How do I manage my retirement income when stocks and bonds are BOTH down for the third time in history? How do I diversify my retirement portfolio during these turbulent times? Will my retirement nest egg be safe if a recession is to come? In this video, Troy Sharpe addresses how both stocks and bonds are down and how to handle them to keep your retirement on track in a down market!
Ab0ve 60 and Retired:
Mark Elliot: I’m Mark Elliot, glad you’re with us today. We’re talking about how do you make investment decisions during a down market. How do you, if you’re retired, withdraw income from your portfolio in a down market? That’s where we’re going today. Troy, I’ve got a couple of stats here that come from BlackRock, and if you’re not, I know you are, but if somebody listening is not familiar with BlackRock, BlackRock is one of the world’s preeminent asset management firms, and they came out with a couple of stats.
They said there’s been only two times in history when stocks and bonds were down in the same calendar year, 1931 and 1969. Well, now we’ve done it for the third time in history. In 2022, stocks and bonds both down in the same calendar year, so 1931, 1969, and 2022. Then we go with the Fed raising interest rates so far, five times. They still have a meeting in November and December, and they probably will raise interest rates again. That is certainly making the bond market go the wrong direction. Bonds work the opposite of interest rates. Interest rates go down, bond values go up, interest rates rise, bond values go down.
Here’s a stat for you, Troy, that the worst stat ever for bonds in a calendar year was 1974, down 2.7% until today. January to July of 2022, bonds were down 8.2%, so almost three times worse than the worst time in history for bonds. What’s going on? How do we survive this?
Troy Sharpe: Well, we’ve been talking about it here on the show for well over a year. With the anticipated hike to interest rates in 2022, that was a pretty clear message that the bond market was going to suffer. Now, when you talk about the bond market, you have to understand you have- it’s a vague term. It’s almost like the term annuities. With annuities, you have fixed annuities, you have variable annuities, you have immediate annuities, you have deferred income annuities, you have so many different types. When you say the word annuity, most people think the same thing, and it’s just not the same thing.
Same thing with bonds. You have corporate bonds, you have government bonds. You have a very important concept called duration, which is essentially if you invest in a bond, how many years or how long does it take for you to receive all of your money back through principal repayment and also interest payments. The longer the duration typically is synonymous with maturity, but duration is a bit shorter the maturity, the longer that timeframe is, the more sensitive to interest rate increases your bonds will be. If you have a 30-year bond, it’s far more sensitive to interest rate hikes than a two-year bond.
For clients for a very long time here, and I’ve been talking about this on the radio show, we’ve talked about it on the YouTube channel, investors, if you’re trying to protect your principal, you shouldn’t be looking at long-dated bonds in an increasing interest rate environment if you plan on needing that income or you want to protect that principal. Now, if you can buy a bond for 30 years from the United States government, let’s say you did it last year well, 30-year bonds we’re paying somewhere around 2% maybe 2.5%. That’s a very long time, 30 years to hold a bond only paying 2%, 2.5%.
Those same bonds today are down significantly more than that 8% number that you quoted. When we say bonds and the bonds are down 8%, we need a little bit more context there. The main point I want to get across is the type of bonds you own with respect to their maturity length, how long before your principal is supposed to be repaid, but also the credit quality of the bond.
Government bonds are of the highest credit quality. Now, I can make a joke here about all the debt and the continuous printing of money and could say that they’re not maybe as safe as they once were but the Full Faith and Credit of the United States government is backing treasuries, T-bills, et cetera, so government bond’s still the safest asset class out there.
Now corporate bonds, you have different types of corporate bonds. You have AAA corporate bonds, you have AA, you have A, you have BBB corporate bonds. BBB corporate bonds are still investment great, very, very high quality. Now, over the past let’s call it 10 years, we’ve seen massive amounts of money flow into BBB-rated bonds from mega institutions like BlackRock and life insurance companies, and many large financial institutions because interest rates have been so low. They had to go down the credit quality spectrum in order to earn any significant type of yield on their lower-risk assets.
What does this mean? Well, this means there is a ton of money inside these BBB-rated bonds. In a recession, in possible downturns, these institutions that have credit requirements as far as their investment portfolio is concerned, there could be a mass exodus which could cause prices to drop even further. Now, I’m not saying this is going to happen but I want you to understand the two components to bond pricing and why bond prices can go down.
It’s not just the interest rate component, it’s also the credit quality component and if we’ll enter into a recession and companies that have mediocre credit quality, let’s say BB or BBB, which again, BBB is investment grade. If that company’s sales revenue decreases, their profit margins get squeezed because they can’t pass those costs onto consumers in the short term or other things related to inflation, or simply, consumers aren’t spending money. Well, the credit quality of those bonds could deteriorate further, thereby causing a mass exodus or sale of those bonds on the open market, which then could drive those prices further.
Enough of the finance 101 here, let’s talk about what this means for you. When we’re in this type of environment, bonds can be a useful tool to the extent that you’re focused on them to receive the income that they produce. We typically want to keep the maturities or the duration of those bonds that we own shorter and we want to own high-quality bonds. We don’t want junk in this environment. Junk is extremely dangerous because if we do enter a recession and it’s quite possible over the next couple of years, what can we expect from the price performance of those bonds? Well, you can expect them to go down even more significantly than the impact of increasing interest rates.
The BlackRock study, while useful to us, like most information that’s out there, it’s just another tidbit of information. How we use that information in portfolio construction for retirement, generating income in retirement, that’s what matters and that’s why a customized approach, we call it the retirement success process, you end up with what we call the retirement success plan is designed to help you mitigate those risks. Designed to have an investment portfolio that’s comprised of multiple assets that generate multiple streams of income.
We want those streams of income to be independent of market performance. If the bond market’s going up or the bond market’s going down, I don’t want your income impacted. That’s one of our number one core principles here. Your income continues despite what the market is doing. That’s our goal. Number two is where else are we going to get that income from? I said multiple streams of income. It’s not just bonds, so we want dividends. We do want some capital appreciation, of course, but we don’t want to depend on capital appreciation for income in retirement.
When we get capital appreciation, which historically is most years in the equity markets, we can increase the amount of income that we spend. In doing so, you essentially take some risk off the table by locking those gains in. I want you spending more money in retirement. I don’t want you spending less. This is why when we have an income plan working together with that investment strategy and risk management plan, combined with step three of the retirement success process, the tax plan, when we have all those pieces working together, we can put you into a position to where you are connected to your money.
You have a really good idea if you need to increase your spending or if you can increase your spending, if you can decrease your spending because markets are performing poorly, but you’re connected. You know what all of these various impact factors out there, stocks going up, stocks going down, interest rates up, down, recession, inflation, being connected to your money and all of our clients have access to their plan online. It’s a digital plan, updates in real-time, so you can log in and you can see exactly where you are. For those of you who like spreadsheets, you can hit the button, look at unlimited, I shouldn’t say unlimited, but a lot of spreadsheets to look at your cash flow, your income, your risk, everything, but this is all part of the retirement success process.
To get started with this, just give us a call. We’re going to sit down, have a discussion. We need to identify if you’re a good fit for what we do, as you want to identify if we’re a good fit for you. The first meeting, there is no cost. We simply understand who you are, what’s important to you, your dreams, your vision, your assets, and income of course, when you want to retire, maybe you’re already retired, we start to gather all this information and if we identify that we’re a good fit for each other after that first visit, our analysts are going to get to work on your particular case, understanding the ins and outs.
When you come back on that second meeting, there’s still no cost for the second meeting, we’re going to go through that analysis with you and we’re going to show you how much potential tax savings there could be if we go a different direction with your tax plan. Most of you probably don’t have a tax plan. I’ve rarely met anyone that came in here and they said, “Troy, this is my tax plan, this is my tax strategy, this is what I’m doing, this is what I’m going to continue to do.” We’re going to go through that tax strategy, we’re going to go through an income strategy, and we’re going to go through that risk and investment portion and then show you what it would look like to be a client.
That second visit with us, it’s almost like an annual review that we have with existing clients because we’re going through all of the possible scenarios and how we can help improve what you’re currently doing. As I said, there’s no cost for that second visit. Typically, once we get through that, we’re just going to ask you, do you want our help? Do you want our help? If you want our help, excellent. We have a whole concierge team that can help with the paperwork and the opening of accounts and transferring assets over. If you don’t want our help, that’s fine. No harm, no foul. You simply go on about your way, keep doing things the way you’ve been doing, and that’s okay.
We don’t know if we can help you and you don’t know if we can help you unless you pick up the phone, give us a call and let’s have that first discussion. Phone number is 1-800-822-6434. I want you to go to the YouTube channel when you get home. If you’re in the car listening, maybe you’re at home right now. Just go to YouTube. Search for Oak Harvest Financial Group. We have hundreds of videos out there on income planning and tax planning and healthcare planning, estate planning, investment talk, lots of videos. Check those out, give us a call. Let’s sit down, have that conversation. 1-800-822-6434.
Mark: We’re talking about how do you make decisions in a down market, a bear market, interest rates are rising, your bond values are going down. How do you make decisions? How do you pull money out of a retirement account when the account is going down? That’s what we’re talking about today. Troy has got a lot more to get to. We’re just halfway through the program today. This is the Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. Back right after this.
Investment advisory services offered through Oak Harvest Financial Group, LLC. Oak Harvest Financial Group is an independent financial services firm that helps people create retirement strategies using a variety of insurance and investment products. Investing involves risk, including the loss of principal. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
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