Past performance does not guarantee future results – Grand Illusion #3

“If past history is all there was to the (investment) game, the richest people in the world would be librarians.” -Warren Buffett

If you have ever bought shares of stock, a bond, or shares in a mutual fund, you were presented with the following disclaimer: “Past performance does not guarantee future results.” The U.S. Securities and Exchange Commission requires it and the SEC is right, there truly is no correlation between an individual investment’s past performance and its future. Past performance has no predictive power whatsoever.

Of course, that doesn’t mean your investment advisor sat you down, rested a hand on your shoulder, and with a kind but concerned look in their eye, uttered these words. No, it was in the fine print somewhere that most of us never bothered to read. Or worse, when we came across this disclaimer, we ignored it, because frankly, we did not want to accept it. We like guarantees. When we buy an investment, we simply want the assurance that it will perform as it has done in the past. Unfortunately, that promise can’t honestly be given.

The “grand illusion” of persistence of performance is hard to diffuse because so much of our life experience is based on the reliability of past performance. We believe the sun will come up tomorrow morning at the appropriate time, because it always has. We therefore assume that it always will. Your summer vacation at the beach, or next winter’s ski getaway, can be planned months in advance because of the persistence of performance of the weather, and the reliability of the change of the seasons. If you have a car that has averaged seventeen miles per gallon since you purchased it four years ago, it would be crazy to assume it will average anything but seventeen miles per gallon next month.

The persistence of performance surrounds us, and it seems quite natural to want to use past performance as a criterion to select our investments. Unfortunately, there is no evidence that the past performance of a specific investment has any predictive power of that investment’s future.

S&P Persistence Scorecard

S&P Global, an independent research company that monitors the mutual fund industry, produces a biannual report they call the “S&P Persistence Scorecard.” These annual reports, always come to the same conclusion: that over a five-year period, less than 1% of the mutual funds in the top quartile at the beginning of a five-year period have been able to maintain their top quartile status at the end of five years.

Many investors waste an inordinate amount of time and energy studying past investment returns, attempting to discover next year’s investment champions. It is an exercise of futility, but it is easy to get caught up in, because we really want this illusion to be true. Founder of Peterson Wealth Advisors, Scott Peterson recounts an experience of when he was first beginning in the investment business:

“I cut my teeth in the investment business in the late eighties and early nineties, back in the day when double-digit investment returns were the investment norm. It seemed as if the whole world was consumed with finding the hottest-performing mutual fund. As a young and inexperienced advisor, I spent countless hours identifying all the top-performing funds so I could direct my clients to them. I now recognize that perfecting my golf swing or cleaning my garage would have yielded equally productive investment results.”

So, who profits from promoting the idea of persistence of performance?

Any entity that touts their ability to direct you to a superior investment, based on that investment’s past performance, perpetrates this grand illusion. The Morningstar, Inc. star-rating system for investments is based on past performance, rendering their system meaningless. That is right: buying a five-star fund versus a one-star fund does not increase your chance of success! Countless newsletters and magazines are sold as they flaunt their recommended lists of the hottest stock or best mutual funds to buy. All their recommendations are based on historical performances which has no predictive power.

Just as the road in front of us is different from the road behind us, it is important to recognize that drivers as well as investors who navigate solely by what they can see in their rear-view mirror are not well equipped to manage the inevitable twists and turns of the road that lies ahead.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!


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Grand Illusion #4: Equities are Risky and Should be Avoided

Do actively managed portfolios beat the market? – Grand Illusion #2

The fallacy that the stock market can regularly and consistently be outperformed by superior investment selection is the ugly stepsister to the first ‘grand illusion’ of investments, market timing. The notion that through an extensive search of the stock market or the mutual fund industry, investors can reliably uncover the next investment superstar is categorically false.

You might think, “If I could only find and buy the next Apple, Google, or Amazon stock in its infancy, I would be rich.” Well, you would be rich, but it is unlikely you will be that lucky. There are thousands of mutual fund managers and pension plan managers, and a wide variety of other highly educated, experienced professionals in the investment industry scouring the investment universe in search of the next investment superstar. The full-time professionals, with their vast resources, can rarely find a hidden investment gem or concoct a superior portfolio of investments, that can reliably beat their corresponding index (or the average).

We like to think that trying to get rich through individual investment selection, versus owning a diversified portfolio of equities, is like betting on a single football team that will win next year’s Super Bowl, versus having a partial ownership in the National Football League (NFL) itself. Owning a share of the entire NFL would entitle you to a proportional share of all the profits from the entire organization and from every team. Certainly, teams within the organization will experiences their ups and downs each year, but overall, the NFL as an entity makes a lot of money (and half of its teams are guaranteed to have losing seasons). A rational investor would not bet on a single team instead of owning a piece of the whole organization. Rational investors recognize that the odds are not in favor of those who try to beat the markets through superior investment selection.

Successful long-term stock and mutual-fund pickers are hard to find. There are no market timers or stock pickers listed among Fortune magazine’s richest people in the world. Wouldn’t you think that if market timers and stock pickers could really do what they claim to be able to do, they would be numbered among the world’s wealthiest individuals? So, where are they?

Does Warren Buffet beat the market?

Some would argue that the oft quoted billionaire Warren Buffett would qualify as a successful stock picker. He is a unique and talented investment manager and has made excellent individual investment choices. But Warren Buffett’s successes can be attributed to his extreme discipline and patience rather than flipping stocks or timing markets. It is interesting to note the instructions he gives to the trustee of his own estate regarding how his wife’s money is to be managed upon his demise: “the trustee is to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” When the third wealthiest person on the planet, who made his wealth by managing investments, instructs his trustees to not even attempt to “beat the market” we should pay attention.

An additional illustration of Mr. Buffett’s belief in the passive investing process is demonstrated in an interesting wager that he made in 2007 with Ted Seides of Protégé Partners. Protégé Partners is a New York-based money-management company that prides itself in its ability to time the markets and outperform the stock market through superior investment selection. The bet was, that for a ten-year period, Protégé Partners would choose a combination of “timing and selecting” types of investments to beat Warren Buffett’s choice of a mutual fund that mimicked the S&P 500. At the end of the ten years, the winner’s favorite charity would receive one million dollars.

When the wager was completed in 2017, Buffett’s S&P 500 index fund returned 7.1% compounded annually. Protégé Partners competing hedge funds returned an average of 2.2%. Surely Buffett’s charity, Girls Inc. of Omaha, was excited to open their mail box after the wager was completed.

There is a lesson to be learned from this wager. Warren Buffett, one of the smartest investors on earth, believes in the value of passive investing. He believes very few investors “can beat the market” and he trusts that investing into the average through index mimicking equities will ultimately beat out those who seek above average investment results through superior stock and mutual fund selecting.

Who benefits from actively managed portfolios?

So, if market timing and superior investment selection has been proven to be unproductive, who benefits from these deficient strategies? Mutual fund companies, brokerage firms, and any entity or individual whose value proposition is their ability to tell you what tomorrow’s star investment will be. Especially egregious profiteers in this illusion are the magazines that provide lists of “the best mutual funds for the year” and the television programs instructing the public on what stocks to buy and sell as part of some inept day-trading strategy.

There is an inordinate amount of time, energy, and money that is wasted on the possibility that market timing and superior investment selection may contribute to investment performance. The academic world refutes the claims that market timing and superior investment selection have any significant impact on actual investment results. In practice, the additional costs (increased management costs and higher trading costs) incurred by those who willingly pay for these tactics far outweigh any possible benefit they might offer.

Many naïve investors believe that if they spend an hour or two every other month checking out stocks, or mutual funds, on the internet, that they will be able to create an investment mix that will outperform market averages. When long term, index beating, investment selection can’t be accomplished by the most experienced professionals, it is doubtful that the amateur on an occasional cruise through cyberspace will be successful.

Certainly, there is a lot of money being made by the deception of superior investment selection. Unfortunately, we once again see that everybody, but the investor is making that money.

So, when it comes to investing your own portfolio we would suggest that you follow the sage advice of Vanguard Mutual Funds founder Jack Bogle, “Don’t struggle to find the needle in the haystack. Just buy the haystack.”

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

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Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided

The myth of “Timing the Market” – Grand Illusion #1

The first “grand illusion” of investments is market timing. Market timing presupposes that those who are smart enough, or follow the markets closely enough, can figure out both when to get into the stock market and when to get out. The goal is to miss the pain and experience the gain.

Of course, we would all love to own equities and enjoy the profits while avoiding downturns, but unfortunately, it cannot be done. The difficulty in market timing is that you not only have to know when to get out, but also when to get back in. Therefore, you must guess correctly not only once, but twice for market timing to actually work.

What we have found is that there are a lot of people and products willing to take money from the public who attempt to time the market, but none have a proven track record to substantiate their claims. Of course, there is the occasional “investment guru” that may guess the temporary movement of the market. When that happens, they have their face on the cover of the financial magazines and show up on the financial radio and television shows, but they are soon forgotten. Why? Because successful market timers must guess correctly twice: when to get out, and when to get back in. That cannot reliably be done.

We often run into individual investors that report to us they saw the financial crisis of 2008-09 coming, and they were able to avoid the big downturn in the stock market. As we investigate their claim in more detail we find that these investors, that take such pride in their investment prowess, usually still have their money sitting in the bank account that they moved their money to during the great recession.  Therefore, even if they did miss the 56% downturn of 2008-09 they also missed out on more than 300% upturn since 2008-09. Again, you must guess correctly twice.

Can you really outperform the stock market average?

The S&P 500 is a representative basket of the 500 largest corporations in the United States: Apple, ExxonMobil, Proctor & Gamble, etc.

An index is a tool that gives us a way to measure how the overall stock market is faring. There is no management of the portfolio of stocks that make up the S&P 500, and you can’t buy into the S&P 500 itself. You can, however, purchase exchange-traded funds (ETFs) and mutual funds that mimic the holdings of the S&P 500. When you buy an investment product that mimics the S&P 500, you become a partial owner of all 500 corporations that compose the S&P 500. You are buying a piece of the entire basket of stocks.

Actively managed portfolios

The alternative to passively investing into an index fund is to attempt to make money by investing into actively managed portfolios. Actively managed investment portfolios are those that attempt to outperform an index, such as the S&P 500, through market timing and superior investment selection. It is interesting to note that in a given year roughly 15% of actively managed mutual funds that invest into large U.S. stocks can outperform the S&P 500.

You may be thinking that you only need to do the research and find the 15% of mutual funds that beat the S&P 500. That is a great idea, but it’s just not that simple. It’s never the same funds that beat the S&P 500 year after year. Every year there will be a different group of mutual funds that outperform. You would have to determine in advance which 15% of mutual funds would be next year’s winners. Therein lies the challenge. Good luck.

Over longer time periods, the percentage of actively managed mutual funds that can outperform the index diminishes dramatically. The obvious question that needs to be asked, therefore, is, “Why don’t I just buy the average?”

Well, why don’t you?

The good news is that you don’t need to “beat the market” to be a successful investor, you only need to get the market’s average and participate in its earnings. Because when it comes to investing, getting the average return of the entire market puts you near the top of the class.

The profiteers of market timing

So, who stands to profit from the illusion of market timing?

First, the mutual fund industry in general. The fees for actively managed mutual funds are more than ten times higher than buying a fund that mirrors an index. The average cost of actively managed large-cap stock funds is 2.33% when expense ratios and transaction costs are considered. The average cost to buy a fund that tracks the performance of the S&P 500 itself is .20% when transaction costs and expense ratios are considered. Even though index funds outperform actively manage mutual funds and are cheaper to buy, for the obvious financial benefits, mutual fund companies promote their more expensive, worse-performing funds instead.

The second group of profiteers of this particular grand illusion is any other person or entity that promotes the idea that they know what the market’s next move will be. The large brokerage firms and the small investment advisors, whose value propositions are their knowledge of the future, are co-conspirators of this illusion.

Magazines, newsletters, and cable news stations that predict the future of the markets, the price of oil, the next recession, or any other future price or event, likewise share in this “grand illusion”.

The following that some of these prognosticators have is amazing. On the air, these self-assured individuals are incredibly convincing. But being convincing doesn’t mean they are accurate. Few investors take time to investigate the track record of those that can “see into the future”. If you were to Google the accuracy rate of their past predictions, you would know better than to follow their forecasts.

Some of the most entertaining promoters of the illusion are the authors of books that have figured out when the “financial apocalypse” will begin. For $34.99, they will share this dark secret with us, and instruct us on how we can thrive while the entire economy collapses, dollars become worthless, and our neighbors starve to death in the streets.

The next time you are in the bookstore, check out the books on investing. You will find a book authored by Harry Dent in 1999. His book, ‘The Roaring 2000s’, predicted that the Dow Jones Industrial Average would surge to 35,000 by the end of the next decade. That never happened. Instead, the first ten years of this century ended up being the worst decade for investing since the Great Depression. The Dow Jones Industrial Average closed the decade lower than where it began, an entire decade with no growth.

Instead of taking a breather after this forecasting disaster, in 2009, Mr. Dent doubled down on his forecasting and wrote a new book, ‘The Great Crash Ahead’. Since this book hit the shelves, the S&P 500 has tripled in value.

It seems like this forecaster just can’t get things right. I wouldn’t be so disparaging about this author if it were not for the fact that he is one of the most quoted “experts” in the financial industry. Every year for the past several years, he has predicted that the Dow Jones Industrial Average will drop by 6,000 points. It hasn’t happened, but that’s not the point. The point is that every time he makes this dire prediction, he sells a lot of books.

The grand illusion of market timing is reminiscent of the California gold rush. In 1849, fortune seekers from across the globe flocked to California in hopes of striking it rich. Fortunes were made, but it was not the hard-working prospectors that become wealthy. Rather, it was the shop keepers, suppliers, and bankers who were the real profiteers. Similarly, fortunes are now being made by market timing. Unfortunately, it is not the investor that will be bringing home the profits. It is the mutual fund industry, brokerage firms, and the financial media that are the real winners.

With the illusion of market timing, everybody makes money but the investor.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!


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Grand Illusion #2: Superior Investment Selection
Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided

Investment myths: Welcome to the Grand Illusions

As investment advisors, as well as ones who have extensively researched investment-related topics over the past thirty years, we have come to a disappointing conclusion: the ideas embraced and promoted by many in the investment industry and the media are not shared by the facts that are revealed in the academic world.

The next few blog posts will be dedicated to debunking the investment fallacies of our day such as market timingsuperior investment selectionthe persistence of performance, and avoiding equities by exposing where academic research and conventional wisdom collide. After all, we really can’t proceed with a constructive discussion about the management of investments during retirement without first dispatching false investment narratives.

So, why is there a chasm between academia and the messages shared by the conventional investment pundits of the day? The simple answer is that for some, profits trump giving quality investment information.

It is also important to remember that financial institutions were created to make profits for themselves and their shareholders, not their customers. These entities as well as the financial media are in the business of selling products and making profits. Giving useful, common-sense, factual investment advice is not their primary objective – selling a product and making money is.

Unfortunately, the tried-and-true facts resulting from academic research are valuable but usually boring. Fictional concepts, no matter how useless and sometimes damaging they may be, certainly have more sizzle, and sizzle sells products. The financial media, whether it is newspapers, magazines, radio or television, must “sell” you the news instead of giving you the facts. The financial news outlets would go out of business if they headlined the simple truths of investing such as “Patience and Discipline, the Keys to Success,” or “Slow and Steady Wins the Race.” To survive, they must continually come up with new and exciting headlines to grab your attention with headlines like, “Six Hot Funds to Buy Now!” or “Wall Street’s Secrets Revealed!” These headlines are catchy, and surely generate a lot of money for their companies, but this type of information does not help the investor.

We don’t begrudge corporations trying to make a profit in the most capitalistic industry on earth. Certainly, there are reputable financial companies that have valuable products and services we can benefit from.

Unfortunately, some companies and individuals fill the airways and printed media with half-truths and even outright lies as they attempt to get us to purchase their products and services. Just as pornography is harmful to all that get caught in its snare, this financial pornography likewise has no redeeming value, gives the investor a false sense of reality, and will devastate the financial future of any that allow themselves to be seduced by it.

As we were searching for a name to call these investment falsehoods, a song that that is often played on our classic rock radio station came to mind. The lyrics to the old Styx hit, “Grand Illusion,” accurately describes the deceptions of our day. So, welcome to the grand illusions of investing.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

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Grand Illusion #1: Market Timing
Grand Illusion #2: Superior Investment Selection
Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided

Investing Lessons Learned from 2020

Once in a very great while, there comes a year in the economy and the markets that serves as a tutorial—in effect, an advanced class in the principles of successful long-term, goal-focused investing. 2020 was such a year.

On December 31, 2019, the Standard & Poor’s 500-Stock Index closed at 3,230.78. On New Year’s Eve 2021, it closed at 3,756.07 —15.76% higher. With reinvested dividends, the total return of the S&P 500 was 17.88% From these bare facts, you might infer that the equity market in 2020 had quite a good year, indeed it did. What should be so phenomenally instructive to the long-term investor is the journey the market took to get there.

The stock market peaked on February 19 of last year then reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August. The lifetime lessons that were once again on display were that the economy can’t be forecasted, and the stock market cannot be timed. Instead, having a long-term plan and sticking to it, acting as opposed to reacting—which is our investment policy in a nutshell—once again demonstrated its enduring value.

Two corollary lessons are worth noting in this regard: (1) The velocity and trajectory of the equity market recovery essentially mirrored the ferocity of the February/March decline. (2) The market went into new high ground in midsummer, even as the pandemic and its economic devastations were still raging. Both occurrences were consistent with historical norms. ‘Waiting for the pullback’ once a market recovery gets under way, and/or ‘waiting for the economic picture to clear before investing’, turned out to be formulas for significant underperformance as is most often the case.

The American economy—and its leading companies—continued to demonstrate their fundamental resilience through the balance of the year, in that all three major stock indexes made multiple new highs. Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution mode as the year ended. There is the expectation that the most vulnerable segments of the population could get the vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of the year, if not sooner.

An additional important lifetime lesson, of this hugely educational year, had to do with the presidential election cycle. To say that it was the most hyper-partisan election in living memory wouldn’t adequately express it. Adherents to both candidates were genuinely convinced that the other would, if elected/reelected, precipitate the end of American democracy. Everyone who exited the market in anticipation of the election got thoroughly, and almost immediately, skunked. They experienced the same awful result as those that sidelined their money during the 2016 election. The enduring historical lesson: never get your politics mixed up with your investment policy.

Still, as we look ahead, there remains plenty of uncertainty to go around. So, how do you and I—as long-term, goal-focused investors—make investment policy out of that possibility? Our answer: we don’t, because one can’t. Our strategy is entirely driven by the same steadfast principles as it was during the pandemic—and will be a year from now. Equities, with their potential for long-term growth of capital and their long-term growth of dividends have been, and will continue to be, the only logical way to invest your money to stay ahead of inflation. This was the most effective approach to the vicissitudes of 2020, and we believe it always will be.

In my 35 years of investing experience, I have noticed that every failed investor reacts to news headlines and current events while every successful investor follows a plan. We will therefore continue to tune out ’volatility’, and we will continue to act and not react. We will follow the time-tested plan, the Perennial Income Model, that has served you so successfully in the past. We look forward to discussing your plan further with you as we meet this year. Until then, we thank you again for entrusting us with your future. It is a responsibility that we do not take lightly, and we consider it a privilege to serve you.

Is your Advisor a Fiduciary?

What is a Fiduciary?

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their client’s interest above their own in all instances. Being a fiduciary requires being bound, both legally and ethically, to act in their client’s best interest. In essence, they are the guardians of their client’s money.

Commissioned salespeople are not considered fiduciaries because they are representing a product or a company, not the individual to whom they are selling a product, and they are not bound by the higher ethical standard of a fiduciary. Commission salespeople follow a different suitability standard in which the transaction must be suitable for a client, not necessarily the best solution. The commissions they earn can create a huge conflict of interest which effectively eliminates them from the fiduciary standard.

All too often, individuals trust advisors that promote themselves as fiduciaries, only to get talked into buying high-commission/high-fee annuities or real estate investment trusts by these same advisors as these advisors fail to live up to fiduciary standards. Sadly, many investors fall prey to the unethical, yet legal, practices of financial advisors who promote themselves as trusted fiduciaries as a door opener to selling expensive, inappropriate, big commission products to the unsuspecting public.

Unfortunately, some investment advisors are allowed to wear multiple hats at the same time, which allows them to be fiduciaries for a part of a client’s money that they manage, and a commissioned salesperson for the balance of the client’s money. It is not right, it makes no sense, but that is how it works.

Who regulates – or better said, doesn’t regulate –  Advisors?

The Securities and Exchange Commission (SEC) typically oversees the activities of the fee-based fiduciary while another regulator, the Financial Industry Regulatory Authority (FINRA) oversees the activities of the broker-dealers who are typically those persons and firms that are commissioned salespeople. Additionally, the State Insurance Commissioners oversee the sale of commission-paying insurance products such as annuities within their respective states.

The problem lies in the fact that the SEC is only interested in the activities of the advisors relating to the advisor’s roles as fiduciaries and does not pay any attention to the non-fiduciary sales activities that are being carried out by the advisors.

So, the sale of commissioned securities and insurance products by a fiduciary is not their concern as they view these activities outside of the scope of their jurisdiction. The deception takes place when advisors advertise themselves as fiduciaries, draw clients into their offices, then act as fiduciaries for a small amount of the client’s assets (10%) and then proceed to sell the client big commission products that are not in the best interest of their clients with the rest (90%) of the client’s money.

As I listen to the radio and see advertisements online, it is usually these bait and switch types of advisors that are promoting themselves as fiduciaries. Buyer beware, you need to do your homework.

How can you tell if an Advisor is truly a Fiduciary?

1. Check out the firms Form ADV and CRS. Form ADV and CRS are the uniform documents filed by investment advisors to register with the SEC. They will let you know how a firm is compensated and will identify conflicts of interest such as receiving commissions in the sale of investments and/or insurance products. You can find a firm’s Form ADV and CRS on the SEC website. If the firm, or advisor you are investigating, earns a commission by the selling of an investment or insurance product then I would suggest avoiding that advisor. They may be “fee-based” which means they act as a fiduciary for some of the client’s money they manage but in the end, they are commissioned salespeople.

2. Know that any product that has a surrender charge, or limits your access to your own money, pays a commission to a salesperson. When an insurance agent sells an annuity, they get paid an upfront commission typically of 6-7%. So, if the agent talks somebody into investing $100,000 in an annuity, the insurance company pays the agent a 6% commission or $6,000. So how does the insurance company protect themselves from losing money on this transaction? Insurance companies place a surrender charge on the annuity that keeps the purchaser from liquidating the annuity for a specified number of years, or at a large cost if the annuity is surrendered prior to when the stated surrender charge expires. This allows the insurance company to recoup the upfront $6,000 commission they paid by collecting large management fees for a number of years or the investor reimburses the insurance company in the form of a surrender charge if they surrender the product early. You are unlikely to get stung as long as you never place your money into a product that charges a fee to withdraw your own money or that imposes a timeframe that limits your ability to withdraw your money.

3. Search Google for a list of “fee-only” investment firms in your area. “Fee-based” advisors are not always true fiduciaries as part of their income comes from selling commission-paying products. Fee-only advisors are compensated by an agreed upon fee and don’t accept, or are even licensed to receive, commissions.

Unfortunately, I don’t see the regulatory environment changing anytime soon and vulnerable investors will continue to be duped by advisors, who claim to be fiduciaries but fail to act as fiduciaries by selling high commission investments and annuities to the public. This travesty will continue as long as the multiple regulatory bodies and insurance commissioners limit their focus on their own perceived jurisdictional responsibilities while ignoring the big picture of what is taking place with the client’s investment portfolios.

If you want an advisor that is truly a fiduciary, one that always acts in your best interest, then it’s critical to understand the potential conflicts of interest that exist in the investment industry before hiring any advisor. My best advice is that you should limit your search for a fee-only advisor whose investment philosophy matches your own.

This Time Really Isn’t Different: What to do When the Stock Market Crashes

Anytime the blended price of America’s 500 largest companies (S&P 500) drops by 34%, you know that there is something significantly wrong going on. This is the fourth time we have experienced this magnitude of decline in my thirty-four year career and every time such an event comes around, we tend to surmise that, “this time it is different”. We conclude this because the details of each crisis are fundamentally different from anything we have before faced.

Thus, the COVID-19 pandemic, and the economic panic it has engendered, seems entirely unique in our history. Moreover, we are without historical precedent as the equity markets become unmoored from valuation fundamentals. We have no idea how the pandemic will affect the earnings of corporations nor how much future dividends will be cut. Furthermore, we don’t really have an idea how long it will take for the economy to stabilize and return to a sustainable path of growth. We are mired in a bog of uncertainty as to how the immediate future will play out.

During times of uncertainty and fear, human nature defaults to the conclusion that our current crisis is fundamentally, and even fatally, different from past bear market episodes. That has always been human nature’s rationale for not staying the course and selling out in a panic. This fear of uncertainty caused the epic selloff in February and March when the stock market dropped 34% in thirty three days.

As I think about the three analogous bear markets of this magnitude that I have experienced during my tenure, I recognize that even though each is radically different in its particulars, each was fleeting in its long term effects once we got through them. The three events I am referring to are the Global Financial Crisis of 2008-09, the terrorist attacks of September 11, 2001 and the stock market crash of 1987.

Global Financial Crisis of 2008-09

During the Global Crisis of 2008-09 the world’s financial system found itself over-leveraged and holding trillions of dollars of worthless mortgage derivatives. Under this burden, the credit system broke. Many of the nation’s largest banks, brokerage firms and insurance companies were teetering on the brink of bankruptcy. In response, the S&P 500 declined 57%, making it the worst equity wipeout since the Great Depression. Liquidity was gradually restored, bad loans were written off and from the market trough of March 2009 to the market’s peak in February of 2020 the S&P index delivered an annualized return of 16.7% and stood almost five times higher in 2020 than its 2009 level.

The Stock Market Crash Following 9/11

As the nation reeled from the events of 9/11, Americans feared that World War III had begun. We waited for the next surprise attack fearing that the next one might be nuclear. The stock market was closed for a week and America was convinced that life as we knew it would forever be changed. We will never forget what transpired on that infamous day yet, economically and financially, 9/11 ended up being just a temporary distraction.

Black Monday, October 1987

On a beautiful fall day in October of 1987, the stock market had its single worst day in recorded history. The S&P 500 plummeted on Black Monday by 23%. Nobody understood the drop and we all wondered if this was our generation’s crash of 1929 and the ushering in of our very own Great Depression. I remember a couple of investors shooting their stock brokers while other distraught investors jumped from buildings and bridges. As disturbing as the events of Black Monday were, the stock market quickly rebounded, ushering the unprecedented growth that was experienced from the date of that crisis until the year 2000.

Today it is difficult if not impossible to envision that the financial effects of the COVID-19 pandemic will soon be a distant memory, a mere paragraph in a history book that will be added with the other Black Swan events of our times. This will happen because there simply is no other option. There are 330 million hungry American consumers and almost 7 billion additional consumers worldwide that will keep the market’s permanently marching on to new heights. The human race is too adaptable, too motivated, and too ingenious to let terrorism, viruses, or come what may derail our progress. There will be other crisis, there always are, but history has proven that whenever the human race is faced with a challenge, we ultimately overcome the challenge and move on.

Thus, the lesson of this crisis, as well as every other crisis past and future, is that although the exact nature of every crisis is unique, the resulting economic and financial impact of these crisis are remarkably similar and remarkably negligible. Long term investors cannot allow themselves to buy into the most destructive and expensive phrase ever uttered….. this time is different. “This time is different” will forever be the anthem of the failed investor and we can’t allow that phrase to creep into our psyche. History has proven that it is a losing proposition to bet against the ingenuity and indomitable spirit of the human race to succeed. We will overcome COVID-19, and this soon will become just another blip on a chart.

Stay the course, and remember that this time really isn’t different!

How the CARES Act Impacts Retirees

We are all on information overload these days, so I am trying to only share information with you that is pertinent and that directly impacts your situation as a retiree.

Our government sprang into action this past week to create an unprecedented stimulus package to combat the financial effects of the coronavirus. The new law resulting from this stimulus is called the Coronavirus Aid, Relief, & Economic Security Act or the CARES Act. The CARES Act covers a lot and it contains provisions that are designed to benefit individuals as well as businesses. I think it is important for you to understand some of the major provisions of this new law but the following is not intended to be an all-encompassing review of the CARES Act. I simply want to outline those provisions of the stimulus package that most impact retirees.

  1. Eligible taxpayers will receive a tax rebate check. The amount of the tax rebate is $1,200 per person plus $500 per dependent child. The amount of the check is reduced by a phaseout provision for individuals who made over $75,000 and couples that made over $150,000 last year, or in 2018 if you have not filed your 2019 taxes. Starting in May, you should begin to see this money deposited in the checking account that receives your tax refund or into the account where your Social Security check is deposited. If the government has no checking account on file for you, you will receive a check in the mail. Please be careful of scams! Nobody from the government will be calling or emailing you regarding this rebate!
  2. Many retirees begrudgingly take money that they don’t need out of their IRAs once they are age 72 (previously was age 70.5) because the required minimum distribution rules stipulate that they such a distribution. The CARES Act has eliminated the IRA required minimum distribution requirements in 2020. Retirees who have taken required minimum distributions within the last sixty days can redeposit their RMD to eliminate the tax on those distributions. For retirees who donate to charity: It can still be advantageous to make charitable contributions directly from your IRA to your charity even though there is not a required minimum distribution obligation in 2020.
  3. The tax filing deadline has been extended from April 15th to July 15th. This means that the date to make 2019 contributions to IRA and HSA accounts has also been extended to July 15th.

There are additional provisions and benefits associated with the CARES Act for those that have contracted the virus, have a spouse that has contracted the virus, or if you have lost your job as a result of the coronavirus. I won’t mention those benefits here but you should be aware that they exist if you are unfortunate enough to fall into this category.

Strategic Opportunities in a Market Decline

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill

As I watch the emotional reaction of investors during market turbulence, I concur with Churchill as I see individual investors categorize themselves into two separate camps. They are either victims or they are opportunists.

Beyond reminding the self-prescribed investment victim of the overwhelming historical evidence of the resiliency of the stock market, there is little that can be done to save them from themselves as they panic and sell as markets decline. Therefore, let’s not waste our time discussing how to rescue the lemmings as they throw themselves off a cliff

Let us focus instead on the positive steps that can be taken by an investment opportunist when stock markets retreat. There is so much that can and should be done in every financial crisis. The prepared opportunist can turn today’s temporary stock market lemon into tomorrow’s lemonade.

An investment opportunist recognizes that every downturn is temporary, every bear market is eventually followed by a bull market, and that the stock market will eventually go on to reach new record highs. There has never been an exception to this pattern, only the timing and duration of the bear and bull markets is uncertain.

Six ways to take advantage of a temporary market downturn:

1. Roth IRA Conversion

A traditional IRA will someday be taxed while a Roth IRA grows tax-free. Therefore, Roth IRAs are more advantageous to own than traditional IRAs. You can convert a traditional IRA to a Roth IRA, but you must pay income tax on the entire amount of the traditional IRA that you convert. So, let’s say you own 10,000 shares of ABC stock that are priced at $10 per share. The value of your investment is therefore $100,000. If you were to convert these 10,000 shares at the $10 price you would need to pay income tax on the $100,000 converted to a Roth IRA.

In a down market, an opportunist would realize that his ABC stock is now only worth $7 per share. If he were to convert all 10,000 of his shares that are now worth only $70,000, he would only have to pay tax on the $70,000 Roth conversion, not the full $100,000. When the price of ABC stock rebounds to $10 per share our optimists would have $100,000 worth of Roth IRA value but they would have paid tax on $70,000 worth of Roth IRA conversions.

2. Refinance Your Mortgage

When the stock market recedes, it is common for the Federal Government to step in and attempt to jump-start the economy. They do this is by reducing interest rates. This move will often temporarily reduce mortgage interest rates. The opportunist would jump at the chance to refinance their mortgage because a thirty-year, $300,000 mortgage with a 3.5% interest rate costs $60,000 less over thirty years than the same mortgage with a 4.5% interest rate.

3. Fund IRA/Increase 401(k) Contributions

An easy way to take advantage of a temporary market downturn is to contribute additional funds to retirement accounts. We have all heard the maxim, “buy low, sell high”. Well, then buy when equities are selling at a discount.

Some of you will remember the years 2000-2009 which was the worst decade for investing since the great depression. Large stocks ended the decade at the same levels that they began the decade. That’s right, ten years with zero growth. The pessimist would say, “I am glad, or I wished, that I missed out on that disaster”. Meanwhile, for the opportunist, this decade was a wonderful investment opportunity! As markets went down the opportunist systematically purchased depleted equities in their 401(k)s and IRAs at a substantial discount. These once depleted shares are now worth 400% of their 2009 value and that’s taking into consideration the latest downturn.

Those who make annual contributions to retirement accounts should contribute when markets plummet. Those who systematically contribute to 401(k)s should consider reallocating conservative investments within their 401(k)s to equities and/or increasing their 401(k) contribution rates.

4. Rebalance Your Portfolio

There is proven value and additional security when investors diversify their investments. Few would argue that diversifying or creating the proper mix of investments to accomplish specific goals is important. The challenge is keeping portfolios diversified. As markets fluctuate, portfolios get out of alignment as top-performing investments become a bigger allocation and underperforming investments shrink to a lesser allocation of the original portfolio mix. Rebalancing brings the investments back to the original mix. The process of rebalancing requires buying and selling securities which ofttimes create unwanted taxable gains. Rebalancing can be accomplished during market downturns with greater tax efficiency because the capital gains incurred are less as depleted equities are sold.

If it so happens that your rebalancing requires purchasing equities to bring your portfolio back to its original composition, then rebalancing adds additional value as temporarily beaten up equities are purchased at discounts.

5. Tax Loss Harvesting

Let’s say that Clara bought a mutual fund three months ago for $100,000. Because of the recent slide in equities, this investment is now only worth $80,000. Clara could simply hold on to that investment and wait for it to rebound to $100,000. There would not be any tax benefits or consequences by waiting for the depleted shares to rebound.

However, Clara is an opportunist and hates paying income taxes. She decides to sell the diminished investment and create a $20,000 capital loss which would benefit her taxwise. She then invests the $80,000 into a very similar investment to that which she sold and when the market rebounds she would still have the $100,000 of value plus a $20,000 capital loss that could save her several thousand dollars in income taxes.

6. Invest Excess Cash

The most important criteria to consider when deciding how to invest is time horizon, or how long money can be invested until it is needed. Money that will be required in the next five years for a purchase or for income should not be invested in equities because of the short-term volatility that accompanies the stock market. Money needed between five to ten years should be moderately invested into a mix of equities and fixed-income investments. Money that will not be needed for ten years and beyond should be invested in equities to help fight inflation. Market corrections provide opportunities to reassess portfolios and put money that is on the sidelines to work.

A Concluding Thought

The richest men in the world, from every generation, did not get that way by betting against the ingenuity and indomitable spirit of the human race to create a better life for itself. Successful investors have always been richly rewarded for their willingness to invest in the future. This generation is no exception. Today’s optimists, or those willing to invest a better tomorrow, are thriving.

Turning Retirement Savings Into Income: 4 Income Plans Evaluated

For the new retiree, it’s a huge challenge to create a plan to transition a career’s worth of accumulations into a retirement full of income that needs to last until the end of life. There are so many factors to consider and every retiree’s situation is unique. So copying your retired neighbor’s plan won’t work. It all comes down to the question: How am I going to create an inflation-adjusted stream of income from my investments that will last for the rest of my life?

There are several retirement income strategies that are widely used today by people that hold themselves out as “retirement professionals”.

4 Retirement Income Strategies


Unfortunately, there are salespeople in every community that would have you think that buying an annuity is a good substitute for having a retirement income plan. An annuity’s promise of guaranteed income and protection from volatile markets is appealing to the new retiree. The problem is that these products – with their high fees and low returns – will never keep up with inflation. The retiree that gets talked into following the “annuity ‘IS’ my plan” method may shield themselves from temporary market swings, but they condemn themselves to permanent losses in purchasing power throughout retirement. That’s important because at just a 3% inflation rate, it’ll cost $2.40 in the 30th year of retirement to buy what a dollar bought in the first year.

Market Timing and Investment Picking

The perceived value of many in the investment industry is their claim to forecast the future and to pick “market-beating” investments. Unfortunately, the facts reveal that these “sophisticated underachievers” of the investment industry rarely beat market averages over time. Having a plan that’s designed to work through all the different stages of the economy is better than betting on the future direction of the markets – or the future success of a handful of investments.

Betting on Historical Averages

If equities have historically averaged 10% and bonds have averaged 5%, shouldn’t I be able to split my investments between these two investments and average a 7.5% return? Sorry, it doesn’t work that way! The problem lies in the fact that these long-term averages are derived from a series of annual returns, both higher and lower, that don’t resemble the long-term average. Even though it’s true that large US stocks have averaged around 10% over the long run, rarely has their annual return come close to 10% in a given year. Stocks have historically fluctuated on an annual basis from a high of 54% to a low of -43%.

Taking a systematic withdrawal based on long-term averages will devastate a retirement portfolio when the occasional down year (or even down decade) comes along.

Time Segmented Withdrawals

The time-segmented withdrawal strategy was inspired by a Nobel Prize-winning economist and we believe it’s the most reliable, inflation-beating income strategy available today. This methodology matches the retiree’s current investments with their future income needs – just as professional money managers of large pension plans match their investment portfolios with the future payouts to their participants. It only makes sense that individuals have their own retirement income managed the same way that managers of pensions have successfully managed pension cash flows of millions of participants for generations. Yes, adopting methodologies 1, 2, or 3 is easier for the local investment advisor to create and manage than a time-segmented income plan, and that’s why you haven’t heard of time-segmented income plans from other investment advisors. But, shouldn’t your future income be based on what’s in your best interests and not on what’s easiest or most lucrative for the investment advisor?

Peterson Wealth Advisors has taken the academically brilliant idea of time segmentation and transformed it into a practical model of investment management that we call “The Perennial Income Model™”. To get a better understanding of the Perennial Income Model™ you can request our book “Plan on Living, a Retirees Guide to Lasting Income and Enduring Wealth”. For specifics on how the Perennial income Model™ could be applied to your retirement income plan, schedule a complimentary consultation with one of our Certified Financial Planner™ professionals.