August 10, 2012
  • Seek passive management
  • Look at ETFs and index funds

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Charles Ellis & Mark Cortazzo Transcript 8/10/12 #907

August 10, 2012

WEALTHTRACK Transcript #907- 8/10/12

CONSUELO MACK:  This week on WEALTHTRACK, legendary Financial Thought Leader Charles Ellis and award winning financial advisor Mark Cortazzo show us how to cut sky high investment fees to save money and grow our nest eggs over time. Controlling your investment costs is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. How much do you pay in investment fees every year? What is the actual dollar amount you pay to your financial advisor, let alone the mutual funds you own and the firms that have custody of your investments? How much do they really take away from your portfolio and its performance over the years? According to a ground breaking article by legendary financial consultant and WEALTHTRACK guest Charles Ellis, “investment management fees are much higher than you think.”

As Ellis points out the little over 1% of assets paid by most individuals and little less than one-half of 1% paid by institutional investors are “seen as so low that they are almost inconsequential” It turns out they are anything but! As Ellis points out “investors already own those assets so investment management fees should really be based on what investors are getting in the returns that managers produce.” Considered that way, fees are much higher. Pension giant CalPERS, the California Public Employees Retirement System, earned just one percent on its $233 billion dollar investment portfolio in the past fiscal year. If it were to pay the average half a percentage point charge on assets under management, the fee would equal 50% of their return for the entire year!

The financial toll investment fees take on portfolios over the years is stunning. Last year, financial advisor and WEALTHTRACK guest Mark Cortazzo introduced a flat fee portfolio product for individuals with smaller and less complex portfolios than his usual high net worth clients. He compared the ten year costs for two clients, each with a $500,000 portfolio- one paying the not unusual annual fee of 1.5% of assets; to another, a flat fee client paying his $199 a month charge. With all other things being equal, the flat fee portfolio saved more than $80,000 in fees over the ten year period.

This week we are going to examine investment fees and how you can reduce them with Charles Ellis and Mark Cortazzo. Financial Thought Leader Charley Ellis is a world renowned investment consultant to governments, institutions and the financial industry. He has authored or co-authored some 18 books including the investment classic, Winning the Losers Game, and more recently, with Princeton economist Burton Malkiel, The Elements of Investing. He is devoting a great deal of his time to helping individuals become better investors. Mark Cortazzo is founder and senior partner of MACRO Consulting Group, a 20 year old financial advisory firm catering to high net worth, and now Main Street, clients. Mark has been recognized as a top advisor by Barron’s, Worth, and Fortune magazines among others. I began the interview by asking Charley Ellis how much higher investment management fees are than we think.

CHARLES ELLIS:  It depends on what you’re thinking, but most people, honestly, most people think the fees are roughly one percent. That is low, compared to anything else. You buy and sell a house, one percent commission, you think, “My, God.  That’s really low.” It just doesn’t happen that way. And if you look at it that way, fees are low.

CONSUELO MACK:  Right. And it’s one percent, based on the assets under management, for instance. So you a $100,000 portfolio, it’s a $1,000 fee. Ah, nothing.

CHARLES ELLIS:  Right. The problem with that way of thinking is that it doesn’t reflect any economic reality. For an example, if you’re an investor, you already have the assets, so you’re not getting the assets. You’re getting something else. What are you getting? You’re getting a return on the assets. Okay. So what’s the fee on return? If you take the kind of return people are expecting from now, out over the next 10 or 15 years, you’re paying about a 15% fee. That’s not low. That’s a pretty high fee. That’s twice as much or more than most people, say, would pay for a house sale or transaction. It starts to look like a pretty good profit margin, even for a pharmaceutical company. That’s a lot.  But that’s not the right way to look at it, and that’s not the whole story. It’s actually a great deal higher than that.

CONSUELO MACK:  So Mark, you run an advisory firm and you have seen what a lot of your competitors are doing as well, and, basically, the one percent of assets under management, as a fee, that’s the standard, right? Some are higher. So what’s your response to Charley’s critique that, in fact, fees are much higher than you think, when you just look at the returns you’re getting?

MARK CORTAZZO:  I agree, and I think that the one percent is even wrong. We’ve had a lot of people come to us to review the fees on their portfolios to compare to what we’re doing, and they have a million-dollar account, and we ask them what’s their fee, and they said it’s one percent, because at a million dollars the fee goes to one percent. We looked at the fee schedule, and it was actually two percent for the first $250,000, 1.75 for the next 250, and one-and-a-half for the next $500,000.  And when we did the math on a $1.1 million account, they thought they were paying one. They were paying 1.63%. So it’s 60% higher than what they thought was one, which in and of itself might have been a very high cost for a $1.1 million account.

CONSUELO MACK:  And is that common practice, do you think, in the industry?

MARK CORTAZZO:  The most common fee structure that we see at big brokerage firms and investment advisories is a blended- not back to dollar one- it’s a blended fee, you know, where we think that it’s not obvious to the client what they’re paying.

CHARLES ELLIS:  One thing you should pay attention to is if you went to Canada, the fee normal would be something just over two percent, and if you go to all the major countries in Europe, it ranges between that two percent and one percent. And if you go to Japan, it can get even higher. So our fees are low relative to the world norm and behavior.

CONSUELO MACK:  And that’s a change, Charley. You have been in the financial business for 50-some-odd years. You started as a very young child. And essentially, it was not always this case. So how did we get here? I mean, how did we get to where one percent is the norm, and even that’s not real?

CHARLES ELLIS:  Well, for 50 years I’ve been working with investment management firms, and the basic metric has always been the same. You can increase your fees, and if you do increase your fees, nobody seems to mind, and you can increase your fees again, and nobody seems to mind. Because everybody says you would never comparison shop for price if you needed brain surgery. If your family was faced with a major lawsuit, you wouldn’t concentrate on the price of a lawyer. You’re looking for skill. And if you want to get great skill, you have to be prepared to pay up. And those who traditionally have had the lowest fees for active management have been not particularly skilled and not particularly well represented as to what their capabilities were. So we’re looking for value.  We look for– best indication of value in most markets is price. So we are prepared to pay a price in order to get good value.  After all, my family is dependent upon it. I’m dependent upon it. I want the best. And if you want the best, you pay up.

CONSUELO MACK:  So where is the flaw in that argument now? Because you have said that, in fact, the market has changed now. And so buying the best- whatever the best is- the best has changed. So how has the market changed, in which case, that model doesn’t really work anymore?

CHARLES ELLIS:  Well, the main change is there are so many truly wonderful, brilliant, hardworking, well-educated, slaving away at it people trying to beat the market that they’re just too darn many of them for any one of them to be able to do better than the crowd. And if you believe, as I do, in the value of prediction markets, there’s been no prediction market in the world with as many people putting real money into it, and really doing the research, and being free to make any choice they want to make, and working at it all the time. So they’ve got it pretty well right. Not perfect, but so much better than it ever has been before, that it’s very hard for anyone to do better than the crowd. And it’s even harder to figure out who’s it going to be before it happens.

CONSUELO MACK:  So you have a different approach at MACRO Consulting, the way you treat different asset classes.

MARK CORTAZZO:  As an extension of what Charley was saying, trying to define who’s going to be the best manager, you’re starting to see a lot more model portfolios that are using indexes as their base to invest the portfolios. So my 60-40 mix of index-based funds isn’t going to have a big fundamental difference in performance versus somebody else’s 60-40 mix. We’re buying the same indexes and the same asset classes. The average fee for a $500,000 account, national average, is one-and-a-half percent. We, as well as other discounted firms, are at about half a percent for that $500,000 account, and at a million, that one percent fee, there’s plenty of firms that will manage an index portfolio for a quarter of a percent, and that’s a big difference net in your pocket.

On the low return, one of the things that’s very frustrating for us is, we see people coming to us with fees that are 1.5, 1.75 percent, and they have half their money in fixed income, and the ten-year treasuries at 1.5, 1.45, their fee is more than their yield, so, you know, to Charley’s point, not 15%. It might be 100% of the earnings on half their portfolio is the fee. And so we’ve talked to clients about calling out part of the portfolio, put it in a money market. You know, money market, you can shop it around and get one percent net, FDIC insured, and then have the equity portion managed or, you know, an 805 equity portfolio managed, where you’re reducing your fees, and you’re reducing your risk.

CONSUELO MACK:  So Charley, are some of the most influential institutional clients, probably at your behest, starting to question the fee structure? Is there any change occurring?

CHARLES ELLIS:  Gently questioning would be about as far as most people take it.

CONSUELO MACK:  And why is that?

CHARLES ELLIS:  But there is a different way of answering your question, which takes us to the, well, what about active management versus passive management, which is a really important proposition. And if you look at the data, it’s very clear that institutional investors and individual investors, but particularly institutional investors, have been increasing. The number who invest in passive has gone up, and up, and up…


CHARLES ELLIS:  …every year. The percentage of their assets individually that goes into passive, goes up and up every year. So two of the major forces are increasing steadily and never reversing. Now, the reason for that is partly fee and partly the imperfectability of active management. So that if you really want to get a reliable result, and you would like to save money in doing it, going to what bothers most of us as individuals quite a great deal, I don’t want to settle for average in anything else, why should I settle for average in this?  It turns out that is not average. That is comfortably above average.

This last year, for an example, 80% of actively managed funds underperformed the benchmark they were aiming for. You say, “Well, what happens over a long period of time?” It’s pretty grim again. Roughly, 70% of funds have been underperforming over every decade, and make it 20 years to make it longer. The data is not so good. It goes up towards 80% underperform.  That’s a very powerful message, and people are getting it. And even though they’d like to have above-average children, and above-average automobile driving skills, and above-average dancing skills… we’d all like to have everything be above average. The fact of the matter is, if you can have an average flight on an airplane, you’d take it, because an average flight may be a yawner, but that’s just what you want in flying an airplane. And in the same way, if you really want to concentrate on what’s important in investing, you’ll concentrate on what you’re trying to retrieve, how much risk can you take, and what basic kinds of investing will do well, and then implement it through passive investing, either ETFs or index funds.

CONSUELO MACK:  Mark, let me ask you about some other fees that we are not aware of. What are some of the most obvious that we should pay attention to?

MARK CORTAZZO:  When we build Flat Fee Portfolios, we’re trying to eliminate as many of the conflicts of interest as possible. And you look at many of the asset management programs that are out there. They’re run by companies that are product manufacturers. So they also manage mutual funds. And so, you know, we’ve had examples where someone would come in, and they had 19 different mutual funds in their asset allocation model, and 16 of the 19 funds were a proprietary fund of the group that was doing the asset management. Now, there’s 26,000-plus mutual funds out there. They weren’t the best in 16 of the 19 categories. So they’re making additional soft dollar from the asset management fees. There are 12(b)(1) fees in additional costs that get passed on. And so the asset manager, if they’re receiving any other sources of revenue from that program, their objectivity to pick the best funds is compromised because of revenue. And so, the internal costs are very, very important to us, and when we do an analysis, we actually run that report for our client, and say, “Here’s all the funds.  Here’s your expense ratio. And here’s what you’re paying internally in fees a year, in addition to the advisory fee.” And it’s usually a very surprising number to most people.

CONSUELO MACK:  So what are the other kinds of red flags or even yellow flags that go up, if you’re an individual investor?

CHARLES ELLIS:  Very large generality. The real problem for investment management was, 50 years ago, strictly a profession. It didn’t pay particularly well, but it was interesting work, and you could take some real pride in what you were doing, and you accepted it. It just didn’t happen to pay very well. Over the last 50 years, as fees have been increased, and the assets under management have gone up a great deal, and computerization has made it possible to manage substantially more money, the business pays very well. As a result, the focus on profession has gone down and the focus on business profitability has gone up. So you really ought to be watching is this firm in it for the business side or are they in it for the professional side.

And there are keys to the questions you can ask. What is the average length of employment of the people in your organization? How much do you invest in new people training and developing their skills and capabilities? How much of your time, Mr. Account Representative, do you spend every year in training programs? If you look at the senior people in your organization, how many of them are professional people, how many of them are business people? And by and large, organizations that are widely known and widely regarded for investment management tend to be pretty serious about the professional side.

CONSUELO MACK:  How about naming some names? What companies would you say really have set a standard of professionalism that you would feel comfortable referring, an investment management firm or financial advisory firm, that you would feel comfortable referring friends to?

CHARLES ELLIS:  I’ll start with Mark’s favorite and mine, Vanguard and DFA, two truly outstanding outfits. We can get into more detail in it, if you want to. T. Rowe Price, outstanding organization. Capital Group, which manages the American Funds- outstanding organization. I know, they’ve had in the last couple of years some imperfection in their results. Don’t worry about it. They are a great organization, and they will figure out what the problems are, and get right back on track, and you can always trust them in the long run. Dodge and Cox is also quite a good firm.

MARK CORTAZZO: I agree with virtually all the names that you listed. We use many of them, you know, in our asset management for our high net worth clients as well as our flat-fee program. But every one of those organizations has areas where they’re particularly strong. And working with an advisory group that’s independent, that’s not getting any money from any of them can help construct an all-star team, where you have each of those management teams do the position that they do best, and instead of having one fund family group managing every asset class within that portfolio, having them do their specialty I think can help…

CHARLES ELLIS:  But Mark, that’s what you would say, because your business is to help sort it out and figure it out. You could also say any one of those firms, as a family of different funds, has consistent integrities, consistent discipline, consistent professional commitment, and they’re pretty darn good.

MARK CORTAZZO: Absolutely.

CHARLES ELLIS:  So you could go either way.

CONSUELO MACK:  Charley, you wanted to make another point. Because, you know, the active versus passive debate, and Mark, I’m going to find out in a minute where you come out on that, and we’ve had this discussion before, Charley, and I think it bears repeating, because you have had 50 years, basically, of analyzing professional managers, and to advise, you know, clients where they should put-  big, big clients- where they should put their money, and it’s been a battle for you as well as to, you know, you finally said go passive. So what did you want to say about that topic?

CHARLES ELLIS:  Finally, the epiphany. You’d think after 40 years you would get it. I didn’t.  Forty-five years, somewhere in there I started to get it and realized. Part of it is by shifting from working with investment managers, to working with clients of investment managers, and watching what gets delivered, and you start paying a little bit more careful attention to it. Big stunning surprise for me was to find out mathematically that most managers underperform the benchmark they’re aiming for. Just happens to be the reality. Mathematically, nobody has been able to figure out who is going to do better in the future. Just can’t be done.

So okay, that’s pretty tough. What’s the third thing? The third thing is those who underperform, underperform by twice as much as those who outperform. So that doesn’t sound like a good deal. Then I’m looking at the numbers. Meeting, after meeting, after meeting, and it finally comes on like a light bulb. That string of numbers that are called fees is pretty big compared to that string of numbers called your extra return. In fact, the fees are huge compared to the incremental or extra return. I believe what the managers ought to be doing is adding investment advice and counseling, because there the value is tremendous, getting in the right direction, getting the basic structure right. That’s really valuable.

CONSUELO MACK:  So Mark, active versus passive management, where do you come out in the debate?

MARK CORTAZZO: We also looked at the math. And if you think about this logically for a minute, all of the active managers put together are the market. So if you look at the collective performance of all active managers, their performance is the market. So the only differentiator is going to be their fees. So most index funds, the vast majority, almost 100% of them, underperform their benchmark, but it’s by a very little amount, where the active managers, that divergence can be greater. And for people who don’t want surprises, and, you know, good or bad surprises, I think that buying passive, it’s controlling some of the things you can control. Passive has much higher tax efficiency. You can control that. The fees you can control. You can control where you own, what you own.

So you’re taking a market that feels like it’s out of control, and at least empowering yourself with the ability to adjust the things that you have the ability to adjust. So we have an active model portfolio that we manage for clients that won’t take our advice to go to a passive strategy in our flat-fee model, but we frequently have follow-up conversations with them to see if they’ve learned the lesson. So we think that for model-based portfolios over long periods of time, control the things you can control, and costs, obviously, is one of the big variables.

CONSUELO MACK:  So the One Investment for long-term diversified portfolio, and, of course, an investment can be an action that you take, whatever. So what would it be? What’s the one thing that we should do or the one thing we should invest in? Charley Ellis.

CHARLES ELLIS:  Well, the best thing every single individual and probably every single institution can do is just sit down quietly and say, what do we really, really, really want to accomplish? What do we really, really want to avoid? And what is the most realistic way of getting where we want to go? That’s probably the best thing anybody can do.

CONSUELO MACK:  So very much back to basics.

CHARLES ELLIS:  Find out who you are, what are you trying to accomplish, and from there, it’s not all that difficult to get a pretty good answer, and to getting a brilliant answer to the wrong question would cause lots of harm.

CONSUELO MACK:  In the context of our fee discussion, minimizing the fees, is there one action we should take to minimize our investment fees?

CHARLES ELLIS:  Sure. Everybody, everybody who’s an individual investor should be actively seeking passive management. They can do it with ETFs. They can do it with index funds. And the best known, most widely capable index fund managers are the ones to go with.

CONSUELO MACK:  Mark, same questions to you.  One Investment, one action we should take for a long-term diversified portfolio.

MARK CORTAZZO: I’m going to go with controlling the things that you can control. And I’ll give you three quick examples. Things like money markets. The average money market is paying four-one-hundredths of a percent. You can shop that around and get FDIC-insured money markets paying over one percent right now. So that’s 25 times the yield. On your safe money, control the thing you can control. Making sure you’re looking at where you own, what you own. So tax-inefficient investments, make sure you own those in the tax-deferred accounts; tax-efficient investments, make sure you own them outside in your taxable accounts.

And the third and most important thing is making sure that you understand what you’re paying in fees, in dollars, as a percentage and relative to your portfolio size. And are you getting a good value for that? You know, it is something that people spend a few minutes to try to save a few percentage on their auto insurance. That’s hundreds of dollars. By taking the time to look at that and having it reviewed by someone, it could be tens-of-thousands of dollars, and maybe even a six-figure difference, even on a more moderate size portfolio over time, because it’s the effect of that compounding that’s being sliced off with those higher fees.

CONSUELO MACK:  Mark Cortazzo, it’s so lovely to have you here from MACRO Consulting, and Charley Ellis, from numerous organizations, you know, author or co-author of 18 books, a new one on the way. Just great to have you on WEALTHTRACK, always.

CHARLES ELLIS: It’s a pleasure to be with you.

CONSUELO MACK:  At the conclusion of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is the essence of what Charley Ellis and Mark Cortazzo just discussed. It is: know what your investment fees are and take steps to minimize them.

Ask your financial advisor for an itemized list of the dollar amounts you are paying for all of their services, and the fees on each of your investments so you will know exactly what you are paying every year. If they won’t do it, start looking for another advisor. If you manage your own portfolio, analyze the costs yourself or pay another investment professional to do it for you. It can save you a ton of money in the long run. If you have a 401k, you are in luck. All 401k statements are now required to show the actual dollar amounts you are paying in fees.

Speaking of saving a great deal of money, during next week’s fund drive for public television we are re-running our must-see interview with social security guru Mary Beth Franklin on how to maximize your social security benefits. If you would like to watch this program again, please go to our website, It will be available as streaming video or a podcast no later than Sunday night. And that concludes this edition of WEALTHTRACK. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.

Charles Ellis & Mark Cortazzo

August 10, 2012

The Myths About Investment Management Fees

How much do you pay in investment fees every year? What is the actual dollar amount you pay to your financial advisor, let alone the mutual funds you own and the firms that have custody of your investments? How much do they really take away from your portfolio and its performance over the years? According to a ground breaking article by legendary financial consultant and WEALTHTRACK guest Charles Ellis, “investment management fees are much higher than you think.”
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August 3, 2012

Watch this Episode

Robert Kessler Transcript 8/03/12 #906

August 3, 2012

WEALTHTRACK Transcript #906- 8/03/12

CONSUELO MACK: This week on WEALTHTRACK, why rock climbing government bond investor Robert Kessler says we still haven’t seen the peak of the generational bull market rise in U.S. treasury bonds and why other investment routes are much more dangerous to your financial health! Great Investor Robert Kessler is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S.  A recent headline in the Financial Times read: “Blue-Chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest us companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”

It is a development we have talked about with many WEALTHTRACK guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe.  The so-called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”

So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, which is made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?

On the other hand, yields on U.S. treasury bonds have extended their multi-decade long decline over the last year, lifting the prices of the underlying bonds, as global investors sought their safety and liquidity. It has also helped that Federal Reserve Chairman Ben Bernanke has clearly spelled out the Fed’s intentions to keep interest rates low. And he has reiterated time and again that the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.” As PIMCO bond guru Bill Gross put it, in explaining why he is holding 35% treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”

This week’s WEALTHTRACK guest has been overweighting Uncle Sam in his portfolios for the ten years plus that I have been interviewing him. It’s been an extremely profitable run and he is sticking with it. He is Robert Kessler, founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios for institutions and high net worth individuals with a concentration in U.S. treasury debt. I began the interview by asking him about his long standing and contrarian investments in treasuries. What is he seeing that Wall Street is not?

ROBERT KESSLER:  I think Wall Street is seeing all the same things I’m seeing. We’re just really interpreting those things a little bit differently. I look at the interest rate environment that we’re in right now, and most people think that this is created by Ben Bernanke, the Central Bank, and zero is some artificial number. The fact of the matter is, zero is a number that exists all over Europe now, and, in fact, that number is negative in five, or six, or seven countries in Europe.

CONSUELO MACK:  So this is zero interest rates or negative interest rates on government debt, short-term government debt.

ROBERT KESSLER:  Short-term government. Actually, even longer term. In Switzerland, it’s minus .25.  So people who have a lot of money, and they want to park it someplace, they actually have to pay the government to put it there. Now, we haven’t seen that before. If you look at the way Wall Street’s interpretation of that is, they’ll say that that’s totally artificial. That’s not reality. And the reality really is that big money right now doesn’t want to go anyplace with it. It doesn’t matter if it’s corporate money, where they’re sitting with trillions of dollars, or individuals. What they want to do with it is make sure it’s totally safe. And money has a real value. Most people don’t look at money properly.

Money is a commodity.  Just like gold, or like grain, or corn, or anything else. To store it someplace, it costs you some money. So if you want to store it in Switzerland, they’re going to charge you a quarter of one percent. When we look at zero in the United States, to make this really interesting, and people say, “Well, where do you think interest rates really are going?” And now I really look at everyone and say, “I don’t know. But they certainly could go negative,” meaning that the whole treasury curve, which is two-year, five-year, ten-year, all of that curve could all go down to zero. And everyone thinks there’s so much out there to buy. Look at all those treasuries. Come on. We have so much debt. Someone has to support it. What actually is there is, if I don’t want to sell my treasuries and you don’t want to sell your treasuries, there aren’t that many treasuries. And that’s why rates really can go quite a bit lower.

CONSUELO MACK:   I know that you hear from other people on Wall Street. And if someone on the other side were looking at you and saying, Robert, okay, so interest rates are at zero. Short-term interest rates are at zero. Investors have other choices. Zero is not a good rate. That’s what they’re saying. It’s not a good return. Therefore, even Ben Bernanke, who is keeping short-term interest rates at zero, which is a reality, and is saying that, I’m going to keep interest rates at zero probably through 2015, if not beyond; even he is saying the reason that I’m keeping interest rates so low, one of the reasons is I want people to invest in risk assets. I want people to go and buy stocks and, you know, finance the economy, where they get a higher return. I’m going to make investing in treasuries so unattractive that I want them to buy something else, and, therefore, help the economy.

ROBERT KESSLER:  In the environment we’re in, which is a deleveraging, deflating environment, a real return on money may actually be negative, meaning that if inflation actually goes negative, one percent is a pretty good return. And the only reason all of this is happening is because there’s no demand in the marketplace. And as much as Japan tried to do something, you can’t create that demand. And that’s exactly what Ben Bernanke’s talking about. He’s saying, “If I get these rates low enough” … there was a Swedish experiment, which is interesting, when Sweden had a very difficult time, the Central banker said, “You know, we ought to think about going negative.” Imagine that. The rate overnight won’t be zero. It will be minus 50.

CONSUELO MACK:   Right.  So I pay you for the privilege of owning  a Swedish government bond.

ROBERT KESSLER:  A half of one percent. That will certainly induce everyone to go buy something else. And the answer is, when there’s no demand from the private sector, I don’t care how much money you produce, I don’t care how much you print- if the private sector doesn’t want to borrow it, you have no marketplace. We have what we call no velocity. No movement of money. So that’s the environment we’re in. And as to what an investor needs to look at, is not what the real return is on a treasury against inflation from last year, but where will it be next year. And next year looks like we’re going to be looking at, if not deflation, certainly lower prices.

CONSUELO MACK:   Let’s talk about kind of, there are different things that you’re looking at. So one of the things that Wall Street would say is that, you know, number one, inflation isn’t going to continue to go down, because, like, it never does for any length of time, and, therefore, at least in our recent experience, and all our models are predicated on the fact that we’re going to get some inflation, and with all the stimuluses the Fed is doing, central banks around the world are doing, we will get inflation. You’re saying, no, the reality is we’re in a deflationary environment, and, in fact, you know, we’re not going to get inflation for a long time. Why?

ROBERT KESSLER:  Let me give you the Japan example. The Japan example is a very good example, because we claim in this country that we would never do what Japan did.

CONSUELO MACK:   Right.  No one wants to be a Japan. That’s the blanket statement everyone makes.

ROBERT KESSLER:  We are doing exactly what Japan did. And interestingly enough, in 1997, that’s seven years after the deep recession/depression hit Japan, an administration came in, 1997, and said, we’ve got to contract the economy. We’ve got too much stimulus out here. We’ve got to tighten things up. That will make things better. The rates on the ten-year in Japan at that point were around two percent. Within a year or two they dropped to .8, and the deficit went straight up, even though everyone wanted to bring it down.

And the reason was, you can tighten everything up, but again, if there’s no demand and people perceive that prices are coming down, cash looks very good. And now we’re talking money. And money is really important, because money takes on a tremendous value in a deflating economy. If you’re a gold bug, the argument is inflate, inflate, because that’s a terrific thing to happen. All of this stimulus is going to cause inflation. And, in fact, in this kind of an economy, it doesn’t matter what stimulus you put in, because stimulus only works if someone wants to spend the money. And the fiscal side of it, which is the government side of it, right now, looks like, as we get into the fiscal cliff that people love to talk about, the fact is that will be very contractionary on the economy. So I would argue that if we get into that position, you will see rates go even further down.

CONSUELO MACK:   One of the realities that you’ve identified at Kessler Investment Advisors as well is that zero interest rates can stay zero for a long time, or go lower for a long time.

ROBERT KESSLER:  I think in this particular case, there are so many people who keep saying we’ve never seen this before. We’ve never seen this exact same thing, but we’ve seen this before. And I suspect that interest rates will stay extraordinarily low until we get out of this balance sheet problem of individuals getting rid of some of the debt. It’s 25% of homeowners are underwater. You have this huge unemployment problem, and the number that came out today, the Philadelphia Fed Index, actually had an employment number that would suggest, in this month coming up on the employment news, that employment could go negative again. Now, if you stop and think about that, the argument has been quantitative…

CONSUELO MACK:   You mean job growth could go negative.

ROBERT KESSLER:  Job growth will go negative. If you stop and think about how serious that is, we’ve had quantitative easing one, quantitative easing two, and probably something more. None of that has helped. And it’s simply because money is going no place. And the people who have it are buying whatever sovereign they feel safest in.

CONSUELO MACK:   So Robert, another reality that you have identified at Kessler Investment Advisors is that instead of what Wall Street is telling you- I’m going to make you money, and that the traditional investments that make money, like stocks, that have over the last, you know, 40 years, whatever it is, in the post-World War II period- that, in fact, that investors are saying, “No. No. No. You don’t understand. My first principle is I don’t want to lose money.”

ROBERT KESSLER:  We have an enormous number of investors leaving the stock market now and going into fixed income.  Obviously, they feel that that’s too volatile, and that slow transition is probably going to continue for some time. But the concept of an investor saying, “I don’t want to lose money,” it usually means I want to make a lot of money, but I don’t want to lose any money. And you have to be able to explain to make a lot of money you’re going to be at risk to lose a lot of money. I would suggest the big problem we all seem to have is we can’t distinguish between a savings account, your pension account, your IRA, and an investment account.

CONSUELO MACK:   And you’re saying it’s very important to differentiate between your investing and your savings. What’s the difference?

ROBERT KESSLER:  The purpose of a savings account, as we all grew up, and we saved something, is to know it will be there. So, obviously, the return isn’t important. It’s the return of the money. And so I look at a savings account or a pension account, you cannot lose there. And that’s why I’ve suggested for years that you buy a zero coupon U.S. Treasury, meaning that the treasury will pay off in a certain period of time, because you have to have that money. That’s a savings account. An investment account is, have a good time.

The odds are, these days, for the last ten years, no one has made any money in the stock market unless you happen to buy at the right time, sell at the right time, and buy… and none of us do that. We’re all random buyers, so we all make mistakes. So the average person really doesn’t distinguish between those two pockets of money, and I would suggest that’s becoming very relevant now, because suddenly, if you look at the average homeowner, let’s take the homeowner, you have a decrease of $7 trillion in the value of what they had over the last two, three, four years. $7 trillion. An enormous amount of money. And if you look at their median net worth of that same homeowner, it’s gone from $126,000, that’s the average person, down to 77.  That means they lost 39% of their money, of what they really thought they had. So all of these questions become extremely relevant if we talk reality, and I think that’s what we should be talking.

CONSUELO MACK:   The fact that rates are coming down all over the world gives fuel to the argument on the other side, and that is, I can’t tell you how many people have told me that somewhere around 60% of the companies in the S&P 500 now are offering dividend yields that are greater than the yields on the ten-year Treasury note, and this is a once-in-a-lifetime opportunity.

ROBERT KESSLER:  And they should. And they should, because everyone has done terrible with all of these companies. So they should give you some of your money back. But the best argument I can use is that these are the same companies that don’t know what to do with the cash they have, and they’re not out there buying any other companies. There are mergers going on, but they’re not spending the money. So if they’re not spending the money, what are you spending the money for? And then at the same time, there are no big dividend payers. There are no big cap stocks that are not going to be affected by a global deterioration in the economies that we’re looking at. They all will be. And if the stock market comes down, which I suspect it probably will, they’ll come down, too. What do you care if you’re getting 4% if it drops 40%? That is the risk you take. So you think, well, this is a terrific deal, because in the long term, four percent looks good. It doesn’t look that good if you go back to 2008.  You had an AT&T that was paying a very nice dividend, and it dropped 47%. I don’t think that’s what you want. And so I suspect that if you didn’t want any of the other stocks, you probably don’t want those stocks either.

And, again, I’m back to the subject, you do not want to lose money, because in an economy where prices are coming down, there’s tremendous opportunity. Everyone thinks that I’m being pessimistic about this. If you have money, and the price keeps coming down, the money gets more and more valuable. That’s why people are parking it where they think they can get it back, which ends up being in sovereign debt or good sovereign debt.

CONSUELO MACK:   So Wall Street would say this is an example of extreme pessimism, and the times of extreme pessimism are when you make the most money by buying the securities that everyone else is shunning.

ROBERT KESSLER:  But that has to be the excuse that we use, otherwise you wouldn’t buy anything from Wall Street. It’s a silly argument. We’re faced with a real serious problem in this country, as it is in Europe, but in this country, especially right now, because we have a disorganized kind of Congress, we have a situation where no one can get together on what to do, and I suspect there really is a reason for that. No one knows what to do. You can take this side, or you can take this side. It really doesn’t matter. The net result is, there are no simple solutions, and we’re certainly not going to get one, from what I can see.

And so this thing is going to linger, and the question is, do you need a crisis to begin to really try to solve this? Maybe that’s what happens. Maybe you do get a crisis. But this is not being pessimistic. I’m just telling you what’s happening. And the only reason we can make money in this market is because we really don’t care about what anyone else says. The key to this market right now is to follow whatever your own instinct is. If you don’t understand it, and it doesn’t make sense, and you can’t sell your house, and all the terrible things that we all know are happening, happen, well then, why do you want to go out and buy stocks? I mean I’m not doing this just because I want to hit the stock market. But this is a very serious period of time, and I don’t think people are treating it as serious as they should.

CONSUELO MACK:   So most investors, most individuals, in their retirement savings, have gone the traditional route, and they certainly do not own a lot of treasury securities. So what are you advocating? That they basically, you know, liquidate, pay the taxes, everything, and put them into treasuries? I mean, you know, what are our options?

ROBERT KESSLER:  I’m going to do the same thing I did last time you were kind enough to have me on the show, I think, at the end last year, and I said, go out and buy long-term 20-year, that’s a good thing to do, zero coupon U.S. Treasuries. They will yield about 280, 2.8 percent. Nothing terrible about that. In the last six months, since I’ve said that, they have returned 11%.

CONSUELO MACK:   In six months.

ROBERT KESSLER:  In six months. Better than the stock market and everything else. I will make the assumption that 280, 275 is not a terrible return. If you have this opportunity that I’m talking about, that rates actually come down, because if rates come down, a lot of people feel that 30-year, 20-year treasury will come down a point; if they come down a point, then you make 25% return. Worst-case scenario? You’re making 280. Not so terrible. That’s your retirement fund. That’s your serious money.

As far as the other money goes, I would be in this wait-and-see attitude. I’m really not trying to be pessimistic, and I know it sounds pessimistic, when I’m saying negative things, but those negative things are happening regardless of what I tell you. They’re happening in Europe. And this doesn’t even count the fact that we could have an oil disruption. We could have all the usual things that seem to be on our plate all the time. So sure, I think for a retirement fund, right now I’d be out buying all the treasuries I could get my hands on. I mean, but I think when you talk about the investment money, the money that you have to invest, I think you want to stay very, very cautious.

CONSUELO MACK:  All right. Very cautious at this point. So the One Investment for long-term diversified portfolio is?

ROBERT KESSLER:  I would say zero coupon treasury, if it’s a retirement fund. If it’s in a retirement fund, there’s absolutely– there’s no issue about time. You’re keeping it for a long period of time. But the other money that you have is money that really has to be put to use now, and you don’t want to waste it. It’s not going to be there necessarily 20 years from now. It’s money you’re going to invest in. Well, I can’t find anything to invest in. So keep it in cash. I know I’m kind of escaping by saying that, but I don’t think there’s anything wrong with cash.

CONSUELO MACK:  So, you know, you said earlier in the interview that you’re really not a pessimist, that you’re actually an optimist. So what are you optimistic about?

ROBERT KESSLER:  I think that people needed to go through this change in attitude towards how they spend money, what they think of money, and that change is taking place. There’s a realism coming into the marketplace. I think that makes for a better country, and that makes for a better people in the end. It doesn’t mean it’s easy, and it doesn’t mean this is going to be a very comfortable change. But it will probably be, as it usually is, for the better. What we don’t want to see is some serious kind of crisis that makes it worse. I think the problems in the United States are solvable, if we can get a Congress to probably do something together. There are things to do here. But you can’t have 20 million people without a job, 45 million people on food stamps, and a bunch of people without healthcare, and then say, “Well, we don’t really have any problems here, and I think we should buy some stocks.” I think that attitude is exactly the wrong attitude. I think the problem becomes you have to pick up demand, and there is no demand in our system right now, and with good reason. People are pessimistic.

CONSUELO MACK:  So what is it going to take to turn around demand?

ROBERT KESSLER:  I don’t know. I don’t know. It’s a process. And the process is this horrible deleveraging, this pay down the debt, and people have to consciously understand when you pay down the debt, you’re increasing the value, in this case, of the currency. Because remember, the currency can buy everything cheaper. The U.S. dollar is the place to be. I’m very optimistic about the dollar. I think that’s a great place. I think the treasury market looks terrific here. That is the country. In between, there are problems that have to be solved.

CONSUELO MACK:  Well said. Robert Kessler, thank you so much for joining us from Kessler Investment Advisors. And we will have you on again, you know, in a year, and see how you’ve done, as you have done extremely well over the last seven years on Wealth Track. So thanks for joining us again.

ROBERT KESSLER:  Thank you. Thank you for having me.

CONSUELO MACK:  At the conclusion of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. As we did last week, we are recommending a book for summer reading. This one is the choice of guest Robert Kessler. It’s called The Great Depression: A Diary. It’s by Benjamin Roth and it was published by his son in 2010, many years after his death. Roth’s diary is a compelling and eye opening account of the Depression seen through the eyes of an ordinary middle -class American. You will recognize the policy debates about inflation, skepticism towards big government, and worries about too much stimulus, that as Kessler says were “prevalent, recurring, and in the end, all wrong.” You can make up your own mind.

I hope you can join us next week for a shocking discussion about the cost of investment fees. According to our two guests- legendary financial consultant Charles Ellis, who is exclusive to WEALTHTRACK, and top financial advisor Mark Cortazzo- fees are much higher than you think. They’ll tell us how to fight back. If you would like to watch this program again, please go to our website, It will be available as a podcast or streaming video no later than Sunday evening. And that concludes this edition of WEALTHTRACK. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.

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