The Monday Plunge

As the markets seem intent on adding to their volatility this week, this episode of Advisor Skinny is focused on commentary related to the stock market environment caused by the drop in oil prices, and accentuated by the fears surrounding the widening coronavirus outbreak. I share how and why the “circuit breaker” triggered in the S&P 500 on Monday of this week, and how you can use this information to help your clients better understand the market, and properly manage their concerns.

How Advisors Get Left Behind (hint: it’s only by choice)

Target Readers:

  1. Advisors seeking growth and direction.
  2. Advisors struggling to adapt and change as the industry evolves.
  3. Advisors looking to increase profits and/or the value of their practice.

Talking Points:

  1. How has your business changed over the last 10 years?
  2. Do you wish to retire or transition, but your practice valuation is stifled?
  3. Are you continuing to nurture your business successfully?

Here’s the Skinny,

We’ve all heard before the statement, “the only constant is change”…

Take a moment to reflect upon your business 5 years ago, even 10 years ago. Was it exactly as it is today? Or is it dramatically different?

Many in our industry started out as agents in the insurance/annuity business or as registered reps in the securities business. Yet today, a primary focus is more often directed toward assets under management. But even that segment has evolved.

Years ago, many advisors were managing their own portfolios for investors, Rep as PM (portfolio manager) is the common terminology today. Yet, now, the Rep as PM model is dwindling as advisors embrace the scalability of using third-party asset managers and TAMP programs like USA Financial Exchange. Indirectly, this new model has solved two crucial problems for advisors…

  1. Asset gathering (not asset managing) is the revenue lifeblood of a retail practice.  The more time an advisor spends managing money, the less time they spend growing the practice and attracting new assets. Therefore, profits often go up in direct proportion to reduction in directly managing assets.
  2. Rep as PM and/or advisor managed portfolios, stifle the value of an advisor’s practice. They choke out scalability, which can crush the valuation of a practice (no buyer wants to buy “a job,” they want to buy “a business,” and it’s impossible to climb inside the head of the advisor managing the money), but the advisor focused on gathering assets can turnover their systems and processes along with the scalability of third-part asset management. Therefore increasing the valuation of the practice.

The point is, to use another true cliché, “if you aren’t growing you are dying.”

If you do not adapt and remain agile, eventually the marketplace may diminish your worth to the point of disaster. I am not a close follower of Sears, but it did not surprise me to see hundreds of stores closing. (Sears previously announced 166 stores to close this year. Now they’ve added 68 more to the list. There are less than half the Sears stores today as there were just 5 years ago.)

Strictly from my own consumer perspective, they do not appear to have kept pace with digital or online sales, their storefronts have fallen out of favor and seem out of touch with today’s shopper, and the few times I’ve wandered into a Sears store they struck me as being almost vacant on product and in a state of disrepair. At some point simple math will grind such a business to a halt.

Similarly, in our industry, think of the advisors who have not evolved. Conducting their business as if it’s from the 1980’s or 1990’s. Trying to live on commissionable products alone. It’s an uphill battle and we’ve all seen their decline. Business models need to adapt and evolve as the business changes… Or you end up feeling like Sears in an Amazon world.

So how do you stay ahead? Keeping your business on the cutting edge?

  1. You continually enhance your offerings and services, making yourself indispensable to the investor/client.
  2. You continually strengthen the relationship you maintain with the top 50% of your clients, targeting replication of the top 20% (not the bottom 80%).
  3. You automate and utilize technology to reduce the mundane and increase the culture, value, and experience of your staff.
  4. You monitor trends for the future valuation of your practice, which almost always will parallel the future appeal to new investors and clients.
  5. You run an “experience-based” business model that delivers an elite client experience. Not a discounted fee, or diminishing returns model.
  6. You affiliate with institutions that help you accomplish everything listed above.

Things are not the same…  Thank God…  Are you ready?

Everything can (and will) always get better and better with time, as long as you continue to nurture your business as if it is a loved family member. It’s a mindset. And the beautiful option is that you get to choose… Adapt and grow rather than decay and decline.

That’s the Skinny, 



The Conundrum of Socially Responsible Investing

Target Readers:

  1. Investors confused by socially responsible investing.
  2. Advisors considering additional emphasis on socially responsible investing.
  3. Advisors struggling to gain traction with socially responsible investing.

Talking Points:

  1. Is socially responsible investing as popular as the media promotes?
  2. Will millennials finally bring socially responsible investing mainstream?
  3. Should investors consider adding socially responsible investing into their portfolios?

Here’s the Skinny,

Socially responsible investing is great in theory, but lacks in real life traction.

Sad but true.

People talk a good game, but as I’ve always said, “If you really want to know what people think or believe, study their actions, not just their words.”

Nuveen just released a detailed study titled, “Investor interest in responsible investing soars.”  The study/survey includes great detail within its 9-pages of results, but one graphic including the core questions really caught my attention…

I do not question the validity of the verbal responses from those surveyed.  However, in answering questions number 2, 4, 6, 7, and 9…  I can’t help but wonder, do their “actions” really support their “words” in real life?

For example:

  • In questions 2 and 4, would the respondent actually be willing to take a pay cut to work for such an employer, or do they mean they would expect the same pay, but prefer such an employer?
  • In question 6, would the respondent be willing to pay more for a similar quality product, or do they mean given the same price and quality they would prefer such a product?
  • In question 7, I would propose a similar scenario, but then question 9 seems to cut straight to the point, unless they interpreted it as meaning given equal returns, which would you feel better about?

Human nature is tricky.

In real life, our asset management firm, USA Financial Portformulas, offers 30+ investment model strategies, and one of our least popular models (according to assets invested) is our socially responsible model based upon the S&P 500 universe.  Interestingly, investors seem to love knowing that we have such a model even though they may not invest in it themselves.  I find that predictable, but still intriguing.

Similarly, cigarette smoking is the leading cause of preventable disease and death in the United States, yet over 13% of adults age 18-24 still smoke and almost 18% of adults age 25-44 continue to smoke.  In the United States, over 70% of adults age 18+ drank alcohol in the past year (and that’s including ages 18-20, when age 21+ is drinking age).  With a growing trend toward marijuana legalization, 22% of adults admit to current usage (even more than cigarettes).  I believe it’s safe to say, most adults know these things are not good for their health and most would steer their children away from such things…  Yet these industries are all thriving.

Does investing work similarly?

I think, all things being equal, investors prefer the idea of socially responsible portfolios.  But if the socially responsible portfolio does not live up to its “less socially responsible peers” and/or it costs more to return the same or less, then investors generally tend to revert back toward traditional portfolio allocations.  And financial advisors know this, so many do not broach the subject unless the investor makes such a request.

Do I sound cynical or am I just a realist?

I love the idea of socially responsible investing.  And speaking as asset manager, it’s not that difficult to add socially responsible screening mechanisms in order to de-select the socially irresponsible stocks.  But until market demand supports the effort, the effort isn’t worth the price of mass deployment (at least not yet).  Like I said, we promote a socially responsible investment model, yet it is one of the least utilized models we provide.

Additionally, socially responsible investing can become a bit murky.  When does an investment cross the line?  If you wish to invest with social responsibility, but you enjoy craft beer or a nice glass of wine, do you re-include the alcohol industry even though it would normally be excluded?  Or what about a tech firm that has poor data security and/or outright sells data you would deem private – include or exclude?

I’ve read that the socially responsible investing category under professional management is currently as high as 22%, but again, that math is a bit murky as it does not include passive management (only active or professional management).

In the end, many lay claim to millennials being the force behind the ultimate push toward socially responsible investing.  And in many ways that argument makes perfect sense, yet millennials are also credited with the push toward marijuana legalization…  And it may be difficult for those two things to coexist.  Not all that different from previous generations wrestling with ways for socially responsible investing to coexist with the popularity of alcohol.

It’s an emotional subject and a trend to watch closely.  But I contend the trend is probably further off in “action” than it is in “words.”

That’s the Skinny, 



Creating the Most Value in Your Practice

Here’s the Skinny…

The first quarter of any given year is probably the time that most financial advisors visit strategic planning topics  – such as , “How do I get the most value out of my business and/or create the most value in my business?”

Historically, I’ve consulted many advisors regarding the flip-flopped order for the “Top 4 Targets” regarding positioning your practice for clients vs. positioning your practice for market valuation.

Interestingly, I believe the Top 4 Targets are identical in both scenarios (or from both viewpoints – customer vs. buyer), however the order is changed.  


The reality is that systems, sustainability, and profits can be hard to assess separately as they can be so intertwined in their functionality.  The main point is that clients are specifically looking for your expertise, while potential buyers know that you will be exiting the business (at some point after they buy it from you) so they are much more concerned with the repeat-ability and duplication of your systems, sustainability and profits.

For a 5-minute deep-dive discussion on how to structure your practice for success, watch Positioning for Clients vs. Positioning for Market Valuation

One of the strongest contributors to systems, sustainability and profits is the overall percentage of recurring revenue from AUM that you receive within your practice (in comparison to non-recurring revenue from commissions).  In fact, the Succession Resource Group has published a 15-page report titled, “Your Guide to Increase the Value of Your Business”.  Specifically, when it comes to revenue they state…

“The recurring revenue currently receiving the largest premiums (from business buyers) are 3rd-party managed assets due to their recurring nature and ability to scale…” 

They go on to publish a chart that illustrates the Industry Average Valuation for Transactional Revenue (i.e., commissions) is a factor 1.0 X Revenue.  Whereas, the Industry Average Valuation for Recurring Revenue (i.e., AUM fee revenue) is a factor of 2.60 X Revenue.

Source:  Succession Resource Group

Obviously, that represents a 160% “premium or advantage” for AUM recurring revenue over commission non-recurring revenue.  And they also argue that 3rd-party AUM is valued higher than other form of AUM.


Well, think about it as if you are a buyer and then it makes perfect sense…

If you are buying a practice chock-full of 3rd-Party AUM, you can hit the ground running, not miss a beat, and have potentially endless scalability.  You can continue with the systems that are already in place to gather assets with no worries about having to “climb inside the brain” of a self-managing advisor.

On the other hand, if the selling advisor is self-managing the money, how exactly is the buyer to duplicate that thought process and execution once the seller leaves?  And furthermore, how are they to gain scalability whereas the more assets they gather, the more workload, complexity and liability they create for themselves as the money management component escalates, and by default puts strain on the ability to gather new assets?

Additionally, the “business risk” associated with those assets skyrockets in a self-managing practice.  Meaning, if the customer is unhappy with the money management performance, they have no choice but to leave the practice.  Whereas, an advisor “managing the relationships” rather than “managing the money,” can easily pivot to another money manager that more closely aligns with the investor’s needs or desires.

Simply put, buyers are not looking to purchase a job…  They are looking to purchase a business!

Utilization of 3rd -party money managers enhances your practice in ways that commission and self-managed models cannot.

That’s the Skinny,

A New Stock Market Era has Begun (actually its already 5 years old)… Yet Almost Everyone Missed It

Here’s the Skinny,

The popular 1st Quarter 2018 USA Financial Trending Report has been released along with the January 2018 USA Financial Trend Tracker.

Here’s an except from the report…

On January 4, 2018, the Dow Jones Industrial Average (DJIA) closed above 25,000. Just eight trading days later, on January 17, 2018, the DJIA closed above 26,000, sprinting through the fastest 1000-point growth milestone ever. Many may remember years ago when I first introduced the stark visual differences of “your father’s stock market” (1980-1999) in contrast to “your stock market” (2000-2012).

The visual distinction for the S&P 500 for the 20 years of 1980-1999 compared to the 13 years of 2000-2012 is shocking. In fact, in my opinion, it changed everything. It ushered in the age of risk-management as king, unseating passive buy and hold investing as the logical approach. However, we are now dealing with a whole new era that began in 2013. (Note: I consider 2012/13 as the transition point for the next era, as 2013 was the year the market surpassed its previous highs, finally recapturing gains from both 2000 and 2007).

Once again, we see a very distinct contrast from the previous era, even with the performance flatness from late 2014 to early 2016. If we string all three eras together on a single chart, you can quite literally see and feel the “tone” of the market change as we progress through time (the RED vertical lines separate the eras).


Continue reading the 1st Quarter 2018 USA Financial Trending Report.

See the most recent  trending updates and the accompanying explanatory video.  

That’s the Skinny,

Trust Company of America – Exciting Acquisition

Here’s the Skinny…

Last week we learned some good news for both USA Financial Portformulas and USA Financial Exchange – Our custodian, Trust Company of America (TCA), has signed a definitive agreement to be acquired by E*TRADE Financial Corporation.

We view this as a positive development as we believe the resources of E*TRADE will allow TCA to invest more in its innovative technology, valuable platform and in the top-notch service. Subject to regulatory approvals, we expect the transaction will close by the end of the second quarter of 2018.

We want to highlight some TCA features that will not change as a result of this transaction:

  • TCA will be run as a standalone entity and the TCA brand will remain unchanged.
  • The TCA leadership team will remain in place and will be able to continue to make decisions that are in the best long-term interests of your clients and your business.
  • TCA will continue to be non-competitive. You should not expect your accounts to be directly contacted by TCA or E*TRADE selling any products or services as a result of the acquisition.
  • TCA statements, tax forms, the client portal will remain the same.
  • TCA’s fee structure will not change.

E*TRADE is committed to ensuring TCA has the people, systems, and technology it needs to solidify its status as an industry leader. Like TCA, E*TRADE is a leader in technology, and both organizations will benefit from its combined technological resources and experience. Over time, TCA will be designated as an E*TRADE company in its branding so you will be able to benefit from E*TRADE’s national brand recognition.

We expect this change to ultimately enhance the benefit and value you already experience in dealing with USA Financial Exchange and/or USA Financial Portformulas as we continue to partner with TCA.  No doubt we will be in touch with more information as second quarter 2018 arrives.

That’s the Skinny,




Mike Walters, CEO




Risk Managed Accounts May Subdue Sequence of Returns Risk (Part II)

As a follow up to the previous post: Here’s the skinny

Risk Managed Accounts May Subdue Sequence of Returns Risk (Part II)

Risk managed accounts are my first line of attack (my second will be discussed in Part III) against the sequence of returns risk for investors withdrawing retirement income from their accounts.

In Part I, we analyzed a scenario in which investors had a nest egg of $1,000,000 and were attempting to take annual withdrawals beginning at $60,000 and increasing each year by 3% adjusting for inflation.  The problem was, depending upon the sequence of their returns, (1) one ran out of money, (2) another had a declining balance, and (3) the third maintained their $1,000,000 nest egg after withdrawals.  Mathematically these are all accurate and true.  That’s the unusual challenge with sequence of returns risk – it depends on the luck of the draw.

So, do we just throw up our arms and pray the sequence of returns works in our favor?  Of course not.

The looming retirement planning question is “How may we prepare in real life?”  Can we do anything to combat this risk besides simply withdrawing less money?  Well, let’s address the ultimate stress-test…  Let’s hypothetically look at what would have occurred to investors in the midst of the 2008-09 financial crisis.

We will compare and contrast relevant numerics for the S&P 500 Index alongside a risk managed account from USA Financial Portformulas, using the Sector Bull-Bear Strategy.

Here’s what performance and accumulation look like if we simply assume that both the S&P 500 and the Sector Bull-Bear Strategy have $1,000,000 invested and are allowed to accumulate with no withdrawals from 2004 through 2016:

Sector Bull Bear

I’ll attach a PDF brochure for the Sector Bull-Bear Strategy if you would like to know more details specifically about how the model functions.  Suffice it to say here, the Sector Bull-Bear is a formulaic trending risk managed model that uses specific criteria to select amongst 11 sector ETFs for the S&P 500 via “sector trigger scores,” but then also calculates an overall “master sector trigger” to formulaically dictate when the model will shift entirely out of equities to a conservative bond/gold ETF blend.

The chart above illustrates the S&P 500 (the GREY line) versus the net fee performance of the Sector Bull-Bear (the BLUE line) from the beginning of 2004 through 2016.  Take particular note of how the Sector Bull-Bear would have responded during the 2008-09 financial crisis by automatically shifting out of equities – revealing the popularity of using risk management.

But remember, we are discussing the perils of the sequence of returns risk and the difficulties it creates when distributing retirement income withdrawals from a portfolio.

So next, we will extract withdrawals just as we discussed in Part I of this write-up.

In the chart below, we will use the identical investment of $1,000,000 and identical performance from the chart above.  However, now we will assume that the investor begins to immediately withdraw $60,000 per year, via monthly income checks, increasing each year by 3% to adjust for inflation.

Sector Bull Bear 2.png

In this chart, the GREY line still represents the S&P 500 with ZERO withdrawals, just so you have a point of reference.  But our real focus is now on the green and orange lines.  The GREEN line represents the S&P 500 less the withdrawals (again, beginning withdrawals at $60,000/year paid monthly and increasing 3% annually for inflation).  Notice the severity of the decline during the 2008-09 financial crisis and the fact that by 2016 the GREEN line is running consistently below the initial investment of $1,000,000.

The ORANGE line represents the Sector Bull-Bear less the same withdrawals (again, beginning withdrawals at $60,000/year paid monthly and increasing 3% annually for inflation).  Once more, focus your attention on the reaction of the ORANGE line during the 2008-09 financial crisis.  Also, follow the ORANGE line movement through 2016 as it remains significantly above the initial investment of $1,000,000 through the duration.  This is the value of using risk management to combat the sequence of returns risk!

Unfortunately, all I ever read about the “acceptable retirement withdrawal rate” and/or the “sequence of returns risk” is that one must reduce their retirement income.  It’s as if everyone forgot what investment planning was all about.  Risk management is why we exist!  Anyone can simply identify a 60/40 portfolio allocation and reduce income payments from 6% down to 3%; there’s no need for a financial advisor in a relationship based on that math.

But financial advisors exist to deliver value to their investors.  And risk management is one of the primary ways that such value may be delivered…  Especially to an investor in need of withdrawing retirement income.

That’s the Skinny,




Mike Walters, CEO




2017.09.14 sector-bull-bear-strategy

Risk Managed Accounts may subdue Sequence of Returns Risk (Part I)

Here’s the Skinny…

Risk Managed Accounts may subdue Sequence of Returns Risk (Part I)

For simplicity, I’m going to start this explanation with data published by BlackRock used to illustrate a basic understanding of sequence of returns risk.

Stated simply, during accumulation and/or savings years, sequence of returns has zero impact.  Meaning, if you start with a lumpsum, the order of identical annual returns (positive or negative) has no bearing on the end result.

However, the opposite is true during the distribution and/or retirement income years.  If you are making withdrawals and/or extracting income then the sequence of returns is crucial.  In fact, it can make or break your retirement.  Negative annual returns experienced early during one’s distribution years may spell disaster.

Assume the following:

Scenario 1: Accumulation or Savings Years

  • Three investors made the same initial hypothetical investment of $1,000,000 at age 40 with no additions or withdrawals.
  • All had an average annual return of 7% over 25 years. However, each experienced a different sequence of returns.
  • At age 65, all had the same portfolio value, although they had experienced different valuations along the way.

Scenario 2: Withdrawal or Distribution Years

  • Three investors made the same initial hypothetical investment of $1,000,000 upon retirement at age 65.
  • All had an average annual return of 7% over 25 years, which followed the same sequences as during the savings phase example.
  • All made withdrawals of $60,000 (6%), adjusted annually by 3% for inflation.
  • At age 90, all had different portfolio values after the same annual withdrawals.

Accumulation ReturnsAccumulation Withdrawals

Please refer to disclosures at bottom of post.

As you can see in scenario 1, the changing order for the annual returns has no impact on the end result.  All three investors finish with exactly the same end accumulation value.

On the other hand, scenario 2 illustrates why historically the generally accepted “safe” withdrawal rate has been considered 4%.  However, in current times as we’ve experienced significantly lower interest rates, the dot-com bubble and bear market of the early 2000’s, plus the 2008-09 financial crisis, many now contend that a 4% withdrawal rate is no longer safe – and that withdrawal rates should be dialed back to 3% or lower.

You see, this is not an exact science, as it depends on so many investment variations and factors.  In scenario 2 for example, a 6% withdrawal rate was assumed and Mr. White ran out of money, while Mr. Rush may be in trouble depending upon how much longer he lives and what his future annual returns may be, yet Mrs. Doe appears to be in good shape financially.


When such “acceptable” or “safe” withdrawal rates are researched and calculated they are done so assuming static traditional investment allocations.  Therefore, they assume, for example, that one simply must withstand and absorb declines from significant market downturns – yet the entire purpose of risk management is to mitigate downturns!  And if one can mitigate downturns, the impact on the research and income calculations is significant (more on that in Part II)

However, unfortunately, investors are generally taught that accumulating a certain sized nest egg will solve all their retirement woes.  But obviously, that is not the case.  It helps, don’t get me wrong, more is always better than less when accumulating toward retirement.  But scenario 2 shows very clearly that the accumulation amount isn’t the only important factor.

Yet most investors think that’s all there is to worry about – “I just need to save until I hit my magic number.”  Again, it’s not that simple.  Crafting a retirement income plan requires more knowledge, more sophistication, and different tools then does simply saving and accumulating toward retirement.

That’s the Skinny,

Mike Walters, CEO




Chart 1

Source: BlackRock. This graphic looks at the effect the sequence of returns can have on your portfolio value over a long period of time. Other factors that may affect the longevity of assets include the investment mix, taxes and expenses related to investing. This is a hypothetical illustration. This illustration assumes a hypothetical initial portfolio balance of $1,000,000 with no additions or withdrawals and the hypothetical sequence of returns noted in the table. These figures are for illustrative purposes only and do not represent any particular investment, nor do they reflect any investment fees, expenses or taxes.

Chart 2
Source: BlackRock. This graphic looks at the effect the sequence of returns can have on your portfolio value over a long period of time. Other factors that may affect the longevity of assets include the investment mix, taxes, expenses related to investing and the number of years of retirement funding (life expectancy). This is a hypothetical illustration. This illustration assumes a hypothetical initial portfolio balance of $1,000,000, annual withdrawals of $60,000 adjusted annually by 3% for inflation and the hypothetical sequence of returns noted in the table. These figures are for illustrative purposes only and do not represent any particular investment, nor do they reflect any investment fees, expenses or taxes. When you are withdrawing money from a portfolio, your results can be affected by the sequence of returns even when average return remains the same, due to the compounding effect on the annual account balances and annual withdrawals.

Predictions are Dangerous

Here’s the Skinny…  

Predictions are Dangerous  

As Yogi Berra famously stated, “It’s tough to make predictions, especially about the future.”

But since there are only three ways to invest successfully, far too many investors underestimate the difficulties and therefore (consciously or subconsciously) choose not to heed Yogi Berra’s wisdom.   

Buy when you shouldHold when you should. Sell when you should. 

Unfortunately, to make matters worse, many experts are all too happy leading investors astray, spouting off predictions as if they were fact, giving interviews, writing articles and publishing books loaded with poisonous advice and dangerous stock market outlooks. In fact, I saw Jim Rogers was back in the news promising the worst crash of our lifetime and his (he’s in his mid-70s). Luckily, Yahoo Finance ran an opposing article on June 13, 2017, titled, “Why Extreme Market Predictions Like Those From Jim Rogers Provide No Value”* along with a list documenting Rogers’ chicken-little string of dangerous and inaccurate predictions:  

2011:  100% Chance of Crisis, Worse Than 2008: Jim Rogers
2012:  Jim Rogers: It’s Going to Get Really “Bad After the Next Election”
2013:  Jim Rogers Warns: “You Better Run for the Hills!”
2014:  Jim Rogers – Sell Everything & Run for Your Lives
2015:  Jim Rogers: “We’re Overdue” for a Stock Market Crash
2016:  $68 TRILLION “BIBLICAL CRASH” Dead Ahead? Jim Rogers Issues DIRE WARNING
2017:  THE BOTTOM LINE: Legendary Investor Jim Rogers Expects the Worst Crash in Our Lifetime  

Jim Rogers seems like a nice-enough fella. He doesn’t strike me as a crook trying to lead people astray. But regardless of his intent, that does not make his predictions any more accurate.

As if that’s not enough, searching for such misleading books on Amazon can be almost comical. Well, only if it wasn’t so devastating to think about all the investors’ wealth, hard-earned dollars, and retirement dreams that have been squandered following so many compelling predictions that turned out dead wrong.

Imagine the financial ramifications from just three classically horrendous predictive books, all written by highly educated and respected authors, who I must imagine completely and wholeheartedly believed they were speaking truth to investors. 

Dow 36000

DOW 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market
by James K. Glassman and Kevin Hassett
Prediction = Bull Market
Reality = Bear Market

A very compelling title, yet in reality with hindsight being 20/20, this book could hardly be more wrong. Ironically, its 1999 copyright was just before the tech bubble burst in year 2000. By 2002 the DOW was trading well below 8,000. It wasn’t until 2006 that the Dow finally reclaimed its 1999 high watermark. In 2017, the Dow closed above 20,000 for the very first time – still 15,000 below Glassman and Hassett’s sky-high prediction 18 years later.


Different this time

Dow 30,000 by 2008: Why It’s Different This Time
by Robert Zuccaro, CFA
Prediction = Bull Market
Reality = Bear Market

Again, a promising title for investors looking forward to 2008, as the book was copyrighted five years earlier in 2003. But as we know, reality can strike deep as the financial crisis of 2008 ultimately sent the Dow plummeting below 8,000 again by early 2009. Not until 2013 did the Dow surpass its 2007 highpoint.  Again, it wasn’t until 10 years later, in 2017, that the Dow hit 20,000 – still 10,000 below the anti-crisis prediction 14 years later.

Great Crash ahead

The Great Crash Ahead: Strategies for a World Turned Upside Down
by Harry S. Dent with Rodney Johnson
Prediction = Bear Market
Reality = Bull Market

This somewhat spooky title is meant to strike fear, yet is only one in a string of similarly predictive books Dent has written. The introduction for this book (copyright 2011) states straight up, “The crisis is likely to be at its worst by early 2015, or by early 2016 at the latest, and only after stocks crash to between 3,300 and 5,600 on the Dow by the end of 2014, or 2015 at the latest.” But in real life the Dow ranged from the 15,000s to 18,000s in 2014 and 2015 – again keeping in mind that the Dow subsequently broke through 20,000 in 2017 – 15,000 above Dent’s dire prediction six years later.

So, if even these investment and economic experts can be so very, very wrong – while no doubt believing they were so very, very right – what in the world is the professional financial advisor or astute investor to do? How can one approach the remainder of 2017, and beyond, with any confidence in their individual portfolio selection?

I suggest you push outlooks and predictions aside and concentrate on risk management tools such as formulaic trending to help identify the current environment or status of the market and economy. Use existing data and quantitative reality to assist you in steering your investments, essentially calculating the ongoing odds in favor, or against, equities as we move through time. This way, you can adhere to logical rationale when adjusting your portfolio, based on real time monthly data – rather than rely upon random, often ill-fated, or misguided human emotion.

There is no system, no money manager, no investor, who can gauge the market with 100% accuracy. If anyone ever tells you otherwise, they are lying to you. But there are ways to manage the risk that will always be inherent in the stock market.

Therefore, I believe that risk management should automatically trigger among all three ways to invest successfully. And hopefully, you select a risk management tool with an acceptable degree of accuracy.

Buy when you should.       Hold when you should.      Sell when you should.

Before diving deep into formulaic trending risk management, let me quickly dispel one common misconception where long-term investors automatically think of themselves as buy-and-hold investors. By definition, it is accurate that a buy-and-hold investor must be a long-term investor. However, the opposite is not true. Meaning, by definition, a long-term investor is not required to be a buy-and-hold investor.

For example, I am definitively a long-term investor. But I adamantly refuse to be a buy-and-hold investor.

In other words, I do not wish to limit my options to just “Buy when you should” and then hold indefinitely. I prefer that my options trigger and adjust across all three. Therefore, although I am a long-term investor, I stretch beyond the boundaries of a buy-and-hold investor.

This is an important distinction that many take for granted. You see, even if an investor owns something as simple as a mutual fund, the fund manager is then buying, selling and holding within the fund on behalf of the investors. In the world of risk management, the process is similar, but to reuse a previous example, it simply “stretches beyond the boundaries” of a typical mutual fund. Whereas a mutual fund must be constrained by its category or subcategory, risk-managed accounts may jump across categories depending upon market and economic conditions.

In understanding risk management, especially using formulaic trending, a simple visual aid that is available is our publishing of our patented RAM® Score (Recession and Market Allocation Management) as correlated to various market indices.  Each month, as explanation to both advisors and investors, we share the RAM Score correlations for eight primary indexes. This scoring mechanism calculates seven sub-components related specifically to each market index and the economy, then using specific weighting, aggregates them as one so that zero becomes the scoring baseline. Similar to the concept of a “canary in a coalmine,” when an index has a positive monthly RAM Score, we believe it indicates the current environment is favorable for such equities (keep mining). If the score is negative, then we believe the environment has become unfavorable and one may wish to exit said equities (stop mining).

Keep in mind, this is not predictive nor is it market timing. It is trending. Meaning, it is specifically an analysis to identify and validate the current situation or state of affairs so that one may recognize the trend at hand and therefore invest accordingly.

As of June 2017, all eight of our primary indexes are reporting a positive RAM Score. This includes the S&P 500, S&P 100, DJIA, NASDAQ-100, NASDAQ Composite, Russell 2000, Russell 3000, and Russell 1000. So, if one were using the RAM Score tool to assist in their risk management within an investment strategy, the current status would indicate that one should (for now) continue to invest in the corresponding equities. However, it is important to understand that this is in no way predictive of the remainder of 2017 or beyond. It is also important to understand that the market may go down when RAM Score is positive and it may go up when RAM Score is negative, but overall, we believe RAM Score may be indicative of the greater trend at hand, and therefore useful in helping to guide investment choices accordingly.  

Below is a RAM Score Correlation visual for the S&P 500:

RAM Score chart

The RED valleys indicate when RAM Score is negative.
The GREEN mountains indicate when RAM Score is positive.
The TAN line indicates the traditional S&P 500 with no correlation to RAM Score.
The BLUE line indicates the S&P 500 correlated to RAM Score so that it allocates to cash when RAM Score is negative.

As one studies the graph above, it becomes easy to see that identifying what trend exists at any given point in time can become quite useful and valuable for an advisor or investor.

By redirecting investor focus away from predicting future outlooks for the market and economy and toward clarification of the current trend status that exists today – by default we may then eliminate the emotional toil that trips up so very many investors.

As we are fond of saying, Plan First, Invest Second®.

The real challenge may not be in the selection of an investment, but in the selection of the risk management style you wish to employ. Apply scrutiny to research how certain risk management approaches react under different environmental duress and situations. Scrutinize, locate and plan accordingly as you infuse the risk management tool into your portfolio management.  Then step back – remaining a long-term investor (but not necessarily a buy-and-hold investor) – and allow the risk management tool to implement, operate and adjust according to plan on your behalf.

The next time a well-meaning friend presents you a “predictive” financial book, just smile, nod appreciatively, and use it for kindling. Or, better yet, if they are a really good friend, tell them you employ risk management tools so that your emotions don’t run amuck and get in the way of your investing.

That’s the skinny,




Mike Walters, CEO