With the impending recession and market crash on the horizon, Mike and Brian Decker talk about how to help protect your assets when it hits on the show Protect Your Retirement. If any one of the four bubbles that have been discussed in past episodes’ pops, many could lose their retirement. Enjoy this episode and be sure to tune into future episodes of Protect Your Retirement.
MIKE: Good morning everyone, this is Mike Decker and Brian Decker here at Decker Talk Radio’s Protect Your Retirement and today we’ve got a critically timed show. This whole show is about recession risk, how to protect your assets in a recession, and with me is Brian Decker from Decker Retirement Planning, who is a licensed fiduciary. And Brian, just to kick off the show, would you define what a recession is?
BRIAN: Sure, Mike. This is the definition of a recession. Economists define an economic recession when there’s two back to back GDP negative numbers.
BRIAN: So when that gross domestic product number of the United States economy is negative two quarters in a row, by definition, we are in a recession. So I wanna give a credit to some of the great research that we get here Decker Talk Radio, Decker Retirement Planning in Kirkland. I’m gonna be drawing from some of the information from Gavekal Research that came out Wednesday of last week.
BRIAN: They talk about the rising odds of a US recession and one of the favorite sources of information is the NFIB small business survey. The NFIB stands for National Federation Of Independent Businesses. The headline number take down from 94.4 to 94.1, but that wasn’t the big deal, Decker Talk Radio listeners.
BRIAN: It was the significant drop in the jobs opening component of the NFIB number, that dropped from 30 to 24 or from a cyclical high to the lowest level in 15 months. This suggests that demand for US labor may be rolling over, which is concerning. The NFIB is the go to number, because it’s one of the most reliable US recession indicators and it focuses on the demand side of the labor market.
BRIAN: So the job opening survey is also a favorite, simply because it works. It tends to rise during growth periods and provides a reliable recession indicator when the trend definitively reverses. So in the past year, US consumption fuelled by strong job market has been really the only loan growth driver in the US economy. If the US labor market starts to weaken, it’s hard to see another engine of growth riding to the rescue.
BRIAN: The problem with the latest [soft?] NFIB number is it calls into question whether another pickup is sustainable. So a recession in the next 12 months, Decker Talk Radio listeners, for the US economy, is not guaranteed, but Gavekal says that they’re putting odds at around 50 percent. If we have a further deterioration in the job openings or construction data, or further rise in yields, that would raise the odds even more.
BRIAN: A weakening growth outlook hurts corporate turns and rising bond yields means a higher cost to capital for business, which moves money away from the profit side and earning side. And as we’ve mentioned in several radio segments, there’s two things that keep the stock market up. One is interest rates. The lower the interest rates, the higher the stock market, all other things being equal.
BRIAN: Number two is earnings. If earnings are growing, then you have a stock market that can continue to go higher. Price earnings expansion has been happening because the interest rates, the general interest rates, have been going down for 36 years now. 36 years interest rates have been trending lower. Now we are at a point where interest rates are very close to zero.
BRIAN: The 10 year treasury yield is at 1.7 percent. If interest rates start to go up, that will burst a lot of bubbles. So what we wanna talk about-by the way, in past segments that we’ve done, we’ve talked about the four, four bubbles that we are dealing with right now. One bubble burst in 2001 and ‘02, that was the tech bubble. And that caused the 50 percent drop in the SNP.
BRIAN: One bubble burst in 2008. It caused a 55 percent drop in the SNP and that was the mortgage bond market. We have four bubbles right now. We have…
MIKE: Now, Brian, real quick, just for the new listeners for Decker Talk Radio, can you go over the four bubbles that could be bursting today?
BRIAN: Yeah. Let’s do that right now. Number one, it’s the country’s debts around the world.
BRIAN: The G7 nations have expanded their country debt to over 100 percent of GDP. Historically, when any country goes there, it’s very difficult to draw that back. Number one, that’s a bubble that’s been created by low interest rates. Artificially low interest rates, by the way, from our central bank, the federal reserve bank, and other central banks around the world.
BRIAN: It’s easy money. It’s free money, so countries have printed money and produced an inordinate amount of debt. Number one. Number two, with artificially low interest rates, another bubble has to do with real estate. Real estate is measured by the affordability indexes in all the major metropolitan areas around the country, have a gap between average wages in those areas and the home that an average wage could qualify for today. And comparing that home value with the average home in that area and there’s usually a gap.
BRIAN: Sorry. There’s usually a gap that creates a negative gap called the affordability gap. When that gap is as big as it is right now, it’s unprecedented. You cannot have a continued sustaining run in real estate prices because you don’t have the wages to support it in each of the areas. So that’s number two. Number three, you have because interest rates are kept artificially low, you have a stock market that is propped up artificially high by the central bank and the federal reserve.
BRIAN: The price earnings ratio of the stock market right now is 25. It’s only been higher one time before and that was in the late ‘90s, ‘98-‘99 before the tech bubble burst. And then the fourth and final bubble that we have is the bond market bubble. The bond market bubble, corporate bonds, utility bonds, municipal bonds, government bonds, the Treasury bond market, all of those are-in the high yield bond market.
BRIAN: All of those are trading at record unsustainable high prices. Once interest rates go up, you will take a major hit in the bonds and in real estate and the stocks.
MIKE: Brian, can I interrupt you real quick for the second?
BRIAN: Yeap.
MIKE: Bonds, this is something we talk about a lot on this show and I just wanna put a little plug in here for our new listeners tuning into Decker Talk Radio today. If your broker or banker puts your safe money in bonds, call us. And I’m gonna extend a quick offer on this right now just because we don’t have time, this is not the show, but if you have safe money in bonds, we wanna be able to talk to you and go over essentially how to protect your assets and get you out of what could be a very…
MIKE: I mean, Brian, how do you put it with bond funds being so potentially volatile, or potentially dangerous?
BRIAN: Well, bond funds have interest rate risk. So in this show today, what we’re gonna talk about in this hour is how to protect your portfolio, your retirement during a recession. That’s what we’re gonna talk about today.
MIKE: So real quick though, so I extend the offer for the next 10 callers calling right now, if you have bond funds as you safe money, we will have you into our office for free visit and we will go over how to actually have safe money and to get rid of that bond or interest rate risk that could cripple, if not destroy, your retirement.
BRIAN: If we have a recession, let’s talk about protecting your assets. And let’s talk about your hard assets. You’ve worked all of your life, you gather hard assets, this is your real estate, your cars, your tangible assets. Very simple. I’m gonna take 30 seconds on this. Decker Talk Radio listeners, I hope, I really hope that you have an umbrella policy. This is a writer on your homeowner’s insurance that you take out and you have…
BRIAN: For $400 or $500 a year, you have an additional $1 000 000 of liability coverage. So when you bump someone in the parking lot and they’re gonna sue you, you have additional liability protection and it protects what you’ve taken a lifetime to gather and those are [INAUDIBLE] the assets that you’re gonna expect to produce an income or a paycheck for the rest of your life.
BRIAN: So Decker Talk Radio listeners, you have in your 20s, 30s, 40s and 50s, have spent a lifetime of receiving 1099 or W2 paychecks. Once you retire, we are experts at creating your paycheck and retirement for the rest of your life. And that’s very important, that those assets are not compromised because you bump someone in the parking lot.
BRIAN: So number one, we hope that you have a solution for liability risk. Number two…
MIKE: Now, Brian, real quick before we move on to number two, you had a client, I believe you got a client at Decker Retirement Planning that had a quick instant in front of the grocery store. A guy bumped into him, no, the client bumped into this guy and walks [around?] because he was a good person and said “Are you okay?” Do you remember that story and what the guy said?
BRIAN: Yeap. And the guy rolled his window down and, who was bumped, there was obviously no damage to the car.
BRIAN: He was just being a nice person. He got out of his car and said “Hey, are you okay?” The guy rolled his window down, was already on the phone with his attorney and said, smugly “Hey, before I answer if I’m okay or not, you’re required by law to send over a net worth statement to my attorney.” And the guy is right.
MIKE: So it’s not…
BRIAN: And the guy was right.
MIKE: The umbrella policy isn’t necessarily for actual accidents. It’s also to protect yourself from people that are gonna try and take advantage of the system like that.
BRIAN: Correct. Let’s say someone gets hurt on your property, around your trampoline or your pool or in your house. They slip and fall in the winter time on your walk way. They can sue you. And sadly, in our litigious environment right now, many people see that as a blank check and they will sue you. All right, so number one is to make sure that you have liability protection. Number two, in your retirement, let’s make sure that as spouses, that you protect each other from long term care risk.
BRIAN: This is the risk that one spouse bankrupts the other spouse because of long term care cost. So one of the things that is very important is to hope for the best, but plan for the worst. What is the worst? Well, the worst is a healthy body with Alzheimer’s. Alzheimer’s is probably one of the most expensive of all the cases that we see in retirement.
BRIAN: So let’s plan on this. So let’s talk through what an Alzheimer’s journey would look like. It’s usually split into thirds. The first third of the journey is where one spouse is taking care of the other spouse. Does it cost money? No. Is it cumbersome and time consuming and emotionally draining? Yes, it is. But the first third of the journey, there is no cost, but there’s a lot of time and effort and emotional energy that’s invested.
BRIAN: The second third of the journey in this long term care example is where you now need help. It’s in home care, it’s not 10 000 a month yet, but it’s couple thousand a month and it grows as you need more and more help. Is it 10 000 a month yet? No, but in the second third of the journey with Alzheimer’s, you are going through as best as you can, doing as much as you can, with the help of in home care.
BRIAN: Now you get to a point where you definitely need help full time. This point, this is where your spouse is putting on shirt and tie or a dress and going off to a meeting at two in the morning and they’re endangering themselves. And you need full time care. So now you’re checking him or her into a full time care facility. At this point, you are talking about 10 000 a month. But no longer are you talking about many years. Sadly, this is near the end.
BRIAN: And this is where 18 months, two years. Do you have $180-240 000 in protection for long term care? We can even double this, get up to $350-400 000-400 000 in long term care. Let’s talk about the main six ways to protect yourself from long term care cost, long term care liabilities.
BRIAN: The tragedy is the people who can afford it don’t need it. And by the way, we’re fiduciaries, which means that we’re required by law to put your best interests before our company’s best interests. We sell long term care, but 90 percent of the time, we don’t recommend it. We show our clients that in their plan, their financial plan, that they can self-fund, that they can self finance this $400 000 risk.
BRIAN: So we show our clients about self-financing. When they come in, we show them in their plan how to self-finance. So that’s number one. We wanna see if you can self finance your risk. I’m gonna go all the way to the other extreme. Sadly, the people who need it, can’t afford it. And one of the most popular-sadly, tragically, one of the most popular ways to protect each other, husband and wife, is by divorce.
BRIAN: It’s a killer. Divorce. Sadly, because they can’t afford the premiums of long term care coverage, couples will just say “Honey, I just gotta divorce to protect the assets that I have so that you can go on Medicaid, and that I have the assets that won’t bankrupt me and leave me penniless.” So tragically…
MIKE: Brian?
BRIAN: Yeah?
MIKE: Can I ask you quick question here because we’ve talked about this before in other settings and there’s this question I have.
MIKE: If you divorce, the assets technically separate, but do they still live together, do they have to live separately for Medicaid? I mean, it just seems like it’s kind of a weird situation, to where they legally are divorced, but they could still live together, maybe they don’t, I mean do you have any comment on that, [of?] the technicality?
BRIAN: Tragically this is the point where typically… Decker Talk Radio listeners, this is where you are now, one spouse is in a full time facility and Medicaid is picking up the bill.
BRIAN: And the surviving spouse is trying to just survive with the assets that they’ve got. So that’s number two, is just divorce. Number three is the most popular among those that purchase long term care coverage. It’s called traditional long term care. Traditional long term care is where you pay for 4 or $500 for what’s called a guaranteed level premium, and you, for 4 or 500 bucks a month, you have access to about $3 or 400 000 of long term care coverage.
BRIAN: But if you get hit by a bus, you don’t get that. There’s no death benefit. It is for long term care. What we wanna make sure that Decker Talk Radio listeners are aware of is that yes, you’ve got traditional long term care from Genworth, Unum, Jackson, the major carriers, but we wanna make sure that you know that guaranteed level premium is not guaranteed level at all. Not at all. Usually in your late 60s, early 70s, you’re gonna get a letter that states that your guaranteed level premium has just gone up 40-50-60 percent.
BRIAN: What the insurance companies want you to do is to panic, cancel, so then they keep a risk free premium stream for all those years where they put out nothing, they keep those premiums. Or you panic and cut your benefit in half, keep the premiums the same. The insurance company wins either way. We wanna make sure, Decker Talk Radio listeners, that you know that this is coming, that you budget for it, and that you don’t make the mistake of believing that with traditional long term care, that guaranteed level premium means that your premium’s never gonna go up.
BRIAN: It will. It will go up. Guaranteed level does not mean guaranteed level. So that’s something you wanna make sure.
MIKE: Real quick, just to add… Yeah, we’re not being hyperbolic here because every event we do, every seminar we put on, when you ask that question, Brian, there’s at least one hand that goes up that they’ve gotten the letter and the rest of people that haven’t are going to get the letter. So this isn’t some hyperbolic statement. This happens.
BRIAN: Right. So yeah, we’ve had clients, people in the audience at the seminar, when we ask who’s gotten the letter, they do raise their hand. All right, that’s number three, is traditional long term care in the six ways to minimize and handle your long term care risks. Number three is traditional long term care. Number four is where an insurance guy gets a hold of you and says “Gosh…”
BRIAN: You know, you get hit by a bus, with traditional long term care, you don’t get anything. What you should do is pay out-but a whole life or universal life with a long term care rider. So now this $400 000 death benefit is accessible either in death or it’s accessible in the form of a long term care rider benefit.
BRIAN: Now you get the money either way. It sounds brilliant, it is brilliant on the chalkboard. In reality, it’s very expensive. It’s about $1000 a month and we wanna warn you that it’s very expensive. So that’s number four. Number five, what we actually use most of the time when we buy long term care insurance is we buy asset based long term care.
BRIAN: This is where an account is created, it’s a liquid account, you can put money in, you can take money out. But you try to save about $10 000 a year for 10 years, so you have about $100 000 saved in this account. If you die or when you die you have a XX death benefit. If you go into a long term care facility, you have the XXXX, 400 000 long term care benefit there.
BRIAN: If you change your mind, you can pull all the money out. We like it, we use it whenever there’s that need. And then number six, the last on the list, is something that hasn’t been used recently. We just wanna make sure that Decker Talk Radio listeners know about this. In protecting yourself from long term care expenses, it used to be, you could use a safe harbor trust, put funds in there, have them move your assets in the name of your brother or your sister, usually a sibling.
BRIAN: And if you were diagnosed with long term care… I’m sorry, if you were diagnosed with a debilitating illness, moved into a full time facility at 10 000 a month, you go on Medicaid, your assets are protected, your surviving spouse has access to all your assets and the taxpayer pays all your expenses. That’s how safe harbor trust is supposed to work. Until four or five years ago, the IRS came out with a five year clawback provision.
BRIAN: If you’re diagnosed with a debilitating illness like Alzheimer’s, within five years of you entering a long term care facility, that money is clawed back and is going to pay for your long term care expenses. But an equally problematic situation is when you move those funds arms linked to a sibling, they own those funds. They can wake up one day and say “Hey John, I really like these assets that you and your wife gave me.”
BRIAN: So that for many reasons the safe harbor trusts just have not worked out well. But I wanna move along because we’ve talked about recession risk, protecting your assets from liability risk by using an umbrella policy, number one, number two, protecting each other by long term care costs, hopefully not bankrupting one’s spouse by the other’s long term care expenses.
BRIAN: The two others I wanna spend time on in this radio segment is interest rate risk on your bond funds and stock market risk on your stock funds. When we have a recession, stock markets go down. It’s like they’re connected. When we have a recession and the economy’s slowing down, interest rates… If they remain neutral, usually we have a situation where earnings are going down, the economy is slowing down.
BRIAN: And the economy cycle’s lower and so [does?] the stock market. So let’s talk about… We’ll pick off the easy one. In fact, we already mentioned this top of the hour and that is interest rate risk. Interest rate risk by definition is losing principal when interest rates go up and you own bond funds. When interest rates go up, bond prices go down. And yet, this just…
BRIAN: As I’m talking to you here, at Decker Talk Radio, I’m raising my hands and clenching my fists in frustration because no financial person should tell you that your safe money is in bond funds. When interest rates are at all time record lows, interest rate risk is at all time record highs.
BRIAN: So if you go to a banker or a broker and they use the asset allocation pie chart, that should be strike one. Because that’s appropriate as an accumulation vehicle in your 20s, 30s and 40s. If you use it over 50 years old, that will jeopardize and put your retirement at amazing risk. We will show you the difference between the pie chart and a distribution plan.
BRIAN: The distribution plan that we use, as fiduciaries to our clients, creates a paycheck for the rest of your life. It looks at sole security, it looks at your rental real estate, it looks at your pension, it looks at income that you can draw from your assets, and it creates your monthly paycheck that comes to you for the rest of your life. It tells you how much you can draw, it uses a [INAUDIBLE], cost of living adjustment. And it creates…
BRIAN: In fact, Mike, I think this is a good time. We should offer listeners to call in so that we can put it side by side, show them the asset allocation pie chart, show them the distribution plan. We can show them side by side, visually, how we use mathematics to show how much our clients can draw from their assets and include their other sources of income for the rest of their life.
BRIAN: And how the pie chart, the asset allocation pie chart, how they use the four percent rule, which by the way has destroyed more people’s retirement than any other-this is my opinion, than any other financial strategies, destroyed more people’s retirement than any other strategy in the last 50 plus years.
BRIAN: We should offer people to call in to see this.
MIKE: Well, I completely agree because chances are, Decker Talk listeners, you’re taking too much risk. So this is critically timed, especially before the election, while interest rates are all time low with the four bubbles that we talked about, the time is now to let us prove to you the Decker approach. And what we’re talking about here, what we do at Decker Retirement Planning, will help protect your retirement. So for the next 10 callers, that are calling right now, we will allow you the visit with Brian one on one, go over your plan, your asset allocation and your investments, and we can compare side by side the distribution plan, so you know mathematically and logically how you can protect your retirement.
MIKE: And that was unfortunate, with all those white hair people that went back to work because they had to, because they took too much risk. So Brian, let’s keep going. We still got the other two points. I mean, we just discussed what-interest rate risk, stock market risk, which one do you wanna to continue with now?
BRIAN: I’m gonna finish up on interest rate risk. When these callers call and come in, you know, you deserve to know that there’s alternatives. What are you gonna do? With interest rates so low, you gotta put your safe money somewhere. How do you diversify it?
BRIAN: We will show you. How can you use instruments that give you any type of return? We’ll show you instruments that for the last 16 and a half years have averaged around six and a half percent. six and a half. When the 10 year treasury’s at 1.7 and the 10 year CD is maybe two percent, that’s a far cry above those very low interest rates.
BRIAN: So we, as fiduciaries, are not doing any of our clients a favor by locking in 10 year rates at all time record lows. Not with CDs at two percent, not with treasuries at 1.7. So interest rate risk is the amount of money that you lose when your banker or broker tells you that your safe money is in bond funds. And by the way, they use the rule of 100 to tell you that if you’re 60 years old, you should have 60 percent of all your money in bonds or bond funds, which sarcastically, actually factually, means that 60 percent of your money is earning almost nothing. Almost nothing.
MIKE: Brian, just for-to play the devil’s advocate here. The rule of 100, as much as we hate it, the idea of putting, if you’re 70 years old, 70 percent of your assets in a safer investment, there’s at least something to say to that, but to put it in bond funds and think bonds are safe, that’s like saying red is blue or saying the sky is green. That just doesn’t make sense. So if you wanna put 70 percent of your funds in safe money, that’s fine. Bonds don’t qualify for safe money, though. Would that count as, I guess, the more devil’s advocate approach to the rule of 100?
BRIAN: Some bonds qualify as save money, but bond funds, that’s the key, bond funds do not. When interest rates are this low, bond funds have interest rate risk and are not safe. Okay.
MIKE: Excellent.
BRIAN: I’m gonna move on. Now, let’s talk about stocks. When you have the markets cycling for decades, every seven or eight years, the markets get creamed. You have the market cycling, you have the economy cycling.
BRIAN: These are repeatable patterns. Every seven or eight years, the markets get creamed. So let me give you some dates. 2008, markets drop. From October of ‘07 to March of ‘09, that was a 55 percent drop. Seven years before that was 2001, Twin Towers went down that year, middle of the 50 plus percent drop, January 1 to March of ‘03. Seven years before that was 1994, Iraq had invaded Kuwait, interest rates were going up, the economy was slowing down and stock markets did nothing.
BRIAN: Seven years before that was 1987, Black Monday, October 19th, 30 percent hit in one day, 550 down points. Seven years before that was 1980. ‘80 to ‘82 was two year recession, the stock market lost over 40 percent. Seven years before that was ‘73-‘74 recession. Stock market, again, down over 40 percent.
BRIAN: Seven years before that was ‘66-‘67. Market’s, again, down over 40 percent and it keeps going. So ladies and gentlemen of Decker Talk Radio, seven years plus the bottom of the market, which is March of ‘09 we are due. I hope you’re ready. I hope you have a plan to protect your retirement money that you have taken a life time to accumulate.
BRIAN: If you listen to your banker or broker, they will tell you to ride it out, don’t time the market, be a long term investor. And that makes absolutely zero sense because when you’re in your 20s, 30s and 40s and you’re drawing a paycheck, you can take that kind of a hit. You can ride it out. But when you’re over 50 years old and you’ve accumulated several hundred thousand dollars, you cannot afford to take a 30 percent hit, and then take four years to get your own money back. You can’t afford to do that anymore.
MIKE: Let’s say that our Decker Talk Radio set the jackpot and that your 2000, they got $4 000 000. And let’s say they’re taking out, using this buy and hold strategy in taking an income, and they retire then, what would happen, can you run those numbers for us?
BRIAN: Sure. I wish, for Decker Talk Radio listeners, that you could see the SNP 500 numbers that I’m gonna recite to you. Let’s say that you retire January 1 of 2000, you have a banker or broker as your advisor, you’re using the asset allocation pie chart, and you’re being told to draw your money at a rate of four percent a year.
BRIAN: Why four percent? Because, and here’s how the four percent rule works. Four percent because stocks have averaged around eight and a half percent for the last 100 years. Bonds have averaged around four and a half percent for the last 36 years. So let’s draw just four percent from your assets for the rest of your life and you should be fine. So we retire you January 1 of 2000, and by the way, Decker Talk Radio listeners, if we have a bull market, an eternal bull market, the four percent rule works.
BRIAN: It works beautifully. But as soon as you get into a flat market cycle, not only doesn’t it work, it actually destroys your retirement. So we’re in a flat market cycle January 1 of 2000, and you lose 50 percent of your assets in the downturn of 2001 and ‘02. But sadly, it’s worse for you. Because you’re drawing four percent a year, you’re entering ‘03 down 62 percent.
BRIAN: Good news is markets double from ‘03 to ’07, but you don’t get all that because every year you’re drawing four percent. Four, four, four, four, four, and then you take the hit of ‘08, 37 percent minus four percent, and now you can no longer stay retired. In 2009, the gray haired people came from everywhere. They came back to work at banks, they went to fast food, they went to Walmart.
BRIAN: They had to go back to work because the four percent rule destroyed their retirement by the millions. Millions of people had their retirement destroyed. The guy who invented the four percent rule came out and publicly retracted it, saying it doesn’t work when interest rates are this low. He called it “dangerous” and he doesn’t use it. And yet the bankers and brokers still use it today. They still use the four percent rule as a way to distribute your income.
BRIAN: We wanna warn you about this. We hope, we hope that if you have… We hope you have the guts to, number one, recognize, I guess I’ll use the baseball analogy. Number one, if you have a plan and it’s in the form of a pie chart and you’re over 50 years old, that’s strike one. That’s an accumulation plan, totally fine in your 20s, 30s and 40s. If you’re using it over 50 years old, that’s strike one. It’s inappropriate.
BRIAN: Number two is when your banker or broker has your safe money in bond funds. That’s ridiculous. And number three, when they tell you that they’re gonna draw your income from using the four percent rule for the rest of your life. That’s a strategy that in 2009, 7 years ago, the creator has debunked that strategy, saying that it doesn’t work, and yet the bankers and brokers are still using it today.
BRIAN: And we hope at that point, that you get up and walk out. So that’s strike one, two and three. So on your stocks, I apologize for swerving… I wanna talk about how to protect the stocks in your retirement portfolio. By the way, if you have more than 25-30 percent of your money at risk, when I say at risk, I’m talking about not principal guaranteed, you’re taking far too much risk.
BRIAN: Far too much risk, Decker Talk Radio listeners. And chances are, I would guess 9 and half out of 10 of you out there are taking far too much risk. Almost all of you have most all of your money at risk and it shouldn’t be that way. But that’s the model of the bankers and brokers. So that’s why you have so much money that you’ve got at risk. So let’s talk about how it should be. You should have ladder principal guaranteed accounts that generate your income, so that when interest rates go up or down, you have zero interest rate risk, and you have monthly income coming from principal guaranteed accounts, so that when the stock market goes up or down, when interest rates go up or down, when the economy goes up or down, it does not affect our clients.
BRIAN: It does not affect your income, your lifestyle. your vacation plans. We took this plan through 2008 and all our clients that did the planning, none of them had to change anything. Not their vacation plans, not their lifestyle, they didn’t have to go back to work, move in with the kids, because they used the distribution plan. So first off, on protecting your money from a recession, you’re taking too much risk to begin with.
BRIAN: I hope that you come in and see what a distribution plan looks like and how we protect you. We’ve already made those calls. Now, I wanna be specific for the rest of today’s show on how to protect your stocks from the downside of the market. The stock market is a two-sided market. It goes up and it goes down. For reasons that make no logical sense, the banks and brokers have a one-sided strategy in a two-sided market.
BRIAN: If the markets go up, you do well. If the markets go down, you lose money. I hate to say this, it really bothers me, but the reason why bankers and brokers keep all your money at risk is because that’s how they get paid. If you move money out of risk, they cannot collect fees on CDs, treasuries, corporates, agencies, municipals, money market or any other safe investments. They will keep you in stocks, mutual funds, ETFs, because that’s how they get paid.
BRIAN: So sadly, most all of people’s money are at risk. We wanna cut your risk down. And on the portion of your money that is at risk, we at Decker Talk Radio have a two-fold mission statement for our risk money. Number one, we want our managers to keep up with the SNP when the markets go up. Not an easy task because 85 percent of money managers and mutual funds don’t do that. And when the market’s rollover, we want the models that we use to protect principal when the markets go down.
BRIAN: We want a two-sided strategy in a two-sided market. Are they out there? Well, if we are acting as fiduciaries to you, the client, we are not using the mutual funds of our company. Because sadly, we get paid more, so we’ll use those. So when we see clients transfer their assets in to fund their plan here at Decker Talk Radio, Decker Retirement Planning in Kirkland, sadly, I see the same family of funds, X, Y, Z family of funds, or A, B, C family of funds. Why did they use those?
BRIAN: Well, because they got paid. We can’t do that. We as fiduciaries have an obligation to go out and use math to find out who is the best performing money manager or a mutual fund. So since January 1 of 2000, we go through the Morningstar database for mutual funds, the largest database of money managers. I’m sorry, the largest database of mutual funds in the country, and then we use the Wilshire database to screen through the different money managers.
BRIAN: And we wanna know who’s beating us, who has better returns than the six managers that we are using. Better meaning cumulative net of fee performance since January 1 of 2000. Not better from last week, last month, last year. We’re talking long term, consistent, better net of fee performance. And every quarter, we screen through these to try to find better performance.
BRIAN: And every quarter, we get around 60 or 70 that yes, they do beat us. They fall in the four categories. Number one, yes, they’re beating us, but gosh, they’re close to new investors. We can’t use them. They’re not taking any new clients. We just move those aside. Number two, yes, they’re beating us, but they’re hedge funds and we’re not gonna put any money in a hedge fund. So Decker Talk Radio listeners, let me explain why.
BRIAN: Let’s say that you and I are in New York hedge fund. We get paid two ways. First of all, the one percent fee keeps the lights on, pays the bills, but what puts Ferraris in our garages is the two and 20. What is the two and 20? The two and 20 is where all returns above two percent are shared 80-20. 80 percent for the client, 20 percent for us. That pays us a ton of money.
BRIAN: So here we are, it’s end of October, beginning of November. Let’s imagine, I’m just making this up, that we’re down five percent. We don’t get paid if we’re down five percent. So what are we going to do? Predictably, we’re going to use options, futures, leverage, and we’re gonna goose that portfolio, because [MAKES SOUND] if it blows up, we can always start another one.
BRIAN: We can’t have that mentality managing retirement money. So we don’t. So number two, many that are beating our managers are hedge funds. We won’t use a hedge fund for your retirement money. Number three is when the per account minimums are 3 000 000 or more, we can’t diversify that. And number four, when we have managers that are highly volatile, we will not use them.
BRIAN: For example, there’s two mutual funds, CGM Focus and the Bruce Fund, that qualify to be on our platform of managers. We can’t use them because in 2008, they both lost over 40 percent. 40, 40 percent. So what is left is the six managers that we use are objectively factually the best models that we can find to use for our clients. Now, are we acting as fiduciaries for our clients in finding and searching for the best performing net of fee managers? Yes, we are.
BRIAN: These managers, all six of them, have quantitative, computer-driven, trend following, two-sided models. These are models that when the market trend’s higher, they’re invested in the market, and when the market trend’s lower, these are quantitative, computer-driven models, that automatically will switch to defensive mode and either use cash or the VIX, the volatility index.
BRIAN: They will buy whatever’s going up in a down market. And for example, in 2001 and 02, when the SNP lost 50 percent, the two mutual funds that we’re using made 30 percent. One made 30 percent, the other made over 40 percent in 2001 and 02. We like that. We use that. In 2008, the six managers that we use, a couple of ‘em didn’t make money, a couple of ‘em made a lot of money.
BRIAN: Overall, all six, they were able to make money. So in 2001, 02 and 08, these managers, these models are able to protect client principal when the markets go down. When the markets were up between ‘03 and ‘07 and the markets doubled, these models, these computer models doubled also. When the markets went down, they went into protection mode.
BRIAN: Why isn’t your broker or your banker telling you about these models? In other words, this is a point, Decker Talk Radio listeners, where I know what you’re thinking. You’re thinking “Hey Brian, if this is so great, why isn’t everyone doing this? Why doesn’t everyone have these models?” There’s four reasons, four very important reasons why not everyone is doing this. Number one, what banker or broker do you know who’s going to recommend no-load mutual funds to you?
BRIAN: That they don’t get paid on. By the way, two of our six managers are no-load funds. That’s not gonna happen, number one. Number two, bankers and brokers, when they… They put their careers at risk by recommending models that tell you what to buy, when to buy and when to sell. Now you don’t need him or her. So that’s point number two. Point number three is by far the biggest and most important. Why aren’t bankers and brokers going to tell you about two-sided, long, short computer-driven trend following models that protect you in down markets and track with the SNP in the good markets?
BRIAN: It’s because… the asset allocation plan is required by all bankers and brokers to be used because it keeps them from being sued. It’s liability risk for the bankers and for the brokers. If you think about how you put your asset allocation plan together, step one, yes, you filled out a risk questionnaire, you submitted that, and it produced a recommended diversified asset allocation pie chart portfolio, and it’s been out in investment policy statement that you signed and dated, now you cannot sue the banker, broker because you created that plan.
BRIAN: And I guess there’s number four. The big mutual fund companies like Vanguard, Infidelity, their business model is to create hundreds of funds to gather billions in assets they are not, NOT, they’re not going to scale down to the 10 or 12 models, mutual funds that you really need. So for those four reasons, you will not find two-sided models and a distribution plan outside of a fiduciary’s office.
BRIAN: And by the way, I know I’m being long-winded here, but we’re hearing more and more bankers and brokers telling you that they are fiduciaries. I wanna end this show with the three-fold test. Do we have time for this, Mike?
MIKE: We’ve got three minutes left, so let’s do one per minute.
BRIAN: Okay. Very quickly. The three-fold test makes sure that you’re dealing with a fiduciary, is number one, they have to be independent. They have to work for an independent company, or else they’re a sales man, or woman, they’re a sales person for the bank or the brokerage firm.
BRIAN: We’re an independent company. No one tells us what we can and cannot sell. Number one, they have to be independent. Number two, they have to be series 65 licensed. Series 65 prohibits us from receiving securities commissions. We cannot sell you a variable annuity. We cannot sell you a commissioned securities product.
BRIAN: So that’s number two. The salesmen are series 7 licensed. They sell you commission products all day long. We cannot do that. Number two, series 65 license. Number three, the corporate structure is an RIA, a registered investment advisory firm. As a registered investment advisory firm, that’s the structure of the fiduciary. Unless your advisor has all three, they’re a sales person.
BRIAN: So we’re looking out for you at Decker Talk Radio. In this radio show, we went through some key ways that you can protect yourself in a recession, why we expect a recession, we read the NFIB numbers at the top of the show, we covered how to protect yourself from liability, by using the umbrella policy. We covered the six ways that you can protect yourself from long term care risk. We covered stock market risk, interest rate risk in this radio show.
MIKE: You can listen to it again, you can go to our podcast, iTunes or Google Play to subscribe, and on our website, you can also read the tons of articles that we’ve written to help inform you on how to protect your retirement. Take care everyone, have a great week.
