Jag: Welcome to our weekly podcast, the Art of Wealth Unbroken where we provide our listeners with insights and proven strategies to protect the wealth they’ve built against poor financial planning, investment mistakes, global and national economic conditions, and governmental policies. We discuss the topics in finance, retirement and politics that are on your mind, giving you certainty and uncertain times.

These discussions can help you make better informed decisions so you can make better financial choices with the wealth you’ve built and are continuing to grow. Our hosts are Stacey Andres, registered finished consultant, and Michael Wallin, certified financial planner. I’m Jon JAG Gay, and gentlemen, last week we talked about these buffered ETFs.

We’ve gotten into a little bit of the pro and con we’re gonna take a deeper dive on them as a way to protect that middle bucket of income of the three buckets of retirement planning. We’re gonna jump in today and talk about the why the how, and the terms of these buffered ETFs. 

Stacey: Thank you, Jag. Hey Mike, glad to be back with you today.

As Jag had just mentioned last week, we dove just really high level on some of the pros and cons of these buffer ETFs. In today’s market when everything is so volatile. We talk specifically about products that could be used for that second bucket, looking out two, three to potentially five years of income planning and what we can use to help grow that bucket of money.

We mentioned the buffet ETFs for both of us. One of the reasons why we like it so much is that it has the potential for some decent growth while giving significant downside protection. And when we’re talking to clients today with the volatility that everybody’s experiencing, everybody’s asking the question, how can we, or what is out there that we can use?

To help keep us protected from having a 20, 30%, 40% draw down, but still give us some good potential for some growth. 

Michael: As you mentioned, Stacey in today’s market environment, diversification across many different asset classes is key to a very intelligently designed and constructed healthy portfolio.

So sometimes we have to get outside of the blocking and tackling and using of the equity markets or the bond markets when those areas are really not performing for us. And I think it says it perfectly in the name, it is a buffer and that’s what a lot of our clients are looking for today. How can I get a buffer of protection against this volatility?

We have individuals that are either approaching retirement or are currently into retirement. They are looking at becoming dependent upon the resources that they have gathered over a number of years. And they’re saying, I’m gonna start drawing income from this. I do not have the ability to let this account just grow back through this typical bond and equity markets.

I can’t afford to lose any dollars that I have today. And I’m sure there’s many of our listeners that are hearing this. And they’re saying, yes, that is me. Well, don’t take that knee jerk reaction. As the only solution you have is to run right over and sell out of every position and sit in cash. Last week, you said it very clearly. Today’s inflation rate at 9.1% means that in a cash position, you are reducing your buying power by nearly 10%.

So, what we are looking for is alternatives. How can you stay in the market? So that when we come down, we hit the bottom of the trough and we start coming back up into an expansion. You are in a position for your portfolio to recover. If you’re sitting in cash, you will watch the recovery happen. And you will miss out and you will lock in your losses and that’s not just gonna be detrimental to you on one year or two years or three years.

We are talking about locking in the losses, impacting your buying power, meeting your overall budget for the long duration of retirement. 

Stacey: Prior to the show, Mike, we were talking just about some of the performance of these products over the past. Almost 50 years since 1975, that there are only two occurrences where the market has been down more than 30%. And when I talk about the market being down, say these periods begin every single month. So there are just over 570 periods of time that these products could have began. And over that period of time, only on two of those instances, were they down where a client would have realized any sort of significant loss, but because we ladder these in together, that really also is another layer that helps buffer the volatility that’s taking place. And so over any one of those periods of time, over the course of a year, a client’s portfolio would only have been down about 3%. So when we talk about these buffer notes, Mike, JAG asked the question earlier, how do these things work? 

Michael: One of the areas is the issuer of the buffer ETFs. They are buying options around this investment solution. And what they’re looking at is a 95% probability of being in the money. So when you’re looking out there at a well diversified platform, you have the ability to go out to a broker. You can buy an ETF, but you don’t have any protection around that ETF.

So firms that we use, they find a more strategic way of taking that investment solution that you’re looking at and bubble wrapping it with options that allows us that in the event of a downdraft in the market, a correction in the market, then we are mitigating our losses. And so this is lost mitigation through diversification.

And when we look at that, let’s just say January one, through December 31st, 2008. And if we look at all the selected market indexes, and we look at their total return, when we’re looking at that, the S&P 500, I think most of the listeners are most familiar with that platform. It was down 37%. A 37% drop.

Well, a lot of people would feel like, well, there’s nothing out there that has done any good. Well, that’s not true. There are one to three year treasury bills that were up six to 7% during that same duration. That means that is a 43% better return than the S&P 500 experienced. The Bloomberg US aggregate was up 5.2%, but 20 year treasury strips, when we look at those, they were up 54.5%. If you’re buying options into those, you’re giving that downside protection. And that’s why we use resources like we have available, you know, at Optiviese, to look at what are strategic solutions, not just using the basic fundamentals. As I stated earlier, equities and bonds, but how can you diversify through proper loss mitigation tools to give yourself an opportunity for a downside protection?

So let’s say you had a hundred thousand dollars that you put into an account and the market went down by 30%. Well, you’re gonna have that 30% downside protection. Now it’s gonna cap you a little bit on the upside. So those would typically be a cap around 14 or 15% on a hundred percent liquid account.

Now, if the market is down 30%, you are protected. If the market is down 31%, from the time that you go into that position, you actually are only experiencing a 1% loss in your portfolio. 

Jag: At Optivise Advisory Services, they combine the expertise of their seasoned professionals in financial planning, tax legal and investment to assist their clients in achieving the lifestyle they’ve always dreamed of through their proprietary Info Right system. They address each of the 10 pillars in their planning process, investment retirement, income tax, social security, education, healthcare, personal care, charitable legal, and wealth transfer. Their comprehensive approach brings a certainty in uncertain times.

To receive your free Arc of Life report, you can visit artofwealthunbroken.com or call (855) 378-1806. The link and phone number will be in our show notes, artofwealthunbroken.com, or (855) 378-1806. The Arc of Life report will show you how to each of the 10 pillars in the Info Right process connect together to form your unique, personal financial canvas.

Stacey: So Mike talking about that buffer, I think it is important because we’ve been throwing around the number that was saying, it protects a client from the downside. Protects ’em in a volatile market. But what does that really mean? And you kind of touched on it there right at the end. So let’s say that you have a 30% buffer allocated or tied to the product that we’re using.

If your portfolio with that particular product is down anywhere between 5% and 30% and that product matures. At that point, you get 100% of your principal back. If the product will be down 31%, like Mike had referenced or 35%, the product has a buffer of 30%. So they are absorbing that first 30% of the loss.

And your realized draw down in that case would only be 1%. If the market was down 31%, it would only be 5%. If the market was down 35%. So hopefully that brings a little bit of clarity and understanding. When we’re talking about what drawdown looks like and how that protection actually works to benefit you.

Michael: Yeah. And again, what I love about these types of solutions, whether it’s a Buffer ETF, or whether it’s a Buffer note, there are different solutions, as we’ve stated on the show today. Whether it’s the Buffer ETF is right for you. Whether a buffer note is right for you. These are tools that as we analyze ’em for you, we can determine are they a good fit for your solution?

Where should they fit as you traunch your money, and then making sure that you have full liquidity so that you can access your money or pivot as opportunities present themselves for market timing in the future. 

Stacey: Yeah, we find that many clients might, they can easily handle a five to maybe a 10% draw down. What makes them really, really nervous is when they start having draw downs that are in excess of that.

And sometimes well in excess of that, So by using these strategies and laddering them together, we talked about a little bit about laddering in the last show. When using CDs and using MYGA’s multi-year guaranteed annuities. You can also use laddering strategies for these types of vehicles and they can work very, very well.

Jag: I just wanna jump in here for a second for our listeners who may not be familiar with the term laddering. That’s when you are starting and ending, you’re staggering the start and end dates of all these vehicles so that they mature at different times. Do I have that right? 

Stacey: That is absolutely right, Jag. 

Michael: That is correct.

Jag: So guys, we kind of got into the weeds a little bit here on Buffered ETFs, really threw out a lot of numbers and really dove deep into it. If our listeners wanna know more about Buffered ETFs specifically, or anything related to planning their financial future, their retirement planning, art of wealth unbroken, that’s the website. Website again, artofwealthunbroken.com. All the information you need gonna be. there You can also call Michael and Stacey at (855) 378-1806. Again, you get that free Arc of Life report. Find out about these buffered, ETFs or anything else you wanna know. They are a wealth of information as you’ve seen in these last 23 episodes, (855) 378-1806.

Content information gonna be in our show notes as well. And guys, we’ll talk to you again next week. 

Stacey: Thank you, Jag. Thank you, Mike. 

Michael: Thank you Stacey. Thanks Jag.