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We Hold The Line

I hope that by the time you’re reading this, the majority of the stock sell off has occurred. Of course, we may still have a few more storm clouds to weather. And that’s ok. The financial media is already using their platforms to sound the alarms because, for them, this is Christmas in February. Over the last year and a half, the market has move upwards—slow and steady—with little angst or volatility. Now that we have some serious selling action, they all get a chance to preen and tell us how much smarter they are than all of us.

 

Don’t buy it.

Market corrections, like this one, can be scary. However, they also serve a great purpose— to shake out the weak hands, clear out over hedged players, and (to be honest) keep the rest of us on our toes. If you’ve sat in investment meetings or presentations with our team, one of my favorite statements to make is in reference to how quickly the market can take away our gains. For instance, we had an amazing January—with equity portfolios seeing 5-7% growth in a single month!! Now, those same portfolios have given back those gains in a matter of days.

To quote one of our clients “Ramp Up is nice. Ramp Down is horrid.”

The truth is that corrections are normal—but I feel that some additional explanation may be in order about what’s going on and why. Here’s my list of a few possible reasons—none of them alone would drive this downturn (in my opinion), but when taken together…

  1. We are way overdue. Human emotion and behavioral biases still hold significant sway over market movements. In the last several weeks, I have heard multiple remarks about the market and it’s recent run. The more frequent the remarks—the more diverse the types of investors that make them— this usually a sign that we probably have people taking risks they shouldn’t be taking. These folks are the first to sell once we see volatility pick up.
  2. Technology. With the ever-increasing ability of investing algorithms to run portfolios without a human touch, we are now seeing how quickly the automation can impact investors during volatile trading days. If the algorithms are programmed to sell after a 5% drop, they WILL sell —no matter what is going on. A large percentage of trading these days is done with algorithms, and I think that big swing days in the markets could be a new component of the investing process for years to come.
  3. The Gimmick Portfolio. With technology comes its uses—and its abuses. The investing world is no different. Despite the fact that there is no research that can validate anyone’s claim to being able to sell out of the market at “just the right time” or invest in “just the right” stocks…there are still salespeople out in the marketplace trying to push these types of strategies on investors. These strategies sound so good…so perfect… but it’s been my experience that they are nothing more than a bag of onions being paraded around like a bag of apples. There is no free lunch in the investing world— and these types of strategies can bite you in times of volatility. We are likely seeing some of that play out at the moment.
  4. The Federal Reserve. The new chair, Jerome Powell, was sworn in yesterday. Having the Dow drop over 1100 points on your first day isn’t the greatest first day at the office, huh? What may have started this turn in equities is the idea that the Federal Reserve may decide to deviate from their 3 scheduled rate hikes this year—and possibly add a 4th. While there has been nothing substantial said about this becoming a reality, we always see a little shuffling of the deck if something unexpected arises. If this indeed proves to be the catalyst, we will likely be looking back in a few weeks at this market tantrum wondering “what they heck was that all about?”

These are some of my opinions, and I believe that many other financial professionals share them since I’ve yet to see anything concrete come out about why we are seeing this correction. Considering that the majority of economic news we’ve been getting— unemployment numbers in January were great, corporate tax cuts triggering reinvestments in our country, wages ticking upward, and GDP accelerating— we haven’t seen any data that points to the party being over. So, for now, consider this just par for the course with investing. We have to be able to withstand some downturns. In fact, dare I say that having a correction can be healthy for the bull markets?

Remember, we always work within the context of a plan. We plan for not only the good times—but also the scary times. That way, when we do see volatility rise against us, we can hold the line.

 

Investment Advisory Services offered through AlphaStar Capital Management, LLC, a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. AlphaStar Capital Management, LLC and Vertex Capital Advisors, LLC are independent entities. Insurance products and services are offered through Vertex Capital Advisors, LLC by individually licensed and appointed agents in various jurisdictions. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by Vertex Capital Advisors, LLC.

Retirement Focus: It’s About Cash Flow

I was recently having an in-depth conversation with one of my clients, and he said perhaps one of the truest statements I’ve ever heard when it comes to retirement planning. While we were discussing some potential ideas for him and his wife, he said:

“You know, you will probably create hundreds of these plans over the course of your lifetime. But, me, I only get to do this once…so I can’t afford to mess it up.”

Naturally, he was thinking about himself and his family when making this statement; however, his mindset reflects the thought process of plenty of workers today. The idea is that you only get one shot at having a successful retirement, so one had better make it count.

As more and more Boomers move into their retirement years, those of us in the financial industry are beginning to see changes in the retirement planning landscape. For one, people are living longer—-much longer—than they have in the past. In fact, I have a relative in my own family that worked for 34 years and is now entering his 31st year of retirement. How crazy is that?!

One might expect that with the Baby Boomer generation creating such demand for retirement planning services, there would be some definite benchmarks for how to measure retirement success. Unfortunately, the only thing our industry has agreed about is our disagreement on how to plan for retirement; and the continuous information dump provided by the internet only adds more layers of confusion and noise.

Some advisors will argue that retirement is all about “safe money” or “not losing” your nest egg, and others will stand for the exact opposite, saying “nothing beats the market over time.” The debate is endless, and in many ways, it can seem pointless, as proponents often care more about pushing their viewpoints than hearing those of their opposition. In the middle of this battleground stands the client, who just wants to enjoy a secure and safe retirement. In my opinion, this could quite possibly be the worst environment for someone who genuinely wants advice because they’re trapped in a world of debate about financial products.

So, how does someone go about trying to plan for their retirement? What should be the focus?

In my opinion, the most important facet of a retirement plan is having sources of guaranteed cash flow.

Now, for the sake of this discussion, let’s qualify what I consider to be guaranteed vs. non-guaranteed. In my view, guaranteed income sources would be: social security, pensions, or income from annuities (contractual guarantees only).

Income that I personally do not consider guaranteed is: bond interest, dividend payments, rental income, or any other type of distribution from a portfolio of securities.

Of course, this is the point where everyone’s biases begin to run wild, and they debate starts to rage. “How can you say that ______ is guaranteed?” or “Clearly, you must not understand the income reliability of __________.”

The goal here isn’t to get lost in the minutiae of social security reform proposals, pension funding, or the actuarial reliability of investment products. The point is this—- Cash Flow is what matters in retirement.

In the July 2014 Issue of the Harvard Business Review, Robert C. Merton writes:

“To begin with, putting relatively complex investment decisions in the hands of individuals with little or no financial expertise is problematic…More dangerous yet is the shift in focus away from retirement income to return on investment that has come with saver-managed DC plans: Investment decisions are now focused on the value of the funds, the returns on investment they deliver, and how volatile those returns are. Yet the primary concern of the saver remains what it always has been: Will I have sufficient income in retirement to live comfortably.”

Sadly, I believe that Merton is 100% correct in his beliefs. Financial discussions that focus on retirement planning are too often dominated by conversations about portfolio returns—-recent returns or projected returns—take your pick. Instead, we should be helping clients understand how the income pieces of their plans can fit together to establish an overall cash flow strategy.

From there, we can allow the clients to help determine what level of fluctuation they desire in their income streams. Naturally, some clients will not want to have any fluctuation; therefore, they will gravitate towards more of their assets being dedicated for income. Yet, some clients, will find themselves more open to some fluctuation, as long as they have a nice baseline of guaranteed income. These clients may be more inclined to place more assets in a growth-oriented strategy that allows for market fluctuation.

Our role as retirement income planners is to help clients navigate the multiple decisions they will face as they transition into the retirement season of their lives. But, I can honestly say that I have yet to meet with a client who didn’t have the desire for knowing their retirement cash flow potential as a very high priority. Workers today spend much of their energy in focusing on returns—too much energy. Returns are important; however, I don’t believe they should be the dominating factor in a planning process. If we want to work with the massive numbers of Baby Boomers moving into their retirement years, the conversation needs to begin with cash flow—-that’s where these clients experience their money and their retirement.

Michael H. Baker, CFP®, RICP®