RR S4 E24 MARKET VOLATILITY FOR AGES 50 & OVER [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 advisers here at Decker Retirement Planning, Clayton Bradshaw.
CLAYTON: Last week, we covered the 50 and under demographic and how they should handle today’s market volatility. We’re going to continue that conversation about the 50 and over demographic.
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BRIAN: So if you’re within five years of retirement, we have a different set of suggestions for you. And just imagine if you took a hit of 30, 40, 50 percent and what you’ve taken a lifetime to accumulate within five years of retirement date. Do you think that you can retire on the same date? Probably not, right?
CLAYTON: Right, yeah. Yeah, you want to make sure that you have those assets and you keep those assets because, taking that hit, you’re going to have to work longer.
RR S4 E24 MARKET VOLATILITY FOR AGES 50 & OVER [00:01:05]
BRIAN: Right. So here’s some suggestions. When the market is at or near all-time record highs and we’re within three weeks of an election, you can do several things. Let’s just throw some out. Number one, let me tell you what won’t work. If you diversify among large-cap, mid-cap, small-cap growth value, international emerging markets, indexes and ETFs, are you diversified in the equity arena?
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CLAYTON: No, you’re not.
BRIAN: Okay. No. Because in 2008, equal amounts of those took the same hit and you were down 37 percent in the calendar year of 2008. It offered you no help. That’s like saying that you’re diversified if you own several different types of technology. Technology stocks, drug stocks, they’re all stocks. They’re all equities. They’re all economic dependent, and so we would just share with you that that’s not a way to diversify your risk.
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BRIAN: It’s going to be important that you know your options. One option, I’ll just throw this out, is to raise cash, maybe 50 percent cash on the equity side of your portfolio, and wait until a new president is installed. I’m just throwing out, that’s idea number one.
BRIAN: Idea number two is to, and by the way, if you liquidate your portfolio on plan A, we’ll call that plan A, make sure that if it’s a taxable portfolio, you offset your gains.
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BRIAN: So if you have a huge capital gain on selling some, make sure that you offset it with some losers so that, when you raise 50 percent cash, that you are aware of your capital gain results. Also know that you should stay out of the market for at least 30 days or you have a wash sale. Talk to your CPA about a wash sale. That means that if you have that loss and you get back in that stock, you can’t claim that loss and there’s no offset on the gains.
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BRIAN: It doesn’t affect your gains. It affects your loss and taking the loss. Okay, plan A, anything else on plan A which you recommend, which is just to step out and take 50 percent, raise 50 percent of cash until normalcy, not normalcy, that might never return, but until a new president is installed? Because the new president is going to be how you should build your portfolio around.
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BRIAN: There’s some things that President A and President B, those two presidents have different policy and agendas, and you might want a different portfolio depending on who goes in. So that’s plan A is to raise 50 percent cash. Anything on that topic before we move on?
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CLAYTON: No, I think for a lot of folks though that are that concerned with it, what would happen is that they get out and then they’d see all of what their position was swing. And then they’d wish they were in and then they’d jump in at the wrong time, and so I just don’t know if that’s a-
BRIAN: Okay. Okay, on plan A, you have to get back in when the new president is-
BRIAN: You just have to get back in.
RR S4 E24 MARKET VOLATILITY FOR AGES 50 & OVER [00:04:49]
BRIAN: Okay. Plan B is to hedge. Hedging means that for a small amount of money, you can hedge the downside with leverage. So that means that if you have a hundred thousand dollar portfolio or a million dollar portfolio, it’s about 10 to one, you can take a portion of your portfolio and buy puts that expire in, I hope, in January. That would be long enough. And you can take a small amount and perfectly hedge the downside. So that would be option two.
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BRIAN: Any questions or comments on that?
CLAYTON: No. Makes sense.
BRIAN: Option number three is another very good option. Plan C is to use two-sided trend following models. That’s what we do. So for the last 20 years, the best returns that we’ve seen from Morningstar database, from the Wilshire database, from Timer Track [Theta?], from others, is the highest returns net of fees are coming from the two-sided computer trend following models. That’s a lot of technical jargon. So let’s break this down.
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BRIAN: When the markets go up, a long only account makes money. It’s a one-sided strategy in a two-sided market. Markets go up and down. They’re two-sided markets. A long only strategy, buy and hold, is a one-sided strategy in a two-sided market. It goes up if the markets go up and it goes down if the markets go down. There are trend following models, that are computer models, that are designed to make money in up markets or down markets. That’s what we, as fiduciaries to our clients, use because if the markets trend up from here, our clients can benefit.
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BRIAN: But if the markets trend down from here, our clients are able to make money in a market that goes down 30, 40, or 50 percent. Those are three very good options on how they can protect their principal for someone within five years of retirement, someone in retirement, or someone ready to pull the trigger at retirement. I would lump all of them together. That for the equity portion of their portfolio, which is smaller for someone that’s over 70, larger for someone that’s within five years of retirement, but they can hedge. They can raise cash. Or they can use what we use, which are two-sided computer trend following models.
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CLAYTON: Right. So there’s a couple things that I want to point out that I particularly like about this two-sided approach. Number one, it takes the emotion out of the investing.
CLAYTON: And trying to guess or getting cold feet on an investment and backing out too soon or too late and not realizing it. So, when you’re using a computer driven model, it’s following numbers and data, it’s not making an emotional decision on getting in or getting out.
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CLAYTON: Right. So that’s number one. The other is it functions. It allows you to just enjoy your retirement or enjoy those years leading up to retirement. You don’t have to worry about watching your account everyday and “should I get in” or “should I get out” and questioning what you’re doing. You can go and you can work and you can enjoy the time with your spouse, your significant other, or your family, or doing hobbies, living that fulfilling life that you want to live. That’s what we see our clients able to do using this strategy. It’s happening in the background for them so that they can focus on the things that are most important.
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CLAYTON: Because there are folks that I’ve talked to that have gotten into retirement and they’re stuck at their desk, at their computer, watching the markets and watching the news. They’re getting caught up in it and, unfortunately some of them, they don’t sleep well because they’re so stressed about what’s tomorrow going to bring? And I’ve got to wake up tomorrow and read the headlines and change my investment. So for folks that don’t want to have to deal with that headache that it can be for some, that have their lives that they want to live, this two-sided approach, these computer driven models, they can be a great way to approach investing and retirement.
RR S4 E24 MARKET VOLATILITY FOR AGES 50 & OVER [00:09:17]
CLAYTON: That’s why we use them, because we’ve done the research. We’ve combed through the databases. We know where the highest earning managers are. So we use them for our clients, for this aspect of this portfolio. And we’ve talked in other episodes about your emergency cash is in one place where it’s safe and protected. Your safe money, where your income is coming from, is in another principal protected account where it can’t lose value, so it’s safe. And so you’ve got a smaller portion of your portfolio that can still be participating in the market and growing so that you can still get that same kind of… I think some people just like watching their money grow, and this allows that to happen.
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CLAYTON: So we’ve talked about these three strategies. Now, I mentioned earlier that we were going to talk about, and this would be the last few minutes, we’ll wrap up the show today, but we talked about questions that folks should be asking their advisor, things their advisor should be saying to them. So, kind of, some things to watch out for. Brian, you’ve been doing this for 35 plus years. Over the last 20-plus, you’ve been doing distribution planning. What are one or two of the biggest questions that you wish clients that you have today would have asked their previous advisor years ago that would have set them up better to meet with us and start planning retirement?
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BRIAN: They’re actually the two things we’re recommending right now. Know what your risk is. Know what your quantified risk level is. Not what you think it is, but that would be one reason to call in and find out your quantifiable risk score. And does that match with how you invest. That is critically important.
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BRIAN: And number two, know, find out, and use these two-sided trend following models because, like you said, it takes the emotion out of it, it allows you to enjoy life, and you’re able to use what is factually, mathematically the highest earning net-of-fee risk accounts available. And they’re available. They’ve been around, some of them, for over 20 years.
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BRIAN: So those two things, if they do that, now, yes, if they want to stay long only and they have their portfolio, they should consider the other two options, raise some cash and consider hedging their remaining portfolio. But do something, because we are at a level in the stock market, a level of market valuation, that’s only been exceeded one other time. That’s 1999.
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BRIAN: And when you get to this level, market drops can, and it depends on what candidate gets in. There’s a candidate that is viewed by the market as market unfriendly. If that candidate gets in, we might not be at these levels again for 10 years. Historically, when the markets trade at 23 times forward earnings, which it did in 1929, it took over 18 years for the market to come back.
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BRIAN: Almost 20 years. And then in January one of 2000, it took about 14 years for the markets to come back. So now, if we are at this level of market valuation, please do something. Know what your risk level is and make these adjustments while we’re near market highs, and two, be able to protect yourself and educate yourself on how you can be in the markets with a two-sided strategy in a two-sided market.
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CLAYTON: Sure. Thanks. So, a few other things, consider that when you’re talking with your advisor, and a couple other things to ask them. And this is just for your own knowledge and peace of mind that you are getting sound advice from a fiduciary. Make sure your advisor is Series 65 licensed, not Series seven. Make sure they’re independent, not attached to some major bank or brokerage. And then also make sure that their firm is structured as a Registered Investment Advisory or RIA.
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CLAYTON: If you do those three things, that’s going to help give you a foundation, make sure you’re getting the best advice, and if you want to know more about that, give us a call and we can talk you through what all of that means and talk you through some specifics on it. But, most importantly, call us. We can that free of risk analysis for you. We can quantify what your risk score is, tell you kind of where you’re at, that way you can judge for yourself. Is this really where you want to be? You can ask yourself that. Eyes wide open, is your portfolio set up the right way for you, or was it just set up with done and away, that it was just something that they thought that’s what you wanted to hear.
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CLAYTON: We’ll tell you what the facts are. We’ll tell you how everything’s laid out and we can show you what all of the options are for alternatives. And we’ll go through all of that with you. So, again, you can go to our website at Decker Retirement Planning dot com or you can call us 833-707-3030, again, 833-707-3030. We can do a free 15 minute call. We can get you that free risk analysis report. We’d love to hear from you. Feel free to reach out to us, give us a call. Visit our website. Let us know what you think. We’d love to talk to you. We look forward to talking to you next week.
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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 information 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 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, opinions contained here and provided by third-parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Decker Retirement Planning.