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

Did You Get Abandoned (to Fend for Yourself) on DOL PTE 84-24?

Here’s the Skinny…

Did You Get Abandoned (to Fend for Yourself) on DOL PTE 84-24?

As it turns out, almost every institution, including BDs, RIAs, IMOs and insurance companies, abandoned their advisors to fend for themselves under the scrutiny of DOL PTE 84-24 (Prohibited Transaction Exemption 84-24) because they wanted to distance themselves from any risk and liability related to the advisor’s business, but of course they still want to be paid the same …

… meaning advisors inherited 100% of the risk and liability under PTE 84-24 – many of whom never even realized what they’d actually just become subjected to – and it’s nothing to scoff at. Read more