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 talking about risk… what it means and what it looks like in a retiree’s portfolio. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day everyone, this is Mike Decker and Brian Decker on another edition of Decker’s Talk Radio’s Protect Your Retirement. Very excited for today’s show. Can I give the clue? It’s all about…
BRIAN AND MIKE: Risk.
MIKE: All about risk, and we define risk as a mathematical term, but we’re going to dive into that and what that means right now. Brian?
BRIAN: Including a discussion of… Bitcoin.
MIKE: [LAUGH] You know… so I’m 29 years old, right? And all my friends are saying oh, Bitcoin’s the greatest. Oh, you should invest in Bitcoin… and I just go do you know what Bitcoin really is? Do you have any idea how volatile that is? A fake currency?
BRIAN: And how they’re calculating the value of Bitcoin.
MIKE: And they’re bragging to me about how, you know, they put in 20 bucks, now it’s 30 bucks… and they’re all telling me oh, I don’t know how you do that nine to five job, you know, I’m a part-time investor. It’s just a joke.
BRIAN: Yeah, that’s funny. Okay, so on risk, we are Decker Talk Radio, Decker Retirement Planning with Mike and Brian Decker. We wanna cover risk. Risk is one of three very important components of any person’s retirement portfolio. The first component is some cash. [CLEARS THROAT] Everyone’s different with how much cash that they need, but we have done the homework and found that there are some good places to get 1.25, 1.3 percent on your money market, and that is Goldman Sachs has a good money market.
BRIAN: C-I-T, Capital One, Ally, and… there’s one more. Darn. Synchrony. So those are the five that we’ve done our homework at Decker Retirement Planning. We have a fiduciary responsibility to go out and find the best returns that we can and keep your funds’ principal guaranteed.
BRIAN: The second part of your retirement portfolio is safe money. We’ll cover that in a different segment, but we will point out that if you’re drawing income from a fluctuating account, you’re committing financial suicide. Mathematically, you cannot draw from a fluctuating account because what happens? When markets go up you compromise the gains, and when markets go down, you accentuate the loss, and you’re committing financial suicide once you retire.
MIKE: Can I just interject there? If you’re wanting that show and can’t make Sundays at the airing time, you can always go to iTunes or Google Play for Decker Retirement Planning or Protect Your Retirement. Just search for that, and you can it sent to your phone every week so you don’t miss the content. Or go to Decker Retirement Planning dot com, catch all the shows at your convenience.
BRIAN: Good. Good. Okay. So, when it comes to risk, let’s define risk. Risk is something that to us means it’s not principal guaranteed, so it has risk. Banks and brokers will tell you to put your safe money in bond funds.
BRIAN: Are bond funds principal guaranteed? No. Are bond funds safe? No. When interest rates are at or near all time record lows, you have interest rate risk when it comes to bond funds. Bond funds lose value when interest rates go up. For example, in 1994, the 10 year treasury went from six to eight percent in one year.
BRIAN: Your quote unquote safe money in bond funds lost 20 percent according to Morningstar that year. In 1999, the 10 year treasure went from four to six percent in one year. How did your bond funds do? Your quote unquote safe money from the bankers and brokers. They lost 17 percent on average. If we go from where we are right now… 2.3 percent, with the fed openly telling us that they’re going to have at least four more rate hikes next year, what happens to your bond funds?
BRIAN: They lose money. So just like a math teacher teaches that two plus two is four, bond funds… when interest rates go up… will lose money. I wanna point out that your bond funds are not safe.
MIKE: Can I point out that for those that don’t understand that concept, just go to Investopedia dot com and Google how bond funds work. It’s simple and they’ve got some great videos explaining all that.
BRIAN: Okay. So now, this whole radio segment today… uninterrupted, no commercials… is going to be 56 minutes of just risk focused strategies for people that are retired. So now let’s talk about the banks and brokers, again, with interest rate risk, when interest rates are at or near all time record lows, interest rate risk is at or near all-time record highs.
BRIAN: I wanna emphasize that bond funds are not safe when interest rates are this low. So, I’m going to move on. Should you have all of your money at risk? In your 20s, 30s, and 40s probably smart to do so. You’ve got a job, you’ve got income coming in. W-2, 1099 income… no problem, that’s fine. Once you take that last paycheck you’re ever going to take, you cannot afford any longer to take 30, 40, or 50 percent market hits because you can’t replace that.
BRIAN: And it takes typically, historically, four years to get your money back, and that’s four years where what are you doing? No longer drawing income from your portfolio? You can’t do that. Most people can’t do that. And so we wanna hopefully approach this at Decker Talk Radio listeners with a common sense approach of someone that is a fiduciary to their clients.
BRIAN: A fiduciary is someone who’s required by state law to put their client’s best interest before their company’s best interest. So, if I’m working at X-Y-Z bank… Mike, if I’m working for X-Y-Z bank, guess what kind of mutual funds you’re going to get?
MIKE: X-Y-Z bank mutual funds.
BRIAN: That’s right. If I work for A-B-C brokerage firm, guess what mutual funds you’re going to get?
MIKE: It’s simple. Why would they put together their product and then not sell it?
BRIAN: Right. So, is that being a fiduciary? No, it’s not being a fiduciary.
MIKE: It’s kinda like if you walk up to a Toyota dealership… and I love Toyota… and expect them to talk to you about every single car possible that you could buy? That’s kind of insane. Of course they’re going to talk to you about Toyota cars, because that’s what they sell. That’s the dealership you’re at. The same goes with these different mutual fund companies or banks.
BRIAN: Right. Okay, so, why do most bankers and brokers have all your money at risk?
MIKE: If you don’t know, it’s because that’s how they get paid.
BRIAN: That’s how they get paid. When I started at a regional brokerage firm in 1986, my manager would come in and remind us on a regular basis… Brian, we get paid to keep our clients at risk. If you have a banker or broker, financial advisor, that has all your money in a pie chart where you are diversified among different bond funds, stock funds, and has all your money at risk, that is not in your best interest, it’s in his or her best interest.
BRIAN: They’re not acting with proper suitability, they’re not acting as a fiduciary to you no matter what they say if they are or aren’t fiduciaries. By the way… nah, I’m not going to go there. I was going to define how you can know for yourself if you’re dealing with a fiduciary or not. I’ll just say it real quick.
MIKE: It’s real quick… three checkpoints.
BRIAN: Yep. Number one, you’ve gotta be independent. If you’re working with a big bank or brokerage firm, they’re telling your advisor what they can and can’t work with you on.
BRIAN: Number two, their Series 65 license. They cannot take security commissions. Everything is fee-based, above board only so that they can’t scam you with things that are non-transparent and heavy commissioned items like variable annuities, where the broker takes eight percent right up front. He gets paid every year you own it. The insurance companies get paid every year you own it, and the mutual fund companies get paid every year you own it.
BRIAN: Three layers of fees that usually add up to five to seven percent before you make a dime. We don’t like variable annuities. We try to perform a community service in having you stay the heck away from variable annuities. Also other annuities… income riders, income annuities… we don’t like those because they just don’t do anything that we need them to. They don’t grow funds quickly.
BRIAN: On the second part, if your advisor is a Series 7 licensed advisor, they have the ability to charge you security commissions and to get you in and recommend variable annuities, non-traded rates that are usually 12 percent commissions and you’re locked in. Is that in your best interest? No. Is it in his or hers? Yes. And then the final is the worst, and that’s C-share mutual funds.
BRIAN: C as in Charlie. C-share mutual funds… if you look on your statement and you see that you have C-share mutual funds… these mutual funds are so toxic when it comes to fees and non-friendly to consumer approach… that’s translated meaning deceptive… that they are not allowed to be transferred into the systems at TD Ameritrade, Schwab, Fidelity and Vanguard.
MIKE: We actually did an event this last week, and someone had C-share mutual funds and we brought this up at the event… you could see, he was just livid with his broker. Wrote down a huge note and is coming in, and we’re going to fix that.
BRIAN: Right. So, C-share mutual funds… the deception is, the broker tells you that there’s no upfront commission, there’s no backend commission, there’s no… and what they don’t tell you is that there is a one percent annual fee that is tacked on, it’s called 12B1, and it’s tacked on, and the broker deceptively tells you there’s no front or backend fees.
BRIAN: What they don’t tell you is that they’ve just doubled your fees because the mutual fund is already charging you one percent, and they’re going to charge you another one percent, and there’s no disclosure on it. It’s dishonest, it’s deceptive, it’s wrong, and if you look at your statements and you see a C-share by the description of those funds, your broker is taking advantage of you and if they have not transparently divulged that fee, legally you have a case to collect those fees back.
BRIAN: You have to be told about the fees that you’re being charged. Okay, so, if you wanna find out if your advisor is a fiduciary or not, test number one is they’ve gotta be independent. We’re an independent company at Decker Retirement Planning. They need to be totally independent. Number two, they need to be Series 65 licensed, not Series 7. And number three, they need to be an R-I-A… a registered advisory company.
MIKE: That structure is critically important to be a fiduciary to the client. All right. The whole hour is talking about risk… what are your different strategies to control risk? Some people will trot out a couple of statistics that are a little deceptive. One says that nobody can time the market.
MIKE: Here’s the deception on that comment… that’s true. Nobody can time the market, but computer programs, trend following programs, have been able to make money in 2000, ’01, ’02, and in ’08. So guess what? Mike, if we know that there are trend following models that are out there that are two-sided strategies… they trend when the markets go up, they protect principal and are able to make money when the markets go down… if those are out there and available, would a fiduciary use those?
MIKE: Yeah. [LAUGH]
BRIAN: That’s a hard one, isn’t it? Yeah, they would. And this is one of the main reasons that people come in and see us at Decker Retirement Planning… our offices in Seattle Washington, Kirkland Washington, and Salt Lake City Utah… did you know that we have six managers that are two-sided strategies… and I’m going to talk more about this in the time that we have… two-sided strategies that when the markets go up, the kinda hang with the S&P when the markets go up, and when the markets go down, they are able to and have historically made money when the markets drop.
BRIAN: Not just protect principal, but were able to make and not lose money.
BRIAN: Right. And we’re going to talk more about this. So, on the percentage exposure, we wanna talk common sense here. Is it right to have a hundred percent of your money at risk when you’re over 55 or in retirement?
BRIAN: The answer is definitively, mathematically, logically, common sense… no. No, it’s not. And so, what do we recommend? In the plans that we do… any by the way, we’re a math based firm. We have a spreadsheet that we call a distribution plan or an income plan that shows all of your different sources of income on the left side of the spreadsheet.
BRIAN: So if you’ve got rental real estate, if you’ve got pension money, if you’ve got income from your portfolio, you’ve got your social security, your wife’s social security… and we gross it all up minus taxes… that gives you annual and monthly income with a COLA… we use a three percent COLA… cost of living adjustment… to give you a little more money every year to age 100. Most people have no idea how much they can spend. They’re guessing.
BRIAN: Even some very smart people… you’re just guessing unless you do the numbers. That’s something we do day one for our clients, is we collect information and we give you your distribution plan so that you can see mathematically how much money you can draw so that you don’t run out before you die. The right side of the spreadsheet is bucket one, two, and three, which are laddered, principal guaranteed accounts that are designed to give you your income for the first 20 years of retirement.
BRIAN: Those are principal guaranteed accounts. That means that about 75 percent of your funds typically have no risk. This is unheard of with banks and brokers. Clients come in and they see this, and they breathe a tremendous sigh of relief, because they knew… intuitively… they knew that that’s how it should be. We’re doing mathematically the common sense strategies that even people with no finance background, no background in the stock market… they know intuitively that they shouldn’t have all their money at risk.
BRIAN: At Decker Retirement Planning we don’t do that. Now, of the 25 percent or so that is as risk… that’s what this show is all about… is what strategies should we have to protect your funds when markets are dropping, and to track with the markets when the markets are going up? So, let’s talk now about downside protection strategies. Probably the most popular is the buy and hold.
BRIAN: The buy and hold… these people are convinced that since nobody can time the market… which is deceptively true… no person can time the market, but trend following algorithms have been around for 20 years, and they have done a very good job at having a two sided strategy… up, down… in a two-sided stock market that goes up and down. These have been around for 20 years. We as fiduciaries to our clients go through the biggest databases… this is very important.
BRIAN: Right here, this is the most important part of the show, because I’m going to give, with full transparency, how we choose the six managers that we have. If you’re tasking your advisor to look out for you, I would suggest that they should do what we do, and that is we go to the Wilshire database, the largest database of money managers in the world… we go to the Morningstar database, the largest database of mutual funds in the world, and we also go to TimerTrac and Theta to other databases, and we wanna know simply two things… who’s tracking with the S&P when the markets go up?
BRIAN: Very tough to do because 85 percent of money mangers or mutual funds each year don’t track with the S&P. And who’s protecting principal when the markets go down? Those are our twofold mission statements, and that’s a very difficult second mission statement because who do you know that made money in 2008? Those are two very high bars. So, with those two mission statements in mind, we go through the databases looking for those that have it, and the six that we have in place are doing just that.
BRIAN: Every quarter when we go through the Wilshire database and the other databases, I wanna know who is beating who we’ve got. And every quarter I get around 60 or 70 that legitimately beat the managers that we have in use for our clients. But they fall into four categories. Number one, yes, they’re beating us, but they’re closed to new investors. I can’t work with that.
BRIAN: Number two is yes, they’re beating us, but their per account minimum is three to five millions dollars. I can’t diversify that. Number three, they’re hedge funds, and we’re not going to put your money in a hedge fund because hedge funds are set up… and in this radio show, I wanna be thorough, so I’m going to describe in detail why we would not use a hedge fund. Hey, let’s say Mike that you and I run a New York hedge fund… we get paid two different ways.
BRIAN: One is the one percent management fee, that keeps the lights on. But what puts Ferraris in our garages is called the 2 and 20. The 2 and 20 says that all the returns above two percent we share… we get 20, client keeps 80. So guess what? Let’s say that it’s November first, we’ve got two months to go for the year, we’re down five percent, what are we going to do?
BRIAN: Predictably, we’re going to goose that portfolio with options, future, leverage, and derivatives to get that sucker up there, because if we don’t, we don’t get paid that 2 and 20. So what happens when in the fourth quarter the news comes out in the first quarter that A-B-C hedge fund blew up. This happens every year. We don’t like the incentive and the compensation structure that incents high risk in the fourth quarter if they’re down.
BRIAN: So that’s not something that we use with any retirement clients. Fourth and final is yeah, this guy mathematically they deserve to be on our platform, but they’re high beta funds. That means that in the good years, they go way up, and in the bad years, they go way down. For example, there’s two mutual funds, C-G-N Focus and the Bruce fund… they deserve mathematically to be on our platform.
BRIAN: We can’t use them because in 2008 they both lost over 40 percent. So what’s left mathematically is the highest net of fee, third party verified client account actual performers that have tracked with the market when the markets go up and protected principal when the markets go down. These are the funds and the managers that we use for our clients.
BRIAN: Wouldn’t you expect your banker or broker, if they’re really looking out for you, to go out and do the homework that we just did? Now we gave that call in for the people to come in and see… we’ll show with full transparency the name, we’ll show a breakdown of year by year, and I think to a person everyone is pleasantly surprised when they see these returns.
BRIAN: All right, I rode up the chair… I went skiing yesterday Mike and it was awesome to be up there. I rode up the chair with a guy who’s 60 years old, he’s saved, he’s never sold a share of his portfolio.
BRIAN: He bought the indexes, he did everything right, and he’s accumulated a very nice nest egg. He asked me, he said I know that I should take some chips off the table. I said yeah, because every seven or eight years the markets get creamed. And he goes I know. And I said well, I’m going to tell you the dates. The dates are 2008… the markets from October of ’07 to March of ’09 lost over 50 percent.
BRIAN: Then seven years before that was twin towers went down in 2001 you’re the middle of a three year tech bubble bursting… another 50 percent drop. Seven years before that was 1994… Iraq had invaded Kuwait, interest rates spiked, the economy was in recession, and the stock market struggled. Seven years before ’94 we had 1987, Black Monday, October 19th… 22 percent drop in one day, 30 percent drop peak to trough.
BRIAN: Seven years before that was 1980. ’80 to ’82… sky high interest rates, the economy in recession… 46 percent drop. Seven years before that was the ’73, ’74 bear market… that was a 42 percent drop. Seven years before that was ’66, ’67 bear market, that was a 40 plus percent drop, and it keeps going. So if we bottomed in March of ’09, we’re in year nine of a seven, eight year market cycle.
BRIAN: When I told this to the guy in the chairlift, he was sobered up and he says I know I’ve gotta do something. But now here he’s in a position where he has to try to time the markets. I told him about two-sided trend following models, and that, in our opinion as a fiduciary, is the solution. So what are the other options?
BRIAN: Some people think that they can just figure out when to get in and get out of the markets… I don’t think there’s many people that can do that, ‘cause here’s what happens. I’m going to describe human nature what happens every seven or eight years. Markets drop 10 percent, takes their breath away, and then they think well, when the markets get back to where they were, I’m going to lighten up some.
BRIAN: But this time, the markets don’t. So now they’re down 15 percent, and then they start to get sick to their stomach. Now they’re down 20 percent and they’re not sleeping well. So they say well any time the markets bounce, I’m going to lighten up. And now the markets… before you know it… are down 30 percent. And then they tell themselves that they are long term investors and the justify not doing anything and they pat themselves on the back for being so smart and then they’re down 40 percent.
BRIAN: Now down 40 percent they realize that this is a life changing event, that they no longer have the money to do the things that they wanna do. Now they’re down 50 percent. At 50 percent they’re nauseous and they just close their eyes and sell… at the bottom of course. So, a lot of people do what I just told you. The headlines are horrible when the markets are down 50 percent.
BRIAN: Human beings are horrible investors because of two emotions. Mike, what are they? Two emotions that keep people from being good investors.
MIKE: It’s greed and fear.
BRIAN: Greed and fear. Greed keeps you from selling or lightening up when the markets are high… fear keeps you from buying when the markets are low. So, fear and greed keeps human beings as horrible investors, but also fear and greed keeps human beings from not being able to compete with two-sided models like the ones that we use.
BRIAN: Computers have beaten investors for 20 years on these trend following models. So, that’s what we use for our clients at Decker Talk Radio, or Decker Retirement Planning. Another very popular strategy is to use what are called stop losses. Stop losses when you buy Microsoft for 40, stock’s at 60 and you tell yourself that if it drops 10 percent that the stock is automatically sold.
BRIAN: Well, for the first few years your experience on the stop loss is very frustrating because when the markets just have their normal volatility, you get stopped out of the Microsoft stock ‘cause it pulls back, and then it rockets to a new high without you. You’re not back in. So, that happens five, six, seven, or eight times, and then you say forget this, I’m going to have mental stop losses, and then you fall into the trap of what I just described, oh gosh, just a few minutes ago where you think that you’re going to sell and you don’t because these losses, when the markets drop, are breathtaking.
BRIAN: So let me describe how two-sided, trend following models work. Now, a lot of you have been at the beach… the tide comes in, there’s a shift every 12 hours and the tide goes out. I’m not talking about the noise of the waves that roll in every 30 seconds or so, I’m talking about the market internals. The externals of the markets are how many points the Dow, S&P-R Nasdaq are up or down in a day. Those are the market externals.
BRIAN: The market internals are things like the advanced decline line. The number of new highs. The number of new lows. The percentage of stocks trading above their 200 day moving average, 100 day moving average, and 50 day moving averages. Those are market internals. When you have a strong market making new highs, you also have the new high list going up, new low list going down and then the percentage of stocks trading above their moving averages going higher.
BRIAN: The opposite is true. So when you have a market that is making externally new highs, but the internals are collapsing long before the external market starts to drop, you have these two-sided models protecting your capital by moving them to cash or going short, allowing you to make money as the markets drop. These models have been around for 15 to 20 years and we use them because they have made money.
BRIAN: We are a math based firm. Let me bring up another point that a lot of clients will use, and that is they will say Brian, I’m just going to buy the S&P for three very important reasons. And by the way, this is totally rational, logical. Some of your friends will say that you buy the S&P for three reasons. Number one, for performance reasons, you’re beating 85 percent of money managers and mutual funds every year.
BRIAN: Number one. That’s one of the reasons that you would buy the S&P and let her rip. Second is diversification. You’re diversified among 500 of arguably some of the best companies in the world domestically and internationally. And number three is fees. Fees on the S-P-Y-E-T-F are very small. Negligible. Four basis points. .04 percent. So for all three reasons, totally logical, friends of yours will tell you to put all of your risk money in the S&P.
BRIAN: We would argue against that mathematically, logically, because we would tell you that the markets crash every seven or eight years and a buy and hold strategy on the S&P where you lose 50 percent twice in the last 17 years… not so smart when you’re retired. You can handle it when you’ve got a paycheck coming in, but when you’re retired and you take a 50 percent hit… in 2001 and ’02… and it took until October of ’07 to get your money back.
BRIAN: Just in time to lose 50 percent a second time. And it took until October of 2013 to break even. You can’t handle 13 years of no returns… no equity returns… when you’re retired. It doesn’t make common sense and it doesn’t make math sense. So, that’s another strategy that we wouldn’t recommend. By the way, if you put a hundred thousand in the S&P January one of 2000, with dividends reinvested, it would grow today to about 270 thousand. Average annual return is just under five percent.
BRIAN: If you put a hundred thousand with these six managers that we’re using, a hundred thousand grows to over 900 hundred thousand, net of fees, and average annual returns net of fees is 16 and a half percent. And the reason is because when an accumulative number you don’t take two 50 percent losses, you can accumulate a very large return. So, I wanna talk about fees when it comes to risk money.
BRIAN: Hey Mike, who are you happiest with? Let’s say that you gave me a dollar, and I gave you a 1.10 back. And you gave one of your other buddies three dollars and he gave you six back. Who are you happiest with?
MIKE: The higher return. The six dollars.
BRIAN: And I would argue wait a second, he’s three times more expensive, and you would say…
MIKE: Doesn’t matter. Net of fee performance.
BRIAN: It’s all about net of fee performance.
BRIAN: That’s correct. So we act as fiduciaries to our clients by being sensitive to fees, but it’s all about net of fee performance. It’s all about net of fee performance. You don’t let the fee tail wag the dog when it comes to your portfolio, or else you will suffer a life changing event every seven or eight years when the markets crash. Now I wanna talk about Bitcoin for a second.
BRIAN: I read an article this morning… most people have no idea how the value is created and where the proper valuation is. I don’t. I read the article just stating that most people don’t know… I don’t know how to properly value the Bitcoin. I have no idea what it should be priced at. But I will tell you that I do know how to value the S&P 500.
BRIAN: The S&P 500 is trading right now at 26 times trailing earnings. That puts it higher than 1929 and second only to 1999 as the most expensive market ever. Ever. And whenever the stock market has traded at 25 times earnings or higher, 10 years from that date, there’s never been… not one time… there’s never been a positive 10 year return.
BRIAN: Not in 1929, not in 1999. So now, a lot of people… because they don’t have downside protection on their risk money… are in for something that could be devastating to their retirement. So at Decker Retirement Planning, we have downside protection because 75 percent of our client money is laddered, principal guaranteed accounts. We’ve been through 2008 with our clients, and at Decker Retirement Planning, none of our clients had a life changing event.
BRIAN: They didn’t have to change their travel plans even. They definitely didn’t have to go back to work, move in with the kids, sell their home, none of that because the money that was responsible for their income for the first 20 years is laddered and staggered principal guaranteed accounts. And the managers we’re using now… five of the six managers made money in 2008… and I’m going to get much more specific on the six managers here in a second.
BRIAN: All right. On trend following models, I told you about how risk managers… there’s a guy who wrote a book called What Works on Wall Street. James O’Shaughnessy. And in his early editions, he shows in appendix A the biggest study ever done. For 50 years, he looked at who’s got the highest returns.
BRIAN: And in appendix A, all of ‘em are two sided models or absolute return models. All of them. So we are math based. We’re fiduciaries to our clients. We simply use the highest net of fee return options for our clients. And that’s what we plug in, and we use right now six different managers. Three managers are equity focused, the other three are diversified long short two-sided strategies that have nothing to do with the stock market.
BRIAN: They focus on gold, silver, treasuries, and oil. Why that list? Here’s why… in 2000, ’01, and ’02 guess what made money? Gold, silver, oil and treasury bonds. In 2008 guess what made money? Gold, silver, treasury bonds and oil. In every downturn, that’s the go-to mix for what we call a safe haven.
BRIAN: So, we’ve out our diversification of managers so that with six different managers, we can lower what’s called model risk. Model risk is the risk that a trend following model, a computer algorithm, just gets out of sync with the market. Does it happen? Yes, it does. Is it a valid concern? Yes, it is. So how do we eliminate or minimize model risk? Two ways.
BRIAN: Number one… we don’t have one model, we have six. So, we’re diversified among companies and company strategies. So when a model does after five or six years of doing really well, a model for about a year will just kinda flat and bounce around and unsync from the markets that they trade. When that happens, we have oversight to these managers, and we put ‘em on the bench.
BRIAN: We have a way that we can weight… W-E-I-G-H-T… we weight the managers. Let’s say that five of our managers are doing really well, but one manager, the last three trades, he’s lost money every time. Well, guess what we’re going to do? We’re going to lower the weighting on that manager from an equal weighting, which is 16 percent, and cut them in half to eight percent. If they keep losing money, then we bench them.
BRIAN: We put them on the bench. Right now we have one guy that’s on the bench for Decker Retirement Planning for our six risk models. Our oil guy… we’re not taking his trades right now. So that allows us to minimize the exposure of model risk. Now, with the six managers, we are diversified. One of the six managers’ annual average return is 18 percent net of fees. He made money in 2008. That’s very important.
BRIAN: 17 and a half percent net of fees. Has he lost money? Yes. Three times. In the last 15 years, he’s lost money three times, but they were all small losses. Two and three percent. But we weight… W-E-I-G-H-T… we weight that manager out of there when he’s not keeping up with the markets.
BRIAN: What about the other managers? So the second equity manager we have averages 20 percent net of fees. He’s lost money two times… one was in ’08, he lost 11 percent in 2008. And we, by the way, don’t call our clients like bankers and brokers do and say hey, Mr. and Mrs. Client, markets are down 37 percent in ’08, good thing you’re with us, you only lost 25 percent.
BRIAN: That’s a horrible thing to say. And then, on top of that, they tell you, by the way, you gotta cut back your spending and retirement, let your portfolio recover… how are you going to do that? Are you going to tell the utility companies and the food companies that you’re just not able to pay as much anymore? It’s unrealistic. It doesn’t make common sense. Okay. The third manager that we have… by the way, only one manager has lost money in ’08. That was the second manager.
BRIAN: The third manager is our best equity manager, and he made 23 percent in 2008, has not had a losing year from ’02… he lost two percent in ’02 when the markets were down much more than that. In fact 2000, ’01, and ’02, he trades the NASDAQ 100 index which was down not 50 percent like the S&P, it was down 70 percent, and he made money over that three year period. Then he tracked really nicely with the S&P when the markets went up, made 23 percent in ’08 and was doing great until last year in 2016 he lost 12 percent with the market up.
BRIAN: And it’s something where using the weighting strategy, we didn’t put his trades in at all for last year. So those are the average annual returns for the three managers. On the equity side are 23, 18, and 20 even. The risk managers that have nothing to do with the stock market are gold, silver, treasury bonds, and oil.
BRIAN: These are two-sided strategies, long short with all of them. The oil… he’s not had a losing year, but this year he’s just struggling with the oil market breaking to new highs, so we don’t have any exposure this year. But his average annual return is very high. It’s above 30 percent for his oil.
BRIAN: Average annual return for treasure bonds… by the way, the quote unquote 2008 for treasury bonds happened last year and that was when the 10 year treasury for the United States hit 1.6 percent May of last year and ended the year 2016 at 2.6 percent. Most people lost double digits during that move, and he was able to make, not lose, money.
BRIAN: Average annual return for treasure bonds is over 30 percent for him, and he made over 30 percent in 2008. Last one is gold and silver. If you bought and held gold and silver, you would’ve had a nice last 15 years except for ’13, ’14, and ’15. Gold lost 45 percent, silver lost 65 percent in those three years. With a two-sided strategy, this manager… and by the way, your buy and hold return for gold in the last 15 years is nine percent for gold and about eight percent for silver.
BRIAN: Silver is much more volatile than gold. Average annual returns for this manager that we use for gold is over 29 percent for his two-sided strategy, which by the way, got rid of all of the losses for ’13, ’14, and ’15. Anyone who bought and held gold, the two-sided strategy made, not lost, money. And then in silver, got rid of most of them… there was a four percent loss in 2014… but average annual returns for silver is higher than 30.
BRIAN: So these are the best managers that we can find, and a lot of people look to them and say geez, why isn’t our guys doing this? Why isn’t our advisor… why isn’t our banker, broker, doing what we’re doing? By the way, at Decker Retirement Planning, we wanna point out there’s four important reasons why not everyone is doing this. Number one, in the past, some of our managers have been no load mutual funds. Who do you know that’s going to advise you to use no load mutual funds that they don’t get paid on?
BRIAN: Mike, do you think that’s going to happen?
MIKE: No. You can’t live off of a charity.
BRIAN: Yeah. And the second reason is that not everyone is doing this is because if a banker and broker tells you about a two-sided, trend following model, [CLEARS THROAT] they don’t need you anymore because they have a model that tells you what to buy, when to buy, and when to sell.
BRIAN: But the biggest reason in my opinion is number three. The biggest reasons not everyone’s doing this is because [COUGH] the bankers and brokers require their salespeople to use the acid allocation pie chart. Not because it’s in your best interest, because it’s clearly not. It keeps them from getting sued. So think about it. When you put your pie chart together with the banker and broker, the step one was they gave you a risk questionnaire which you filled out, and then once you filled it out, they submitted that and it spit out a diversified pie chart of mutual funds, with stocks, bonds, et cetera.
BRIAN: And then they had you sign an investment policy statement. Now you can’t sue them… they’re bulletproof because you created that. And I guess there’s a fourth reason why not everyone’s going to do this, and that’s the big banks and mutual funds… they create their business models to create hundreds of funds to gather billions in assets. They’re not going to go down to the four or five that you really do need.
BRIAN: So, for all four reasons, that’s why not everyone is doing what we do at Decker Retirement Planning where we use a distribution strategy showing how much income you can draw for the rest of your life with a three percent COLA, and the money that you have at risk has a two-sided strategy to keep you tracking with the S&P when the markets go up, and protecting principal when the markets go down.
BRIAN: So this is very important that you know you won’t find those two items outside of a fiduciary’s office. I wanna give another illustration of how trend following models work. Image that you put into the computer all the world stocks. Large cap, mid cap, small cap, growth, value, international merging markets, indexes and E-T-Fs. Everything goes into the computer. And all the stocks that are trading above their 200 moving day average are held in the portfolio.
BRIAN: By the way, ever stock index or E-T-F has an average price for the last 200 days that is plotted as the solid line. It’s the 200 day moving average. Universally, around the world, any stock that’s accepted… any stock that’s trading above the 200 day moving average is said to be in an uptrend. Any stock trading below it is said to be in a downtrend. Uptrends make you money, downtrends lose you money.
BRIAN: So, during 2000, ’01, and ’02, when the tech bubble burst, the managers that we’re using were able to make and not lose money because when the techs started crossing the 200 moving day average and were sold, there were hundred of other stocks that made, not lost, money in 2000, ’01, and ’02. For example, can you think of some? Real estate was strong for that period of time in 2000, ’01, and ’02.
MIKE: What about utilities?
BRIAN: No, well…
MIKE: How’d they do?
BRIAN: They did okay, but the strongest ones were real estate, the material sector like copper, steel, aluminum, cement, and timber.
MIKE: Mm-hmm. Mm-hmm.
BRIAN: Gold and silver were strong.
MIKE: Treasuries?
BRIAN: Treasury bonds were good.
MIKE: Yeah.
BRIAN: Oil, biotech, healthcare… hundred of stocks were able to stay strong allowing the managers to make, and not lose, money.
BRIAN: So, this is something that’s very important because we right now ladies and gentlemen, at Decker Talk Radio… we’re in a position where… I just wanna say again… the markets have only been valued than where we’re trading right now one time before, that was in 1999. One time in the history of our stock markets. That’s how high the valuation is.
BRIAN: When markets go down, they typically go down 35 to 40 percent. Can you afford that kind of a hit? Do you have a plan in place?
BRIAN: When it comes to risk, I hope that you have a plan in place because once you get to these nosebleed levels for valuation on the stock market, Decker Talk Radio listeners, there’s never been a time in our stock market’s history that the stock market has made money in the next 10 years from when it initially hits 25 times earnings.
BRIAN: That’s only happened two times before… 1929 and 1999. So now, people that are in retirement are expecting something from their portfolio that’s never happened before. They’re hoping for a positive return. At Decker Retirement Planning… with offices in Seattle, Kirkland Washington, and Salt Lake City Utah, our clients will not be affected because buckets one, two, and three that produce income for the next 20 years are principal guaranteed.
BRIAN: So when the markets crash, they’re unaffected. The cash portion of our client portfolio is also having no market exposure… there’s no problem. The 25 percent or so that has risk exposure… we fully expect our clients to make, and not lose, money when the markets drop because we as fiduciaries have gone out and found out these trend following models exist and have existed for 15 to 20 years, and we use them.
MIKE: So, all right Brian, a couple more comments and then we’ll wrap up the show.
BRIAN: Okay. I just want to state again, here’s what downside protection is not… bankers and brokers will tell you that your safe money is in bonds and bond funds when interest rates are this low. When interest rates go up you lose money on bond funds. Just like two plus two is four. That does not protect you. Number two… a buy and hold strategy where you get nailed in the stock market does not protect you.
BRIAN: So that doesn’t work. And number three, when you’ve got all your money at risk and you’re drawing income out of fluctuating accounts, that doesn’t help either. And one last thing I should’ve spent more time on is some clients use income portfolios where they get high dividend strategies, and they think that they’re protected from their dividends. That’s something that historically is concentrating your investment into two different sectors… real estate and oil.
BRIAN: Real estate lost 70 percent in 2008, and oil in 2014 and ’15 went from 110 dollars a barrel down to 25 [CLEARS THROAT]. Now it’s back up to around 60. Oil and real estate have tanked. They cycle. So, it doesn’t work to get six, seven percent dividends and lose 40 percent of your principal. That strategy doesn’t work. So we’re fiduciaries to our clients at Decker Retirement Planning. Hope you come in and see us and we can check out how your downside protection is working.
MIKE: Excellent. So, you’re listening to Decker’s Talk Radio Protect Your Retirement. KVI 570 or KNRS 105.9. Also feel free to go to Decker Retirement Planning dot com for this show or previous casts as well as iTunes or Google Play where you can subscribe, and that’s the best way to do it, because we release the show early on Friday for the podcast listeners. Have a great rest of your week everyone and we’ll talk to you next Sunday.
