Bill DeShurko

I have been around the financial advice industry long enough to understand all “financial advisors” are not cut from the same cloth.  There are financial advisors that work for large insurance companies and there are others, like myself, who are independent and offer a wide array of services, not just insurance products.  Now before my brothers and sisters in the insurance industry blast me, understand I have read almost every page of every book written by insurance product industry as well as countless studies by The American College and PhD’s you would all recognize, so I am not ignorant and uninformed about this topic. 

The recent market volatility brings the annuity salespeople out in force, and I know many hard-working people in the industry, and I have a tremendous amount of respect for them.  In fact, I was one of them for a short time when I came into the industry.  But, they use these kinds of volatile times to say, “see, don’t you wish you had an annuity?”

When you come into the industry you are taught how to sell, not how to plan.  They teach you techniques to work on your client’s emotions.  People like security, and volatility is the enemy to those emotions.  Emotions can prompt us to make uninformed decisions based only on the fear of loss. 

I’ve watched this unfold as many of you have due to the recent volatility due to the COVID-19 pandemic.  It is hard to watch an account dwindle by over 30% (based on the S&P 500) in about a month, if that is what happened to you.  Some variable annuities have very high expenses, the investments inside them have separate fees, and they are very complicated products for the average person to understand.  Heck, most advisors that sell them don’t understand them completely. 

It is my belief there needs to be a plan first, and then the implementation stage can begin.  For instance, If there is a gap in life insurance to protect your loved ones, life insurance is purchased to fill that need. 

But when you are investing for retirement and you need to live off that income it is important to make investments that fit your plan for what you want your retirement to look like.  For instance, what lifestyle you want to live and make plans to achieve that.  As a financial planner I take a look at all possible income sources and determine whether those income sources will be enough to cover those lifestyle expenses and if not, I put a plan in place to get my clients to that goal.  Sometimes, that means breaking the news to them, that they need to work a couple of extra years to get there or save more between now and then, but my approach is never to sell a product to them without first understanding all of their financial circumstances as well as any other family circumstances that may be present.  I have heard many “advisors” say, “I already know I am going to pitch an annuity before I even meet the client.” 

Why is a strategy so important? 

When you sit down with a financial planner, who also manages assets, they will look at the total picture.  Annuities have been around for a long time, in fact if you think about it, Social Security is an annuity.  You paid into it, and you get an income you can’t outlive. When social security and other lifetime income streams just don’t cut it, then you must have an investment strategy that fills in the gap.

Annuities are only guaranteed by the issuing company, I’d rather own any (or all) of the dividend aristocrats than an annuity from an AM Best B rated company for SAFETY. The dividend aristocrats are companies that have increased their dividend for 25 or more consecutive years. Getting a raise every year beats a fixed payment any day.

Annuity marketing sells the “payout” rate on immediate annuities, as in “You’ll get an 8% return on investment.” But they don’t tell you 7% of that is return of your own money. Let us calculate the real rate of return before you buy.

The longer you live the more inflation eats into your fixed income sources.  In twenty years, you will often see your buying power go down significantly.  That is why you need a rising income in retirement and that is where an investment strategy built on financial disciple and a strong investment policy is a must.

Dividend growth investing is a great strategy to provide this rising income in retirement.  I am talking about high quality investor friendly companies with a seriously long track record of dividend payments.  Please see the chart 1 below to see the growth of dividends of the S&P 500 from 1976 to 2018.  I believe this strategy coupled with guaranteed life income sources is the superior retirement planning strategy. 

As you can see from the above chart, compared to bonds, a dividend growth investment strategy gives you a rising income over your long-term retirement.  In fact, common convention tells investors to be in bonds during retirement because they are “safer” than equities. 

When investing in stocks for income it’s important to have an accumulation strategy.

Take for example Cisco (Ticker: CSCO).  Cisco is an internet protocol and network infrastructure company.  They have a tremendous amount of cash and a competitive advantage.  In July 2019 they were trading around $57 per share.  I look at this stock as a great value now that it is currently trading at $36.50 per share.  With a current dividend yield of 4.16% and enough cash to pay and or raise their dividend, even during a recession, I rate this high on my list to buy.

As an individual investor, I suggest you look for opportunities like this in the market, or let us do it for you.  For the last couple of years, finding stocks trading at or below their estimated fair value has been hard.  Look at the below chart as it shows a visual on the yield on cost.

The chart above is NOBL, an exchange traded fund that holds Dividend Aristocrats.  Since its inception you can see how it has performed.  All the companies in this fund pay dividends and have a long track record of doing so.  Our investment strategy is that of investing in these kinds of companies so you can see your income in retirement go up, not get nibbled away at over your long retirement by inflation.

Just like buying an apartment building to generate income through rent, these companies generate predictable, consistent income even during tough economic times.  If you owned an apartment and the real estate market tanked, you wouldn’t panic and sell your apartment building would you?  Of course not, as long as you had tenants paying rent every month, you would still get paid.  The same happens when you own high quality dividend paying stocks.

Bill DeShurko, President and Portfolio Manager

James Kilgore, CFP(R)

Ofc: 937.434.1790 Bill@401Advisor.com or Jim@401Advisor.com

More information on 401 Advisor, LLC can be found at 401advisor.com.

This is not a solicitation to invest, but is for information purposes only. Prior to investing an investor should ascertain whether the investment is consistent with their objectives and obtain a copy of the advisor’s ADV Part II which can be found on our web site, or by asking a representative for a copy.

401 Advisor, LLC is a state regulated investment advisory firm, registered under the Investment Advisors Act of 1940. Registration does not involve approval or supervision of the firm or of its practices and policies by the state of Ohio securities commission.

Investing involves risk. *Past performance is not a guarantee of future results.

March 23, 2020

Dear Clients and Friends,

After another weekend of COVID-19 news I’m sure we are all on edge as we wait to see what the market has in store for the upcoming week. First and foremost, regardless of my opinion or anyone else’s, no one knows what to expect. This is new. We’ve never seen this before. But what I can say is that I cut my teeth in this business during the 1987 market crash and have been guiding clients since, through the Asian Crisis, junk bond collapse, tech wreck and the 2007 – 2009 Financial Crisis. I’d like to think I have learned a thing or two! Below I’ll outline some of the steps we’ve taken and are prepared to take.

But first, for clients a house keeping note. In keeping with Governor DeWine’s announcement today we will be intermittently working in the office and from home in the coming days. We will not be seeing clients in the office. However, our phones will be forwarded if no one is in the office, and we are well prepared to handle all administrative tasks via email or regular mail. Jim and I will be in constant contact assessing the situation and our investment policies.

It’s All About Strategy

The media would have you believe that the only decision to be made is whether to continue to hold your investments or to sell (and soon I hope, when to buy back in). This is a very simplistic, and in our opinion very harmful for most investors. How one reacts to a market sell off depends on…and no surprise here…on your overall investment strategy. I have preached how important strategy is to the investment process for years, and yet I see very little evidence of it in portfolios we review from outside our practice. A client recently stopped in and asked for advice on his retirement plan. I reviewed what he had and basically said he couldn’t sell it fast enough, even after a very substantial decline. When I looked at the fund’s holdings 8 of its top 10 holdings were in the energy sector, and not the large solid cash flow companies but the smaller debt burdened frackers. I think a couple may end up in bankruptcy. He hesitated as “it did so well last year!” I explained that he did a good job in picking the fund, but failed to develop a strategy, i.e. pick a point to take profits and rotate into something more retirement appropriate. He only implemented 1/2 a strategy!

This is where strategy and timing come into play. We have not sold a majority of our holdings. Why? Because, while no one could predict the COVID-19 breakout, our process identified the energy sector as being financially weak back in February. We sold our energy ETF that we held in some portfolios before the market dropped. We sold financials at the same time. Two of the hardest hit sectors over the last month. We have been focusing what we buy for two years now on high quality high yielding dividend paying stocks. Many companies have increased their dividend payouts for 50 years! These are cash flow rich companies that can weather a downturn. I’m not so anxious to sell quality. We went into this downturn holding quality. Our strategy has been to collect our dividends throughout and and plan ahead for the eventual turn around. We’ll see how we do, but I’m pretty confident in what our accounts will look like in a year from now. We won’t have dividend cutters, we won’t have bankruptcies in our holdings. What we will have will be portfolios full of high quality companies that are back in business as usual mode.

As the crisis has unfolded we have raised a bit of cash in some portfolios. We’ve been short off and on in some, but our big focus is what we do when the market seems to be ready for a rebound. We’ve created two portfolios that we feel can maximize our returns during a recovery without taking on undo risk. We’ll be selling in non-qualified accounts to lock in losses for tax purposes (may as well let the IRS give us a little money back!) and rotating into those “rebound” stocks I mentioned earlier. We’re not just staring at the TV, frozen with indecision as those without an investment strategy are.

What to do Now

Unless you are holding stocks of low quality, high debt companies or junk bonds it’s probably too late to sell now. If you’re not a client feel free to schedule a time to discuss your portfolio, goals and an appropriate strategy for your circumstances.

For clients feel free to call or email with any questions or concerns. We don’t have all the answers but we do have a plan!

And for everybody here is a reason for optimism, an article on possible treatment: https://www.livescience.com/chloroquine-coronavirus-treatment.html

Stay safe.

Bill DeShurko and Jim Kilgore, CFP