The following is a transcript from the Radio Show "Decker Talk Radio - Protect Your Retirement. The following comments are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning, KVI listeners. This is Mike Decker.
BRIAN: And Brian Decker.
MIKE: And we're so excited to have you here again today. It's 9 a.m., Sunday morning and we're gonna wrap up our show, or continue our show I should say, of what is a financial retirement. And to recap from last week, Brian?
BRIAN: We covered what a financial plan is. A financial plan has six parts. Number one, you deal with a fiduciary. Number two, you make sure that your plan gives you the income you need and want for the rest of your life. Number three, make sure that you've got a comprehensive tax minimization plan in place. Number four, you wanna make sure that you have asset protection plan to cover all the assets that you've accumulated. Number five, comprehensive risk reduction in your plan. And number six, make sure you have the liquidity that you need for life. Things that just happen in life.
BRIAN: We mentioned also what it's not. What a financial plan is not, is to have a broker or a financial advisor. That's not what it is. That's just the person who manages your money. By the way, Mike, I think that we nailed it last week on five of the six. We're gonna spend the whole radio show today talking about risk reduction.
MIKE: Absolutely. And just for those listeners that didn't catch last week, go to our website. It's www.deckerretirementplanning.com. You can catch last week's show. We've got it on our website just to catch you up to speed. But, today we're talking about risk reduction.
BRIAN: Right. So risk reduction, I'm gonna cover and I hope we can cover this in a one-hour commercial free radio show. We're gonna talk for the whole hour about portfolio risk and interest rate risk, stock market risk. So I wanna start with interest rate risk. Interest rates are at or near 100 year lows. The 10-year treasury yield is right now around one and a half percent. So that's problematic in two areas.
BRIAN: One is when you're retired and you're used to getting CD rates of four or five percent before 2008, those days are gone. Now you're talking about very low CD's. treasuries, corporate agencies, municipal bond yields, that are paying you almost nothing. So the problem that we have with banks and brokers is they use something called the rule of 100 to assign how much you should have in bonds or bond funds. Your quote unquote safe money. The rule of 100 says that if you're 65 years old, you should have 65 percent of all of your investable assets in bonds or bond funds.
BRIAN: If you're 70 years old, 70 percent, et cetera. So that means that you have, and I'm gonna say this sarcastically, if you're 65 years old and you go to a banker or broker which we hope you don't do, they will tell you according to the rule of 100 that you should have 65 percent of your assets earning you almost nothing. Almost nothing. But that's not the biggest problem. The biggest problem has to do with what they assign your money to be in and call it safe. Bond funds lose money when interest rates go up.
BRIAN: Bond funds, for example, in 1994 when the 10-year treasury yield went from six to eight percent in one year, according to Morning Star, the average bond fund lost 20 percent that year. That one year. On your quote unquote safe money. In 1999, the 10-year treasury went from four to six percent in one year. In one year, you lost about an average of 17 percent. If we go from where we are right now with the 10-year treasury around one and a half percent, back to just four percent, that's a hit to principle of about 25 percent on what banks and brokers are telling you is your safe money.
BRIAN: Well, we wanna emphatically make the point that your bond funds are not safe and they have interest rate risk. Interest risk is the amount of principle that you lose when interest rates go back up. So here, we at Decker Retirement Planning in Kirkland, I hope that you go to our website. We've written extensively on interest rate risk, www.deckerretirementplanning.com. This is something that is very, very important because you're probably around 90 percent, the bankers and brokers, around 90 percent of the people in this country are listening to this tripe that your safe money is in bond funds.
MIKE: Brian, I want to ask a quick question here because if bankers and brokers are saying this is your safe money; I don't wanna open Pandora’s box, but, is there a recommendation that maybe later on in the show we're gonna talk about, or maybe another show in the future, what actually would be considered safe money? Because we're showing a problem here but I don't wanna leave the listeners hanging without a solution at some point.
BRIAN: Good point, Mike. So I'm gonna tell you why we think interest rates are gonna go up and how we ladder how we do it.
MIKE: Okay, and that might be another show 'cause I know we have a lot to talk about risk reduction.
BRIAN: Okay. I want to say the same thing two different ways. So on the one hand, interest rates are at or near 100 year lows. I'm gonna say the same thing differently. Interest rate risk is at or near 100 year highs. The risk of you losing money principle, double digit principle hits, your bond funds are not safe. We just wanna say that. Now, why do we think interest rates are gonna be going up? There's a very tight correlation between the CPI, the Consumer Price Index and the monetary base or the money supply.
BRIAN: This is what the Fed prints and puts in circulation. If you could look over my shoulder, let me describe a chart. And by the way, when you come in, we'll show you this chart. The chart shows that interest rates, or no the Fed, the Fed printed what used to be a lot of money from about 1960 to 1975. The Fed printed a lot of money. Although not at first, the CPI, the Consumer Price Index waffled for a few years and then skyrocketed. We got up to the late 70's early 80's when interest rates spiked.
BRIAN: It was Paul Volcker who took over and he got in front of the interest rate problem and got things back under control. And in this chart, it's all fine and back under control from 1985 to 2008. And then in 2008, we have a hockey stick spike that is called Tarp QE1, QE2. Quantitative easing has added to where a monetary base is now almost 20 trillion. In the last eight years, we've added more debt to our country than all the presidents combined.
BRIAN: So we have an issue right now where although not at first, eventually interest rates will rise because you cannot have this kind of monetary base diversions with the CPI and inflation before it naturally closes the gap. And the gap is closed when interest rates do go back up. So Mike, we wanna warn people, you KVI listeners, that if your banker or brokers is using an asset allocation pie chart, since we're in baseball season, that's strike one.
BRIAN: Right. So these risks are real. We wanna warn you that if your banker or broker, financial advisor, tells you to use an asset allocation pie chart, that should be strike one because that's an accumulation plan totally appropriate in your 20's, 30's and 40's where you have an income coming in from employment, W-2 or 1099 income. You can take a hit like 2008 in your 20's, 30's and 40's and ride it out and you're fine. However, once you are 55 plus, and you're within five or 10 years of retirement, or are in retirement, you can't afford to take those hits anymore.
MIKE: Yeah—Yeah.
BRIAN: You cannot take a hit like 2008 and take four or five years to get your money back and draw income from an account that's been hit because when you draw income from a fluctuating account, you are playing financial roulette with your retirement. You're drawing down and compromising the gains on your portfolio number one, as the markets go up. And you are accentuating the losses as the markets go down by drawing money from an account that has gone down. So, now Mike we've covered already in the radio show what we believe interest rate risk is.
BRIAN: How it affects retirees. We've talked about clearly what to look for and how bond funds can lose money and that they're not safe. Now, in contrast to how banks and brokers do it, we want to tell you how we do it. So what we do...
MIKE: The solution.
BRIAN: Yeah, the solution. So when we put together a financial plan and we get to the part that is the discussion about the portfolio, we have two sheets of paper on the conference room table. One lists all the choices that are available for principle guaranteed accounts. All of them.
BRIAN: And the second piece of paper is all the risk choices. All of them. And we talk about the pros and cons of each. So when it comes to principle guaranteed accounts, bond funds aren't on there because they're not principle guarantee.
MIKE: They can lose money, right?
BRIAN: Right. So we wanna make sure that we put a plan together for our drawing income principle guaranteed accounts. For example, in a ladder portfolio we have buckets one, two and three. Bucket one is a five-year account. Bucket two pays income for years six through 10. Bucket three pays income for years 11 through 20.
BRIAN: And so we have the first 20 years of income already set. Now in year 15, we move some money from the risk side to fund the rest of their lives for principle guaranteed accounts. So we have a laddered approach with principle guaranteed accounts that can be guaranteed by a bank, insurance company, a municipality, or the Federal Government. We as fiduciaries don't care who guarantees it, just that it is guaranteed and we're getting the best possible rate.
BRIAN: Once we have that list, we tell the client that the focus is on three things. Number one, that it's gotta be principle guaranteed. Number two, that we're going after the best rate. And number three, that it's gotta produce a monthly income. So that it can distribute income back to our clients. So let's talk about the guarantee first. Mike, and KVI listeners, there's three basic types of guarantees out there.
BRIAN: The lowest guarantee that we don't use anymore since 2008 is called a corporate guarantee and it refers to municipal bonds. These are the companies like Ambac, [INAUDIBLE]. MGIC. Those companies exist to guarantee the payment of principle when a municipal bond matures. The problem is that right now with 49 of the 50 states that have taken on pension obligations they can't possibly pay back, you've got a serious exposure.
BRIAN: 17 cents on the dollar approximately is the exposure of these corporate guarantee to their potential payout. 17 cents on the dollar. We don't like those odds. We know that there is a day of reckoning, and we wanna make sure our clients are not involved with the eventual reorganization of the municipal bonds. So we do not use the corporate guarantee or the municipal bond since 2008.
MIKE: So I just wanna say real quick for those that are just tuning in, this is KVI 570 Decker Talk Radio's program, Protect Your Retirement. And you're listening right now to Brian Decker from Decker Retirement Planning, giving some incredible advice. I mean, this advice could save your retirement ultimately and cause you from making some terrible mistakes. And we're talking right now about risk reduction.
BRIAN: Right. Risk reduction. Okay, so when it comes to municipal bonds I just made the point KVI listeners that if you have them, there's a very important that you can make sure that you don't take a major hit in your retirement by having these municipal bonds values go down. By the way, because of the municipal bond exposure, the best way to watch and see that your municipal bonds do not take the hit and go the way of Puerto Rico and Detroit, and some of the California issues that we've watched tank in value. I hope that you look every month at your statement and every month it shows a dollar value, the price of the bond.
BRIAN: Any municipal bond that says three, four, five percent coupon on it should be trading above par. There's only one reason, KVI listeners, that your municipal bond would trade below par. And that is that the ability for that bond to pay back principle at maturity is eroding. If the bond drops below par, or 100 point zero zero, we hope here at Decker Retirement Planning, we hope that you pick up the phone and you sell it. If you call your broker, banker, or financial advisor and ask why the Seattle Seward bonds have dropped below par, you're gonna get the run around.
BRIAN: We've seen this. We've been through this. We've been advising clients to lower their risk by watching their municipal bonds and selling them when they drop below par for many years now. We help clients avoid the Puerto Rican issue because three years ago they started to drop below par. Clients who listen to us, picked up the phone and sold out, and they avoided the major hit that now those Puerto Rican issues are trading with a 60 percent loss. And remember this is your safe money. Okay, we've talked about there's three different guarantees, the lowest one is a corporate guarantee.
BRIAN: It refers to municipal bonds, and we do not use it. The next highest guarantee has to do with what's called FDIC. FDIC doesn't have a fund to it, it's just funded on an as needed basis, and that guarantee we're fine on, as soon as interest rates go back to where we can use CD's as a way to draw income.
BRIAN: Right now with interest rates so low, it really not a great time to use fixed rate investments. The highest guarantee in the world has to do with what's called a reserve guarantee. A reserve guarantee has three parts to it. Number one, the companies that invest in reserve guarantee, they'll take in your money, say your 100,000, and they have to reserve five percent against that. So a 105 percent is in reserves. These are short term investments, like commercial paper, bankers’ acceptances, overnights, things like that. And you have the CPA firm usually with criminal liability.
BRIAN: They have to go around and on a quarterly basis sign off that the reserves are there. So if the company shell were to go down, those reserves are there to cover you. Now in this case a reserve guarantee like I said, has three parts. If the company shell were to go down and you were compromised in any way, the states, all 50 states, take a piece of the transaction and they have a reserve fund. So in Washington state, that would be your backstop number two to make you whole if the company shell went down, you could be made whole at the state level.
BRIAN: But there's a third level. There is a consortium agreement with all those who invest in reserve guaranteed investments, and they have a consortium agreement to make each other whole. So that if one company were to go down, then all the others have signed on that they will make those clients whole. So the highest, KVI listeners, the highest principle guarantee in the world is a reserve guarantee. We like that guarantee and we use it. Now Mike, some people will say, "Well, what if the government collapses and what if the currency becomes worthless?"
BRIAN: And that's when we say, "Well, you know, at that point it's food and water and everything becomes tribal." And we have...
MIKE: That's a different situation [LAUGH].
BRIAN: Yeah. So money is now worthless.
Mike: Yeah.
BRIAN: Okay. So what we offer people in the principle guaranteed section of their plan is they could use fixed rate investments which is CD's, treasuries, corporates, municipals, utility bonds, things like that. Those are fixed rate investments, obligations of the issuer to pay a fixed rate over a fixed period of time. We used to use these before 2008. After 2008, not the best deal. In fact, we also, KVI listeners, we used to use savings accounts and we'd even create our own personal pension accounts from banks and insurance companies where we would give X amount of money and then ask for monthly income over 60 months and that's when we would get two and a half, two percent, something like that.
BRIAN: We'd at least get some kind of return. Now the returns are almost zero. So we don't use those anymore. However, there is something, and this is gonna be very important, and KVI listeners if you're driving, you're gonna possibly swerve when I tell you about this and you'll be frustrated with your brokers for not having him or her tell you about what I'm gonna tell you right now. There are things that are called equity linked CD's, if they're from a bank, or equity indexed accounts if they're from an insurance company.
BRIAN: What are these? These are reserve guaranteed investments. The highest guarantee in the world.
MIKE: That's the best.
BRIAN: Right. And what they do is you put 100,000 in these and when the S&P, hence the index, when the S&P for example goes up, you capture around 60 percent of the S&P. When the index, in this case the S&P, goes down, in those years, you don't lose a dime. You don't lose a dime. Those are called equity linked CD's or equity indexed accounts. We like them, we use them, the average return in the last 15 years has been around six, seven percent, and those are the highest returns that we can get for our clients.
BRIAN: So we're an independent company, we can work with any type of principle guaranteed or risk investment. Why in the world would we work with second or third rate investments? We weren't.
BRIAN: Right. I can tell you why you haven't been told about these. It's because they don't pay broker commissions. So that's why your banker or broker, your financial advisor, has not told you about these. They don't pay securities commissions. And I wanna make sure that that's part of dealing with fiduciaries. Someone who is required by law to put your clients’ best interests before a company's best interests.
BRIAN: All right. So continuing, we talked, Mike, about the principle guaranteed side. How our clients are getting much higher rates, they got the highest guarantee in the world, they're drawing income from principle guaranteed accounts, and this is where I make the point in our seminars that we hold at Ruth's Chris every month, this is where I stop and say, now does everyone see why our clients sailed through 2008 unaffected?
BRIAN: They didn't have to go back to work, they didn't have to sell their home, move in with kids, none of that. Because the ones that did the planning drew income from principle guaranteed accounts. And they don't have any interest rate risk, they don't have any stock market risk, they don't have any economic, economy risk. These are laddered principle guaranteed, reserve guaranteed accounts where we're getting the highest return. In the last 15 years, these have averaged around six to seven percent.
BRIAN: Now I'm gonna move into the risk side, Mike. This is kind of where I hope I can talk fast enough to get this covered. We've talked about what not to do, we've talked about not using bond funds, how that's not safe, how it has interest rate risk. And we've talked about what is safe, and how we ladder the principle guaranteed accounts using equity indexed accounts or equity linked CD's. All right. Now let's talk about risk. Someone that's 65 years old and retiring is in a quandary. Where someone that's in retirement is in a quandary. And that is, they can't survive on CD's at one or two percent, but they also cannot take the hit, like 2008 ever again with the stock market.
MIKE: Sounds like you're, what is that phrase? In between a rock and a hard place or something like that. Impossible situation.
BRIAN: It is tough. So with a low interest environment, and the fed reserve using a zero interest rate policy, it's been a tax on retirees because their interest rate is so low that it hurts them in retirement. So what we do for the risk side of your portfolio, actually let me start with what not to do. What not to do, if your banker and broker tell you that, and we're in baseball season so I wanna do strike one, two, three.
BRIAN: If they're using an asset allocation pie chart, that's an accumulation view that should be used in your 20's, 30's and 40's. That's strike one. If your banker or broker or advisor is telling you to put your safe money in bond funds, that should be strike two. That's financial malpractice. Strike three is when they tell you to put all of your money at risk in bond funds and stock funds and tell you that they're gonna disperse your funds using the four percent rule.
BRIAN: I'm gonna talk about the four percent rule right now. Four percent rule, by the way, in my opinion is the most destructive piece of financial advice out there. By far. And it's responsible in my opinion for destroying more people's retirement in this country than any other piece of financial advice out there. So the four percent rule looks like this. It says, KVI listeners, stocks have averaged around eight and a half percent per year for the last 100 years. Bonds have averaged around four and a half percent for the last 36 years. Let's be really safe and just draw four percent from your assets for the rest of your life and you'll be fine.
BRIAN: The problem with that strategy is it works beautifully when the stock market is on a tear. Going up. The problem is what happens when the market goes into a flat market cycle? By the way, in the last 100 years you can divide up the stock market into 18-year market cycles. From 1946 to 64, there was an 18-year bull market, 64 to 82 the market was flat. Absolutely flat. It just dropped. Then from 82 to 2000, the biggest bull market we've ever had and since January one of 2000, most people have not made much money.
BRIAN: In the last 16 and a half years. So when you're in a flat market cycle and you use the four percent rule, let's show you mathematically what happens. So KVI listeners, you won the lottery today, let's say that you're 65 years old, you won four million dollars and you start your retirement January 1 of 2000. That's the good news. The bad news is, markets tank. In 2000, 01 and 02, you lose 50 percent on your stock portfolio. But you're worse off than that because you've drawn four percent a year, four times three is 12, so you're down 62 percent going in to '03.
BRIAN: The good news is the markets double from '03 to '07, but you don't get all that because you're drawing four percent a year. And then, when you take that hit in 2008, down 37 percent, plus you add another four percent on top of that, now you can no longer retire. You're blown out of retirement by the advice of your banker, broker, or financial advisor who has used the four percent rule. And proof of this is the gray haired people that you saw in 2009 going back to work.
BRIAN: In the banks, at Walmart, fast food. Tragically, they had to go to plan B because the financial advice they got regarding the four percent rule destroyed their retirement. In 2009, the guy who invented the four percent rule publicly retracted it saying that it's dangerous, his words, quote unquote, and that he wouldn't use it, his words, quote unquote, and that it doesn't work with interest rates this low. And yet, having the founder of the four percent rule discrediting the strategy, KVI listeners, bankers and brokers still use it today.
BRIAN: It's a discredited strategy. So we wanna jump up and down and warn you, strike one is when you're dealing with a financial advisor that is using the asset allocation pie chart. Strike two is when that advisor tells you that your safe money is in bond funds. And strike three when we hope you stand up and walk out of their office, is when they tell you they're gonna distribute income back to you for the rest of your life using the four percent rule. It doesn't work. It hasn't worked. And it's destroyed many millions of people's retirement in this country, the United States.
BRIAN: All right. So in contrast to that, I wanna tell you a little more of the asset allocation buy and hold market strategy. And by the way, this is common sense. So Mike, let's say that you're not retired. Let's say during your working years you can buy and hold your stock portfolio 'cause you can ride it up and down, right?
MIKE: Sure. I've got a paycheck coming in.
BRIAN: Right. Okay, but now let's change things. Now you're retired and you take those hits like 2008 and it takes four years to make your money back. Now that's something that really does affect you in retirement.
MIKE: Yeah, I can't just cut off my income from my assets and I can't just live off of Social Security. Maybe I can. It would be a lifestyle change that I don't want to make is what I'm trying to say.
BRIAN: Stock market hits happen every approximately seven years. So think this through. 2008 was unmistakable. Seven years before that was 2001, Twin Towers go down, it's the middle of a three-year bear market. We're 50 percent drop in the S&P. Seven years before that was 1994, interest rates went up. We had a recession. And the stock market went down. Seven years before that was 1987, Black Monday, October 19th, 30 percent drop in the market.
BRIAN: Seven years before that was 1980. '80-'82 was a period of high inflation, economic recession, and a 40 plus percent drop in the stock market. Seven years before that was the '73-'74 bear market where 46 percent drop in the S&P. Seven years before that was the '66-'67 bear market, two years, over 40 percent drop. And it continues. So Mike, what's seven years plus the bottom of the market which is March of 2009?
MIKE: Very soon.
BRIAN: No. March of 2016. March of 2016. So we're past due. We are due.
MIKE: What I was saying is we're very soon, 'cause it hasn't happened yet. We haven't been hit by what would be expected. But, I mean it's really just...
BRIAN: We're due. It could be any time. So KVI listeners, I hope that you're hearing this loud and clear. A buy and hold strategy is appropriate in your 20's, 30's, and 40's. But if you're getting financial advice that tells you to ride it out, I wanna tell you why your financial professional who's a salesman not a fiduciary, is telling you that.
BRIAN: Are you ready? It is because he or she doesn't get paid unless your money is at risk. Let me repeat that. Why would your banker or broker give you financial advice keeping all of your money at risk in the asset allocation pie chart? Answer, is it's because your banker and broker only gets paid on money at risk. If you move that money to the money market, those portfolio fees stop. So it's not in your best interest to buy and hold. It's in your banker, broker, or financial advisor's best interest to keep you invested at risk, 100 percent.
BRIAN: And that's how they collect their fees.
MIKE: So for those that are just tuning in by the way, this is Brian Decker you're hearing speak from Decker Retirement Planning, and the program is KVI 570 Decker Talk Radio's Protect Your Retirement. And this, what we're talking about here, risk reduction, is very important so I hope you're listening. And if you don't catch it the first go around, you can go back to our website at deckerretirementplanning.com and you can re-listen to this show. Sometimes what we're talking about, we are very, very detailed. Sometimes it's hard to get it the first time and you have to listen to it a second or a third time because we go very specific.
MIKE: More specific than most radio shows.
BRIAN: Yup. Okay. So in contrast to a buy and hold four percent rule asset allocation mentality, what we do when it comes to your risk money, because we're independent, and because we are fiduciaries, we simply go... And by the way, I personally do this. I go to the Morning Star database and I wanna know who has better returns than what the managers that we're currently holding. And by better I mean since January 1 of 2000. Since January 1 of 2000, who has better returns than the managers that we're using right now?
BRIAN: So Morning Star database is the largest database in the world for mutual funds and the Wilshire database is largest money management database. And every quarter I get around 60 or 70 managers that beat us. Yes, they do. They beat us, but they fall into four categories. Number one, they're beating us, yes, but they're closed to new investors. I can't use them. They're not taking any new money, number one. Number two is yes they're beating us but they're hedge funds.
BRIAN: We're not gonna put any retired client money into hedge fund. Why wouldn't we do that? So let's say Mike, you and I are managing now a New York hedge fund and we get paid two ways. What keeps the lights on is a one percent fee. But what puts Ferrari's in our garages is called the Two and 20. The Two and 20 says that all returns above two percent are split 80, 20. 80 percent to the client. That's where we get paid a lot of money. So here it is today, I'm just making this up. It's November first of 2015, we're down five percent. What're we gonna do?
BRIAN: Well I'll tell you what we're gonna do. We're gonna go for broke 'cause we don't get paid unless we do. So we leverage, we use options, futures, derivatives, and we goose that portfolio because if we blow it up we can always start another one. No big deal.
MIKE: That's like having a broken foot, taking some pain killers to keep running because we're not gonna address any sort of issue. You just wanna make something happen that probably shouldn't be done that way. Is that a good analogy?
BRIAN: Yup. And so we don't want any of our retired client money with a hedge fund mentality. So that's number two. Number three, yeah they're beating our returns, they have better returns than ours, but their per account minimum is three million or more. I can't diversify that per account. And number four and final is yeah, their managers are beating us, but they're high data. I'll give you an example. There's a fund called the Bruce Fund and another fund called CGM Focus. Those two funds deserve to be on our platform based on net of fee performance.
BRIAN: But the reason I can't use them is because in 2008 they lost over 40 percent. Both of them. So what we have as a twofold mission statement for the risk portion of our client portfolio is just two things. One is that they keep up with the S&P in the good years, which by the way, 85 percent of money managers and mutual funds don't do that. That's number one. And number two that they protect principle when the markets go down. So what are the models that we use at Decker Retirement Planning in Kirkland?
BRIAN: We use quantitative computer driven models that are designed to make money in up or down markets. The stock market is a two sided market. It goes up and it goes down. For reasons that defy logic, 90 plus percent of this country managed their money with a one sided strategy, buy and hold, in a two sided market. So when the markets go up you make money, but when the markets go down, you get nailed. Our clients have the ability to keep up with the market when the markets go up, and have their principle protected when the markets go down.
BRIAN: These quantitative computer driven models have been around for 30 years. These models in 2000, '01 and '02, the models that we use, made money every year in 2000, '01 and '02. And then from '03 to '07, when the markets doubled, so did these, and then when the markets got nailed in 2008, the six managers that we're using now combined, they actually made money. And then from '09 to present when the markets were up over 150 percent, these models tracked as well.
BRIAN: So 100,000 invested in the S&P since January one of 2000, for 16 and a half years with dividends re-invested grows to about 200,000, averaging returns around four and a half percent. 100,000 invested in the models that we're using grows to over 900,000 averaging return is around 16 percent net of all fees. This is a vital, very important difference from how banks, brokers, and financial advisors manage money.
BRIAN: Now I'll ask the obvious question. I know KVI listeners you're yelling into your radio right now, "Well Brian, if this is so great, why isn't everyone doing it?" There's four reasons why not everyone's doing what we do. Number one, who do you know, by the way, some of our six managers and models are no load mutual funds. Who do you know that's a banker or broker that's gonna recommend to you no load mutual funds they don't get paid on? That's not gonna happen, number one.
BRIAN: Number two, the banks and brokers are not gonna recommend models that tell you what to buy, when to buy, and when to sell 'cause they have been replaced. You don't need them anymore. Number three, and this is the biggest one KVI listeners. The reason that banks and brokers use the asset allocation pie chart is not because it's in your best interest. Because it's not. It keeps their reps and their companies from being sued. So this is liability protection. If you think of how the asset allocation plan was put together, it was put together based on how you filled out a risk questionnaire and when you submitted it spent, spit out an asset allocation pie chart for diversified portfolio of stock and bond funds.
BRIAN: And then it spits out an investment policy statement that you signed and dated and now you can't sue them. You did that. And then the fourth reason that not everyone is doing this is because the big mutual fund companies like Vanguard and Fidelity, their business model is to create hundreds of funds to gather billions in assets. They're not gonna go back to the 12 or 15 that you actually need. So what is left when we do those quarterly screenings for mutual funds and money managers, what is left is simply the best that we can find.
BRIAN: All right. So Mike, how much time do we have left?
MIKE: We got about 10 minutes left.
BRIAN: Okay. So I'll have time to finish up. So what we have left are models and managers that when the market is trending higher, that's called a risk on market, they have whatever is trending higher. So that's typically in an up market. Transportation, energy, technology, biotechnology, healthcare, typical things that are going up. But when the market tops and starts going down, these quantitative computer driven models automatically transition to whatever is now going up in a down market which is typically gold, treasury bonds, consumer staples and the VIX. V-I-X. The Volatility Index is an ETF that goes up when markets go down.
BRIAN: So in that way our models are able to buy whatever is going up. Whatever is going up is what the models buy. So there's a transition up in a down market. It's a way to protect capital, it's a way to make a lot more money, it's a way to lower risk. Now on a two sided model, some people say, "Gosh, that sounds risky. I don't wanna do that." Well, let's be objective and measure risk mathematically. It's called volatility. There's good and bad volatility.
BRIAN: The good volatility is when you're making money. You want all of that you can get. The bad volatility is measured in losses, or what we call draw down. Those losses mathematically show that you're taking too much risk. So when our models, the models that we're using currently, made money in 2000, '01, '02 and '08, whose got more risk? I would say it's quantitatively factually, mathematically you. It's your broker, it's your banker, and it's your financial advisor is putting you at far too much risk.
BRIAN: The plans that we see when you come in are stunning to me how much risk that you in retirement are taking. It's unnecessary. You don't have to take this kind of risk. So we wanna stand and make sure that everyone knows, KVI listeners, that you know about two sided long short models. So what happens, there's three ways. By the way, I personally feel that the next 2008 is coming. When it comes, pretty soon I would say the next 18 months, there's three ways that these risk models protect capital.
BRIAN: Number one. Number one is whatever is trending higher, you own it. Number two. Whatever breaks the uptrend is automatically sold and cash levels go up. Now if you think that you're going to in your mutual fund that your mutual fund is gonna raise a bunch of cash, you should read your prospectus because typically we see cash level ceilings at five to seven percent by prospectus. That means that when the markets go down, you're gonna take the full hit.
BRIAN: You're not gonna have protection from your typical mutual fund. And number three. Listen carefully to this. When the Dow Jones, the S&P, and the NASDAQ cross the 200 day moving average, the markets are said to be in a defined down trend. And then that happens, a portion of our client portfolio can be held short, allowing us to make money as the markets go down. Again, a lot of clients as soon as they... There's a long part of the portfolio when you make money on the up side. There's a short part of the portfolio when you make money on the down side.
BRIAN: These are quantitative computer drive models that are designed to make money in up or down markets. They are very helpful for retirees because it allows you to have stock market exposure and it protects you from the stock market hits. I wanna talk about some other ways, and gosh Mike, we've got six more minutes, right? Okay. Very quickly I wanna tell you about some other ways that banks and brokers will tell you how to protect your principle. Let's talk about your stop losses.
BRIAN: Stop losses. Stop losses are where you own Microsoft stock, you bought it at 40, it's now 55, and you wanna sell it if the stock pulls back 10 percent. You wanna preserve your gain, so you have what's called a trailing stop at 10 percent. So if the stock goes down below 50, at 49 and seven eighths it's gonna trigger a sell. Well, having done this for many, many, many years, you will find out if you haven't done it, that your stops get triggered on a regular basis.
BRIAN: The markets go down, triggers your stops, and then they turn around go on to new highs and leave you in the dust. So you will be second guessing your stop loss strategies. Totally commonplace. And we see that all the time. So that's point number one. Point number two is where you tell yourself well I'm pulling the stops, I'm just gonna have what's called a mental stop. Mental stop is when you say if the market's down 10 percent I'm gonna lighten up. Let me tell you in detail what we see happening all the time.
BRIAN: By the way, this is human nature. So Mike, I'm gonna pick on you. Mike, you've got 300,000-dollar IRA in the stock market, you've done well in the last seven years, you had... By the way, you've earned your money back from the losses, and you've got some gains to show for it. So now your 300,000 loses 30,000 just like that 'cause the markets go down, and you having experience with stops and stop losses will say, "Oh, well, you know, when the markets go back up to where they were, that's when I'll sell and lighten up."
BRIAN: But this time, once every seven years, they don't. Now you're down 15 percent and you have a knot in your stomach 'cause now it's a lot of money. Then, you say to yourself when the markets get back to a certain level, you will sell. But this time, again, it's every seven years, it doesn't. Now you're down 20 percent. And you're sick to your stomach, it's on your mind, you're not sleeping as well and then you tell yourself, this is putting lipstick on the pig, this is just vacation 101, you say, oh, I'm a long term investor. So that's code for I should've sold and I didn't.
BRIAN: And now the market's down 30 percent and you just are sick to your stomach, throwing up, and you sell typically right at the bottom, and the market comes right back. I just described the average, typical market cycle for the investor.
MIKE: Well, I think there's a huge difference here that you're talking about the emotional reaction to the stock market which is what most people do. And what we're doing with the two sided model is mathematically driven.
BRIAN: Oh yeah, no emotion. No fear or greed.
MIKE: So when you take emotion out of it, you mathematically can make this more successful than trying to use a gut feeling that really puts your entire retirement at risk.
BRIAN: Correct.
MIKE: Am I saying that right?
BRIAN: Yeah. That's a good point you brought up. There is no fear, and no greed with a mathematical, quantitative, computer driven model.
MIKE: And for those that did make the call that could call in, you're gonna see these charts. You're gonna see the numbers. Brian's gonna be very transparent. It's gonna be amazing. That's all I can say.
BRIAN: I'll show you the fact sheets.
MIKE: Yeah. So this is wonderful. Brian, thank you so much for this. Do you have any last things about risk reduction? I feel like we covered it pretty well today.
BRIAN: No, I think we squeezed it into two radio shows.
MIKE: We did. So for those that didn't catch the first segment, you can go to our website at www.deckerretirementplanning.com and you can come back in for KVI listeners, every week, 9 a.m., KVI. We are here 570 AM. And this is Brian Decker from Decker Retirement Planning and just to kinda wrap up Brian, I'm gonna give you two minutes here just to say some other news that you've seen in the market or notable things that you'd like to bring up.
BRIAN: Okay. Here's what I'd like to talk about maybe next time Mike, and that's credit card debt in the country. There is a statistic that is stunning to me. Disposable personal income growth adjusted for inflation grew by just two point two percent over the last year. A full percentage below March's three point two percent pace. However, with the savings rate falling in June of five point three percent, the lowest rate since last October, revolving credit card growth, called credit card spending, galloped ahead at nine point seven percent.
BRIAN: Let me say that differently. The people whose income has been going down have just taken out tons of credit card debt. That's a scary statistic.
MIKE: So that and more next week. Sunday, 9 a.m. KVI 570 Radio. This is Mike Decker.
BRIAN: And Brian Decker.
MIKE: And we'll see you then.