra is to buy and hold and ride it out, so let me say this another way. Does it make sense when you’re in retirement and you’ve earned the majority of what you’re going to earn, and you need that to last the rest of your life to fund your retirement, does it make sense to expose that to stock market hits that typically happen every seven or eight years and typically are 40+ percent drops, and typically take four-plus, four or five years to get back to even?
MIKE: Doesn’t make any sense.
BRIAN: It doesn’t make any sense to us either. We at Decker Retirement Planning think that there’s a better way, so anytime that you start hearing the hits against active management and towards promoting passive investing, buying the indexes, what that is a signal to use at our company is that’s typically a sign of the top. So an active investor, or I’m sorry, an active investment strategy is one that… And by the way, Mike, you’ve heard this hundreds of times. We try with the risk exposure that we have with our markets to track with the S&P when the markets go up and protect principle when the markets go down. In fact, we go beyond that. We have six different managers, three that are involved in the indexes, and we have a two-side, I… This isn’t what I want to spend a lot of time on…
MIKE: It’s…
BRIAN: …because we’ve talked about this so many times.
MIKE: It’s worth just mentioning really quick because I’m sure some people are going to want to come in and talk to you in person about what we’re doing…
BRIAN: Okay.
MIKE: …so we’re not just throwing darts at problems. We want to be solutions people.
BRIAN: Right. So let’s talk about the managers that we have. At Decker Retirement Planning, we observe that we are extremely mathematical oriented. We don’t care much about opinions. We want to know the math, so we’ve gone out and done the research and we’ve looked at the top managers bottom line net of fee performance, not hypothetical, not back-tested, but actual client account net of fee performance, and we just want to know who’s hitting the best numbers net of fees.
BRIAN: And so, um, we have right now one manager that trades the S&P that made over 100 percent in 2008, and his average annual return is around 20 percent since 2006, average annual net of fee return, number one. Number two… And by the way, since 2005, lost money one time, and that was in 2015, lost four percent.
BRIAN: The second manager trades long cash or short, the NASDAQ 100 Index. They lost 11 percent in 2008, but the average annual return is 21 percent net of fees. The third manager that we have trades the S&P also, average annual return net of fees 18 percent, and his 2008 return was a positive 17.5 percent.
BRIAN: The fourth manager, fifth manager and sixth manager we have, we’ve decided as a company to diversify away from the stock market. Mike, this is fascinating. What asset groups went up in 2008? Up?
MIKE: It was very limited.
BRIAN: Right.
MIKE: If I remember right, was it gold, precious metals?
BRIAN: Gold and silver.
MIKE: And then there was one more. It’s got to be something necessary. It had to have been, was it gas or oil or something to that?
BRIAN: Oil, right.
MIKE: Okay.
BRIAN: And there was one more. [WHISPERS Treasury]
MIKE: I want to say, like, the government stepped in and tried to do something good, so…
BRIAN: [OVERLAP]
MIKE: …something with the treasury?
BRIAN: Treasury bonds.
MIKE: Okay, yeah.
BRIAN: So when there’s a flight to safety in a panic, people buy gold, silver, treasury bonds.
MIKE: [LAUGHS] It’s like the end of the world.
BRIAN: It’s true. You can take it to the bank. Every time the markets crater, every bear market, gold, silver, treasury bonds go up. Now oil most of the time is also one that goes up when the markets get hit. So guess what we do as a company? We have diversified into a two-sided strategy in gold, silver, treasury bonds and oil. Let me say these numbers really quick…
BRIAN: Okay, so when it comes to buying and holding gold, since 2005, your average annual return is nine percent, but you took a 45 percent hit in 2013, ’14 and ’15. Silver is much more volatile, so since 2006, your average annual return is 7.9 percent in silver, but you took a 65 percent hit in 2013, ’14 and ’15.
BRIAN: So what this manager did is they put a two-sided strategy on gold and silver, and instead of losing 45 percent for gold in ’13, ’14 and ’15, all the losses vanish.
MIKE: Mm-hmm.
BRIAN: Now the average annual return with no losses in that time frame go from nine percent to 29 percent, and when you use it on silver, the return goes from 7.9 percent to 49 percent average annual returns, net of fees, and the only loss in all of those years was once, and that was for silver, and that was down four percent in 2014. Brilliant. So we have that manager, part of our stable of managers. And then last thing, and I’m taking too much time…
MIKE: Mm-hmm.
BRIAN: We have a long short gold, I’m sorry, long short energy manager that net of fees last year did over 100 percent, and then we have a treasury bond manager, same guy, who last year net of fees did over 37 percent in treasury bonds. Now this is particularly interesting because if you remember May of last year, treasury bonds, the 10-year treasury hit 1.4 percent and then by January of 2017, was at 2.6 percent.
BRIAN: Most people lost double digits in that timeframe on their bond funds.
MIKE: Mm-hmm.
BRIAN: This guy never had a losing month, so we are very, very excited to have diversification in gold, silver, energy, treasury bonds, four different sectors that did well in 2008. Plus we have three other managers that are trading S&P and the NASDAQ indexes.
MIKE: So if you’re interested in seeing who these managers are and seeing the third-party verified numbers come in and see us. We have offices, in Seattle, Kirkland, and in Salt Lake City.
MIKE: We want to be transparent and we want to help people in retirement, just simply show people a safer approach to retirement. There’s no need to ride that rollercoaster. Based on, Brian, correct me if I’m wrong, what you see over at Decker Retirement Planning, chances are Decker Talk Radio listeners, you’re taking too much risk.
MIKE: There are other options out there. There’s better ways to invest. Brian, are we… I think we’re still talking about the passive, the buy and hold, the emotions that go behind people that try and just hold onto the index. Let’s finish that thought.
BRIAN: Yeah, let’s finish that up. When there’s a downturn, you think that you’re going to be smart and brilliant and gray-matter focused? Heck no. Logic goes out the window in a panic. Let me recreate how 2008 unfolded. Markets were humming right along the first half of 2008. And by the way, typically a market has five waves to it. The first one sobers you up. It’s a 10 or 15 percent drop very quickly. And then there’s some kind of a bounce where you retrace half of that.
BRIAN: And you think with your fear and greed personality, “Oh, this isn’t much. I’ve been through these before.” And so you get down 10 or 15 percent, and then you retrace half that. And then the third wave down is what is stunning, and is scary and very difficult. That third wave down is when Lehman, for example, went broke, their illiquidity. Lehman crashed, and that caused the markets in 2008 over a three-week span.
BRIAN: Investors lost 29 percent of their capital and 44 percent over the next three months. A downturn is fast, it’s furious, and it’s sobering. And that’s when good, smart, logical, long-term investors get turned upside down. They panic and they sell. Take it to the bank. People… Here’s how the emotion goes. Wave one down gets your attention. You see the market return half of that, and you think, well, if it gets back up to where it was you’re going to sell or lighten up.
BRIAN: Nope, this time it doesn’t. Every seven or eight years, the markets get creamed. So then this third wave down takes you down, and then you panic. Then there’s wave four, which is about a one-third recovery, and then the death knell, where the markets make a new low. This was March of 2009, where the markets put in the last dagger, and a lot of people just throw in the towel. The news, the headlines, are scary.
BRIAN: It can be geopolitical. It can be economic, but it scares you. You’re not sleeping at night, you have a stomachache, you know you should’ve sold. And at that point, you no longer can say or do anything other than try to protect your capital. And all of you smart, wise, long-term investors that are all proponents of passive investment and buying the indexes, all you guys panic, and you sell at the bottom. All of you.
BRIAN: And I’m careful in superlatives. And because people inherently sell at the bottom, that’s why in, oh gosh, 75 years, the S&P has averaged 8.5 percent, individuals are at two.
MIKE: All right.
BRIAN: So let’s talk about some rules of investing. These crack me up.
MIKE: [CHUCKLES]
BRIAN: I just want to mention some.
MIKE: And real quick before we dive in there, this is Decker Talk Radio’s Protect Your Safer Retirement Radio… Well, I should say it’s a radio on KVI 570 9:00 am in the Greater Seattle area, or if you’re tuning in via podcast on Google Play or iTunes, we’re glad to have you, as well. Or some people that listen to our Website on www.deckerretirementplanning.com. You’re listening to Brian Decker from Decker Retirement Planning, who’s a licensed fiduciary giving some great information about investing in the markets right now. So Brian, let’s go over guidance are you calling these?
BRIAN: Some rules of investing.
MIKE: Some rules of investing on anytime, or is this for a certain season with the markets?
BRIAN: For anyone, anytime.
MIKE: Anyone, anytime, all right. So if you’re tuning in, this is applicable to you. Let’s dive right in.
BRIAN: Rule Number One: Chances are you’re taking too much risk.
MIKE: [LAUGHS]
BRIAN: Geez, Mike. Every person that we see come into the office, they buy into the banker and broker model where they have everything at risk.
MIKE: Well…
BRIAN: So typically…
MIKE: …there’s a lot of garbage out there and people don’t know, I think, how to sift through it. I mean, I just read a prominent figure that was saying you should have-getting 12 percent every year on your investments or they’re crap. Where are you getting 12 percent on fixed investments?
BRIAN: Should we call that guy out?
MIKE: No.
BRIAN: You don’t want to?
MIKE: No, because the guy does a great service in a different part of the financial industry, but investing is not his forte. But can you imagine? I mean, we talk about that, junk bonds and other terrible investments might pay that much, but…
BRIAN: I think we should call this guy out.
MIKE: Ugh. We don’t want to be negative.
BRIAN: All right.
MIKE: If you hear someone saying that you can draw eight percent from your portfolio and your investments should be making 12 percent, and he’s out there, he’s a national figure, don’t listen to his investment advice.
BRIAN: Listen to his economic and financial planning advice, but not his portfolio return advice.
MIKE: Yeah.
BRIAN: How’s that?
MIKE: Yeah.
BRIAN: That’s not negative.
MIKE: Good budgeting, good debt, good practical on that aspect, but anyway.
BRIAN: Okay, Rule Number One: Chances are you’re taking too much risk. So…
MIKE: Hey, Brian. Before we dive into that, can we define risk?
BRIAN: Risk is the exposure that you have to things that are not principle guaranteed. I can’t tell you, almost without exception we have people come in with the banker broker model where all their money is at risk. Whether it’s diversified into bond mutual funds or stock mutual funds or individual stocks, all their money is at risk because that’s how they grew up. Now having all your money at risk in a banker broker accumulation pie chart is for someone in their twenties, thirties and forties. When you turn 50, you’ve got to change to a different strategy called distribution planning.
BRIAN: Go to our Website, deckerretirementplanning.com, and see. If you’re a visual, see what a distribution plan looks like. It takes your assets that you’ve worked your whole life for, and it places them in categories. We call them buckets. Buckets one, two and three are principle guaranteed, and typically, Mike, we have our clients take 75 percent, about, of their assets out of risk and put it in principle guaranteed accounts. Twenty-five to 30 percent should be around what’s right for at-risk when you’re over 50 years old.
BRIAN: Let me put it this way. On this first rule, where you’re taking way too much risk, why in the world when you’re close to retirement and you’ve earned the majority of what you’re going to earn in your whole lifetime, and you’ve saved the majority of what you’ve saved in your lifetime, why in the world would you put all of that at risk? Particularly when almost predictable market cycles are every seven or eight years and have been for decades. We’re in year nine of a seven, eight year market cycle. We’re due. Why would you have all of your money at risk? It just doesn’t make any sense, so that’s Rule Number one.
MIKE: It kind of feels like going to Vegas and trying to earn your retirement.
BRIAN: Geez, yes.
MIKE: [LAUGHS] Don’t do it.
BRIAN: Okay, so Rule Number Two. You ready for Rule Number Two?
MIKE: Number two.
BRIAN: Rule Number Two is the stock market is a two-sided market. It goes up and it goes down.
MIKE: Now that sounds like common sense, but why do you have to say that, and why do people not understand that? Because of course people see the markets go up and down.
BRIAN: The market’s a two-sided market, and you should have a strategy that’s designed to make money in up or down markets. Do you? No, I know that you don’t. People don’t. We’re one of the few firms that have a strategy where we use models that are designed to make money in up or down markets. The six managers that we’re using right now collectively made money in 2000, ’01 and ’02 when the tech bubble burst and people lost over 50 percent.
BRIAN: Did your banker or broker make money? No, they didn’t. Actually, they did. They made their commissions off you. But you didn’t make money. Your portfolio went down. In ’03 to ’07 when the markets doubled, these managers also doubled. And then in 2008 when the markets lost 55 percent from October of ’07 to March of ’09, these managers made money. Net of fees, they made money.
BRIAN: And then from March of ’09, the market bottom, to present, markets are up over 155 percent, 160 percent, and these managers have more than tracked with the S&P. So let me say it this way. Since January 1, 2000, 100,000 in the S&P with dividends invested, grows to about 220,000. Average annual return is about 4.5 percent. 100,000 with the managers we’ve got grows to over 900,000. Average annual return is 16.5 percent, net of fees.
BRIAN: So none of these managers and models were created by Decker Retirement Planning, none of them. We just did the work that no one else seems to be doing, and that is, we are going out and going through the different databases that are out there to find the managers that we’ve got, and we are constantly looking. Mike, I’m spending half the show on something… Let me, I’ll keep going. I’ll finish up the rules of investing.
MIKE: Okay.
BRIAN: Number one, you’re taking too much risk. Number two, the market’s a two-sided market. It goes up and goes down, so make sure that you have models that are designed to make money in up or down markets. Rule Number Three is to diversify, so like we’ve done, you should have models that are specifically selected to do well. Like, for example, in 2008, gold, silver, treasury bonds and oil all went up.
BRIAN: So try to have exposure to sectors that are diversified because, and I did this work myself, Mike. I did my own calculations. If you think diversifying your equity portion of your portfolio in large-cap, mid-cap, small-cap growth and value, international and emerging market investments in 2008 saved you a dime, you are mistaken. In 2008, if you bought those indexes, large, mid, small-cap, growth value, emerging markets and international ETFs, and you equally weighted them, you know this answer, Mike.
MIKE: Mm-hmm.
BRIAN: Markets were down 37 percent in 2008. An equally balanced portfolio diversifying you just like I said, also lost 37 percent.
MIKE: Well, you’re diversifying to look exactly like the market.
BRIAN: Here’s the point. The point is in a panic, in a waterfall decline, everything goes down. Diversification benefits go out the window unless you’re diversified outside of the stock market, like gold, silver, treasury bonds and energy. Those are sectors that we have chosen to diversify, and because in 2008 and in 2000, ’01 and ’02, those offered good benefits of diversification.
MIKE: Okay. Now, Brian, I’m going to just interject here because I’m sure a lot of callers want to see what diversification looks like.
MIKE: This is a special one because people are probably thinking they’re diversified the right way.
BRIAN: Do you know what cracks me up? One person came in and said, “Am I diversified?” I looked at their portfolio. There were 12 different technology names.
MIKE: Yeah, but that’s what they think. They’re just buying stuff. They don’t know what they’re buying. They just know that they have a lot of something. We want to help people.
BRIAN: Yeah. Diversification isn’t the number of stocks you have, it’s diversification regarding correlation. So this is an important point. Correlation is, if you guys are golfers out there, and let’s say, Mike, you and I are in a golf tournament. If we are negatively correlated…
MIKE: I hope it’s not for money, because you would destroy me.
BRIAN: No, we’re a team.
MIKE: Okay.
BRIAN: So if we are negatively correlated as a team, we will win the tournament because my worst holes will be your best holes. And as a team, we will kill it.
MIKE: Mm-hmm.
BRIAN: But if we are positively correlated, then we will lose every time.
MIKE: I will lose for you. I am a terrible golfer, and you’re really good. [LAUGHS]
BRIAN: But here’s the point.
MIKE: Yeah.
BRIAN: In the stock markets, you want to have the sectors that go down… When the markets go down, you want to make sure that you have other sectors that are going up and carrying the ball…
MIKE: Mm-hmm.
BRIAN: …during that period. And you want to have sectors that go down, you want to have managed with a two-sided strategy so that when they do go down, you can benefit. Okay, I’m spending way too much time on this.
MIKE: Yeah, we’ve got to keep going on this. Number four.
BRIAN: The fourth rule is to know that markets crash every seven or eight years. They cycle. They don’t trend, they cycle. Stock markets cycle, and when we talk about the typical investor, they spend… This cracks me up, Mike. They spend all their time researching individual stocks. That’s totally backwards. It should be market first, sector second, stock third. So hear me out on this.
BRIAN: The research, hours and hours of research should be where you are in the market cycle…
BRIAN: …number one.
BRIAN: Number two, you should know what sectors do well in the 11th and 12th hour of a market cycle.
BRIAN: Number three. Inside that sector, you should know based on relative strength and fundamental analysis, how to pick your stocks so that you do best. Anyone who follows those three pieces of advice will kill it in the markets and will enjoy a great, long career. The best managers, and by the way, we don’t use any human beings. All our equity models are mathematical algorithms.
MIKE: Mm-hmm.
BRIAN: Not because we’re anti-human.
MIKE: [LAUGHS]
BRIAN: It’s because that’s where we’re getting the best bang for our buck, and that’s because we’re fiduciaries to our clients, we owe it to them.
MIKE: Bill Gates and Elon Musk would be so proud.
BRIAN: Yeah.
MIKE: Have you heard about their fear of artificial intelligence?
BRIAN: Yeah. Truck drivers and taxi drivers are sweating it big right now.
MIKE: Yeah. Well, anyway…
BRIAN: Okay.
MIKE: Are you on number five?
BRIAN: Yeah, so number five is to have a plan to make money in a down market. That’s the fifth and final plan. That’s it. No…
MIKE: Is this like a big short situation? I think a lot of listeners may have either seen the movie or read the book, and we’re not saying that there’s a big short situation. That was a unique situation, but to make money…
BRIAN: That was a one-time situation for the real [OVERLAP]
MIKE: That was an anomaly. But to make money when markets go down is, I mean, what? When markets go down, people typically lose money, but this is… What you’re saying is have a plan for when markets go down to basically complete your, I think it was point number two. Markets are two-sided, so you want to have a side for up, or a strategy for up and a strategy for down. Am I understanding that correct?
BRIAN: Yeah, you’re right.
MIKE: Okay, so we’re just emphasizing that you can have a plan…
BRIAN: Correct, emphasizing.
MIKE: …for when markets go down.
BRIAN: Right. And just some common sense here. Markets don’t grow to the sky. They return to the mean over time. Fads are bubbles that will eventually burst. So you remember in the last 100 years, there was the nifty fifty, there was the railroads, there was AT&T. What happened to all of those fads? Oh, there was the Holland tulip investment of the 1700s. That didn’t go over very well.
BRIAN: The price of tulips spiked way up because people could make tons of money, and then they crashed and people lost all of their money. So every fad, whether it’s biotechs or whether it’s technology or whether it’s real estate, we’ve lived through those three bubbles.
MIKE: Mm-hmm.
BRIAN: Right now, by the way, notice that there was one bubble that took the markets down in 2000, ’01 and ’02. That was the… We’re never going to get to, we created a whole radio show for something we haven’t talked about yet.
MIKE: Yeah.
BRIAN: Do you realize that?
MIKE: Talk about a teaser.
BRIAN: Okay. So in 2000, ’01 and ’02, there was one bubble. That was technology. That was reversion to the mean when technology was way overpriced, and it came back to the mean. And it overshot on the upside, and it overshot on the other side. So technology in March of 2003 was a fantastic investment, but fads are bubbles that burst eventually.
BRIAN: Also, markets that are overextended usually go further than you think, both ways. So markets can go up. The trend goes further than you think, a strong uptrend and a strong downtrend. By the way, Mike, the NASDAQ hit in March of 2000, hit 5,000, and then it went down to 1,100. No, let’s call it 1,200. That’s an 80 percent drop.
MIKE: That’s a big deal.
BRIAN: Do you know that China went on their Shanghai Stock Exchange, China went from 6,000 in October of ’07 to 1,700. That’s a 75 percent drop.
MIKE: That’s…
BRIAN: So these are huge drops. So fear and greed create bubbles on the upside, and they overshoot on the downside. Okay, one…
MIKE: History repeats itself, and I feel like we’re just a bunch of stooges, like The Three Stooges that slap themselves in a circle over and over and over again. We’re doing this to ourselves…
BRIAN: Right.
MIKE: …over and over again, but for some reason investors seem to have a short memory span.
BRIAN: Right. So now let’s talk about market breadth. If you have large, mid and small-caps and you have transports in the DOW all participating, that is a broadly advancing healthy stock market. When you have narrow breadth, where you have six stocks going up…
MIKE: Mm-hmm.
BRIAN: …and I’m not exaggerating this. It’s called FANG. Facebook, Apple, Alphabet…
MIKE: What’s Alphabet?
BRIAN: Just Google.
MIKE: Okay, not Sesame Street. [LAUGHS]
BRIAN: No.
MIKE: Facebook, Google…
BRIAN: Facebook… Let me say it this way. FANG is Facebook, Apple, Netflix and Google, FANG. Those stocks, if you would’ve owned those for the last several years, you would’ve just killed it. But…
MIKE: Even Netflix?
BRIAN: Yep.
MIKE: Not Hulu?
BRIAN: No.
MIKE: Hulu’s lagging.
BRIAN: Yeah. It’s FANG. So when breadth is very narrow, you have this big increase, and it’s an unhealthy market when you have a narrow advance. So market breadth right now, in fact, is pretty healthy, which is good news. The public is predictable. They’ll buy most of the stock near the top of the market, and they’ll buy the least at the bottom. By the way, speaking of passive and active management, did you know that 1 trillion dollars has moved from active to passive in the last two years?
BRIAN: In other words, part of a market top, we talked about in the front part of the show…
MIKE: Mm-hmm.
BRIAN: …where they think, “Well, I can do this. I’m going to just buy the index.”
MIKE: Yeah.
BRIAN: In the last 18 months, two years, 1 trillion dollars have moved out of actively managed funds and people are just buying the index.
MIKE: And for those that are just tuning in on the radio right now, you can catch this show or a rerun at deckerretirementplanning.com, or catch the podcast to have a rerun on Google Play or iTunes. This is Decker Talk Radio’s Protect Your Retirement. Brian Decker from Decker Retirement Planning, a fiduciary, Series 65 license, giving some great information on investments. And we’re being kind of broad here, but these are general rules, principles, guidance that everyone should be taking into account because, like the first thing that you said, chances are you’re taking too much risk right now, and you don’t want to be doing that, especially when…
BRIAN: That’s Rule Number One.
MIKE: And that kind of set the tone for everyone because we’re nine years into a market…
BRIAN: That cycles every seven or eight.
MIKE: Yeah. So when there’s a correction that happens, you don’t want to get on that slipper side going down…
BRIAN: Right.
MIKE: …with the rest of the people that may have to deal with that, unfortunately. So…
BRIAN: One last thing before we dive into what we were going to start the show 40 minutes ago…
MIKE: Okay.
BRIAN: One last thing. When the experts all agree, chances are the opposite is going to happen.
MIKE: Okay.
BRIAN: When everyone agrees that something is going to happen, you can almost take it to the bank that the opposite of what they say is…
MIKE: The opposite?
BRIAN: The opposite.
MIKE: So all the experts, when they all agree, they’re wrong?
BRIAN: Oh, absolutely.
MIKE: [LAUGHS]
BRIAN: When all the experts agree that the market is going to go up 10 or 15 percent this year, they’re going to be wrong. It’ll be in the other direction.
MIKE: Is there something like… I don’t want to be a conspiracy theorist, but if they all agree, is it them just trying to goose the markets to keep it going up?
BRIAN: Oh yeah. It’s not good for business for XYZ Bank or ABC Brokerage Firm to be bearish on stocks. It’s not good for business, so why would we turn to them for any forecasting? It makes no sense to me.
MIKE: Yeah.
BRIAN: Banks or brokers are not arm’s length to make forecasts. All right…
MIKE: Even though they’re supposed to be.
BRIAN: By the way, we call them permeables because they’re never bearish. Abby Joseph Cohen of Goldman Sachs is never ever bearish. And also an interesting statistic. Did you know that sell recommendations from banks and brokerage firms encompass about five percent of all the recommendations? Ninety-five percent of the recommendations are buy and hold, not sell.
BRIAN: If you own something and the recommendation is to hold it, Mike, are you going to sell it?
MIKE: Hmm. Hmm. [CHUCKLES]
BRIAN: Holding’s what?
MIKE: I should sell it.
BRIAN: No. Hold means you hold onto it.
MIKE: Well, yeah, but who’s making the recommendation?
BRIAN: Yeah, I’m just saying it’s not good advice. All right, Mike, with the time that we have left, which is 15 minutes, I think, let’s talk about what we planned to, which is… I want to cover some commonsense mathematical things, a couple of things that are important to me. For example, if you are going into retirement or you are retired and you’re wondering about whether or not to pay off your house…
MIKE: Mm-hmm.
BRIAN: Should you or shouldn’t you?
BRIAN: Okay. So if someone is wondering at anytime 50-plus if they should pay off their house or not, we use math. There’s two different thoughts on this. One is we like to call it the CPA recommendation. If you’re investments are earning six or seven percent and the cost of your mortgage is, let’s say it’s 3.5 percent or even four percent. Let’s say that you’ve got a four percent mortgage. You get an interest deduction on the interest that you pay for your mortgage. Net of that interest deduction on your taxes.
BRIAN: Let’s say that the cost of your debt, net, is three percent. Why in the world would you take six or seven percent positive-earning money and pay off three percent debt? That’s a positive arbitrage that’s working in your favor. So as long as you’re earning more on your assets that the cost of your debt, mathematically it makes no sense to pay it off. So just saying that a CPA would say to just let it ride.
BRIAN: Now the CPA would also say for peace of mind you can see that you have the assets to pay it off on a ledger basis on a distribution plan. You can see that you’ve got that two or 300,000 to pay it off, but you’re using that two or 300,000 to your benefit to make that extra money. So if you’re earning seven and you’re paying off three percent debt, you have a net four percent positive arbitrage in your favor.
BRIAN: Okay, that’s the mathematical approach that we use. The other approach is from someone that we know named Dave Ramsey.
MIKE: Who knows a thing or two about debt. And if you guys don’t know who Dave Ramsey is, he’s a big deal when it comes to getting out of debt, controlling debt, not digging yourself into a hole. He’s a credible source when it comes to debt, and so we do want to acknowledge him and his good work he’s done for helping people get out of debt.
BRIAN: He’s a genius. I just want to say, not going to tear him down. He’s a genius, but he says to his people that emotionally you have a benefit of being totally free from debt. We agree with that.
MIKE: Oh yeah, it’s a wonderful feeling.
BRIAN: We totally agree. Yeah, to be totally free, you owe nobody nothing.
MIKE: Mm-hmm.
BRIAN: Proper grammar, right?
MIKE: [LAUGHS]
BRIAN: But we also want to…
MIKE: I think he’s a Tennessee boy, so that might come out right.
BRIAN: We want to point out… Let me give you two situations. For the client that has three or four million in assets and they have a 300,000 dollar mortgage, that’s not going to change things very much if they pay off their house when it comes to the cash flow that they receive from their investments for the rest of their life.
MIKE: Mm-hmm.
BRIAN: But if you have someone with 750,000 with a 300,000 dollar mortgage, now if that person pays off his mortgage and follows Dave Ramsey, he can no longer retire. And all we want to do at Decker Retirement Planning is point out that if they want to pay off their house…
MIKE: Mm-hmm.
BRIAN: …there’s a consequence that goes with it. That’s all. We just want to run the numbers and make sure that they can pay off their house.
MIKE: It’s simple math, but this isn’t just for a house, Brian. I’m sure you’ve had some people, Carillon Point, the clients you see here, you’re overlooking a yacht club it seems like. A ton of boats here. You’ve got clients that might have boats.
BRIAN: We see everything.
MIKE: Do you sell the boat? Do you sell the second house? Vacation or all the things that you might come up with.
BRIAN: We just want to run the numbers mathematically to see if it makes sense, if they can live on the income that can be generated after they pay off their credit cards or pay off their house or whatever it is. We want to just run the numbers. That’s my point.
MIKE: And then keep a budget.
BRIAN: Right.
MIKE: Make sure you can live within your means and you can expect that.
BRIAN: All right. So the second point I want to talk about here that’s important is how do you decide whether to take a lifetime of income or a lump sum? If you work for XYZ Company and they say, “Brian, after 30 years, you can either take 250,000 for life or 200,000 dollars lump sum.” How do you decide? So what we do at Decker Retirement Planning is we run the numbers.
BRIAN: So if you can take 200,000 lump sum, we would ask what the payments are for the 250,000 lifetime payments. This is an actual case. So in this case, a 65-year-old was told that they would get payments of 12,500 dollars. So I’m going to cover this two different ways. The first is mathematically. So we take 12,500 divided by 200,000. That means it’s going to take 14 years to get your payments that you could get today.
BRIAN: So there’s three reasons that mathematically we would tell you to take the lump sum. The first one is rate of return. If I put a three percent rate of return on that 200,000 lump sum, that person that takes the 12,500 lifetime payments can live as long as they want and the lines never cross. You can’t live long enough because I’ve got a 14-year head start over someone that is taking a lifetime of income. So that’s the first thing.
BRIAN: We would recommend a lump sum based on rate of return. The second thing is we would recommend the lump sum based on something called estate, due to the estate. The second reason is based on estate reasons. So let’s say that you and your wife, I know you’re not married, but let’s say that you are, chose lifetime payments of 12,500. Me and my wife chose the lump sum, and we both go hang-gliding and sadly, tragically, all the hang-gliders get a bunch of wind and we all go down and we all die.
MIKE: Terrible story.
BRIAN: I know. Bad news for you, Mike, because you and your wife died. Guess what happens to those payments of 12,500?
MIKE: They’re gone, aren’t they?
BRIAN: They are gone. But for me and my estate, that 200,000 is distributed to beneficiaries. It’s in my estate. So the first reason to take lump sum payments over a lifetime of income is based on rate of return, and the second is due to estate reasons. The third reason has to do with corporate risk. The poster child of corporate risk is Pan-Am and United. Mike, if you worked for Pan-Am and United and you qualified for a lifetime pension in the sixties or seventies, guess how much you got after they went bankrupt?
MIKE: Wasn’t it 40 cents on the dollar or something like that?
BRIAN: It was like a third, yeah.
MIKE: That’s not a good situation you want to be in. That’s a lifestyle change.
BRIAN: Right. So for all three reasons, we would recommend that you take the lump sum payout instead of a lifetime income stream. Return, corporate risk and estate risk. So what would be the reason for you to take a lifetime of payments? There is only one in our opinion, and that has nothing to do with facts or mathematics. It is emotional. Emotionally you just know that that check is going to be there. You don’t have to worry about investing it or worry about anything, I guess. I can’t relate to this, but these people just want that check from XYZ Company, and they’re okay with corporate risk, they’re okay with investment return risk, and they’re okay with estate risk.
BRIAN: All right, so, Mike, now I’m ready to talk about, and dang, we have two minutes.
MIKE: Mm-hmm.
BRIAN: Okay, what we’re going to talk about in the next radio show, and we’re not attorneys, but we’re going to talk about wills, power of attorneys, living wills, and we’re going to talk about trusts. We’re going to cover all of the estate docs. We’re going to talk about the estate taxes.
MIKE: Mm-hmm.
BRIAN: We’re going to talk about state estate taxes.
MIKE: That’s a tongue-twister.
BRIAN: Yep. We’re going to cover all the different documents in our next radio show. By the way, Mike, I know you know this answer. Maybe you do. Do you know what the focus we have in our company… We have a two-fold focus, actually a three-fold focus when it comes to your documents. Number one, to make sure that when you and your wife pass away, that your children still love each other after your estate is processed. It’s very common to have your children never talk to each other again because the way that they have to process their estate documents.
BRIAN: So when we talk about this, that’s Priority Number One. Priority Number Two is to make sure that you pay minimum or no taxes. And Priority Number Three, and I’m running out of time, is to make sure that the assets flow to the beneficiaries smoothly, quickly and effectively the way that you want them to.
MIKE: Makes sense. Now, Brian, thank you so much for coming out today. This is Brian Decker, a licensed fiduciary and founder of Decker Retirement Planning, a safer approach to your retirement. And we want to give a big warm thank you for spending the time with us today. And for just a quick wrap-up of this show, this is, if you’re just catching it right now, Decker Talk Radio’s Protect Your Retirement, a program brought to you by Decker Retirement Planning. Go to their Website, www.deckerretirementplanning.com, for this show if you want to catch it from the beginning to the end, or a number of articles that Brian and his team have written.
MIKE: Also you can catch this show and subscribe to it via podcast on iTunes or Google Play. And last, but not least, for those of you that would have questions that you’d like us to address during the show, please feel free to call 800-261-9446. All questions submitted will be put on the show and be able to answer them according to what you’re curious about, what you want to know about your retirement and how to help protect it. We look forward to your questions, and we’ll talk to you next week. Take care.
