In this week’s episode of Protect Your Retirement, we went over a lot of different information ranging from share buybacks to insider purchasing and selling. Be sure to pay attention to every minute of this episode because it is jam packed with information. Tune in and take notes!
BRIAN: Good morning, KVI listeners, this is Brian Decker. Mike Decker, my compatriot is on the road today, so it is just me. This is Decker Retirement Planning and we are going to be talking about a lot of information on the front part of this show. Negative interest rates, the expectation that it may come to the United States. We’re gonna talk about share-buybacks and the effect that it has on contorting and distorting earnings per share. We’re gonna talk about FED policy, which is now called UMP, Unconventional Monetary Policy. We’re gonna talk about insider purchasing and selling, price earnings ratios, earnings, and how to protect your retirement.
BRIAN: That’s what we titled this show, How to Protect Your Retirement. At Decker Retirement Planning in Kirkland, we focus our practice on making sure that clients retire and make sure that they can draw the income that they need and want for the rest of their life, through distribution planning. Not, capital N-O-T, not the allocation pie chart that the bankers and brokers use. So, we’ve got a full plate lined up here and want to start off with negative interest rates. Negative interest rates are happening right now in some of the G-7 countries.
BRIAN: It is against all, [LAUGH] it’s against econ 101 to have someone pay to watch their money. Usually people invest their money in hopes for some kind of a gain. Why in the world would people invest their money and pay money with a negative interest rate? Historically, a typical economic expansion, by the way, lasts around 50 months, 5-0. And the average recession runs about 10 months. The great recession in 2008 ended in June of 2009 and that puts us right now in the 87th month of economic expansion.
BRIAN: This tells me that we’re nearing the end of the business cycle and will likely see a recession in the next two years. During recessions, the Federal reserve have lowered the benchmark interest rate policy by an average of 500 basis points, which is five percent. According to the FEDS latest dot-plot forecast, the benchmark interest rate would have to rise to a maximum of three percent by January of 2018, with a mean forecast of one point eight percent to have any ability to lower interest rates to help the economy out of recession.
BRIAN: This is monetary policy, KVI listeners. Now that the 10-year treasury is at one point seven percent, how in the world can the FED lower interest rates when the key interest rate levels are almost zero? I guess that means that this time there’s no cavalry that’s gonna come to the rescue when the economy slows down. And that’s concerning to a lot of people.
BRIAN: So, if we assume that the recession begins in January of 2018, with a FED-funds rate at the committee’s most optimistic forecast of three percent, and the FED reacts with a five percent reduction in rates over the next 10 months, we would see deeply negative interest rates by 2018. Do you think that negative interest rates are coming to the United States? The FED official, Stan Fisher, has said that the tradeoffs with negative interest rates, hurting savers to benefit investors, is worthwhile.
BRIAN: By the way, let’s call this what it is, KVI listeners, negative interest rates, or low interest rates are a tax on investors, targeting retirees, all focused on preserving and protecting the huge, massive debt that the United States has taken on in other countries. Because if interest rates do go up, the interest payments on those debts can be the pin that pops the debt bubble. We’ll talk more about that in the program. So, negative interest rates seem more like a matter of when and not if.
BRIAN: One of the main goals of negative interest rates policy, N-I-R-P, NIRP, is to induce consumer spending. So if you’re getting taxed to save your money, the logic follows that you will actually spend your money or probably put it at risk in the stock market or in real estate. Savers will be incentivized to spend money rather than save it. Consumers in countries that have negative interest rates, which right now is Germany, Japan, Denmark, Sweden, and Switzerland, have in fact actually increased their savings rates, according to the latest data from O-E-C-D, which is the Organization for Economic Cooperation and Development.
BRIAN: In fact, savings rates are at the highest level since OECD started keeping track in 1995. That tells me, KVI listeners, that people are very worried about the track that, not only the United States is on, but all these other countries are on. There’s no safety nets when the markets turn down the next time. I am not a purveyor of fear here, I’m just hoping that you have a plan, KVI listeners, to protect your retirement.
BRIAN: So here at Decker Retirement Planning, we focus on making sure that whether interest rates are high or low, whether the stock market is up or down, whether the economy is in expansion or recession, our clients are able to stay in retirement and don’t get blown out of retirement. So, if you have concerns, the focus that we have here at Decker Retirement Planning is on distribution planning. That’s quite different from having all of your money at risk with the bankers and brokers with the asset-allocation pie chart.
BRIAN: The asset-allocation pie chart is fine if you’re in your 20’s, 30’s, and 40’s, and you’re getting paychecks. It’s not fine to put all your money at risk when you’re in retirement. Distribution planning creates your paychecks that will be coming to you for the rest of your life. The asset-allocation plans don’t do that.
BRIAN: Picture a spreadsheet where you see the left side of the spreadsheet being your sources of income, whether it’s income from your portfolio, rental real estate, social security, pension, we total all of that up, minus taxes, is your annual and monthly income that you can spend for the rest of your life. We go out to age 100. It’s priceless to see how much money you can draw, because if you do this mathematical calculation before you retire, you can see, eyes wide open, if you can retire. If you retire without doing this, you place your retirement in jeopardy. You’re guessing.
BRIAN: And if you’re in retirement, you do not currently know how much money you can draw from your portfolio, there again you are guessing. Okay, I just want to spend a few minutes on this to show how distorted earnings per share has gotten because of share-buybacks.
BRIAN: The great share repurchase spree that’s happened over the last, oh since 2012, has distorted earnings quite dramatically. Share-buybacks have been one of the biggest drivers of U.S. equity markets since the end of the financial crisis in 2009. Between 2012 and 2015, U.S. companies bought over one point seven trillion of their own stock, according to Goldman Sachs. Without these big purchases, U.S. equity flows would have actually been negative by over one trillion during that period.
BRIAN: Low interest rates have encouraged companies to take on debt and much of it was used to buy back shares, rather than investing in their underlying businesses. So think of that for a moment. They are… public companies are choosing to buy back their shares rather than reinvest in their businesses. So, that’s all I want to say about that is it’s if we’re running a company and we take on debt, normal company expansionary businesses are going to use that debt to continue to expand and flourish.
BRIAN: Buying shares back typically is a last resort to smokescreen your earnings and make them look better than expected so that you can prop up your stock price artificially until the next quarter. And, since 2012, a lot of the S and P 500 has continued to use that smokescreen. That should be to you, as an investor, a warning. Okay, now let’s talk about FED policy. FED policy is there for you as the investor. It’s the white-hat cavalry that comes rushing in to save you when the economy starts to turn down.
BRIAN: We just talked about how typical economic expansion is 80, 88 months. We are past that right now, so we are very short in time on the typical economic expansion. It’s about to turn over and roll over. In the next 18 months, we expect that the economy will go down, there will be a contraction, there will be a stock market that will lose 30 or 40 percent. Why do we say that? Because this has been going on for decades. I hope, KVI listeners, that you have protection of capital strategies in place for your bonds and bond funds, and for your stocks and your stock funds.
BRIAN: I’m going to talk to you more specifically about this on this show. At Decker Retirement Planning, our clients, whether the markets trend higher or lower, have strategies in place that if interest rates go up or down, we do not lose money on our bonds or bond funds. And if the stock market goes up or down, we have strategies in place that help protect our client capital when the trend turns from being an up trend to a down trend.
BRIAN: If you do not have these strategies in place and your banker or broker is telling you to ride it out, buy and hold, hang on, be a long-term investor, be tax-efficient in your investing, all of that is code for, “Leave your money with me, don’t move it, keep it all at risk, because that’s how I get paid. I don’t get paid if you take defensive measures. I get paid as a banker or broker, to keep all of your money at risk.” This is sickening to me. KVI listeners, if you think you’ve got a plan because you’ve got an asset-allocation pie chart, you do not have a plan.
BRIAN: Especially if you’re over 50 years old. You do not have the appropriate plan. You’ve got to switch to a distribution plan with protection of capital measures that can create downside protection strategies in your bonds and your stocks. Okay, so now let’s talk about FED policy and what it’s changed to. [LAUGH] I don’t know how else to say this, so I’ll just… a summary of the critique of the unconventional monetary policy would include the following points… by the way, FED policy used to be called monetary, or Keynesian.
BRIAN: Now it’s called unconventional. [LAUGH] We are in uncharted territory when it comes to the FED policy. So here’s the critique, there’s seven critiques. Number one, there is little evidence, according to BIS and others, that the unconventional monetary policy implemented since 2009 has provided a significant, lasting boost to either the economic activity or inflation. So, failure on number one. Number two, there’s strong evidence that the FED’s unconventional monetary policy has had a significantly inflated real and financial… has significantly inflated real and financial asset prices.
BRIAN: Read in, code word, the stock market. This has contributed to a widening economic inequality of income and wealth. Number three, even if there are short-term benefits to FED’s unconventional monetary policy, these are subject to diminishing returns and raise the risk of fueling speculative bubbles. When such bubbles burst, the dislocation tends to feed through the real economy, possibly triggering recessions and/or deflation.
BRIAN: Increasingly aggressive unconventional monetary policy narrows the room to maneuver of central banks and risks leaving them with limited policy choices for dealing with the next recession. Let me just sum that one up. There’s no net. The trapeze flyers now have no net because interest rates are so low, they cannot come to the rescue like they typically have by lowering interest rates and trying to stimulate economic activity.
BRIAN: Number four. When the next downturn comes, central bankers will be under political pressure to experiment with even more dangerous forms of unconventional monetary policy, including helicopter money, which is code for money financed fiscal stimulus. In other words, just more printing of money via quantitative easing. Number five, central bank’s independence is reduced as monetary policy becomes the servant of fiscal policy and the objective of targeting inflation gives way to the imperative of financial repression as the government requires that interest rates be held below the rate of inflation, so the government debt can be inflated away.
BRIAN: Let me interpret what was just said. Monetary policy now places government debt before the benefit of any investors. Interest rates are held artificially low so that interest owed on the debt can be, quote unquote, inflated away. It’s a tax on savers and that’s just how the cookie crumbles, according to the FED. Okay, the last two are short.
BRIAN: Number six, the breakdown of faith in an unconventional monetary policy, threatens central bank credibility and legitimacy. Number seven, just because thoughtful people outside of central bank credibility and legitimacy, the FED policy is going to be their only way out, or so they think. All right, I just wanted to go over some important parts of FED policy and site sources so that you know that Brian here at Decker Retirement Planning is not just stating that there’s a problem when there isn’t a problem.
BRIAN: We are in uncharted territories when it comes to the stock market, price earnings ratios, that have been mostly propped up by share buybacks, like we just talked about, not organic earnings, and we’ve had now six quarters in a row of lower S and P earning. Earnings are one of the two things that prop up stock prices. The second is where interest rates are. The lower the interest rates, the more money that is willing to take risk rather than suffer with a one point seven percent 10-year CD.
BRIAN: When interest rates are this low, people are more open to taking risk to try to get some kind of return on their money. All right, that’s all I want to talk about when it comes to the FED. I do want to talk about how to protect your retirement. So at Decker Retirement Planning, this is what we do. We only work with people that are within five years of retirement, or are in retirement, and all we do are planning using distribution planning and two-sided trend-following risk models. This is very important.
BRIAN: Let’s talk about one thing at a time. There’s three parts and I’m gonna spend the rest of the radio show today talking about how to protect your safe money, which is bonds and bond funds, how to protect, number two, your risk money, which is your stock market money, and number three, how to generate income and see how much you can draw for the rest of your life. So number one, let’s talk about your bonds or bond funds. This is demonstrably false for a banker or broker to tell you to put your safe money in bonds or bond funds.
BRIAN: When interest rates are at all time record lows, you are not being done any favors by having a banker or broker telling you to lock in those rates with bonds. There are other options out there. And this would be a good… well, I’ll hammer bonds and then I’ll tell you that there’s a lot of options out there. When it comes to fixed-rate investments, fixed rate investments like CD’s, corporate bonds, municipal bonds, agencies, government bonds, treasury bonds, all of those are fixed-rate investments, utility bonds.
BRIAN: They are fixed-rate obligations to pay you a fixed rate over a fixed period of time. We used to use these all the time before 2008, when rates were higher. Now that rates are lower, we talk to our clients about them and have them as an option, but very few clients since 2008 are locking in all-time record low interest rates. So what are the options? Another option would be to use bond funds. We don’t use bond funds. I want to talk to you about how ridiculous this is.
BRIAN: Banks and brokers will tell you using the rule of 100, that if you’re 65 years old, you should have 65 percent of your money in bonds or bond funds. If you’re 55 years old, you should have 55 percent of your money in bonds or bond funds. It’s called the rule of 100. And now that interest rates are at all time record lows, you’re expected, listening to your financial advisor, using the rule of 100, that you should have 55 or 65 percent of your money earning almost nothing. That doesn’t make any sense. That doesn’t make any sense and it bothers me most that that’s not the biggest problem.
BRIAN: If they tell you to put… if bankers and brokers tell you to put your safe money in bond funds, when interest rates go up, you will lose significant double-digit losses in your principal when interest rates go back up. Interest rates eventually will be going back up. Nobody on the planet knows when, but when interest rates do go back up, your bond funds that are told by your bankers and brokers to be your safe money, they will lose money. In 1994… this is very important, this is just math. In 1994, the 10-year treasury went from six to eight percent in one year.
BRIAN: That bump, according to morning star, bond funds lost an average of 20 percent. Now remember, this is supposedly your safe money. Then in 1999, the 10-year treasury went from four and a half to six and a half percent in one year, in 1999. That was a 17 percent loss to your quote, unquote safe money. If we go from where we are now, with the 10-year treasury at one point seven, back to just four percent, where we were just a few years ago, that would represent over a 25 percent hit-to-principal on what banks and brokers are calling your safe money.
BRIAN: This is called interest rate risk. KVI listeners, if you have an asset-allocation plan and think that that’s a retirement plan for you, and you’re over 50 years old, you are mistaken. You are using an accumulation plan that is appropriate in your 20’s, 30’s, or 40’s. It is not appropriate after you’re 50 years old, to use a pie chart. Second, when you have your money in bond funds, you have interest rate risk such that anyone, any financial professional that tells you to put your safe money in bond funds, is like the math teacher that tells you that two plus two equals 15.
BRIAN: Interest rates will eventually go up. When they do, you will have significant interest rate risk and you will lose significant principal when bond prices go down. Now let’s talk about your alternatives to keeping bond funds safe, number one, and getting any kind of a yield, number two. This is very important because we are specialists at Decker Retirement Planning, want to make sure that you know that we believe you should have some safe money.
BRIAN: In fact, most of our plans for people over 50 years old, have significantly less risk than what you’re taking right now. Most people are taking far more risk than they need to. When it comes to your safe money, typically our clients have two-thirds or three-quarters of their money out of the stock market. Not at risk. So how are they getting any kind of yield at all? We use a laddered portfolio approach, so we have five-year money, 10-year money, 15-year money, 20-year money.
BRIAN: We have a laddered portfolio approach so when interest rates do trend higher, we benefit from higher rates. If interest rates go down, we are not adversely affected. So number one, we use a laddered approach. Number two, we do not use bond funds. And number three, right now, with today record low rates, the best rates we’re getting are coming from equity link CD’s, if they’re from a bank, or equity indexed accounts, if they’re from an insurance company. Here’s how these work.
BRIAN: They’re based on the S and P 500, many of them are. There’s all kinds of indexes that can be based on, but let’s use an example of the S and P 500, so that when the index goes up, you capture a percentage of that rate of return, and when that index goes down, you lose nothing. Nothing. So for example, in 2000, oh one and oh two, stock market was down, S and P lost 50 percent, you lost nothing. You didn’t make anything but you didn’t lose anything.
BRIAN: Then from oh three to oh seven, when the markets went up, during that period you captured around 60 percent of the market gain. Every year you locked in a new basis from which you cannot go backwards. Then when the market tanked in oh eight, you didn’t lose a dime. And then when the market doubled again, every year you captured a portion of that gain from the S and P. This is where our clients are capturing returns of six and seven percent without any downside risk.
BRIAN: So this is something where in the last 25 years, the average returns are around six, seven percent, and this is where we’re capturing the best returns for principal guaranteed accounts. We ladder them so that if interest rates go up we don’t lose principal. If interest rates go down, we’re not adversely affected. Unlike bond funds, that when interest rates do go up, you will get hammered and it should never be called your safe money with bond funds. We’ve talked about that.
BRIAN: Now when it comes to guaranteed principal, let’s talk about the guarantees that are out there. There’s basically three types of guarantees that are out there. The lowest guarantee that we actually used to use, we don’t use anymore, has to do with a corporate guarantee. This is AMBAK, FIGIK, MGIC, these are corporate guarantors of specifically municipal bonds. After 2008, when many of the states have taken on pension obligations they cannot possibly pay back, we have steered away from municipal bonds.
BRIAN: We don’t use them in our planning. And we’re very nervous about the exposure that these corporate guarantors have on the tremendous debts that are out there. They have about 17 cents on the dollar exposure to the massive debt that’s out there and their risk that they’ve taken on. We don’t like them, we don’t use them, and we warn people about them. In fact if you own municipal bonds, I just want to take a segue here and tell you, here’s a freebee, KVI listeners.
BRIAN: There’s a very important way that you can protect your municipal bonds by looking at your monthly statement, and if you see, in today’s low interest rates, your bond price drop below zero, now this of course does not include zero-coupon bonds that are below zero in a creed two par, 100 point zero zero, but if you see your municipal bonds drop below par, I hope you pick up the phone, call your broker, and sell them.
BRIAN: This is very, very important advice. I hope that you heed this advice, KVI listeners. If you have municipals bonds, that in today’s low interest rate environment, the bond price drops below par, I hope you pick up the phone and sell. Why? Because in today’s low interest rate environment, with the municipal bond at three or four percent, or even five percent, there’s only one reason that that bond price will drop below par and that is the integrity of the bond is eroding and the ability for them to pay back full principal at maturity is being compromised.
BRIAN: Price is going to be the best indicator of your risk in municipal bonds, or any other bond, so I hope that you pick up the phone and call and sell. If you pick up the phone and you make the mistake of calling your broker, and ask your broker, who sold you the bond, “What’s going on here?” I’ve seen this so many times, take it to the bank, they will make up some story on why your bond is fine and why you should hang on. I saw this with the Puerto Rican issues that are now trading at 50 cents on the dollar, 40 cents on the dollar.
BRIAN: We saw these bond prices, three, four years ago drop below par and many of the people took our advice and they sold and they were able to retain their principal. Now, this money is supposed to be your safe money, now these Puerto Rican issues are trading at 40, 50 cents on the dollar and you’ve taken a major hit on what was supposed to be your safe money. So, KVI listeners, I hope if you have a bond portfolio, I hope you protect it by looking at your monthly statement and if your bond price drops below par, you don’t call your broker, you just pick up the phone and you sell it.
BRIAN: Okay, enough said on bonds. I want to switch over now to talking about how we protect client portfolio in the stock market. The stock market is a conundrum because on the one hand you cannot afford to take a hit like 2008. But I know, I get it, KVI listeners, you can’t live on CD’s at one point seven percent for a 10 year CD either. I get it, I get it, I get it.
BRIAN: So if you have a distribution plan, you have shrunk your risk by using a laddered portfolio approach, not using any bond funds, but using equity-linked CD’s or equity-indexed accounts, that can protect you from downside and give you a guarantee. The lowest guarantee, and something we don’t use, is called the corporate guarantee that I just reviewed. The next highest guarantee is called an assumed guarantee. It’s FDIC. We’ve used them in the past when we’ve bought CD’s, totally fine with it, there’s assumed guarantee because there’s no fund from FDIC, it’s just on an as-needed basis.
BRIAN: Banks and brokers will step in and they will guarantee you with taxpayer money, our money, from the Federal government, and bail out banks on an as-needed basis. It’s an assumed guarantee. We’re fine with it. When rates come back, we will be using CD’s again. Right now rates are too low to be using CD’s. The highest guarantee in the world is a reserve guarantee. A reserve guarantee has three parts to it and I want to use a worst-case scenario, try to pick the devil of all banks or insurance companies in the last decade, and easily it’s gotta be AIG.
BRIAN: AIG almost went bankrupt in 2008. So let’s say that you had money with AIG, but you had a reserve guarantee. When your money comes in as an investor, any banker or broker that are using these equity-indexed accounts or equity-linked CD’s, have to reserve five percent on top of your invested funds so that there’s a buffer there. Third-party, usually the CPA, comes around every quarter and signs off. That person has criminal liability.
BRIAN: They sign off that those reserves are there and that they’re sufficient, such that if the corporate shell of the bank or the brokerage, or the bank or the insurance company were to go down, that your funds would be in tact. That is protection level number one. Let’s say that for whatever reason, that your principal is compromised. Now you’ve got 90,000 instead of 100,000, where do you go to make up the difference? All 50 states take a piece of this investment and they have a backup fund, a safety fund, like the state of Washington has over a billion dollars in, it’s there to make you whole.
BRIAN: And that is there to help you in case you need it to back up your reserve guarantee. So that’s backup number two. Backup number three is a requirement for these investments that all banks or insurance companies that invest in equity-linked CD’s or equity-indexed accounts, that they have a consortium agreement to make each other whole, to cross-insure each other. Three layers of protection to produce the highest guarantee in the country, and that’s what we use to protect client principal. So our principal, this is very important, the principal that we talk about being guaranteed, is guaranteed.
BRIAN: Okay, let’s talk now about your risk money in the stock market. Like I said, it’s a quandary. With low interest rates you can’t put it all in CD’s and yet you can’t take a hit like you did in 2008 ever again. You know that doesn’t work. By and whole doesn’t work. So, KVI listeners, this is where we use models that are designed to make money in up or down markets. With your stock market money, we wanna make sure that you have trend… there’s several names for these. These are two-sided models.
BRIAN: The market is a two-sided market, first of all. It goes up and it goes down. If you use a one-sided strategy from the bankers and brokers where you make money if you buy and hold, when the markets go up you will make money. When markets go down, you will lose money. Every seven years, there is a market hit, KVI listeners, that is massive. It’s the seven-year market cycle. 2008 unmistakable. That was from October of oh seven to March of oh nine and that was a massive, 50 plus hit. 50 plus percent hit.
BRIAN: Then seven years before that was 2001, the middle of a three-year, 50 percent bear market. Twin Towers went down in oh one. Seven years before that was 1994. Iraq had invaded Kuwait. Interest rates spiked, the economy slowed down, and the markets were struggling. Seven years before that was black Monday, October 19th, 1987. One day, 550 points, 30 percent drop in the market.
BRIAN: Seven years before that was 1980. 80 to 82 was a 40 plus percent decline in the market, sky-high interest rates, a big economic recession, economic slow down. Seven years before that was 1973, 74 bear market, where over 40 percent came out of the stocks. Then seven years before that was 66, 67. That was also a 40 plus percent bear market, and it keeps going. The markets bottomed in March of oh nine. Seven years, plus nine, brings us to where we are today. We fully expect the next 18 months to be very rough.
BRIAN: KVI listeners, I hope you have a plan in place. At Decker Retirement Planning our focus is to work with retirees, putting plans together that protect your retirement from markets like the markets that are coming. I hope you have a plan in place. Buy and hold is not a plan. Buy and hold is a deer in the headlights, what do I do now, and do nothing. It is not a plan. So what do we use? There’s a book that was written called What Works on Wall Street, by Jake O’Shaughnessy
BRIAN: He spends over 300 pages talking about fundamental analysis and his mutual funds, hoping I guess, that no one goes to appendix A. Appendix A is where he talks about his findings in the biggest study ever done on what works on Wall Street. What models have produced the biggest returns over the last, since 1950 when he started his study. All of the top 10 models, all of them, are two-sided risk models. They’re trend-following models. They’re long, short models. These are quantitative, computer-driven models.
BRIAN: If I’m a fiduciary, and I am, If I’m a fiduciary, I am not doing my clients a favor by having you buy and hold and taking unnecessary risks when the best mutual funds and money managers have been using quantitative trend-following programs for over 30 years. This is not new. This has been around for many years and we use them for our clients on the risk portion of their portfolio. So for example, imagine in a trend-following model, the 200-day moving average.
BRIAN: This will give you a good example. Here’s how these work: in the 90’s, everyone was making money. There was chimpanzees throwing darts at the Wall Street Journal stock page on CNBC and out-performing the best and brightest money managers. Everything was going up in the 90’s. But something happened. In 2000, the lines started to turn. Now, there’s something called 200-day moving averages. It’s the average price for the last 200 days of every stock index and ETF.
BRIAN: If you’re trading above the 200-day moving average, you’re said to be in an uptrend. If you trade below it, you’re in a downtrend. Uptrends make you money. Downtrends lose you money. So in the 90’s, we were heavily invested in these models with technology and the other sectors that were screaming up. But in 2000, oh one and oh two, the markets got crushed. Early in 2000, the models that we’re talking about, the trend-following models, got out of technology and stayed with oil. The energy sector did very well in 2000, oh one, and oh two.
BRIAN: They stayed with real estate. Real estate made money in 2000, oh one, and oh two. Stayed with biotechnology, healthcare, which also did well. The material sector like copper, steel, aluminum, cement, and timber also did well in 2000, oh one, and oh two. No person could have picked all of this. But a computer can. A computer gets rid of what is going down and holds on to what continues to go up. These are called trend-following models, two sided models, long-short models, momentum models.
BRIAN: These are all the same names for these types of investments. They are used in mutual funds. They are used in third-party money managers. We use these models for our clients. So the models that we’re using today, made money in 2000, oh one, and oh two. Then from oh three to oh seven, when the markets doubled, so did these models. Then in oh eight, the markets were crushed. This was a different decline than in 2000, oh one, and oh two, three-year decline. This was a waterfall, panic decline.
BRIAN: The only thing that went up in 2008 were gold, treasury bonds, and the U.S. dollar. That is about it. These models are trend-following models, which can have a portion of their portfolio go short. Now as soon as I say short, where you can make money as the markets go down, I know, KVI listeners, I can read your mind and you’re thinking, “Risky.” Let’s be mathematical in our approach to risk. Risk is defined as volatility. But there’s two types of volatility. There’s the good type of volatility, where you’re portfolio goes up, you want all of that you can get.
BRIAN: There’s the bad type of volatility, when your portfolio goes down. We define volatility as losing money that defines risk. Who has more risk? The person who bought and held and took a 50 percent hit in 2000, oh one, and oh two and in oh eight? Or the models we’re using, that are momentum, trend-following models. We have a two-sided strategy in a two-sided market. This should make common sense. So as the market’s trending higher, we along the market, as the market’s trend lower, these models, these computer models, automatically shift to protection of capital mode and are designed that they can make money as the markets go down.
BRIAN: So in 2000, oh one, and oh two, the six models, I’m sorry… In 2008, that’s where we are, in 2008, when the markets were down 37 percent for calendar year, some of our models lost a little bit. One of the six lost four percent. Another lost six percent. Another made 16 percent. But one of our models that is tied into… when I say our models, it’s not internal, these are outside managers that we’ve hired to manage money for our clients.
BRIAN: The best model that we use made over 100 percent in 2008. So, that helped bring all of the models, all six of them, into a positive point for 2008. And then since oh nine, the markets have more than doubled, so have these models. The six models that we are using, combined together, have not lost money in 2000, oh one, oh two, or oh eight, or any of the years between. This is very important that you know that this is out there. Now I know what you’re thinking.
BRIAN: If this is so great, why isn’t everyone doing it? KVI listeners, so many people have asked me that. If this is so great, why isn’t everyone using distribution planning? Why isn’t everyone using directional models, momentum models, two-sided models? Why isn’t everyone doing that? Four important reasons. Number one, two of our six models are no-load mutual funds. What banker or broker is gonna tell you about no-load mutual funds that they don’t get paid to have you work with? So, that’s number one.
BRIAN: Common sense, that’s not gonna happen. Number two, if a banker or broker tells you about directional models, you really don’t need them anymore. Because the models will tell you what to buy, when to buy, and when to sell. Now you don’t need them anymore. So they’re putting their careers at risk. Number three, and this is the biggest reason, by the way, not everyone’s doing this. Bankers and brokers are required to have you use the asset-allocation pie chart. Not because it’s in your best interest, because it’s clearly not.
BRIAN: But because that’s how they keep from getting sued. If you think about how you created your asset-allocation pie chart, you were given a risk questionnaire, which you filled out, and you submitted to your financial advisor. And then they produced an investment policy statement that you signed and dated. Now you can’t sue them. You created that. And I guess there’s a number four, and that is the big mutual companies like Vanguard and Fidelity, their business model is to create hundreds of funds to gather billions in assets. They’re not gonna go to 12 or 15 that you really do need.
BRIAN: So for all four reasons, you are only gonna find distribution planning with two-sided, directional models for your risk, with a fiduciary. You’re not gonna find them with salesman that come from bankers and brokers that are paid and incented to do what is in their best interest, not your best interest.
BRIAN: Now a lot of bankers and brokers these days are lying through their teeth and saying that they are fiduciaries. So I want to just take a second and talk to you about what it takes to be a fiduciary. A fiduciary is someone who is required by law to put their clients’ best interests before their company’s’ best interest. Salesmen are bankers, brokers, and insurance agents. They are salesman. How can you know, when they say that they’re a fiduciary, I hope you write this down.
BRIAN: There’s three identifiers and requirements of a fiduciary. Number one, this is common sense, they have to be an independent company. If I’m working for Wells Fargo, or a big bank, I am being told what I can and cannot offer. An independent company, like us at Decker Retirement Planning, no one tells us what we can and cannot offer. We’re independent. So that’s point number one. Point number two, to tell if someone is a fiduciary, is they are series 65 licensed, not series seven.
BRIAN: A series seven securities license is someone who can receive commissions. A fiduciary cannot receive securities commissions. They are above board, fee only, advisors. We cannot take security commissions. So the hidden commissions, like telling you there’s no commissions in C-share mutual funds, which is a travesty, where there’s no commission up front or behind, or at the back end, but they tack on a one percent charge so that you don’t know about them. I hope you look at your statement and make sure, KVI listeners, you don’t have any C-shares. C as in Charlie.
BRIAN: C-shares, mutual funds, they are so bad that Schwab, TD, Ameritrade, some of the discount brokerage houses will not allow them to even be transferred into their companies because they are just horrible. They want them sold before new clients transfer money there. Okay, so number two is make sure that they are series 65 licensed. A series 65 cannot charge you commissions.
BRIAN: Number three, third and final, is the corporate structure will be an RIA, registered investment advisory company. An RIA is how the corporate structure must be set up to be a fiduciary. At Decker Retirement Planning, we are an RIA, we are series 65 licensed, and we are independent. Those are the three requirements to know if you’re a fiduciary. Okay, the last thing I wanna talk about, KVI listeners, is how a distribution plan is different. And with the time remaining, I’m just gonna focus on how assets are distributed.
BRIAN: So picture a pie-chart, an asset-allocation pie chart, where you have your large cap, mid cap, small cap, growth value, international merging markets, indexes, and ETF’s, for your equity side of your portfolio, and then you have your bond components, and then the cash, and that rounds out your asset-allocation pie chart. It’s based on how you filled out the risk questionnaire.
BRIAN: That’s totally fine as an accumulation plan in your 20’s, 30’s, and 40’s. But if you use this over 50, you will be having bond funds in there earning almost nothing and having significant interest rate risk, and you will be having, number two, all of your money at risk when you shouldn’t. And number three, you’ll be told to buy and hold the stock market and ride things up, take the market hits, and take three or four years to just get your own money back again. You cannot do this after you’re 50 years old. This should be common sense.
BRIAN: What we… and I guess I’ve saved the worst for last, the way that bankers and brokers distribute your income, is using the four percent rule. And I’m gonna end the show with this. The four percent rule goes like this: it says that stocks have averaged around eight and a half percent for the last 100 years, bonds have averaged around four and a half percent for the last 35 years. Let’s be really safe and just draw four percent from your assets for the rest of your life and that should be fine. The problem with that, KVI listeners, is if you use the four percent rule, that works as long as the stock market goes up.
BRIAN: Stock markets don’t trend, they cycle. If you look at the 18-year cycle chart, you will see from 1946 to 64, the markets trended higher, nice bull market. But from 1964 to 82, 18 years of flat. 82 to 2000, the biggest bull market we’ve had. And since January one of 2000, most people haven’t made much money. It’s the start of a flat market cycle.
BRIAN: If you retire January one of 2000, or in any flat market cycle, you get hammered in 2000, oh one, and oh two, you lose 50 percent of your stock money, but you lose more than that ‘cause you’re drawing four percent a year. You start 2003 down 62 percent, but you double your money from oh three to oh seven, but you don’t get all that ‘cause you’re drawing four percent a year. And then you take the hit of oh eight. Plus four percent. And you can no longer stay retired. In fact the guy who invented this rule came out in oh nine and said that it doesn’t work.
BRIAN: It does not work when interest rates are this low. And yet the banks and brokers still use it. And you remember, KVI listeners, many of the gray-haired people that came out of retirement, they had to sell their home, they had to move in with the kids, they had to go back to work, work fast food, retail, banks, Wal-Mart, they had to go back to work because the four percent rule destroyed their retirement. Now, we’re in baseball season still, strike one. I’ll end the program on this, strike one is when any banker or broker shows you an asset=allocation pie chart. Strike two is when they tell you your safe money is in bond funds.
BRIAN: And strike three, when you get up and walk out, is when they use the four percent rule to distribute your income for the rest of your life. So much in this program. This is Brian Decker with Decker Retirement Planning. Hope you have a great rest of your Sunday.
