RR S4 E29 LESSONS LEARNED IN 2020 PART 1 [00:00:01]

BRIAN:  Welcome to Safer 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 Safer Retirement Radio.  With me is my co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.

CLAYTON:  Welcome back.  We’re excited to be back for another episode today.  We’re gonna be talking about lessons that we’ve learned in 2020, and we do want to hit a little bit on, if we’ve got time, some things that we’re looking forward to in 2021.

 

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CLAYTON:  If we don’t get to that today just know that we will be talking about that on our next episode.  So, we hope you stick around.  As well, we are gonna be talking about something that we’re giving away to our listeners, so we hope you stay tuned for that.  It’s gonna be a way where you can know if your risk is matched up with your portfolio, your risk preference is matched up with your portfolio.  So, we’re heading into the end of the hear, so obviously there’s a lot on people’s minds.  Holiday shopping, trying to do some stuff with family without trying to be in too big of a group.  We know that some states [CLEARS THROAT] it’s a little bit easier to get together with a small group of people, whereas other states, like I know California just locked everything down.  It’s better than Australia.  I know that a few weeks ago… Did you hear about Australia?

 

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BRIAN:  No.

CLAYTON:  Australia locked everything down to the point that you could only, from what I saw, maybe this is incorrect but from what I remember seeing, you could only, only one person in your household could leave the house once per day.  You couldn’t exercise outside, you couldn’t walk your dog, you couldn’t do anything.

BRIAN:  Wow.

 

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CLAYTON:  So they, two weeks they locked everything down.  So, I hope things worked out for them.  It sounds like their numbers are doing pretty good.  But, California’s trying to follow, I think, a similar suit by tightening the belt on who can do what, so hopefully if you’re in California or in any of those states that are affected, we’re thinking about you.  We hope that you can get out soon and get back to the normal routine, but, I want to mention an activity that we did that was pretty fun this last week, that I think for somebody that, for adults that are looking to get together with a group of people and do something fun without having to interact too much.  We actually went and did some go-cart racing, and it was a lot of fun.  You can get going pretty fast in these go-carts, so.

 

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BRIAN:  Yeah.  I just wanted to say that I learned something go-cart racing.  Dr. Fauci said to social distance, so every time you came up beside me, that wasn’t social distancing and I had to put you into the wall, because you were getting within six feet of my go-cart.

CLAYTON:  Is that why you did that?

BRIAN:  That’s why I did that.

CLAYTON:  Okay.  That’s helpful to know.  Now I understand a little bit more, so that I appreciate you trying to keep me safe by putting me into the wall.

BRIAN:  And I didn’t appreciate how much social distancing you were after you passed me, when I put Josh in the wall.  You passed me and the social distancing was way too far.  I kept seeing you go farther and farther away.

 

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CLAYTON:  So, [CLEARS THROAT] it was a good time.  It was a lot of fun, so we joke about these things but we did have a good time.  So, we hope that if you can do something, if you can get out, do something fun, we recommend doing some of those, kind of those high-speed electric go-carts ‘cause you can keep a safe distance but still have a good time getting together with some people.  So hopefully through the holidays if you’re missing family and friends you can get together, whether it’s virtually or whether it’s doing something else.  But let’s jump into things today and talk a little bit about looking back at 2020 as we’re wrapping up the year, some of the things that have stood out to us, and some of the lessons we’ve learned.  So we’ve talked, let’s talk first about, talk about, what the Fed or do you want to talk about market valuations, kind of where do you want to start today?

 

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BRIAN:  They’re both connected.  Let’s talk about the Fed.  The Fed continues to be the reason, if you plot the amount of money that’s been poured into the markets from the Fed through quantitative easing, it matches almost one to one with the rise of the markets.  It’s really interesting.  So as long as the market, as long as the Fed keeps pumping, the markets keep going.

 

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BRIAN:  Now we’re at a level, right now, where market valuation, price to book, price to earnings, price to sales, price to GDP, and you go on and on, our risk bucket news [fodder?] that goes out every Monday has an interesting article from Hussman [PH], who says that we are at a market level that surpasses 1929 and 1999.  So, we’re at a market valuation level that is a record level.  So that means that there’s three reasons why stock markets go up.  One is increased earnings.  Well, those have caved because of the economies getting shut down around the world.  Those have dropped off.

 

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BRIAN:  But even before February of this year, there was a detachment of earnings from the markets two years ago.  S&P earnings peaked about 18 months ago.  So that’s one reason.  Increased corporate earnings drives markets higher.  Number two, declining interest rates.  So, declining interest rates means that if you can no longer get five percent on a five-year CD, and now it’s less than one percent on a 10-year, people will try to get some kind of a return in the stock market.

 

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BRIAN:  So, as interest rates decline, that pushes more money into the stock markets.  Well, we’re at a level where interest rates are pretty close to zero, and the Fed has made an announcement that they’re gonna keep rates low.  We’ll talk more about that in a few minutes.

CLAYTON:  Sure.

BRIAN:  The third reason that markets go higher is the Fed.  So quantitative easing, pumping money into the markets through purchase of mortgage-backed bonds.  And so they’ve been doing that for 12 years now, and the Fed has… I don’t know what their limit is, but they just keep coming to the rescue.

 

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BRIAN:  So, we saw 32 percent drop in the market in five weeks between February 17th and the end of March, and that was the quickest 30 percent drop ever recorded in the market’s history.  And right on schedule the calvary [PH] comes to the rescue and the Fed pumps the money and gets things started again.  And we are seeing a hockey stick spike up in quantitative easing and Fed purchases to rescue the markets earlier this year.

 

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BRIAN:  So, we’re at record levels, but earnings aren’t supporting it now, and interest rates aren’t supporting it now.  It is sole… Have you ever played Jenga?  Where you keep pulling things out?

CLAYTON:  Different pieces of wood out of the big tall tower.  You’ve got the three pieces of wood on each level.

BRIAN:  Yeah.

CLAYTON:  Yeah.

BRIAN:  So, imagine that you’ve got your retirement and it’s on a Jenga, it’s balancing on the Jenga blocks, and you keep pulling over, gosh, over this period of time you’re pulling Jenga pieces out and your retirement, how is it protected when the Fed is the last Jenga piece to pull out?  Because once the Fed announces that they’re going to stop the Fed purchases quantitative easing.

 

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BRIAN:  They did that, they made that announcement, last time was October 27th, 2018, and guess what happened right after that announcement?

CLAYTON:  [MAKES NOISE]

BRIAN:  Yeah, a 20 percent market drop in three weeks.  So, the Fed has to be accommodative and the new people going in with the Biden administration, this is more information than we talked about.  Janet Yellen is going in as the Fed chair.  And she’ll be… she is a demonstrable dove, meaning she’s accommodative in Fed action, meaning wanting to keep interest rates low to help the economy, and wanting to stimulate the economy with Keynesian flooding of the markets with money.

 

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BRIAN:  Do you know the Keynesian strategy is supposed to be where you go and you hit it and then you pull back and you let the markets react?  Imagine a adrenaline shot.  An adrenaline shot for a patient is supposed to give their body a boost…

CLAYTON:  Sure.

BRIAN:  to get them back on track.

CLAYTON:  Right. [CLEARS THROAT]

BRIAN:  Imagine that the economy is on an IV with adrenaline just flowing in.

CLAYTON:  Right.  So, essentially it sounds like you’re saying that the Fed has been supporting and carrying the market through 2020.  So, all of the other typical indicators of interest rates going down, which helps boost the economy, earnings, which typically help drive the markets up, those aren’t there to support what’s happening.

 

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BRIAN:  Correct.

CLAYTON:  And so it’s leaning on the Fed’s shoulders.  The Fed at this point seems like they’re acting like Atlas holding everything up.

BRIAN:  Correct.

CLAYTON:  And so, that’s been kind of the thing that we’ve seen, the Fed has really stepped in, and they haven’t stepped back out like they have in the past, and now we’re dependent on their kind of interactions at this point.

BRIAN:  Correct.

CLAYTON:  And so, it’s gonna be kind of interesting to see where that takes us over the next several years because at some point they will start interacting, right?  ‘Cause we don’t want to pull a Japan situation and go into negative interest rates and all the other stuff that they’ve had to deal with for 20 years.

 

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BRIAN:  It’s interesting you bring up Japan.  Japan peaked at 32,000 and then was cut in half for the next 30 years.  The expectation of a lot of very smart people, no one knows, no one has a crystal ball, but many, many smart, sharp… and by the way I should… We get a lot of research at Decker Retirement.  The people we ignore, we ignore two types of research.  We call ‘em permable [PH] or permabear.  There is no credibility with someone who is always bullish.

CLAYTON:  Sure.

 

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BRIAN:  And there’s no credibility with people that are Eeyores and are always pessimistic.

CLAYTON:  Right.

BRIAN:  They have no credibility.  So, we try to get our research from people who have a demonstrable history of knowing when to put the foot on the gas or when to put the foot on the brake.  Those are the people that we listen to.  Those people, those credible people, are saying that we are in a Japanification.  Is that a word?  A Japanification of the United States, where we go into a maybe one percent GDP growth rate, not much growth, markets trade in a range, for the next several decades.

 

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BRIAN:  So, if you’re a buy and hold investor, that’s worked beautifully because interest rates have been trending down for, since about 1981, 82 somewhere in there.  So we have about 40 years, almost 40 years of declining interest rates.  We have the Fed that’s learned this new trick called quantitative easing that’s taken out these big 2000 ’01 and ’02 50 percent drops.  No more of that.  We’re in uncharted territory actually.  We don’t know what the next big downturn is gonna be until the Fed cries uncle and said I can’t do this anymore.

 

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BRIAN:  Then we’re gonna find out what kind of downside there is in this market.  So, we have nothing to go off of because we’ve never been where we are right now.

CLAYTON:  Right, and so I think some considerations for this, ‘cause obviously this has kind of presented us with something, I mean we’ve learned this, but how as you as the listener can you make some changes to take advantage of a high market right now?  And one of those things is look at selling some of your stock that’s sitting at all-time highs.

 

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CLAYTON:  Consider that as an option in rebalancing your portfolio.  And I know that some people… I mean everyone kind of has a different approach to how they want to talk about risk and so I was gonna bring this up a little bit later, but I think it’s appropriate now to talk about.  For anybody listening I hope you go to our website.  We do have on there, we’ll give you a free risk score, and what that is, there’s two parts to it.  There’s your risk preference, so you’ll answer a quick, takes four or five minutes to go through a real quick questionnaire.  Just gonna gauge your tolerance for gains versus losses.

 

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CLAYTON:  And then, ask you some other questions about your preferences and things like that, and then what it’s gonna do is, we can then look and help look at their portfolio.  And we can help make sure that your risk preference score that you can get, and again that’s just on our website, we can help you match that up with where your portfolio currently is, and plan for the next, for the future as well if that’s something you’d be interested in.  So, there’s a lot of options.  But again, if you go to our website, deckerretirementplanning.com, we’ve got our services listed in the menu bar at the top.  You’re gonna see “get your free risk portfolio score.”

 

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CLAYTON:  There’s a video on there that’ll help explain kind of a little bit about it as well.  But again, jump on there, take a look at it, we’d love to get some feedback from you as well on what you thought of it.  But it’ll give you a free risk score one to 99, and they kind of have it look almost like a speed limit sign so you kind of know where you’re at.  99’s gonna be at the high end, one’s gonna be at the low end.  So yeah, let us know what you think about that.

BRIAN:  Can I chime in on this one?

CLAYTON:  Yeah.

 

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BRIAN:  I’m really excited for people to take this.  So when they take the questionnaire, it will give them a score like you said, but once they see the score it will show a high and low of acceptable gain and loss.  So, if the markets… if your score is a 50 on a scale of zero to 100, you’re accepting a potential loss of, I’m just making this up, 12 percent.

CLAYTON:  Right.

BRIAN:  That 12 percent is an acceptable loss.  Well, if you have a million dollars invested, you’re saying that it’s okay that historically with this kind of a portfolio and this risk number, that you can accept up to a 12 percent loss.

 

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BRIAN:  We’re a math-based firm and it quantifies where you are.  Once you take this, once you answer the questions on the questionnaire, it does two things.  It quantifies where you are in your level of acceptable risk or draw-down or downside.  The second thing it does is it takes a look at what you’re invested in right now.  You download your portfolio, you put it in there, and almost every time Clayton, what do we see?  We see a risk or a 50 with a portfolio of 80.

 

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CLAYTON:  Right.

BRIAN:  We see that all the time.

CLAYTON:  Right.  Typically people, their portfolio is set up a little too high and that’s for a variety of reasons.  One of which is typically the other advisor that they’ve been working with, they have wanted them all in managed funds so they can bill ‘em as much as possible for that even though it doesn’t match up with what their risk tolerance is.  And so that’s why this risk score is so important, because it can help make sure that you as the investor listening in, that you can know, alright, this is my preference for risk, my portfolio does match up pretty close with that, so.

 

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BRIAN:  Right.  And it’s human nature to have risk creep in your portfolio.  So, what happens is, you have stocks like Johnson & Johnson and Campbell’s Soup, and some of the basic companies, and you see, like, you’re driving on the freeway, you see the Ferraris passing you, and those are FAANG stocks.  Facebook, Apple, Amazon, Netflix, Google, and Microsoft.

 

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CLAYTON:  Sure.

BRIAN:  And you think, I’ve gotta have some of those.  And so you add alpha, you add upside to your portfolio…

CLAYTON:  Right.

BRIAN:  but you’re also adding downside.

CLAYTON:  Downside, yup.

BRIAN:  So, this is human nature.  We see this all the time, but there’s two reasons why the timing of this questionnaire is so important.  With the market at all-time record highs in price and in valuation, there has never, superlative intended, there’s never been a better time to do two things.  One, is do what you said, tax loss harvesting.  If you have any losers with a market at record highs, something is wrong with those stocks.

 

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CLAYTON:  Right, right.

BRIAN:  Okay.  And so harvest them, sell your losers, and offset those losses with capital gains.  You don’t have to pay any capital, if you take losses of 150,000 dollars, you can take 150,000 of capital gain and it’s a wash.  It’s really smart, so that’s number one is tax loff [PH] harvesting.  Did you want to add to that before I went to the second point?

CLAYTON:  I was just gonna say on tax, we just talked about tax a few weeks ago on our show, so if you’ve got, want some more details on that you can take a listen to that episode and get a little more insight on tax.

 

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BRIAN:  Good.  The second thing is, what, there’s never been a better time, in the history of the stock market, to rebalance your risk, quantitatively putting your risk level at the level that is acceptable to you.  People don’t know what they don’t know.  They don’t know that they’re a 40 risk and their portfolio is 80.

CLAYTON:  Right.

BRIAN:  They’re taking a lot more risk, and it’s human nature, we see this all the time.  The time to make this adjustment is perfect right now.

 

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CLAYTON:  Yeah.  So again, deckerretirementplanning.com.  In our menu you’ll see our services, and then right below that, just click on that, you’ll see it says “get your free risk analysis score.”  So, head over there, we hope you take a minute to fill that out.  So, we talked about point number one, let’s jump over to point number two.

BRIAN:  One more thing on point number one.  What we learned in 2,020…

CLAYTON:  Right.

BRIAN:  I mentioned there’s three reasons that the markets go up.  Higher earnings, lower interest rates, and the Fed.  We’ve actually learned that there’s two other things I just thought of.  One is the market is reacting to any news on vaccines.  Have you noticed that?

 

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CLAYTON:  Yeah.

BRIAN:  So now, what we’re seeing is, the reaction amount of the market is getting smaller and smaller.  So, when the two vaccines, Moderna and, what was the other, is it Pfizer?

CLAYTON:  Pfizer, in partner with BioNTech.

BRIAN:  Okay.  They announced 95 percent efficacy for their vaccines and the markets when they’re announced had a big jump.

CLAYTON:  Sure.

BRIAN:  But then there was some bad news that Pfizer was only gonna roll out a certain amount, it was less than expected.

 

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CLAYTON:  Right.

BRIAN:  And then they said but we can backfill with this.  That other good news only bumped the market a small amount.  But we’re seeing market reactions to vaccines.  I think that is the end of that.  The second market reaction is any news on between Democrats and Republicans on the stimulus.  They still have not gotten together and rolled that thing out.  Once that is rolled out, now this is, take this with a grain of salt, but I believe the last piece of good news because we’ve had it on from the Fed, we’ve had it from the market’s expectation of a V-shaped recovery, we’re at record levels, earnings aren’t up with the markets where they are, interest rates are as low, in fact they’ve actually gone up a little bit.

 

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CLAYTON:  Sure.

BRIAN:  From .6 on a 10-year treasury to .9 now.  The last piece of good news is once there’s a stimulus that’s agreed upon and announced.  I’m gonna go out on a limb for credibility and say that will be the best time to lighten up your portfolio and probably be looking at near record highs from that point.  Anything after the announcement of the stimulus, is gonna be all on the backs of the Fed, and we’ll see how long the dogs can pull that sled.

 

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CLAYTON:  Sure.  So, couple considerations with that.  Again, if you have any questions about any of this or want to talk about how it affects your portfolio, give us a call.  Ee’d love to chat with you about it.  The number is 833-707-3030.  ‘Cause I know a lot of this is going to apply in certain situations to some people and it might not apply in other situations to other folks.  And that’s why we want to make sure that as investment advisors, and being fiduciaries, we’ve got to know a little bit about your situation to make sure these points, whether or not they work for you or against you.  So, give us a call and we can talk you through that.

 

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CLAYTON:  Investing involves risk, including the potential loss of principal.  Any references to protection, safety, or lifetime income, generally refer to fixed insurance products, never securities or investments.  Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier.  This radio show is intended for informational purposes only.  It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.  Decker Retirement Planning is not permitted to offer, and no statement made during this show shall constitute, tax or legal advice.  Our firm is not affiliated with or endorsed by the US government or any governmental agency.  The information and opinions contained herein provided by third-parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Decker Retirement Planning.

 

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Decker Retirement Planning Inc. is a registered investment advisor in the state of Utah. Our investment advisors may not transact business in states unless appropriately registered or excluded or exempted from such registration. Decker Retirement Planning Inc. is an investment advisor registered or exempt from registration in each state Decker Retirement Planning Inc. maintains client relationships. We can provide investment advisory services in these states and other states where we are registered or exempted from registration.