This week we are talking about the various red flags most people could find in their retirement plans and how you could avoid them as you start preparation for retirement. We go over the 4% rule, trend following models, and other popular topics. Tune in every week to Decker Talk Radio’s Protect Your Retirement on KVI 570 AM at 9 AM or on Soundcloud, Google Play, or our Podcast on iTunes!
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 going over financial news as well as different red flags you may find in your retirement plan and how to avoid them. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning, everyone. This is Mike Decker and Brian Decker with Decker Talk Radio’s Protect Your Retirement. And Brian Decker from Decker Retirement Planning, who is a fiduciary, and a licensed financial planner based out of Kirkland, Washington. So we’re glad to have him on the show today. We’re going to start off the show with what’s going on, financial news in the world, both here and across the world. And then we’re going to get into some incredible information, kind jam-packed with retirement planning and how to look forward this year to making your own retirement plan, if that’s what you’re doing this year.
MIKE: Or if you’re currently retired, it’s still applicable, so stay tuned for that. But Brian, I’m going to turn the time over to you right now for financial news.
BRIAN: Okay, this is the news that I think is very interesting across the world, and here in the United States. Student debt in the United States is nearing 1.4 trillion. That was from a half a trillion 10 years ago. Student debt has tripled in 10 years. By the way, 1.4 trillion is a bubble. So at some point this monster needs to be dealt with. It’ll be interesting to see how that’s dealt with, or is this can kicked down the road in the next administration.
BRIAN: Over the past decade, an increased number of Americans who rent their homes hit a record. In other words, home ownership is at a record low. Renting a home is at a new record high. Third item, and I’m keeping a focus on what’s going on in Italy because of the banks. But the Italian unemployment rate is unexpectedly climbing again. It’s back near 12 percent.
BRIAN: Also, watching the Moody’s morning. S&P and Moody’s, when they downgrade a country’s debt or their banking system, that is something we watch very carefully. Moody’s warned about Turkey’s banking system, and the deteriorating asset quality. By the way, canary in the coal mine, the bank’s share price, those will always proceed a drop or problems with that country’s equity markets.
BRIAN: Cash holdings for mutual funds right now are at a five-year low. That’s important because the buying power is at a five-year low. So, the ability to push the stock market to new market highs is getting weaker and weaker when the cash levels are this low. This next one I thought was interesting. The number one killer of Americans in the United States here for decades, number one, has been, what do you think?
BRIAN: Cancer.
MIKE: Is it?
BRIAN: Yeah. Cancer. The new number one for 2017 is drug-resistant or antibiotic-resistant bacteria, or viruses. That will kill an estimated 10 million people in the United States in 2017. New number one. Next item, intermediate municipal bond funds had their first loss last year in over 35 years. That’s very important because interest rates have trended down for 36 years.
BRIAN: Now with interest rates so low, bonds, not just municipal bonds, but bonds in general, have the wind shifted from tailwinds to headwinds. Headwinds are going to be a problem because on the municipal bond side, taxes are expected to go down. If taxes are lowered, your municipal bonds are less valuable, because all other things being equal, their ability to produce an after-tax gain has gone down.
BRIAN: So the 10-year municipal bond fund, 10-duration, actually lost in the last two months of the year since the election, municipal bonds turned and went straight down. On average, they lost about seven or eight percent. The United States CFO, Chief Financial Officer Confidence is at the highest level in over 10 years, and U.S. small business optimism index surged by the most since 1980.
BRIAN: Last couple things. What would you think, Mike, it costs to raise a child from birth to graduation from college today? What do you think it costs to raise a child? Plus all the food, clothing, the cost of soccer and baseball, and all of that.
MIKE: I’ve always heard the expression it’s a million dollars per child, but is that even close?
BRIAN: No. It’s 233 thousand to raise a child in today’s dollars.
MIKE: Oh. All right.
BRIAN: 233 thousand. Last thing I want to say is the most amazing college football I’ve ever seen was Clemson versus Alabama. That was spectacular.
MIKE: Not really financial news, but it was still notable.
BRIAN: Yeah. That was spectacular. Okay, I want to jump into it. Want to mention that on the fiduciary side, it’s very, very important, Decker Talk Radio listeners, to know that as fiduciaries, we have a requirement from the State level to put our client’s best interest before our company’s best interest. Our client’s best interest is suitability. We are reviewed to make sure that the recommendations that we make are suitable for a client.
BRIAN: We are held to a higher standard. We are required to put our client’s best interest before our company’s best interest. That standard is not there for bankers or brokers. Even with the new DOL rules, the bankers and brokers are drug kicking and screaming towards a higher standard, but not the standard that we are at. So, if you want to know that your financial advisor is a fiduciary, there’s three tests. You should write this down.
BRIAN: Number one, that person has to have a Series 65 license. Not a Series 7. A Series 7 Securities license mean that they can sell for commissions. A Series 65 license forbids your financial advisor for working for hidden commissions. Everything is fee base only. That’s very important, number one, Series 65 Securities license. Number two, they have to be independent.
BRIAN: If you’re working for a big bank or a big brokerage firm, those companies are telling their financial advisors what they can and cannot sell. They don’t have an arm’s length ability to do whatever is in the client’s best interest. And number three, they are the corporate structure is a registered investment advisory firm. Warren Buffet said, and I hope I can remember this quote. He said that dealing with a stock broker is like dealing with a doctor who changes prescriptions based on the amount of commission he makes on the drug.
BRIAN: Gosh, I really messed that up. Do you remember that quote?
MIKE: No, but I mean, I can put it in a different way, which it made more sense to me, using doctors. So I know there’s all kind of doctors out there. If you want to be a theoretical doctor, in theory, if it’s a good doctor, can recommend if you’re sick, maybe take a day off and sleep more. Maybe take some medicine. Maybe change your diet. Maybe start exercising. The doctor understands how the body works, and in theory, take all the analysis and everything, and get you better.
MIKE: But if you walked up to a pharmaceutical salesman and said, “Hey, I’m sick,” they’re only going to give you one thing. They’re just going to give you the drugs that they’re selling, because that’s what makes them money. So you want to know who you’re talking to when you’re talking about investments. Are you talking to somebody who’s only going to give you stocks, they’re going to put your assets at risks, because that’s the only way they’d make money? Or do you want to talk to someone who actually can give you essentially any option and do what’s best for you to help you heal, and not just make some money on the side?
BRIAN: Right. Well, that’s good analogy, Mike. So, we want to just point out that it’s very important that you deal with a fiduciary, someone’s who’s required by state law to put your interest before the company’s best interest. When you go into retirement and this is all that you’ve worked hard to earn all that you’ve got, I hope that you’re not dealing with a salesman from a bank or a broker. Okay. So, let’s get into it.
BRIAN: I would argue, Decker Talk Radio listeners, that today is the most difficult time to retire or plan for retirement in over a hundred years. First off, because of low interest rates. Not just low interest rates, but historic all-time record low interest rates. Last year in June, I think it was, the 10-year Treasury hit 1.4 percent. These are all-time record lows. There’s only one other time, 1940, that 10-year Treasury yield dropped below two percent.
BRIAN: This is very unusual. So we want to make sure that you know that your safe money, and you should have safe money, is not paying you much at all. That’s number one. Number two, the bigger problem is that with rates this low, you have very high interest rate risk. What is interest rate risk? Interest rate risk is the amount of money you lose when interest rates go up. The amount of money you lose on your bond funds when interest rates go up.
BRIAN: In 1994, the 10-year Treasury went from six to eight percent in one year, and according to Morning Star, the average bond fund lost 20 percent in 1994. In 1999, the 10-year Treasury went from four to six percent, and the average bond fund lost, in that year, around 17 percent. If we go from where we are right now, which right now we’re around 2.4 percent on the 10-year Treasury yield.
BRIAN: If we go from 2.4 percent back up to four percent, where we were not too long ago, that move in interest rates would produce a loss of about 20 percent in your bond funds. So we want to tell you that what interest rates are at or near 100 year lows, interest rate risk is at or near 100 year highs.
BRIAN: And yet, according to most bankers and brokers, they use what’s called “the rule of 100” to recommend that you’re quote-on-quote “safe money” be in bonds and bond funds. This doesn’t make sense. “The rule of 100,” I’ll take these one at a time. “The rule of 100” says that if you’re 65 years old, you should have 65 percent of your money in bonds or bond funds. Now I’m going to say this sarcastically back to you.
BRIAN: If you’re 65 years old, your financial advisor, your banker or broker, is telling you to put 65 percent of your money where you’re not earning hardly anything, number one, and doing it at a time when interest rate risk is at or near an all-time record high. This is math, this is not opinion. When interest rates go up, your bond funds lose money, period. Just like two plus two is four, when interest rates go up, you lose money.
BRIAN: Now that interest rates are at all-time record lows, your financial advisor is telling you to put safe money in bond funds. That is like math teacher telling you that two plus two is fifteen. We want to tell you that this doesn’t make any sense, and a financial advisor telling you to put your safe money in bond funds, when interest rates are this low, is financial malpractice. We want to warn you that that’s not good practice for your planning.
BRIAN: Now let’s get on to why we think interest rates that have gone up from 1.4 percent last year in June to this year, it’s right now at 2.4, why they’re expected to continue to go higher. Why we at Decker Retirement Planning in Kirkland, why we think that interest rates will continue to go higher. First off, there’s a very tight relationship between the CPI, the Consumer Price Index, and also the monetary base or the money supply; this is what the Fed prints and puts in circulation.
BRIAN: From 1960 to 1975, the Fed printed what used to be a lot of money. And although it didn’t happen all at first, the CPI went down a little bit and waffled around. But from 1965 to 1975, the CPI and the general interest rate skyrocketed. It took Paul Volcker, the cigar-smoking Fed chairman, to come in and to get in front of interest rates to get them back into parity.
BRIAN: There’s usually a very close parity relationship between the CPI and the monetary base and the money supply, and he did it. If you could see a chart, Decker Talk Radio listeners, you would see that the CPI from 1985 to 2008 have been tracking about the same. And that’s true until 2008. We see a hockey stick spike in our monetary base because of tarp QE1, QE2, there’s a spike in our debt.
BRIAN: And since 2008, we’ve taken on more debt in the last eight years than we have for all the previous U.S. Presidents cumulatively combined, we’ve taken on more debt, and we’ve yet to see interest rates or inflation catch up. But they will. And when they do, the people that were told by their financial advisor to put their safe money in bonds and bond funds are going to get hurt, deeply hurt.
BRIAN: Double-digit losses in what was supposed to be your safe money. So we want to make sure that you know that there’s options and alternatives. We agree that you should have safe money, but we would tell you that your safe money should not be in bond funds.
BRIAN: Hey, by the way, I should’ve mentioned before you gave the phone number that the safe money buckets that we use, have in the last 16 years, number one, they’re principal guaranteed. Number two, they produce monthly income. Number three, they’ve averaged around six and a half percent. And one of the ones that we used last year made over nine percent. So these are worth coming in and seeing. These are principal guaranteed accounts that would interest rates go up, you don’t lose money.
BRIAN: All right. Continuing on, we have low interest rates, high interest rate risk, the expectation that interest rates will continue to go higher. Now let’s switch to, we’ve talked about interest rate risk, let’s talk about credit risk. Credit risk is the risk that your municipal bonds won’t pay at maturity, won’t fully pay off when they mature. Credit risk is a product of most all the states having pension obligations they can’t possibly pay back; you know this is true.
BRIAN: And when it comes to the eventual train wreck where reorganization has to take place to reschedule the debts so that they’re manageable at the state level, municipalities will be part of that. So this is very important. The information we’re going to give you right now is going to be very helpful if you have a municipal bond portfolio. How will you know if your bonds are going into a problem as far as being able to pay off their face amount, their maturity amount?
BRIAN: There’s a very good indicator, and it’s the price of your bonds. So if you have a three, four, five percent coupon municipal bond, and it’s priced in a very low interest rate, should be above, oh, par. It should be above par. Should be at 107, 108, 109, something like that. If it’s got four or five years left to maturity. There’s one reason in a low interest rate environment for your bonds to drop below par.
BRIAN: There’s only one reason. And that is that the confidence and the ability to pay off on maturity is dissolving. So traders and investors with a lot more information than you are making decisions to sell these bonds and the price is going down. So this is very important, Decker Talk Radio listeners, this advice that we would give you is if you have a municipal bond that drops below par, with interest rates this low, and your coupon is three, four, five percent, we hope you pick up the phone and just sell it.
BRIAN: We hope you just sell it. If you call the person, your financial advisor that sold it to you, are they going to admit that they made a mistake by selling you that bond? No. They’re going to talk you out of selling it. Now we’ve been giving this advice to people for a long time, for over 10 years. Over five years ago, we started to see Puerto Rican issues dropping below par. The people who followed our advice and sold, they were able to protect their principal and salvage what they could from their Puerto Rican issues.
BRIAN: The people who did that saved themselves many thousands of dollars. Now, as you know, Puerto Rico is almost insolvent. And remember, this is your safe money. Your bonds are trading around 30 cents on the dollar. So we don’t want to have you go through this, and right now, today, in 2017 there are municipalities in the Northeast, in New York, in Detroit, in California, there are parts of the United States where we are seeing bond issues drop below par. Please remember this advice.
BRIAN: We hope that you track your monthly statements, and if you have a municipal bond that trades below par, we hope you pick up the phone and sell it. That will save you a lot of money, okay? We’ve talked about interest rate risk, we’ve talked about credit risk. By the way, this is kind of an interesting history tidbit. There’s one state, Mike, out of all the 50 states, that don’t have pension obligations that the other 49 states do. There’s one state that’s not in hawk and debt that is financially sound. I know you know.
MIKE: Well, I can’t remember which one. Is it one of the Dakotas?
BRIAN: It’s North Dakota.
MIKE: Okay, yeah.
BRIAN: Yeah. North Dakota because of the energy business there and fracking, they have no pension obligations that have put them behind the eight-ball like all the other 49 states. Okay, now let’s talk about stocks. When clients come in to see us, a lot of clients want to ask to see what their strategy is for their stock portfolios.
BRIAN: They’ll show me their stock portfolio, and I’ll ask them what they’re strategy is, and they’ll say, “Well, buy and hold. I’m going to hold on to this portfolio, because that I know over a hundred years’ stocks have averaged around eight-and-a-half percent.” And that’s a true statistic. Stocks have in a hundred years, averaged around eight-and-a-half percent. However, the problem is, you need to know, and we’re visuals here at Decker Retirement Planning, you need to know that stocks don’t trend, they cycle.
BRIAN: In a hundred years, we would show you, if you were in the office here, an 18-year cycle chart. From 1946 to 1964, there’s a nice bull market. From ’64 to ’82 there’s 18 years of flat. From ’82 to 2000, the biggest boom market we’ve ever had, and since January 1 of 2000, we’ve had a very flat market. The average return for the S&P for the last 16 years has been a little above four percent, even with dividends reinvested on the S&P.
BRIAN: So we’ve had a very flat market. Since 85 percent of money managers and mutual funds underperformed the S&P every year in the last 16 years, the average Joe hasn’t made a dime. So we have right now, I just want to put it on the table, the most difficult time in our opinion for a hundred years, to either be in retirement, or to prepare for retirement because you have near-record low interest rates, and you have a flat market cycle going on.
BRIAN: So the people that are in retirement expecting their portfolio to produce five, six percent CD returns, those aren’t there. And to produce eight-plus percent average annual returns in the stock market, they haven’t been there either. So it’s a very difficult time to be in retirement, and it’s very difficult to set aside and gather and accumulate assets so that you can retire. In times of old, before 2008 when interest rates were higher, you could live off your interest and invest your principal.
BRIAN: Now, times have changed. Times have changed where your ability to live off of principal, you can’t do that with interest rates this low. The 10-year treasuries right now are at 2.4 percent. The five-year CDs are around one-point-eight. The 10-year corporate bond you can barely get three percent.
BRIAN: So we want to make sure that you know that there are ways at Decker Retirement Planning that we can structure things so that even in this difficult retirement environment where interest rates are low, and stock market returns have been fairly flat for the last 16 years, there’s ways to put it together and to not only survive, but thrive using what’s called distribution planning. So I want to contrast, I want to make an offer, Mike, but I want to contrast the asset allocation pie chart.
BRIAN: We don’t like the asset allocation pie chart for people in retirement. It is an accumulation vehicle where all of your money is at risk, number one. You have a buy and hold strategy on your stock market funds, which is a problem because you can take a hit every seven or eight years in the stock market when you’re 20s, 30s, and 40s.
BRIAN: But when you’re over 50 years old and your financial advisor is telling you to ride it out, and you take a 30 percent-plus hit every seven or eight years like the markets do, and it takes you four years to get back to even, you can’t do that anymore when you’re 50. You’ve accumulated a large nest egg. 30 percent of your portfolio in your 20s is not a big hit. 30 percent of an 800 million dollar, million five-dollar portfolio is a lot of money.
BRIAN: You can’t afford to take that hit, number one. And remember, you’re drawing income from this. So now, what are you going to do? Cut your budget down by two thirds so that your portfolio can come back? The problem that the bankers and the brokers use with the asset allocation pie chart is multiple. Remember, all your moneys at risk. You’re putting money in bond funds according to “the rule of 100,” which makes no sense, because now if you’re 60 years old, you have 60 percent of your assets earning almost nothing.
BRIAN: You have record-high interest rate risk, and you have a buy and hold strategy that is void of common sense. The asset allocation plan fails the common-sense test to help you in retirement. At Decker Retirement Planning, we use distribution planning and contrast. Before I’d explain what a distribution plan is, I want to tell you how illogical the distribution plan is for the asset allocation pie chart. It’s the four percent rule.
BRIAN: And then we’ll make the offer, is that all right?
MIKE: Yeah, that’s perfect.
BRIAN: Okay. The four percent rule, Decker Talk Radio listeners, is the most destructive piece of financial advice, in my opinion, out there. In my opinion, it’s responsible for destroying more people’s retirement plan than any other piece of financial advice out there. Here’s how the four percent rule goes. Stocks have averaged around eight-and-a-half percent for the last hundred years; that’s true.
BRIAN: Bonds have averaged around four-and-a-half percent for the last 36 years; that’s also true. So, let’s be really safe and just draw four percent from your portfolio for the rest of your life and that should be fine. The problem is, that works beautifully when stock markets are going up, but when you get into a flat market cycle, Decker Talk Radio listeners, not only doesn’t it work, but in fact it mathematically destroys your retirement. So, let me show you how this works.
BRIAN: Let’s say that you hit the lottery and you retire today, or let’s go back to the beginning of a flat market cycle to show you how it doesn’t work. So, let’s say that all of you listening have four million dollars, and its January 1 of 2000. That’s the good news. You’ve got four million dollars and its January 1 of 2000 and you are retired. The bad news is the markets crashed, the tech bubble burst, and you’ve lost 50 percent, but it’s more than that because you’re drawing four percent a year for three years.
BRIAN: You’re down 62 percent going into ’03. The good news is, the markets double between ’03 and ’07, but the bad news is, you don’t get all that because you’re drawing four percent every year and then you take that hit in 2008 of down 37 percent, plus another four percent from your withdrawals. Now you can no longer stay retired.
BRIAN: And proof that this happened, you remember all the gray-haired people that came back out of the workforce, out of retirement and reentered the workforce in banks, fast food, Walmart, they had to go back to work, they had to sell their home, they had to move in with the kids. They had to go to plan B because the asset allocation pie chart plan, the buy and hold strategy, the bond diversification, the interest rate risk, all of that combined, destroyed their retirement in 2008.
BRIAN: In 2009, the guy who invented the four percent rule, and you can see this on our website at www.deckerretirementplanning.com, we list the guy’s name, we list his quotes. In 2009, the guy who invented the four percent rule says it doesn’t work. He retracted it, saying that it’s dangerous, that he doesn’t use it, that when interest rates are this low, it puts your retirement plan at risk.
BRIAN: The guy retracted it, and yet, that was in 2009. And yet, the banks and brokers still use it today. So to use a baseball analogy, strike one, Decker Talk Radio listeners, is when your banker or broker financial advisor tells you to use an asset allocation pie chart. That should be strike one. An accumulation plan for someone in retirement is not, key word, not a fit.
BRIAN: That should be strike one. Strike two is when they tell you to put your safe money in bond funds. When interest rate risk is an all-time low, that’s financial malpractice. And then strike three, where we hope you get up and walk out, is when your financial advisor tells you that they’re going to distribute asset or income to you for the rest of your life using the four percent rule that’s been discredited for, what is it, eight years now.
BRIAN: So we want to tell you that in contrast to that, we use a distribution plan. And by the way, I’m sorry I’m taking so long. We’ll make an offer for you to come in and see side-by-side what an asset allocation pie chart looks like and what it does against our distribution plan. A distribution plan is a spreadsheet that lists all your sources of income on the left side of the spreadsheet.
BRIAN: It lists your income from assets, your income from rental real estate, your pensions, your social security, we add it up minus taxes, and it gives you an annual and monthly income with a cost of living adjustment to age 100. Our clients see how much they can spend for the rest of their life. If you haven’t done these calculations, you can’t know how much you can spend for the rest of your life. And by the way, the number one fear in this country since the crash of the markets in 2008 is spending too much and running out of money before you die.
BRIAN: That’s the number one fear of people in the United States that are over 50 years old. Our clients don’t have that number one fear because they see on a spreadsheet using a distribution plan how much income they can draw, with a COLA, Cost Of Living Adjustment, to fight inflation, and where the income comes from.
MIKE: It’s an amazing thing when you see someone come in the door with a plan that could be disastrous, and we help them plan, and they have a plan that have sense. Can I say a common-sense plan, a logical plan, a mathematical plan?
BRIAN: Yup.
MIKE: Yeah.
BRIAN: Okay. Now I’ve explained half of it. Half of it shows you your income sources, totals it up each year, and spreads out your income over your lifetime which we have to age 100. It includes a COLA, Cost Of Living Adjustment. It’s priceless, peace of mind, to be able to see how much you can spend, because tragically, very sadly, a lot of you are underspending, and underliving what you could be receiving from your portfolio, just quote-on-quote for you to “play it safe.”
BRIAN: And even more tragically are the people who overspend and who run out of money too soon, and they have to sell their home, move in with the kids. Very difficult to go back to work in your late 70s, early 80s. So the left side of the spreadsheet, if you could imagine, is taking the age of yourself and your spouse to age 100, listing all your sources of income, minus taxes, it shows annual and monthly income to age 100.
BRIAN: On the right side of the spreadsheet is the portfolio. Now we separate out some emergency cash, this is an amount of money that we set aside for clients so that if they have their roof leak, or a water heater burst, or car break go down, they have the ability to have that cash be totally liquid. It’s set aside, it’s in your savings, checking, or it’s in your credit union. That money is set aside. We call that emergency cash.
BRIAN: The next bucket is going to produce income from a principal guaranteed account for the first ten years. That’s what we call bucket number one and bucket number two. Those two combined provide monthly income every month. And what we’re doing is we’re transitioning you from a W-2 or 1099 paycheck that you’re used to your new paycheck which is coming from Social Security, pension, portfolio income, rental real estate.
BRIAN: That’s your new paycheck for the rest of your life. It’s your investments. So we want to make sure you see where they’re coming from and how much. But this is very, very important. The most important thing we do for our clients is that buckets one, two, and three are principal guaranteed and they generate monthly income, and the returns that we’re getting on these have averaged around six-and-a-half, seven percent for the last 16 years. And the best one that we had last year did over nine percent from a principal guaranteed account.
BRIAN: This is worth coming in and seeing. The most important thing we do, which is foundational in the planning, is using principal guaranteed accounts to generate your income so that when interest rates go up or down, or when the stock market crashes every seven or eight years, it does not send our clients back to the workforce. With the banker or broker that you’ve got right now, chances are you have a pie chart, you have an accumulation plan.
BRIAN: And the number one destroyer of your retirement is the stock market crashes that happen every seven or eight years. So check this out. Here’s the dates. 2008, seven years before that was 2001, that was the middle of a three-year 50 percent bear market. The Twin Towers went down that year. Seven years before that was 1994, Iraq had invaded Kuwait, interest rates went up. The economy was in recession and the stock market struggled.
BRIAN: Seven years before that was 1987, Black Monday, October 19th. In one day, the markets lost 30 percent. Seven years before that was 1980. In two years, the markets had lost over 40 percent between 80 and 82. Sky high interest rates, and we had a recession. Seven years before that was 1973, the two year bear market, ’73, ’74, was a 44 percent drop in the markets. Seven years before that was ’66, ’67, two year bear market, were over 40 percent came out of the markets and it keeps going.
BRIAN: So Decker Talk Radio listeners, we are due, because the markets bought on March of ’09, seven years plus that is 2016. So we are right now on borrowed time. Typically economies and stock markets cycle every seven or eight years. We are right now currently in the second longest running stock market advance, second only to the 90s when it went for 10 years without a 20 percent drop.
BRIAN: So we are on borrowed time. When, not if, when the markets drop over 30 percent the next time, our clients, like they did in 2008, all our clients in 2008 that did the planning, they didn’t have to change their travel plans, they didn’t have to change anything in their lifestyle because they were drawing income for the first 20 years from principal guaranteed accounts. They lost nothing.
BRIAN: It did not change their lifestyle, whereas the banker and broker model, where you’re using your pie chart, you got a call, you remember this. You got a call saying, “Hey John, hey Sally, markets are down 30 percent. Good thing you’re with me. You only lost 25 percent.” That is sickening. And, they ask you, instead of drawing four percent from your assets, “Hey John and Sally, now you got to draw one-and-a-half or two percent from your assets for the next four years to let your accounts recover.”
BRIAN: How are you supposed to do that? Are you supposed to have your bills just suddenly disappear? You’re supposed to, what, go back to work? Those are lifestyle changes. Our clients don’t go through that. When interest rates go up or down, when the economies go up or down, or most importantly, when the stock market crashes every seven or eight years, it does not affect Decker Retirement Planning clients that have done the planning.
BRIAN: Because the income is coming from principal guaranteed accounts. We ladder them so that buckets one and two provide monthly income for the first 10 years, bucket three provides monthly income for years 11 through 20. And then the risk money, which is what we’ll talk about right now, the risk money is in long term accounts, and these are accounts that grow and are in the stock market. Now the quandary for retirees for the stock market is this.
BRIAN: At Decker Retirement Planning, we would point out that you’ve got low interest rates. You can’t survive on CDs at two percent. But you can’t also take another hit like 2008 in the stock market. So what are you going to do? You’re going to continue to heed the advice of your banker and broker that has all of your money at risk. That’s ridiculous and you know it. You know inside internally, you have this anxiety that you’re taking too much risk.
BRIAN: When you come in, we’ll show you how to cut that risk by 75 percent. And the money that you do have at risk, you have invested in a two-sided strategy. So what do we mean by this? The stock markets are a two-sided market. They go up and they go down. The models that we use to manage our client money have a two-sided strategy in a two-sided market.
BRIAN: These are computer-trend following models that when the trend is higher, you’re invested. But when the trend is down, we use strategies that are designed to make money as the markets go down. So a couple of things on how we manage client money. Because we’re fiduciaries, do we just pick some mutual funds that we like, or some money managers that we’re familiar with? No, we’re not being a fiduciary to you if we do that approach.
BRIAN: We have a mathematical approach for our clients at Decker Retirement Planning in Kirkland at Carillon Point. We act as fiduciaries by going out to the largest database of money managers in the world, which is the Wilshire Database. And then we go out to the Morning Star Database four times a year, and we want to see if there’s anyone beating the returns for our current manager lineup.
BRIAN: We have six managers in place. We want to know who’s beating those. And yes, believe it or not, yes, every quarter when we do this research, we find around 60 or 70 managers that beat our clients that we have at Decker Retirement Planning in Kirkland. But they fall into four categories. Number one, yes, they’re beating us, but they’re closed to new investors. They’re not taking any new clients. So we can’t do anything about that. But I know who they are. And when they open their doors, I know to go after them. But that’s number one.
BRIAN: Number two, they’re hedge funds. Yes, they’re beating us, but they’re hedge funds, and we’re not going to put any of our client money in a hedge fund. Number three, yes, they’re beating us, but their per-account minimum is three million dollars or more. We can’t diversify that. And number four, there’s a group, there’s two mutual funds that deserve mathematically to be on our platform, but we can’t use them because, I’ll even tell you the names. The Bruce Fund, and CGM Focus.
BRIAN: Those two mutual funds deserve mathematically, net of fees, since January 1 of 2000, they deserve to be on our platform. But we can’t use them because in 2008, they both lost over 40 percent. So there’s no downside protection on those two funds. So what is left is mathematically, objectively, factually the highest performing net of fee money managers or mutual funds that we can find, and we’ve thrown the net out very wide.
BRIAN: So now we are acting as fiduciaries to our clients. Chances are, your mutual fund is not on this list, or your stock broker is not on this list. Your money manager is not on this list. We act as fiduciaries to our clients by doing the math and doing the research and finding the top performing six managers. Mike, we should make an offer to have them come in and see the six managers. But I want to say one statistic before we make this offer.
MIKE: Yeah.
BRIAN: Two statistics very quickly. 85 percent of money managers or mutual funds don’t beat the S&P 500 every year. From January 1 of 2000 to 12/31/16, in 16 years the S&P 500 has a little more than doubled. Average annual return is four-and-a-half percent. The six managers we have, so remember, with the S&P, $100,000 grows to $200,000. A little over $200,000, net of all fees. With the six managers that we have, $100,000 grows to over $900,000.
BRIAN: Average annual return net of fees is over 16 percent. We want to show you those six managers. Come in and take a look because these six managers combined, key word, combined, made money in 2001 and ’02 when the markets lost 50 percent. And when the markets doubled from ’03 to ’07 these did, too. And when the markets took a beating in ’08, cumulatively combined, these managers made, not lost money. And when the markets are up over 150 percent from ’09 to present, these tracked with the market on the way up, too.
MIKE: All right, so we’re going to send this off for those that are 55 years and older, and have at least $300,000 of assets. And I’ve just got to say, chances are with your current portfolio, chances are you’re taking too much risk.
BRIAN: Right. Okay, I mentioned that it’s very common. Most people in this country have a one-sided strategy in a two-sided market. That means that when the markets go up, or as long as the markets go up, you’ll make money. But if the markets go down, you will lose money. We would argue at Decker Retirement Planning in Kirkland that you cannot afford another hit like 2008. So what is our downside strategy? And this is on your risk money. Remember, buckets one, two, and three are principal guaranteed.
BRIAN: 75 percent of your money when the markets crater the next time, our clients lose nothing with 75 percent of their money. The 25 percent that they do have at risk is protected with trend-following models that are mathematical, that are computer-driven models. These have been around for over 30 years, these strategies. This is not new. Because we’re fiduciaries, we’ve done the homework and we’ve found out which six managers are producing the highest net of fee returns in the last 16 years. That is what we look for.
BRIAN: Not who’s best last week, last month, last quarter, or last year. But who over the long term is producing two things? Number one, they keep up with the S&P, which 85 percent of money managers and mutual funds don’t. And number two, when the markets crash every seven or eight years, these managers have protection of capital measures. So I’m going to give you three examples. Gosh, we’re running out of time. I’m going to give you three examples of how these trend-following models protect your capital when the markets go down.
BRIAN: Number one is something called sector rotation. Sector rotation is the ability for a computer-driven trend-following model to buy whatever is going up. In an up-market, that’s called risk-on. You can throw a dart. Everything is going up in a risk-on market. But these sector rotators will buy whatever is going up the fastest. Typically biotech, healthcare, energy, technology, things like that.
BRIAN: Things like that. Those are going to be going up the most. What do you buy when the markets go down? Well, in 2001 and ’02, there were many sectors that were going up while people were getting creamed in technology. Real estate was going up all through that period. Real estate was strong, same with the material sector, like copper, steel, aluminum, cement, and timber. The energy sector was strong, healthcare sector was strong, biotech sector was strong, precious metals gold and silver were strong.
BRIAN: Hundreds of stocks, Decker Talk Radio listeners, hundreds of stocks in 2001 and ’02 were going up in 2001 and ’02 when people lost half of their money. The managers that we’re using right now in 2001 and ’02 made money every year because they are sector rotators and they bought what was going up. Now in 2008, what was going up in 2008? Gold, precious metals, treasury bonds, the U.S. dollar, and something called the VIX, the Volatility Index.
BRIAN: Whoever bought those made a lot of money in 2008. So that is one strategy, and some of our managers are sector rotators. That’s one strategy. The second type of strategy are called trend-following. Trend-following models typically use moving averages to buy whatever is going up. And when the trends are broken, those trends, those stocks or indexes or sectors are sold.
BRIAN: So for example in 2001 and ’02, early in 2000, the trend-following models got rid of technology because they broke their up-trends, their 200-day moving average, their 100-day moving average, their 50-day moving average. Those trend lines were broken and so those sectors were sold. Stocks that continue to trend higher are owned. So it’s a different way to skin the cap, but it buys whatever is going up.
BRIAN: The first example was sector rotators, using sectors that are going up. The second is using moving averages to buy whatever is trending higher. Third and final part of the managers that we use, the strategies that we use, are called long-short. Long is where you make money when the markets go up. Short is where you make money as the money goes down. These are computer-driven models that simply buy when the markets are going up, and they’re short when the markets are going down.
BRIAN: Our best manager in 2008 made over 100 percent in 2008 by cashing in on the volatility of the markets in 2008. These are models that have been around for a long time. Decker Talk Radio listeners, if you haven’t heard of these, if you have been taking a beating or getting substandard returns on your risk money, or if you know in your gut that you’re vulnerable to the next market downturn, we hope that you come in and see us.
BRIAN: Because we can show you mathematically, and we can show you net of fee performance. The fact sheets on all our managers. This is something that you should be doing. So we want to tell you at Decker Talk Radio, Decker Talk Radio clients, with Decker Retirement Planning in Carillon Point in Kirkland, Washington. Come in, see us, we will show you the managers and show you how to significantly lower the risk in your stock market portfolio.
MIKE: Yeah. Want to add to that too, our website is full of tons of articles that have gone in depth with what we’re talking about today if you need to do extra reading. www.deckerretirementplanning.com. We also have a whole slew of radio shows that are saved to our website that you can browse, listen, and enjoy. Also, for a reminder, this radio show is subscribable if you have Podcast, so you could listen to it at your own time when it’s convenient to you, and you can do that through iTunes or Google Play. Just search for the Podcast “Protect Your Retirement.”
MIKE: So with all that, thank you so much for listening. Tune in next week 9:00am, Sunday mornings, KVI radio, or with us via Podcast. Take care, everyone.
