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BRIAN: Welcome to Save for Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in finance and investing, we help you stay up to date on market news and retirement strategies. I’m Brian James Decker, owner and founder of Decker Retirement Planning and host of Save for Retirement Radio. With me is my co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw. Today, we’re gonna cover the different options that we have for our clients on the risk part of their portfolio.
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BRIAN: In any portfolio, Clayton, we’ve got cash, safe money and risk. We’ve talked about cash, we’ve talked about the returns to get on cash, we’ve given specific names of banks on where to go.
CLAYTON: Yep. Right.
BRIAN: We’ve been pretty clear on cash.
CLAYTON: Yep.
BRIAN: And what do you say? That’s usually five to 10 percent of the portfolio?
CLAYTON: Yeah. It depends on the individual or the couple and what their needs are. It’s different for everybody, but it’s typically a small percentage.
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CLAYTON: I mean you hear about those, there’s one particular name that I won’t mention, but he’s a big proponent of having six months of emergency cash set aside. So, think of it like that, right? That’s what we’re looking for cash.
BRIAN: Okay. We agree with most of what Dave Ramsey says, by the way.
CLAYTON: Yeah. Ooh, yeah. Yeah.
BRIAN: Okay. Then safe money we covered in the last podcast. And we covered it I think pretty clearly, carefully and with tons of detail.
CLAYTON: Yeah. So, we talked through some tax minimizing strategies last time. We talk about some of these subjects. So that’s why we’re gonna focus on that risk portion today, right?
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BRIAN: Right. So, a couple of things. First of all, most people, when they come into the office, they have all their portfolio at risk through the pie chart, right? That means that they’re paying fees on all of their portfolio, and they have risk on all of their portfolio. They think that they’re safe with their bond funds, but when bond funds are down, we’ve talked about interest rate risk. We’re not gonna go there today.
CLAYTON: Yeah.
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BRIAN: So what are the options for the risk portfolio, what do we measure it against, and we’re gonna talk today about the two-sided computer trend following models that just in February and March of this year, when the markets dropped 30 percent in five weeks, the fastest 30 percent in the history of the US markets, our clients made money during that period because of what we’re gonna talk about today with the two-sided risk models.
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BRIAN: First thing, Clayton, a lot of people in retirement have a hard time transitioning from accumulation mindset to a distribution mindset. I think if we’re gonna talk about risk, we should start there.
CLAYTON: Yeah. And why do you think that is that there is that difficulty of switching over? I mean, you’ve got 35 plus years of experience, so what have you seen and why has that been difficult for people to make that adjustment?
BRIAN: This is a good question. It’s because they’ve been doing it that way for all of their adult life. They’ve been told by all the bankers and brokers they know that this is the way to go.
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BRIAN: The commercials, the media, the things that they read, everything says modern portfolio theory, buy and hold, asset allocation, pie chart, diversification is the way to go. And by the way, we agree that in your 20s, 30s and 40s and up to 55 years old, no problem because when the markets go down, you have your salary coming in to pay the bills, and you benefit from a drop in the market, even if it’s over two or three years, like 2000, 01 and 02.
CLAYTON: Sure.
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BRIAN: Why? Because your 401(k) is dollar cost averaging with purchases into the portfolio every two weeks.
CLAYTON: Right.
BRIAN: And so, if the markets go down, that gives you two or three years to buy into a down market, and then you benefit when the markets come up.
CLAYTON: Yeah. And that’s a pretty cool thing, that dollar cost averaging, to just drive that average share price down for the mutual funds you’re buying in your 401(k).
BRIAN: Right. All of that changes when you take that last paycheck, you’re ever gonna take, when you retire, you don’t have that income, and now when your portfolio drops 20, 30, 40 percent, you take that whole hit.
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BRIAN: You have no benefit of dollar cost averaging. Your portfolio took that hit. Strike one. Strike two, you’re pulling money out of that portfolio so that when the markets go down, you’re exacerbating that drop. And when the markets come back up, this is strike three. This is what makes it terminal for retirees. They have pulled out a chunk of change if it’s over two or three years, and when the markets come back, it’s coming back with a fraction of their portfolio.
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BRIAN: So, they’re compromising gains when markets go up, they’re accentuating losses when markets go down, and that is financial suicide for a retiree.
CLAYTON: Sure.
BRIAN: So that’s the big picture. Notice that in our retirement plans, what would you say, Clayton, 20, 25 percent risk exposure?
CLAYTON: Yeah. And again, it kinda depends on everyone. And if somebody’s curious on what it would look like, give us a call. We can build a plan out for you and show you about what your risk exposure would be.
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CLAYTON: And what we mean by that is the amount of money that isn’t in your safe money, your cash or those principal guaranteed accounts that we’ve talked about on other shows. It’s just that portion that can go up and can go down, right?
BRIAN: Yep. So, here’s one of the things, one of the many things that I really enjoy about distribution planning. Let’s say that the risk bucket has 20 percent of your money. And so, 80 percent of your money is either safe money or cash. You use the safe money during the first 20 years of retirement.
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CLAYTON: Sure.
BRIAN: And let’s say that you start with X. X can be 700,000, it can be a million, it can be five million. But you start with X.
CLAYTON: Right.
BRIAN: You spend through 80 percent of your portfolio in the first 20 years. Guess what happens to the risk bucket in 20 years. It replaces X in 20 years. Isn’t that cool?
CLAYTON: Yeah. Yeah, that’s one of the genius things about distribution planning.
BRIAN: Now, I wanna make sure that you heard that, understood that. I’m talking you, the client, not you, the Clayton.
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CLAYTON: The listeners, right?
BRIAN: Listeners.
CLAYTON: Yeah.
BRIAN: Okay. In distribution planning, we carve out 20 percent of the portfolio that replaces what you started with so that in 20 years, if you started with 700,000, you have 700,000 in 20 years, and yet, you’ve spent through 80 percent of your portfolio. That is genius.
CLAYTON: Yeah. It’s great to see. When I put these plans together and have these conversations with people when they go into that retirement phase of their lives, they move from this point where 90 to 100 percent of their portfolio is at the whims of the market, and it’s gonna go up, it’s gonna go down, and that’s a panicky thing when you are a year or two away from or into retirement, and you see your portfolio drop.
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CLAYTON: With distribution planning, just like your income was protected through your employment, your income still gets that protection through those principal guaranteed accounts that we’ve talked about. And then you’ve just got that risk portion that still can grow, but that’s long-term money, again, just like your 401(k) was while you were working.
BRIAN: Right. Okay. So now let’s take a few minutes and go through the different options that are out there to use in the risk part of their portfolio.
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CLAYTON: Sure.
BRIAN: So, let’s strike out the easiest worst ones on the list, variable annuities and bond funds.
CLAYTON: Yep. Yeah.
BRIAN: There’s no guarantee on either one. Variable annuities have high fees, so they are a drag as the portfolio goes up three to four percent per year typically is what we see.
CLAYTON: Uh-huh. Right. Yep. Yeah.
BRIAN: And then day one when markets are dropping, January 1, you’re already down three or four percent to start the year, and then you lose more than that.
CLAYTON: Yep.
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BRIAN: We don’t like them, we don’t use them, we don’t recommend any of our clients have a variable annuity.
CLAYTON: Well, and when I’ve had people come in that have a variable annuity, and we call the insurance company together and just ask some simple questions to understand kinda how it operates, inevitably, the blood drains from their face because they realize the con that they got brought into on these products. And yeah, it’s frustrating to see that the other guys out there and gals, other advisors that are pitching these do it in good conscience because I don’t think that it can be done in good conscience.
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BRIAN: No. And we don’t have time to go into the cons of a variable annuity, which is the carrot of the guaranteed return. We’re not gonna go there.
CLAYTON: Right. Right.
BRIAN: We categorically don’t like, don’t use, don’t recommend variable annuities. So, strike that box. The next one, easily the worst investment on all the risk options are bond funds right now.
CLAYTON: Yep.
BRIAN: Because today with the 10 Year Treasury at 0.6, you’re not paid anything, much of anything, and when interest rates go up, you will have a significant loss of principal.
CLAYTON: Mm-hmm. So, strike on bond funds too.
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BRIAN: And by the way, what we’re measuring against to find what we want to for a proper risk choice is two things. One, they’ve gotta track with the S&P when markets go up, and two, protect principal when the markets go down. Those are two very high bars ’cause according to Vanguard, 85 percent of money managers and mutual funds don’t track with the S&P when the markets go up. And two, who do you know that made money in 2008, right?
CLAYTON: Yep.
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BRIAN: Okay. So those are two very high bars. Scratch variable annuities and scratch bond funds. Now let’s go into mutual funds. Just plain mutual funds.
CLAYTON: Sure.
BRIAN: Do they track with the S&P when the markets go up? Typically, not. And do they have any downside protection when the markets go down? No. But there’s one category that we look at from time to time ’cause we on a regular basis will go through and see who has the good numbers, and we see something called sector rotating mutual funds that use, I’m sorry to get jargony here.
CLAYTON: Sure. A little jargony.
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BRIAN: These are funds that track and buy whatever is trending higher when measured against cash. So, what that means is in 2000, 01 and 02, when the markets were going down hard, they track and buy whatever is trending higher, which was gold, silver, energy, real estate, pharmaceutical, biotech. Those sectors were going up when the markets were getting creamed and lost over 50 percent, the S&P at least, and the NASDAQ was down 70 percent during that period.
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CLAYTON: Yeah. So, you might say this is kind of a dynamic way internally that the mutual funds are running.
BRIAN: Right. Those are called sector rotation funds. We look at them, we’re aware of them, we find out who the best of those are. We’ve used some in the past, but they’re not competitive with the models that are coming out, the ones that we’re using now.
CLAYTON: Right. And when you say we look at them when we research them, what you’re talking about is we go through, this is part of the research that we do, is we’re a math-based firm. We’ve talked about that before.
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CLAYTON: We go through all the databases. We know on the principal guaranteed side as well as on the risk side where the highest returning strategies are that are available to the public. We know about these and actively work to implement them. And we’re gonna be talking a little bit more about that as we get to the two-sided models later.
BRIAN: Right. So now, let’s talk about commodities. Commodities, easily the biggest market in the world. This is agricultural energy, precious metals. It’s a huge market.
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BRIAN: Do you buy and hold commodities? No. Not if you’re gonna beat the S&P, and no, it doesn’t protect you when those commodities go down in price.
CLAYTON: Sure.
BRIAN: So, we scratch out commodities as a group. There are ways to own commodities that we’ll get to in a second, like gold and silver and energy, but buying and holding is not the way to go.
CLAYTON: Mm-hmm.
BRIAN: So now there’s another group called managed futures. Futures are a leveraged way to own commodities. Like options are to stocks, futures are to commodities.
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BRIAN: I’m gonna go over this quickly because it’s very jargony, but we’re aware of it, we follow it, and there’s a group called managed futures that are specific to the futures sector that are very good managers, but they’re not tracking with the performance and the returns that we are seeing.
CLAYTON: Yep.
BRIAN: And by the way, when I say the managers that we’re using, these are managers that are averaging well over 16, 17 percent per year for the last sometimes 20 years.
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CLAYTON: Yeah. And we’ll dive into how their strategies work in a few minutes.
BRIAN: Right. Okay. So, scratch out commodities and futures. Now, ETFs, so exchange traded funds, I just wanted to find it and come back to it.
CLAYTON: Yeah. Yep.
BRIAN: Genius discovery and invention. It allows you to invest in sectors and indexes in a very efficient way.
CLAYTON: Mm-hmm.
BRIAN: So, before 2000, if you wanted to buy the S&P 500, good luck, because you buy 100 shares of 500 stocks. It was really rough to duplicate.
CLAYTON: Yeah.
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BRIAN: Now you buy SPY or an ETF like that, and you own that index.
CLAYTON: There’s a bunch of them out there, yep.
BRIAN: QQQ for the NASDAQ, IWM for the small caps. Anyhow, it’s easy to duplicate an index because of the exchange traded funds. Also, if you were wanting to own oil as a sector or gold as a sector, you can buy GLD or OIL and own that entire energy sector. So, you have diversification and you get the benefit.
CLAYTON: Right.
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BRIAN: If you think energy prices are gonna go higher and you’re not sure which stock to pick, you can own the whole sector.
CLAYTON: Sure.
BRIAN: Genius invention, we like it, we’ll use it, and we’ll come back to that in a second.
CLAYTON: Right.
BRIAN: Okay. Now, foreign exchange. I’m gonna quickly go through these. Yeah, it’s out there. You can buy the Japanese yen and the different currencies that are out there, the peso, the Chinese yuan, and they can appreciate or depreciate against the US dollar.
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BRIAN: Is it a way to make money in your risk portfolio? We don’t see that very often. I don’t see it very often. Do you?
CLAYTON: No. The way that I always see it advertised through social media and wherever else I see it online is you see those guys that are sitting in front of six monitors and they always brag that they worked for two hours in the morning and they made 4,000 bucks ’cause they were trading this stuff back and forth, but they don’t tell you about the other week where they lost 8,000 bucks because they made a bad trade.
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CLAYTON: So, this stuff is…
BRIAN: Highly technical.
CLAYTON: …highly technical and yeah, I don’t know. I have never seen anybody come in that actually did this kind of trading.
BRIAN: So, we’re covering this in the conversation to be comprehensive, but it’s not something that we see very often. Now, we’ve saved the best for last, the last three groups, stocks, the dividend strategies and options. So, let’s take options off the table.
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BRIAN: Options are a way that you can control in leverage, via leverage, a large amount of stock. In 35 years of doing this, I’ve never met someone who has made money over a 12-month period by going long calls and puts, never once. So, if they say that this is a recommended way to invest your retirement funds, show ’em the cross of Dracula because… No. Show the cross to Dracula because they’re not telling you the truth or they’re the first person on the planet to ever have done it.
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CLAYTON: There you go. Yeah.
BRIAN: It’s highly risky. It’s like someone saying, “Clayton, I recommend that you go to the slots down in Vegas to invest your risk money because I spent the weekend in Vegas, and my 100 dollars is now a 1,000. So, you should invest your retirement funds on the slots.
CLAYTON: Let’s do it. No, I’m just kidding. It’s terrible. I mean, it’s legalized gambling from an investor’s standpoint.
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BRIAN: Right. It’s highly risky. Okay. Appreciate listeners, viewers for your patience. Now we’re gonna get into the mainstream strategies that we see a lot.
CLAYTON: Yep.
BRIAN: When you buy the stock and you sell the call; this is called covered call writing. What happens is you buy X, Y, Z stock and you sell the call, and instead of being a slot player, now you’re the casino.
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BRIAN: So, you buy the stock, sell the call, and you create a synthetic dividend for your stock. The problem is if the stock is a good stock and goes up, you only made four or five percent, but people would argue, “Yeah, I just made that in six weeks. That’s a good annualized rate of return.” But the problem is if we’re in a bull market, you’re giving away the upside in a covered call strategy. And you have no downside protection, so in February and March of this year, when the markets dropped 30 percent, yeah, you got four percent in a synthetic dividend, but you just lost 30 percent in the stock.
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CLAYTON: Yeah.
BRIAN: In the last 20 years, there was one year that was perfect for covered call writing, and that was 2015. Stocks didn’t go anywhere, bonds didn’t go anywhere, commodities didn’t go anywhere.
CLAYTON: Sure.
BRIAN: But covered call writing in that one year made more than the other indexes. So no, we don’t recommend it, we don’t use it. And now let’s get into the stock market.
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BRIAN: So, there’s three ways generally to own stocks. One is the Warren Buffett method. This is where you buy good quality stocks and you hold them for decades.
CLAYTON: Yep.
BRIAN: Good quality stocks like JCPenney’s and Polaroid and Kodak and Pan Am Airlines. Do you remember that one?
CLAYTON: Those were all companies that there’s a recurring theme here.
BRIAN: Yeah. And maybe J. Crew. What else?
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CLAYTON: Neiman Marcus?
BRIAN: Neiman Marcus. Good quality stocks like General Electric and AT&T. Here’s my point. In our economy, we have something called creative destruction, where every company without exception falls into three phases. A growth phase, a maturation and a decline phase. And if you’re gonna own stocks for decades, you better be nimble because there’s a time when AT&T for example was a no-brainer.
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BRIAN: They had a monopoly on telephones, and they paid a nice dividend, which they raised every year. But just like that, in 2000 when they invented the cell phone. Not in 2000, but in 2000 is when they lost 80 percent of their value.
CLAYTON: Sure.
BRIAN: How to be, Clayton, if you’re retired and you’ve held AT&T stock for 30 years, and then all of a sudden in less than 18 months, you’ve lost 70 percent?
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CLAYTON: Right. And this topic is relevant right now because of these major companies, some of which you just listed, that are filing for bankruptcy right now. I mean, JCPenney, Neiman Marcus or several others that are going through this problem that were high quality stocks that you could depend on for a long period of time.
BRIAN: Correct. And GE is the poster child of the platinum, sterling, blue chip long-term hold company.
CLAYTON: Right.
BRIAN: They’re down 70 percent because the long-term care part of their business was like a parasite that just sucked the life out of their core business.
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BRIAN: Here’s my point. Warren Buffett is a genius, not disputing that. But he gets a salary. He is not retired. So, his portfolio can drop, and it doesn’t affect him. So, this is part of the accumulation strategy, not a part of the retirement distribution strategy.
CLAYTON: Sure.
BRIAN: Does that make sense?
CLAYTON: Yeah. And he could also lose 99 percent of his wealth and still be wealthier than most of us.
BRIAN: Right. Okay. The second way to own stocks is indexing, and we just talked about the ETFs.
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BRIAN: You can buy arguably, three very good reasons to put all of your risk retirement money in the S&P. Point number one is you’re diversified over 500 of some of the best companies in the world. Number two, you own the index that performance reasons beats 85 percent of money managers and mutual funds every year anyhow.
CLAYTON: Sure.
BRIAN: And number three is cost. The cost of the SPY ETF is four basis points. It’s almost free.
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CLAYTON: Yeah.
BRIAN: There’s one reason why we don’t do it. As fiduciaries to our clients, there’s one reason that we don’t recommend our clients put their retirement money, the risk portion of their retirement money in the S&P, and that is there’s no downside protection.
CLAYTON: Right.
BRIAN: So, every seven or eight years, what happens?
CLAYTON: You lose 30 plus percent.
BRIAN: Right.
CLAYTON: That’s been the trend so far for the last 40 years?
BRIAN: Yeah. Actually, for the last 100 years. But with one exception, 2008, because they invented quantitative easing after 2008.
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CLAYTON: Yeah.
BRIAN: It’s never happened before. Okay. So that leaves us with a third option when it comes to stocks, and that is computer trend following models.
CLAYTON: So just to kinda sum up. We’ve talked about the various strategies and ways that someone can manage a risk bucket, and this last one is the one that were talking about earlier, is this is how our clients were able to stay positive on their accounts for the first quarter of 2020.
BRIAN: Right. Can I move the suspense a little bit more?
CLAYTON: Yeah.
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BRIAN: I wanna cover the dividend strategy, and then spend the rest of this time about this.
CLAYTON: Oh, sorry. Yep.
BRIAN: So, in the dividend strategy, you’re supposed to buy seven, eight, nine percent dividend paying stocks, and just let the dividends roll in and it’s “low risk,” not true, and you don’t care what the market’s doing. You just let the dividends roll in.
CLAYTON: Sure.
BRIAN: Here’s the problem. Today, the 10 Year Treasury is at 0.7 percent. So, if you can get seven percent on a dividend, that’s a good thing, right?
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CLAYTON: Yeah.
BRIAN: [LAUGH] Okay. So, when there’s seven, eight, nine percent dividend yields out there, we are taught, and I blame the newsletters like Kipling or anothers that tell you that that’s a good thing. It’s not. It means that the company is ready to cut their dividend, and people have sold the stock, and that dividend that was paying a dollar and was yielding three percent is now yielding eight because the stock dropped.
CLAYTON: Sure.
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BRIAN: So, what happens when these people come into my office, Clayton, is I’ll say, “Hey, you’ve got this dividend portfolio. Pick your favorite.” And they’ll always go to the eight or nine percenters.
CLAYTON: Right.
BRIAN: X, Y, Z pays eight and a half percent. So, I say, “Okay, Mike, check this out. Here’s X, Y, Z company. Here’s their financials, here’s their EBITDA. Ooh, look, they’re paying a dollar a share, that’s right, but look at their EBITDA earnings before interest dividends, taxes and amortization. It’s earning 80 cents. They’re not even covering their dividend.
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BRIAN: Which is why it’s yielding eight and a half percent. It’s high risk. So, let me say this back to you, Mike.” This pretend client.
CLAYTON: Yep.
BRIAN: “You’re using the dividend portfolio and you’re putting all your money in high risk investments. Is that what you’re supposed to do in retirement?” He says, “Clearly, no. I didn’t know that they weren’t covering the dividend. I didn’t know, no one told me that I was having all this risk. And yes, I have been through a dividend cut, where they cut the dividend from a dollar to zero. I lose 30 percent in a day, and I take that full hit, and I can’t keep the stock because it’s no longer paying a dividend, so I realize that loss and now I have to go buy something else at seven or eight percent,” which is more high risk.
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CLAYTON: Sure. So, the point that you’re getting at is while seven percent, just hearing a seven percent dividend stock because interest rates are so low, that’s a problem because that company has issues in their underlying financials, that red flags and warning bells should be going off.
BRIAN: Should be.
CLAYTON: Your seven percent dividend right now in such a low interest rate environment, the red flags, the warning bells should be jumping all over the place because that is screaming, “Get out before they cut their dividend or before they stop paying that dividend because when they do, that stock price is gonna tank.”
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BRIAN: Right. Correct. So, let me give you an example. This is a funny example. Two years ago, Argentina floated a 100-year bond, and it was oversubscribed by three X. Do you remember us talking about this?
CLAYTON: Yeah.
BRIAN: Argentina is in default right now. What a surprise. But wait a second, it shouldn’t be a surprise because Argentina defaults every 12 or 13 years like clockwork, and have six times.
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BRIAN: So, the red flag should be going off when they see eight or nine percent on their dividend portfolio because that means there’s a problem.
CLAYTON: Yeah.
BRIAN: Okay. The last thing we wanna talk about is how to get the highest performance with the least risk. When we go through the databases of the Wilshire Database, Morningstar, Timer Track and Theta, what we see is in these databases for performance, we have certain things that we look for.
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BRIAN: Number one, these managers have to have been around before a crash of some kind. They have to have gone through a crash.
CLAYTON: For whatever sector that they’re managing in, right?
BRIAN: Right. Number two, they have to have real performance, not hypothetical or backtested. Number three, we wanna see a net-of-fee performance, and number four is the biggest. We wanna see who has third-party verified performance.
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BRIAN: We’re not taking anyone’s word for it. So, when the results pour in from the screens that we do for these managers, it’s… Yeah.
CLAYTON: Real quick, I wanna jump in there. I think it’s important to note because I don’t think that enough people realize how much effort goes into scouring these databases and doing the research that we do when I say that. It’s something that we love to do in word of mouth-based firm, so it’s very important that we do it.
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CLAYTON: I haven’t talked to anybody whose advisor goes and does the same kind of work that we do. The other guys out there just won’t spend the time and money into understanding and finding the best managers and the best options available for the investments. And we do that. So, we know and we can confidently say that we know where the best managers are for these kinds of things. I think that’s what you’re getting into.
BRIAN: Right. And this is a good point. When we get the results back, we have to toss out a bunch. Number one, the group that is closed to new investors. You can’t use them.
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CLAYTON: Sure.
BRIAN: Number two, the hedge funds. We won’t use them because of their risk and volatility. Number three, the accounts that demand three, four, five million dollars per account.
CLAYTON: Right.
BRIAN: Four is the high beta managers that in the good years, they go way up, in the bad years, they go way down.
CLAYTON: Right.
BRIAN: So, what’s left are the best performing managers, and that’s what we use for our clients. So, the best that we can find, that’s what we plug in. It’s not in our DNA to say, “Hey, Clayton, we’ll just use these managers. They’re good enough. I’m sure there’s better out there, but let’s just use these.”
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BRIAN: We don’t even think that way. So, these six managers that we use for our clients, we have three equity and three non-equity. We have gold, silver, energy, and we have three managers of the equity markets.
CLAYTON: Yeah.
BRIAN: These managers in a two-sided market that goes up and down, so we say that the market is a two-sided market, have a two-sided strategy. They are trend following computer models, so if the trend is higher in gold, silver or the energy or the stock markets, we are long and can make money as the trend goes higher.
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BRIAN: When the markets are going lower, this is a new concept for most people, we are able to make money as markets go down with inverse ETFs.
CLAYTON: Right.
BRIAN: So, we use those.
CLAYTON: So, I like the analogy that I’ve heard you use before in talking about the tide. Can you walk me through what that analogy is as far as and have our listeners, kinda help them understand a little bit more of the tide of the markets?
BRIAN: Yeah. So, it makes no sense to us, first of all, to have a one-sided strategy in retirement in a two-sided market. That means that you’re just waiting to get whacked.
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CLAYTON: Right.
BRIAN: And if you invested in this S&P January 1 of 2000, you would have to have waited till August of 2014 to get your money back. You can’t do that in retirement. But back to the computer trend following models that we’re using, they are the ones that are producing the highest numbers with the least risk, and we’ll talk about risk in a second. But imagine the tide comes in at the ocean and then at the beach, and then the tide goes out.
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BRIAN: That’s like the markets. The tide goes in, there’s a shift, and the tide goes out. Well, computers catch that shift, and they can be long the markets and make money while the trend is up or the tide is going in, and then they can shift their strategy and go to cash or go short and make money on the inverse side when the markets go down. That technology’s been around for over 20 years, and you gotta ask yourself, “In retirement, why aren’t I doing this?”
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BRIAN: And if you’re not doing this, you’re taking more risk because risk is described mathematically as volatility or standard deviation. So, Clayton, what has more risk, the S&P that’s lost 50 percent twice in the last 20 years or two-sided trend following computer models that have not ever lost money combined, these six managers, have never lost money in the last 20 years?
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CLAYTON: I’ll answer that by saying with the clients that I’ve had that have gone through these dips first quarter of this year, there was also that one in, was it the end of 2018?
BRIAN: Yeah, Q4.
CLAYTON: Q4? Q4 of 2018. When they checked their accounts and didn’t see that they were taking those massive daily losses because of these strategies and the relief that they had, that says everything to me.
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CLAYTON: That relief of them not taking those hits with the market, that was what was important to me because that conversation I have of them calling to not say, “Get me out of the market,” and there wasn’t that panic and there wasn’t that fear that they were gonna lose more money and what was gonna come next, they were comfortable. They knew that their plan was holding up.
BRIAN: Right. One last thing on these computer trend following models, and I’ll throw it back to you. I just wanna sum this up. Less risk, higher return. You don’t take the beating that you do.
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BRIAN: These have been around for 20 years. We’re fiduciaries to our clients. We offer these. And you have less amount of your portfolio at risk and of the amount that is at risk, it’s taking less risk and producing much higher returns. This seems like a no-brainer as a reason to come in, and we will show the client the factsheets. We’ll show the returns of each manager to them so that they can see how these works.
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BRIAN: Okay. Yeah. And with that, so when somebody comes in and we go through this, I mean, we’ll dive into the details. We’ll show you who we’re using, and I know that you mentioned earlier that three of the managers are in the equity sector, and the other three are in commodities. They’re in different sectors. We’re open to using whatever manager in whatever sector. It’s a matter of who is the best and who has gone through those market downturns. And we do shift through them occasionally, and we’ll rotate out from one to another because new managers, as computers have kinda proliferated, right, and everybody has access to technology and better models are coming online, we’re finding those, and that’s why we do this quarterly search for the managers.
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BRIAN: Right.
CLAYTON: So, give us a call, our number, 833-707-3030. Again, that number, 833-707-3030. It’s just for a 15-minute call. I know that there’s still some apprehension for a lot of folks out there with COVID still kinda being present. We can do these virtually. Just give us a call, we’ll talk you through what we’re doing and how it can impact you and answer any questions that you’ve got about your current strategy. Brian, is anything else that you wanted to cover today on the risk strategy?
BRIAN: No, that’s it.
CLAYTON: Okay. We’re grateful that you’ve all been tuned in today. We look forward to talking to you next week.
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