What’s Working Now?


The following is a transcript of Episode #37 of the Retire Happy podcast with Roger Gainer.

All episodes of the podcast can be found at Apple PodcastsGoogle Podcast, and Spotify.

Roger: One of the things I look for in these strategies is, if things start to go crazy, can the manager move to cash? Now, that may seem intuitive, but a lot of mutual funds, because of their stated investment policy, cannot move into cash. It’ll say right in the prospectus, the fund will always be invested at least 70% of its money in stocks. And so the manager doesn’t have a choice. He or she has to manage to that statement because that’s why people bought the mutual fund.

Clark: You’re listening to “Retire Happy” with Roger Gainer, President of Gainer Financial and Insurance Services Inc. Thanks for joining us. I’m your host, Clark Buckner. Even with all the economic difficulties we’ve seen because of COVID-19, there are still certain strategies and investments that are working well for people. So in this episode, Roger shares his insight into some of the assets he recommends right now, as well as some of the things you should avoid. For more content like this, head on over to gainerfinancial.com. Enjoy the show.

Roger, I’m really thankful to have you back on the line for another episode here of our podcast, and especially right now, because it’s just so many things happening in the world. It’s like we couldn’t make this up. We couldn’t imagine where we would be in the world. And for today’s topic, we’re gonna be discussing what the future looks like, and what will continue to work, what we’ve learned through these unbelievable times. There’s a lot of important things you’ve got on the docket today. So first, though, how are you doing? How’s life Roger Gainer?

Roger: Well, it’s been challenging, I can’t deny that, where everybody’s dealing with the sheltering in place and the restrictions on our lives that COVID has presented. But here, where I live, we’ve had quite a bit of fire here in the last month, and today we’re on our 29th straight day of “Spare the Air,” which has forced us to stay inside. It’s made the world kind of small, and really been challenging in dealing with this, not just me, but my neighbors, my friends. In light of that, it’s so easy to get down and to feel overwhelmed, and what’s the point and what’s going to work?

Clark: It’s really tough.

Roger: It is really tough. So that’s one of the reasons I suggested we have this conversation today. Because I would say that the most common thing I’m hearing from clients these days is, “I’m nervous. I don’t trust the stock market, I sold out and I don’t know when to get back in. But gee whiz, it’s setting records. And I feel like a fool for getting out,” and all of those kinds of emotions that people go through. And especially when it comes to investing, you don’t want to be that emotional. That’s one thing, for sure. And we’ll actually talk about that in a little bit. But you and I have talked about how Wall Street’s a great marketing machine and how they convince people of things that aren’t necessarily true. And one of those things is that really the best way to build wealth in America is to invest in the stock market.

And I was just reading this in print before we started our session today, an article on MarketWatch, which is a website I do some research on and look for commentary and analysis of different things financial, it’s a very comprehensive website. And one of the columnists’ name is Mark Hulbert. And he analyzes things using very, very non-biased, very objective approaches. And he’s famous for something called the “Hulbert Digest,” where he takes what other newsletter writers are recommending and then he boils that down to definable patterns. So when these newsletters are too bullish when they’re telling everybody to buy, he’s shown statistically that that’s a great time to sell.

Clark: Really?

Roger: And vice versa when they’re all [inaudible 00:04:24]. Yeah, it’s called contrarian investing, and it is the most consistent way to make money. And if you think about it, it’s very logical, right? If everybody was doing the same thing at the same time, and it could work for everybody, we’d all be rich. And clearly, we’re not. So, if you think of markets as Ponzi schemes… You know, when I used to be a broker, one of the first things I was taught was called the greater fool theory. And the greater fool theory says, “An investment is great as long as somebody dumber than you comes along and is willing to spend more for what you want.” And it’s true, right? Now, why do markets go up? More buyers than sellers. So we have to constantly beat the drum and be cheerleaders to get more people to put their money in the market to push us up.

So, the contrarians were the people that were in early as they’ll say, but those are the people that bought when everybody hated it. And when everybody’s loving it, and that’s when those people sell and they get out. But money has to go somewhere. And this has a tendency when, you know, staying in cash. Cash is great. At certain times, I’m a big believer in cash but if you’re always in cash, and only in cash, it’s hard to get ahead, especially with the low-interest rates that we’re seeing today. So over the last months of being shut in, I’ve been looking at kind of what is and what isn’t working, and more importantly, what looks like it’ll be working into the future.

And we’ve touched on some of this stuff, interestingly. If you go back to our January, before COVID was a big deal, our January podcast, we talked about kind of what to expect. And what’s interesting, I think if we go back and listen to that, you’ll see that, you know, we were talking about what’s coming over the next 10 years and what might work. And COVID has accelerated that timeline. And we’re seeing that a lot of those things I talked about then are things that are actually still working. Now, that’s not to say I haven’t been really surprised by some of the things that aren’t working. This pandemic has certainly exposed areas of our economy, areas of our society, things that traditionally worked fine that just aren’t working right now. And there are structural changes going on in our economy. I don’t want to get too deep in all of that stuff.

But, you know, the world is never going back to where it was at the end of last year. We will adapt, we will adjust, and we will evolve> To think that all the jobs that we had, as we turn the calendar, are going to come back, they’re not. Over the weekend, “The San Francisco Chronicle” published a special section of all the businesses that are historical icons in San Francisco and the Bay Area that are gone, and they’re never coming back. I mean, these are restaurants and galleries and music venues that have been around for decades. There’s a famous place on Van Ness Avenue called Tommy’s Joynt, got the coolest paint job on the outside. And it’s just an old fashioned Hofbrau sandwich house.

Clark: It’s a staple.

Roger: Yeah. And I’ve been going there for the 40 years that I’ve been here, they’re closing and they’re never reopening. So we’re seeing more and more of that. And that’s going to change, it’s going to create opportunities, changes always creates opportunities. But there’s going to be some pain in between as people have to find new jobs or new careers as things go away and new things are born. That’s the nature of how our economy is supposed to work, is that constant evolution.

Clark: That’s a great segue into what we’re talking about today. And looking at what is working now, especially in the midst of some really challenging times. And I know we were talking earlier about how there’s a lot of emotions, you don’t want to be emotional when you’re dealing with your retirement and thinking about investments. So, in that mindset, and among all the nerves that people are feeling, what would you say is working today? And maybe what can we learn from that as we’re in this new world?

Roger: Well, let me start by saying on the surface, it appears that the stock market is working. But if we don’t see that recovery to support these prices that we’re seeing, because let’s face it, stock prices have decoupled from economic performance. Apple took 35 years to get to a trillion-dollar valuation. And then it took two years to get to a $2 trillion valuation here a couple of weeks back. And I would put it to you that Apple hasn’t doubled its sales, hasn’t doubled its profits, hasn’t doubled its potential in the last two years. So why is the stock doubling? It’s speculation. I mean, that’s plain and simple.

You know, it feels good until it doesn’t. And so, you know, given the nosebleed levels in the stock market, many people are calling me rightfully nervous about this. Traditionally, when markets start to erode, you know, we saw a little hiccup here last week, a pretty quick drop of 10%, and it seems to have come back for the moment. Traditionally, people jump into bonds when that happens, but we’ve talked about this before, the risks in the bond market given how low interest rates are today. I got a call from an old friend last week, his sister-in-law is very, very nervous. And he said, you know, she just doesn’t want any risk. So she sold everything and she put it into bond funds. And I explained to him why bond funds weren’t the safe haven that they appear to be. If you go and listen to some of our old podcasts, or a couple of old blog posts, we talk about why bond mutual funds, in particular, provide certain risks. And we don’t want to go down that road today. But, you know, by all means, go to the website and check some of those out.

Clark: Yeah, we’ve got it. It’s there.

Roger: So, if we can’t run to the bond market for safety, where can we go? Now, as we were talking about that, you know, how do Americans build wealth that Mark Hulbert, that’s what we were talking about a couple of minutes ago, wealthy people got wealthy in one of three ways. They got wealthy by starting a business, they got wealthy by investing in real estate, or they got wealthy the old-fashioned way, they inherited it, okay? It’s not the stock market, wealthy people use the stock market to store their money to try to retain purchasing power. And so they tend to be a little more conservative, a little more… There’s a tendency, Mark Hulbert showed, traditionally for wealthy people to underperform things like the S&P 500 or the Nasdaq because they’re not trying to get rich in the stock market, they’re just trying to retain purchasing power. So, given that backdrop, where are we finding value today that we feel good into the future? And one of the first places that we’re finding great value is in the world of real estate. Now, today, a lot of real estate I wouldn’t go near, right?

Clark: And is this the first time you’ve said this?

Roger: It’s the first time I’ve said it in this forum, yeah.

Clark: Right. Well, that’s what I’m saying. I mean, I know I’ve heard you say before real estate has made more millionaires than anything else. And it’s always been such a great option. But it’s taken this big of a change in the world and knowing what we know now for you to see, hey, real estate, what we’re seeing right now, it’s surprising to a lot of people.

Roger: Well, I had clients investing in real estate for years and years and years, this is not something new but it’s taking on much more of a focal point in portfolios. But again, we have to be very cautious because a lot of real estate has been hurt quite badly. If you think about shopping centers, regional shopping centers, we’ve seen large retailers going bankrupt. We’ve seen stores close down, a front page of our local paper today that people are getting excited they’re finally going to let people back into stores in our county. It’s been a long time, we were open for a week back in June. But nobody… You know, retailers have not been able to accommodate customers in their shops. And so shopping centers plus the proverbial Amazon effect, you know, you can just do a couple of clicks and get anything delivered. And we all know that from sheltering in place, right?

Clark: Right.

Roger: You know, things like that, office buildings, what have we learned during COVID? It’s that many people can work remotely. And as a result, we’re seeing people leaving California because their companies don’t want them coming back in the office. So what the heck, we got fires, we’ve got a high cost of living. When you can’t enjoy the great outdoors here, you know, what the heck? And so people are moving elsewhere because they can do their job elsewhere. And what that’s doing, we had a couple of large tech companies back out of leases in downtown San Francisco, one was almost a million square feet of office space and they paid $70 million to get out of their lease.

Clark: What?

Roger: So there’s a landlord that’s going to be stuck with that lease. I believe it was Pinterest, but I’m not positive.

Clark: Wow.

Roger: It escapes me, but it’s one of these bigger companies and they had contracted for this space while it was being built and now, you know, the landlord’s got this empty space. There are millions of square feet of office space coming online this year and next year in San Francisco, but just as people are going elsewhere, working from home, not using the office, all offices are being reconfigured. So you can’t just say, “Oh, all real estate is good.” I know people who own single-family homes that are rentals for them, and the tenants have lost their job. So they’ve lost their job, they’re not paying. Now, they’ve still got to keep the lights on, they still have to pay their taxes, yet they have no income off that asset. So clearly the value is less because it’s not performing. Oh, and, of course, there’s no evictions. So, you know, it’s a good and a bad thing.

Clark: Yeah. Right.

Roger: But the landlords are hurting big time right now. And it’s not fulfilling the objective that they had in their portfolio. So these kinds of risks, we have to be selective in that real estate area, you know, restaurants…

Clark: Yoga studios…

Roger: Hotels, resorts, things like that, if you look at some of the amusement parks are reopening, but, like Disney, but they have a tremendous number of hotel rooms around those places. And mostly, people are going for the day, they’re not getting on a plane with the family and spending a week at Disneyland. So you’re seeing these types of properties… Before we started on air today, we were talking about a hotel in your backyard that I have a client invested in, that I never would have thought would have a problem. But all hotels are in trouble right now because there’s no travel. And the hotel property I’m referring to has managed to keep its doors open and most all of its people employed. But what is it doing? It’s giving rooms to out-of-state workers that are coming to help fight the pandemic, it’s providing emergency workers with spaces. It set up a wing to take on non-COVID patients from hospitals, homeless people, you know, anything to generate revenue, but it’s certainly not generating the kind of revenue that was projected. The weekend before the shutdown, they had 99% occupancy, the first weekend of the shutdown, they had 99% occupancy reserved and only 25% showed up. The second weekend, nobody showed up.

Clark: Oh, man.

Roger: So, that’s what I was saying about you have to be selective with what parts of the real estate world. So what parts are we looking at? Manufactured housing has been a tremendous area of strength. This is an asset class that has been working for years and years and years, some of the smartest people in real estate like Sam Zell have been investing in this area. It is very splintered. A lot of manufactured housing developments are owned by individuals. There aren’t really dominant players but it’s a great place for somebody who’s retired, who’s maybe living on a pension, who wants a home. And if you’ve been in a manufactured house in the last couple of decades, they’re really nice. They’re building factories and then they’re brought out to the manufactured housing community. They’re set up on a concrete pad, and then people pay rent on that concrete pad. The landlord just maintains the hookups, right, for electricity, water and sewage, some common areas, and then a concrete pad.

So there’s very little that can go wrong, and the cash flow, and the overhead’s pretty reasonable and they just kick out beautiful amounts of cash flow. So, manufactured housing has been a tremendous area of strength. And we’ve been able to find some really good opportunities in those areas, being able to buy into specific portfolios of manufactured housing, and even some RV parks. Anyways, that’s been a very, very good option. And you know how you always see the splintered homes after a tornado or a big storm, you don’t own that stuff, the homeowner is responsible for those unfortunate incidents. But you can rebuild very quickly because you just get something on the back of a truck and ship it out, most of the time from the Midwest, and then you set it up and you’re back in business. So, that’s worked out very, very well. Another area that we’re seeing some great success is necessity-based retail.

Clark: And that’s as opposed to just your traditional “Let’s just go shopping for candles” retail.

Roger: Right, right. You know, people aren’t eating out at the local restaurants, people aren’t hanging out in the mall and buying little this and thats. They’re using, you know, retail therapy and that stuff. If you think about what kind of stores you’ve been in primarily over the last six months, it’s the grocery store, it’s the drugstore, it’s the hardware store, it might be the auto parts store. You know, a lot of people can’t afford new cars, so they got to keep their cars running. None of these types of businesses closed at all, anywhere during the pandemic.

Clark: Essential.

Roger: They’re essential and in many cases, you know, pharmacies and grocery stores, in particular, sales are way up because people aren’t dining out, right? So we’re going to the grocery store, we’re buying more stuff at the grocery store instead of eating out. That’s just one example. So, investments that we’re getting in these things have been appreciating nicely and cash flowing beautiful, not missing a beat, not missing a payment, you know, that’s been an area of strength.

Another area in the real estate category are medical office buildings. Now, you got to be careful under medical office buildings, because there’s some types of medical office buildings that have not been doing well. If you think elective surgery centers, nobody’s able to have those things. I actually, three months ago, had to go into one of those places, and it wasn’t nearly as… I make a regular visit, I get some injections in my spine. And about once a year I go in, and it wasn’t nearly as busy as it normally is. But other types of medical office buildings are just, you know, medical offices, are exploding, we’re seeing telemedicine go up. But the doctors are housed in these office buildings so that they can consult with each other, that sort of thing.

Another area is self-storage. Now, again, you got to be in a market that isn’t oversaturated, that hasn’t built too many of these things but, especially in downturns, we saw back in 2008 that these worked out very, very well. You lose a job, you’re in transition, you don’t want to throw all your stuff away or give it away so you put it in storage for a few months or a year or you’re downsizing and you got Grandma’s china, and you need to put it somewhere. So self-storage occupancies are up and demand for self-storage is up. And it’s a pretty consistent cash-flowing area. So these are the kinds of things that are working in the real estate world. We have opportunities that can be accessed for certain investors in all of those asset categories if anybody’s interested in finding out what those things really kind of look like and want to drill down, if you will. So outside of real estate, because, again, real estate isn’t for everybody, it does work well often, as we discussed. If you want to be in things like stocks, we are seeing some success in dynamically managed multi-asset investment portfolios. I know that’s a mouthful.

Clark: Right. Yes, what does that mean?

Roger: These are strategies that are based on algorithms that are constantly comparing multiple asset classes to each other, and then weighting the amount of the portfolio that’s invested in these things based on that algorithm. So, for example, if small-cap stocks, like we talked about before, are showing momentum, the algorithm will increase the exposure to those small-cap stocks. And maybe the large caps are slowing down or maybe showing more volatility and they’ll move and reduce the exposure to those things. There’s a couple in particular that have been doing quite well, since the first of the year, have really minimized losses at the height of the loss back in March, and have been able to participate in the recovery, so, much less volatility.

Some of the more conservative strategies have actually outperformed both the Nasdaq and the S&P 500 since the first of the year. And one of the things I look for in these strategies is if things start to go crazy, can the manager move to cash? Now that may seem intuitive, but a lot of mutual funds, because of their stated investment policy, cannot move into cash. It’ll say right in the prospectus, the fund will always be invested at least 70% of its money in stocks. And so the manager doesn’t have a choice, he or she has to manage to that statement because that’s why people bought the mutual fund. So, having that ability to go to cash will dramatically reduce.

So there are strategies that the algorithm senses. A big uptick like we saw here back, was it last week or the week before last where we had a couple of thousand-point down days and the Nasdaq really got beat up pretty bad? The portfolio will move to cash. When it moves to cash, the algorithm compares cash to a menu of opportunities from different asset classes every day and has to determine if cash is still the best place to be. So that way, you can get back in the market just as soon as it calms down instead of waiting weeks or months to see if it’s safe to go back in the water. So those are dynamically managed multi-asset investment portfolios, have been a nice area since the first of the year.

So, you know, for a lot of people when they’re nervous about stocks, they sell out and they put their money into a savings account, right? I move to cash. And just as a quick aside, a money market is not cash, it’s a mutual fund. And we’ve talked about that in other podcasts. But if you move to cash, what’s the problem with cash today? I have a client who retired last Friday, and we were looking around for where she can put cash that she’s going to be drawing for the next two years’ worth of paying her expenses now that she’s not working. And the best we were able to find out there was nine-tenths of 1% with an online bank, we couldn’t even find CD rates that were over 1.25%. So, fixed indexed annuities give you the type of guarantee of your principal, but because they’re earning interest based on the movement of a market index, you’ve got the opportunity to make more than what a savings account’s going to offer you, while still having that security.

And this is also a nice solution for people that think, “Wow, the market could continue to go up. I’m really nervous about being in because, gosh, it could just trip and drop 20% at any time.” So, an indexed annuity, because you have the downside protection that you can’t lose money, you cannot lose your principal in these tools, you don’t have to worry about missing out if the markets continues to rise and its high-wire act keeps going for years and years and years, you’re still able to participate and profit from that. But these, I really look as alternatives that can help reduce the volatility in an overall portfolio. A lot of times we’re using them to replace bonds in a portfolio. I have a white paper, if any of our listeners are interested, by a Nobel Prize-winning economics professor, the study actually was published last year. And it shows how this tool, fixed indexed annuities, if you replace bonds in a portfolio with them, how much higher your returns are, historically, and how much lower volatility is than what we’ve seen historically.

So those can be a very powerful tool. Like anything else, like we talked with real estate, there’s good stuff, and there’s bad stuff. There’s a lot of products out there, just like mutual funds, there’s a lot of mutual funds out there. And a lot that I wouldn’t go anywhere near. It’s important to work with somebody that has, you know, many companies to choose from, many options, and really drills down and understands the different features and the different structures under these types of contracts. Some of them can be complicated. So it’s important that you do understand, “How do I earn money?” And, “What’s my liquidity?” And, “When can I take my money and go somewhere else with it?” Those are some important questions. That is one area.

And now there’s even fixed indexed annuities that use indexes built on what we talked about with those dynamically-run portfolios. They’re algorithm-driven indices that include as many as 15 or 20 different asset classes. So you can include gold and real estate and commodities and bonds and foreign bonds and emerging market debt and small-cap Asian stocks and small-cap European stocks, and small-cap domestic stock. So you can really set up portfolios. In fact, some of these annuities these days have access to algorithm-based indexes that were only available to big institutional investors previously. So these indexes have been around for a while, JP Morgan, a lot of different, Bank of America, Merrill Lynch, Goldman Sachs, lots of financial institutions have these types of managed indexes, algorithm-driven, but usually, you need tens of millions of dollars to access them. And most of my clients don’t have that kind of money. So you’re able to get that same type of management and expertise, but you can do it at a much smaller scale through one of these annuities.

Clark: Excellent.

Roger: That brings us to the last one, and that’s fixed life insurance. So if you structure a life insurance policy, the right way, for this task, you know, most of the time when people buy life insurance, it’s, you know, “If I die, somebody will be hurt,” and you want to make sure that they’re not, so maybe I’m a business owner and I have employees that I want to make sure still get paid if I die. So we take out what we call key person insurance. Sometimes it’s your family, you’ve got a spouse, you’ve got kids, maybe you’re both working so it takes both your incomes to keep things going. And so we buy life insurance for that reason so that if I’m dead, dollars walk in the door, that’s the traditional method of purchasing life insurance. But when we do that, what are we looking for? We’re looking for the most death benefit for the least amount of money, which works very well in that situation.

Well, what I’m talking about here is fixed permanent life insurance. So instead of term insurance that’s there for a period of years, this is insurance that develops a cash value. Now, if you structure these things properly, and fund them properly, we’re seeing 3% to 5% tax-free growth in these products. They’re liquid, you can get your access to the money, you don’t have to wait till you’re 59-and-a-half. They earn that money and it is, you don’t pay taxes on it, there’s no government reporting. And there’s some very interesting techniques at how to access the money tax-free, and ways to leverage that and even increase that return higher than 3% to 5%. So, fixed life insurance can be a great place to park your cash while you’re waiting for that next great opportunity. I’ve seen it time and time again, I have clients who’ve purchased businesses, I have clients who’ve built houses or purchased real estate using that cash. It’s not like it’s a brand new strategy. But you have to understand how the tax laws work, and how these products work so that you can properly structure a policy to accomplish this type of thing.

Clark: So even in the midst of so much unknown, so many nerves and emotions, it does sound like there are still several options and several paths forward. And all of this is customized, all this is about finding what makes the most sense for you so you can sleep at night.

Roger: At the end of the day, that is what it’s all about. Is what works for you, what works for your specific situation, keeping flexibility going forward, being able to make those adjustments either through the types of indexing that we were talking about, or algorithm-based strategies, or getting well-compensated. One of the things I like about life insurance, before we leave, is I have no idea what’s going to happen to taxes in the future. Pretty sure sometime in the next 20 or 30 years, they have to go up because of the deficits that we’re running up right now. And that stuff is going to have to get paid at some point.

Clark: Right.

Roger: And how are we going to generate that money? So, when clients go into retirement, I like them to have money that they can access tax-free. Maybe in a future podcast, we’ll talk about the hierarchy of money, and what is the most valuable money when you retire? And there’s a distinct hierarchy. And once you understand that, it helps you to focus where you’re putting your money.

Clark: Excellent. And how can someone… I know we always do this, but I still want to do it. And that’s, how can someone take that first step to organize all their options and their thoughts and take the next step with you and your team?

Roger: Stop by the website, www.gainerfinancial.com, and scroll down to the bottom of the first page, and you can download a copy of the Thought Organizer. Because once you take stock of, “How am I feeling about stuff? What am I trying to accomplish?” I think last time we talked about, you know, reinforcing your why, that’ll help you decide which of these tools is right for you, and whether any of them are right for you, you know, I can’t really say. Or if you just want to run some ideas past me, anybody that’s listening, you can have 30 minutes of my time. Just mention this podcast, and I’m happy to be a sounding board for you.

Clark: Excellent. Roger, I’ve always felt better after we talk because there’s a lot going on in the world but it’s nice to take a moment, breathe and look at what you know and have experienced, and to reflect on that and bring some peace to how we’re thinking about this.

Roger: Money is supposed to help you sleep better at night, not create more anxiety.

Clark: I will talk to you soon.

Roger: Great. Thank you, Clark, you take good care.

Clark: Roger L. Gainer, RICP, ChFC, California insurance license number 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative, providing advisory services through HFIS Inc., a registered investment advisor. Gainer Financial and Insurance Services Inc. is not owned by or affiliated with HFIS Inc. and operates independently.