CONSUELO MACK: This week on WEALTHTRACK, award-winning
financial planner Mark Cortazzo on the extreme danger of portfolio volatility in retirement. He is next on Consuelo Mack WEALTHTRACK. Hello and welcome to this edition of WEALTHTRACK,
I’m Consuelo Mack. Our focus this week: the challenge facing
most of us …. Nobel prize-winning behavioral economist Richard
Thaler recently called the drawing down of money in retirement “way harder” than
the saving phase because of the uncertainty of how long we will live. He is proposing adding 401(k) funds to Social
Security to increase monthly payouts. This week’s guest wholeheartedly agrees
with Thaler about the difficulty of the spend-down phase and says another largely unrecognized
danger is portfolio volatility, which can mean the difference between solvency and insolvency
at the end of life. He has the research to prove it. He is Mark Cortazzo, a Certified Financial
Planner, Founder and Senior Partner of Macro Consulting Group an independent wealth management
firm established in 1992. Forbes recognized Cortazzo as one of America’s
Top Wealth Advisors and he has been named a Barron’s Top Advisor for nine years, among
many other recognitions. He is also a WEALTHTRACK regular. Cortazzo has done a number of studies showing
how the accumulation phase of investing assets for retirement if done regularly and systematically
over many years can make just about anyone feel like a genius. However, once the withdrawals begin, what
the pros call the decumulation phase, it’s a whole different ball game. What worked so well in building up a nest
egg can be a disaster when taking it apart. MARK CORTAZZO: The accumulation phase isn’t
timing-dependent, it’s time-dependent. So we did studies going back over 90 years
and looked at it if you put money away every month, regardless of when you started, your
compounded rate of return over long periods of time of what you would expect and what
you receive, even if your timing was very bad; bottom five percent of timing on when
you started doing that, but you did it for the same period of time. CONSUELO MACK: We’re assuming 30 years. MARK CORTAZZO: A 30-year period of time. If you dollar-cost-averaged $5,000 a month
into the market, and we started back in the ’20s and we started in February, went forward
30 years, March, 30 years; so we have hundreds of 30-year periods that we looked at. Your expected rate of return was about 11
percent in the middle. CONSUELO MACK: And for those of us out there
who are saying “No, no, no, that’s way too high” you’re saying no, the 11 percent return
is from dollar-cost-averaging, the compounding effect, that’s totally return, everything,
right. MARK CORTAZZO: Yes, so long-term buying and
just holding stocks over that 90-plus-year period of time for blue chip stocks was about
ten percent a year. So, you actually got a little bit of enhanced
performance by buying when the markets had those dips, it enhanced your performance because
you had multiple entry points. CONSUELO MACK: So that’s still a reasonable
expectation for a 30-year period of time. MARK CORTAZZO: Yes, a 30-year period of time,
sure. If you’re dollar-cost-averaging it. So, if you had terrible timing and you started,
and it was at the bottom five percent of all of these hundreds and hundreds of periods
we observed, you still did eight-and-a-half percent a year compounded rate of return on
your money. CONSUELO MACK: When you’re talking about the
bottom five percent as far as timing is concerned, that’s when you’re buying at market highs. MARK CORTAZZO: Correct. And we looked at all of the hundreds of different
30-year periods, we ranked them, and we looked at the bottom five percent. So, like got in, terrible timing, but you
consistently put the money away. You are a disciplined investor. You had that fortitude to keep plowing the
money in. You still averaged eight-and-a-half percent
a year. And what happens with accumulators is I think
that they get lulled into this false sense of security that they were a great investor,
or that they had this great experience, or they were lucky, and it was their fortitude
and their discipline to continue doing it that gave them a great experience. CONSUELO MACK: Well actually, and that’s accurate. Right, discipline, consistent, automatic investing
over a 30-year period, you come out at the other end, no matter kind of as you said,
what you did, when you started or whatever, you do okay. MARK CORTAZZO: Correct. And so, people come to us who were good investors. My investment’s five times what I put in. I put in $1.8 million, 5,000 a month for 30
years, and my account is eight million bucks. I did a great job. You did a terrible job; you didn’t do a terrible
job, your timing was terrible, and you actually had a very low percentage experience relative
to others, but it still was a great experience. CONSUELO MACK: So, the message, right, for
people who are in the accumulation phase is just do it. MARK CORTAZZO: Just do it. And no matter what’s happening, put your
blinders on, put your headphones on and just do it. CONSUELO MACK: Just keep investing. MARK CORTAZZO: Yes. CONSUELO MACK: But the fact is that there
is a certain amount of hubris that, when you’re dealing with the accumulators who have had
such a great experience in accumulating their assets and savings for retirement, so what
are the biggest mistakes that they make in making the transition from the accumulation
phase, the transition to retirement where they’re actually taking money out of all of
those funds that they’ve accumulated? MARK CORTAZZO: They think the things that
were additive and beneficial as an accumulator will be additive and beneficial as a decumulator,
and it couldn’t be further apart. CONSUELO MACK: What are the things that are
beneficial to you as an accumulator that are harmful to you as you start withdrawing funds
from your portfolio? MARK CORTAZZO: So, volatility and time were
their friend as an accumulator. And volatility and time become their enemy
as a decumulator. So, the longer I’m putting that money in,
the more likelihood I’m going to get close to that long-term expected rate of return,
and the more volatility I have, I’m buying on more severe swings, it actually enhances
that performance. As a decumulator, volatility is your enemy. So, the sequence that performance occurs,
and timing and volatility are critical to your outcome as a decumulator, and time becomes
your enemy. The longer you’re retired, the greater the
probabilities that you’ll run out of money. The longer you invest as an accumulator, the
better your outcome and your probability of a good outcome is going to be. So, it is literally 180 degrees that the things
that are most helpful and beneficial and that helped you succeed, to create money, create
wealth, when you start drawing down from it, and especially if you have a reasonable withdrawal
rate, those are things that can be very, very devastating to the spectrum of your outcome. CONSUELO MACK: So, the market will be volatile. MARK CORTAZZO: Yes. CONSUELO MACK: Therefore, why is volatility
so harmful as you are making these monthly withdrawals from your retirement account? MARK CORTAZZO: So, we did an analysis of somebody
who had a 60-40 mix of stocks to bonds, and they indexed. So, we’re just going to use market performance,
market volatility, no fees, to make it easy. CONSUELO MACK: And that shouldn’t be as volatile
a portfolio, as it’s straight in stocks. MARK CORTAZZO: Correct. And I think people that are getting close
to retirement, they want some fixed income to have. So that balanced to moderate growth portfolio
is very, very common what we see. So, if you are taking a five percent withdrawal
rate, you had a million dollars, you’re taking out $50,000 a year; your expected chance of
running out of money during a 30-year retirement is only about ten percent, okay? It’s a very manageable risk. And even those chances of running out of money
are pretty deep into retirement. So, if you have a little bit of a hit to your
portfolio, like we experienced this last December, and a 60-40 portfolio goes from a million
dollars down to $850,000, a 15 percent hit; that happens frequently. Not an ’08 devastation or the Depression,
the thing that everyone’s afraid of isn’t the thing that’s the greatest risk to them,
or the probability of the greatest risk to them. A little bit of a hit, $850,000 starting value,
and you still need that same $50,000 a year. CONSUELO MACK: Right. MARK CORTAZZO: The fact that the market dropped
the day, the month, the year before you retired and brought your portfolio down to 850, I
was planning on needing 50 grand a year during my retirement; your chance of running out
of money goes from about ten percent to more than 30 percent chance you’ll run out of money
during your retirement. CONSUELO MACK: Wow, just with that. MARK CORTAZZO: A little bit of volatility
on the front-end changes, triples your chances of you running out of money during retirement. CONSUELO MACK: We’ve all been encouraged
to do automatic savings, dollar-cost-averaging, put the same amount in every month, whatever
it is. You can’t just flip that and say: okay, from
now on I’m going to take the same amount of money automatically out of my account every
month, regardless of market circumstances. It doesn’t work that way. MARK CORTAZZO: Correct. CONSUELO MACK: So, what does work? How do you handle market volatility? MARK CORTAZZO: So, there are a lot of different
things that people can do. And it really is what sacrifices are you willing
to make if there’s a problem. And so, it may be that if the market correct
right before you’re about to retire, you work another year or two if you are able to. It may be that you, if in the first few years,
it’s those first five years of retirement, the first few years before retirement and
the first five years into retirement. CONSUELO MACK: That are critical. MARK CORTAZZO: That are really going to set
the trajectory on everything. When the markets go up on average, go back
the last 90 years, the average up market’s 21 percent up. And the average down market’s six percent
down. So, you’re going to know did you get a fast
start and you’re ahead of schedule, where now your withdraw rate’s a lower percentage
and you have a much safer probability of not running out? You have less time and you have a lower percentage;
you’re in great shape, go live your life, enjoy yourself. If you have a hit and now, it’s having that
discussion before you retire: what are you willing to do? Maybe it’s, work part-time and make $25,000
a year where you’re only drawing 25 from the portfolio, not the full 50. Maybe it’s you’re willing to use the equity
in your home if you get to that point where you realize you’re going to have a higher
probability of running out of money, and maybe I’m willing to sacrifice and use the equity
in my home later on. And those are all triggers and things that
if you have them available to you, you at least are making deliberate decisions. It’s like a fire drill. If the building caught on fire right now,
what would you do? I’d grab this important thing and that important
thing, and here’s my exit. Hopefully we’re never going to need to execute
on that, but while the building’s on fire, after I told you the building’s on fire,
I ask you what are you going to do, it’s not going to be as effective a conversation because
it’s going to be very emotionally-driven. As opposed to practical on what are the things
I’m willing to do. It may be annuitizing some of your money. Morningstar did a great study, if you annuitize
a small piece of your portfolio, about a quarter or less than a quarter of your portfolio,
it gives you an outsized cash flow relative to what you would normally withdraw. CONSUELO MACK: Right, and this is throughout
retirement, for instance. Just have an annuity as part of your retirement
portfolio. MARK CORTAZZO: Yes, you took a little bit
of your money and you said: I’m going to convert this principle into a cash flow for
the rest of my life, for a small piece. It takes the withdrawal rate on the rest of
your portfolio down dramatically, and the longer you live, the greater the rate of return
is on that annuity because you’re getting payments for a longer and longer period of
time. Very nice, natural hedge. The really interesting thing about the study
was since I’m not taking as much money from the stock part of my portfolio, it allows
that, even though it’s a smaller amount to start with, it compounds at a greater rate
because I’m not drawing as much from the stocks, over a longer period of time, it actually
has a greater ending value, expected ending value, and a lower chance of running out of
money. It’s less risk with a higher expected return. That doesn’t happen often when you’re investing,
that you get a lower risk with a higher return. So, it really is that honest conversation. Some people aren’t willing to do that. Maybe they build a bond ladder and they can
say that will buy me time, if the market’s down. I’ve got five years’ worth of income that
I can use to draw. And our last couple of major bear markets
have recovered within that window of time and it prevented you from being forced to
sell stocks at the wrong time. Having a ladder; if you need $50,000 a year
and we build a portfolio that has $50,000 of bonds coming due every year for a five-year
period, if the market’s up, we sell from the profit, and we take that bond that’s coming
due and we put it at the back end. And we always have five years’ worth of
time that we’ve bought ourselves with that strategy. So, these are all mitigators. They all have their pros and cons. And it really is modeling this to that client’s
willingness and ability to take risk and what their preferences are
CONSUELO MACK: How do we have a portfolio that will adapt to market declines? Because we will go through market declines
throughout our retirement. MARK CORTAZZO: Yes, and we’re not trying
to time the market; we’re trying to have alternatives to being forced to sell equities
when they’re depressed. When you’re drawing from the portfolio, because
the market gets hit and I sell shares of the stock market to pay my property tax or to
eat or for living expenses, when the market subsequently goes up, those shares don’t
participate. So, it’s not a timing thing where I’ve got
that money to go back in; it’s a I’ve exhausted that resource. It’s a permanent destruction of capital at
that point. CONSUELO MACK: So, you want to make sure that
you’re always invested in the stock market, which is where your growth’s going to be. That a portion of your portfolio should be
invested in the stock market, no matter what. MARK CORTAZZO: Correct. CONSUELO MACK: So therefore, I’m thinking
to myself: well then, I should probably have a substantial portion of my portfolio that’s
not in the stock market, like a bond ladder, but then I’m sacrificing the growth that
would be normally in the stock portfolio. So how do you adjust to that? MARK CORTAZZO: So, if you’re selling from
profits, if the markets are up and they’re exceeding your expected rate of return or
your projection and you’re selling excess, then that’s easy. What you’re trying to do is prevent the market
hit and your withdraw compounding that hit to your principle on the growth engine part
of your portfolio. So that’s why having the ladder, and maybe
you take it from your normal fixed income. Maybe your 60-40 portfolio becomes a 70-30,
and instead of having that fixed income as part of your overall allocation, we carve
that out and that is its own separate account, that’s a liability match part of your portfolio. And also, the equities that you’re in, making
sure that the types of portfolios that you’re investing in produce good risk-adjusted rates
of return. The same rate of return with lower volatility. Surprisingly, even in accumulation, portfolios
that have the same net compounded rate of return with lower volatility, the majority
of the time produce a higher ending expected value. There’s a small percentage of the time where
you get an outsized performance from the high volatility one, but it’s very small and not
worth betting your outcome on. CONSUELO MACK: Right, the volatility, dampening
volatility, which people normally think: gee, if I’m dampening volatility, those are probably
more defensive issues and the upside’s not going to be as great. I’m sacrificing performance. You’re saying not the case. MARK CORTAZZO: Not the case. We run a dividend portfolio. CONSUELO MACK: Right, so you have a strategy
that you’ve been running since 2012 for separate accounts called the Macro Dividend Strategy,
right? That’s been ranked very highly by Morningstar. MARK CORTAZZO: Yes. CONSUELO MACK: How does that work? What is that strategy, and what’s it doing
in your portfolios? How is it behaving in your portfolios? MARK CORTAZZO: So relative to its benchmarks,
it has produced volatility that’s 20 percent less volatile than the S&P or its value potential. CONSUELO MACK: The Russell 1000 value is its
benchmark, and it’s not in the S&P, yes. MARK CORTAZZO: And it’s produced returns that
were in excess of those two indices. And what that means to you as an investor,
we ran numbers on the stock market long-term performance with its average volatility, drawing
five percent from that portfolio, 20 percent chance you’ll run out of money. Same expected rate of return with 20 percent
less volatility, you’ve cut your chance of running out of money in half. CONSUELO MACK: So what, to ten percent? MARK CORTAZZO: Ten percent. CONSUELO MACK: After 30 years? MARK CORTAZZO: Versus 20. CONSUELO MACK: There are a lot of dividend
strategies out there. So what kind of a dividend strategy do you
build? MARK CORTAZZO:We generally buy quality companies. Our portfolio in 2018 was down less than one
percent. And the value index was down about nine, and
the S&P several percentage points, obviously. So, we buy companies that are earning more
than their dividend, generally have good financials, strong financials. We equal-weight the positions generally. So, we don’t want to fall in love with a
stock that runs up and gets to be too large of a percentage of the portfolio where, if
it gets hurt by something that’s unexpected, it has a disproportionate impact on the portfolio. But it is good quality companies that have
distinct advantages versus their peers. Brand loyalty, niches. CONSUELO MACK: I’m looking, like Starbucks
and AVID and Cisco, Microsoft, Union Pacific, those kind of companies. Well-known names, Diageo, right. MARK CORTAZZO: And those are companies that
people love those brands and they’re going to be loyal to those brands, they’ll be willing
to pay a bit of a premium. We really like those type of companies that
can weather a storm, if we have a downturn in the economy, and if you look at those brands,
they tend to not be commodities that are competing on price. CONSUELO MACK: I’m thinking what are some
of the other volatility dampeners. And certainly, we talked about bond ladders,
we talked about some very solid dividend-paying stocks such as are in your dividend strategy. What about, I mean cash, what about Treasury
bonds, what about REITs? MARK CORTAZZO: The thing with cash is, it’s
actually starting to earn a measureable return. And it’s getting close to inflation, which
is good. When you are looking at dampening volatility
or managing risk, you can avoid risk, manage risk and transfer risk. And cash is a risk avoidance strategy. It’s liquid. You’re not going to earn over long periods
of time a rate of return that net of the taxes is going to exceed inflation, so your purchasing
power will erode, and it’s death by a thousand little cuts. Each year over time it buys a little bit less,
a little bit less. And that’s manageable. It’s not as bad as a big hit. We have global equities, because if you look
at the price earnings ratios on international equities versus U.S. equities, there’s a fair
spread. Same industry, a car manufacturer, a car manufacturer. CONSUELO MACK: No, Europe, for instance? Right. MARK CORTAZZO: Yes. So those are things that rebalancing your
portfolio, looking at historical relative valuations on things that you own, and when
one of them gets outsized, rebalancing back to that weighting will naturally sell high,
buy low. So those are things that are all disciplined,
structured, mechanical things that everyone knows they’re supposed to do, like drinking
eight glasses of water a day and getting a half hour of cardio in, that nobody does. Because hey, my stocks are doing great, bond
yields are bad, why am I going to do that? The U.S. is doing well, internationals, I’m
not going to sell this great performer to buy this dog. Well, those are things that are wonderful
for producing better risk-adjusted returns. Dampening volatility. They’re just counterintuitive, and they require
a lot of discipline to execute. CONSUELO MACK: When do I instigate the fire
drill plan? MARK CORTAZZO: I think it’s three to five
years before you retire that we start doing that. CONSUELO MACK: So maybe we should do it, just
as a matter of course. I mean should everyone, if they can, plan
to work part-time or not withdraw the full five percent from their retirement funds,
and is it just that’s just the way we should do it five years in, and five years before? MARK CORTAZZO: I think the answer to that
question is going to be unique to each person. The most important thing that we hope to get
across to clients when they come to talk to us, whether they choose to work with us or
someone else or do it themselves, is that this is a very different sport, with different
rules and different skill sets. CONSUELO MACK: One investment for a long-term
diversified portfolio, what should we all own some of? MARK CORTAZZO: I think that a broad-based
globally diverse portfolio. CONSUELO MACK: Stock portfolio, a balanced
portfolio? MARK CORTAZZO: So, I think that a cornerstone
of someone’s portfolio, having a broad 60-40 mix that has U.S. and international, large
and small, as well as domestic and international fixed income as a cornerstone and something
that you can build off of; and most of the big brands have a cornerstone that they can
use for that. CONSUELO MACK: Mark Cortazzo, thank you so
much for joining us on WEALTHTRACK, it’s always a pleasure to have you on. MARK CORTAZZO: It’s always a pleasure to be
here, thanks so much, Consuelo. CONSUELO MACK: Thanks. At the close of every WEALTHTRACK we try to
give you one suggestion to help you build and protect your wealth over the long term. This week’s action point picks up on Mark
Cortazzo’s dividend strategy. It is: Take advantage of the income, and defensive
qualities of dividend paying stocks. One of my favorite personal finance gurus
is Morningstar’s Christine Benz a long time WEALTHTRACK guest. Benz recently wrote two articles about dividend
paying funds and ETFs. One about dividend growers which focuses on
companies with a multi year history of increasing their dividends every year, the other article
which I am reporting on today is about dividend yielders, companies whose priority is paying
generous dividends with high current yields. The article is titled “3 Funds With Tantalizing
Dividend Yields.” And they are indeed, in this case better than
2.75%.. First on the list is Schwab U.S. Dividend
Equity ETF, it carries a silver analyst rating from Morningstar and it focuses on the higher-yielding
half of the 2500 largest U.S. stocks, excluding REITs. It emphasizes not only companies that have
consistently paid dividends over the last decade but also score well on various profitability
measures. The second name is her only actively managed
fund. It is Vanguard Equity-Income Fund, it also
carries a silver analyst rating. As Benz notes, it is “run by two separate
management teams plying complemetary strategies.” One team is from Wellington which finds dividend
paying companies that appear inexpensive relative to their growth prospects, the other team
is from vanguard applying a quantitative approach. Benz’ third pick is the Vanguard High Dividend
Yield ETF. Also rated silver, Benz says it avoids the
big sector bets normally found in traditional high yield funds like financials utilities,
and energy stocks by the way it weights the portfolio. These three funds combine higher quality companies,
defensive characteristics and those tantalizing dividend yields Benz was looking for. Next week: we turn our attention to finding
global growth prospects. Artisan International’s Mark Yockey joins
us for an exclusive interview. In this week’s EXTRA feature on WealthTrack.com
Mark Cortazzo shares why mentoring new hires is so important to his firm’s culture and
success. An important part of our success is connecting
with you on Facebook, Twitter and our YouTube channel. Thank you for engaging with us. Have a super weekend and make the week ahead
a profitable and a productive one.