facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause

Boutique Fiduciary-Based Wealth Management


Sign up for our quarterly newsletter 


Mader & Shannon Wealth Management's independence means we are free to focus solely on the needs and objectives of our clients.

We are committed to providing value to our clients and have structured our entire organization around this concept.



Portfolio Management


We define value in portfolio management as achieving yield and growth objectives with as little risk as possible while minimizing transaction costs and taxes. Active Money Management - The goal of active money management is to protect the client from major downtrends resulting from the collapse of an overvalued market, and still allow the investor the opportunity to participate fully in the growth in value and income that the equity markets have historically provided.

Find Out More

Financial Planning


Retaining an independent financial professional is as important for planning as it is for portfolio management. Mader Shannon has no commitment to any product or service that will in any way conflict with the best interests of our clients. Our services are designed to offer objective advice and set reasonable expectations. We take the time to educate clients on suitable financial solutions, carefully exploring risk and performance expectations.

Find out More

Our Team

James W. Mader, CLU, ChFC Photo

James W. Mader, CLU, ChFC

Chairman and CEO
Read Bio

James W. Mader, CLU, ChFC

Chairman and CEO

James W. Mader is founder & President of Mader & Shannon Wealth Management, Inc., an independent asset management and financial planning firm. He has been in the financial services industry for 46 years, where he spent the first 26 years as a marketing executive with two life insurance companies. In this capacity, Jim hired, trained, and managed thousands of financial services representatives.

He received the designations of Chartered Life Underwriter and Chartered Financial Consultant from the American College of Bryn Mawr, Pennsylvania in 1977 and 1984 respectfully.

Jim is the past president of the Kansas City chapter of the Society of Financial Services Professionals He has served a 3 year term on the national board and has served for the past 5 years as chairman of their investment committee who oversees the Society’s trust fund. The Society is a more than 80 year old organization of credentialed professionals with over 11,000 members nationally. The organization is made up of financial professionals from accounting, insurance, investments, and law.

Jim is licensed in more than a dozen states for life, health, disability, and long term care insurance.

Jim has provided expert witness services for investment and insurance litigation for law firms in Kansas, Kentucky, Missouri, and Nevada.


George R. Shannon  Photo

George R. Shannon

Co-founder
Read Bio

George R. Shannon

Co-founder
Portfolio Manager 2001 - 2016

George R. Shannon attended The University of Texas at Austin on a football scholarship, where he graduated with Honors. He then was accepted and attended the UT Austin Graduate School of Business MBA program for two semesters. George left the MBA program to join the Merrill Lynch account executive training program in New York, to become a Merrill Lynch Account Executive in Houston. After a year as a stockbroker with Merrill Lynch in Houston, George applied for the Ph.D. program in economics at the University of Texas at Austin, was accepted into that Ph.D. program and took graduate coursework in Economics for two years. While in Austin he was recruited by Rotan Mosle, at that time the oldest brokerage firm in Texas, well known for expertise in the burgeoning oil and gas business in Texas. For a time George both worked as a stockbroker with Rotan Mosle in Austin and pursued his Ph.D. at the University of Texas. During that time he also provided a market report on KVET radio at 5:15 am each weekday morning. George left the Ph.D. program at the University of Texas, eventually joining E.F. Hutton, and later was recruited for management training by PaineWebber. George went through the PaineWebber Management Training program in 1986, again in New York. George has since managed brokerage offices for major brokerage firms such as PaineWebber, A.G. Edwards, and Southwest Securities, Inc.

George brings to Mader & Shannon forty years of experience in the financial markets and the brokerage industry; an excellent formal education in accounting, economics, and finance; and a proven track record of investment analysis and portfolio management. George has an analytical appreciation of value based on fundamental analysis, and believes an appreciation of the liquidity of markets, coupled with an in-depth understanding of the history of asset category performance; provide important keys to successful portfolio management.

George believes three of the most notable recent academic articles concerning reasonable expectations for future financial market performance are the contrasting views expressed by "Valuation Ratios and the Long_Run Stock Market Outlook: An Update"† by John Y. Campbell and Robert J. Shiller: "Stock Market Returns in the Long Run"† by Roger G. Ibbotson and Peng Chen: and "From Efficient Markets Theory to Behavior Finance" by Robert J. Shiller.


Bret Guillaume, CFP® Photo

Bret Guillaume, CFP®

President
Read Bio

Bret Guillaume, CFP®

President

Bret Guillaume joined Mader & Shannon as a Financial Advisor in 2004. A graduate of the University of Missouri - Kansas City, Bret holds the designation of CERTIFIED FINANCIAL PLANNER™ professional.

Prior to joining the firm Bret held the position of Trader with JPMorgan in Tampa, Florida. Prior to JPMorgan, Bret traded options as an independent Registered Representative. Before entering the financial services industry Bret spent several years as a technology consultant for Andersen Consulting and CCP Global.

Bret is Past President of the Kansas City chapter of the Society of Financial Services Professionals. The Society is a multi-disciplinary organization made up of financial professionals from accounting, insurance, investments, and law. Bret is also a member of the Financial Planning Association.


Kyle Sanders, CMT Photo

Kyle Sanders, CMT

Chief Investment Strategist, Portfolio Manager
Read Bio

Kyle Sanders, CMT

Chief Investment Strategist, Portfolio Manager

Since joining Mader Shannon in September of 2011, Kyle Sanders has worked in the capacity of Assistant Portfolio Manager, Investment Strategist and Equity Research Analyst.  He formed a keen interest in financial markets at a very young age and has fully committed himself to the portfolio management profession. 

In his time with Mader Shannon, Kyle has gained an appreciation for not just the mechanics behind the implementation of the Mader & Shannon Total Return Strategy, but also the client-centric approach that sets us apart. As Chief Investment Strategist and Portfolio Manager, Kyle is dedicated to advancing Mader Shannon’s mission of positive client outcomes and excellent risk management.

Prior to joining Mader Shannon, Kyle held positions in retail banking and commercial mortgaged backed security (CMBS) servicing.  He attended The University of Missouri-Kansas City where he attained dual degrees; Bachelor of Science - Accounting and Bachelor of Business Administration - Finance. During his time at UMKC, Kyle served in both leadership and liaison roles in various student and alumni organizations.

Kyle was awarded the Chartered Market Technician (CMT) designation, and he is continuing his education by actively pursuing the Chartered Financial Analyst (CFA) designation.  Kyle is registered with the Securities and Exchange Commission as an Investment Advisor Representative.

Austin Harrison, CFA, CMT Photo

Austin Harrison, CFA, CMT

Investment Strategist, Sr. Equity Research Analyst
Read Bio

Austin Harrison, CFA, CMT

Investment Strategist, Senior Equity Research Analyst

Austin Harrison began his professional career at Mader & Shannon in 2015 and now serves in the capacity of Investment Strategist and Senior Equity Research Analyst. As a member of the portfolio management team, his role includes the research and analysis of publicly traded securities and their related economic trends, from both fundamental and technical perspectives. He also performs various account management functions within the firm.

Austin graduated with honors from Benedictine College with degrees in Finance and Accounting. He is a Chartered Financial Analyst® (CFA) charterholder, a globally recognized, graduate-level credential that provides the strongest foundation in advanced investment, analysis, and real-world portfolio management skills. Austin is also a Chartered Market Technician® (CMT) charterholder. The CMT designation demonstrates mastery of a core body of knowledge of investment risk in portfolio management and is the preeminent designation for practitioners of technical analysis worldwide. He is also registered with the SEC as an Investment Adviser Representative

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. CMT® and Chartered Market Technician® are registered trademarks owned by CMT Institute.


Taylor Graham, CFP® Photo

Taylor Graham, CFP®

Advisor, Client Services Coordinator
Read Bio

Taylor Graham,CFP®

Advisor, Client Services Coordinator

Taylor Graham joined Mader & Shannon as Client Services Coordinator in April 2016. She graduated from the University of Kansas with a Bachelor of Science degree in Business Administration. Taylor is a Series 65 Investment Advisor Representative, an independent life insurance agent, and a CERTIFIED FINANCIAL PLANNER™ professional. She is also a member of the Financial Planning Association and the Society of Financial Service Professionals.

As an advisor and financial planner, Taylor oversees client relationships for Mader & Shannon.  Expertly guiding families and organizations through their engagements with the firm, she continuously delivers upon our commitment to serving the best interests of our clients. 


Tyler Zimmerman Photo

Tyler Zimmerman

Equity Research Assistant, Portfolio Administrator
Read Bio

Tyler Zimmerman

Equity Research Assistant, Portfolio Administrator

Tyler joined Mader Shannon in October of 2019 while in his final year at the University of Missouri - Kansas City. In his time at UMKC, Tyler served on the School of Management Dean's Advisory Board for two years. He has since graduated with a Bachelor of Science degree in Accounting.

While in school, Tyler also held positions at various finance and accounting firms that included wealth management and bookkeeping responsibilities.

Tyler's role at Mader Shannon includes conducting broad-based market research, securities analysis, client portfolio administration, generating reports, and helping maintain the firm's proprietary data. Tyler is registered with the Securities and Exchange Commission as an Investment Advisor Representative.

Portfolio Management

At Kansas City's Mader & Shannon we define value in portfolio management as achieving yield and growth objectives with as little risk as possible while minimizing transaction costs and taxes. 

The goal of active portfolio management is to protect the client from major downtrends resulting from the collapse of an overvalued market, and still allow the investor the opportunity to participate fully in the growth in value and income that the equity markets have historically provided.

Active Money Management

History demonstrates that although stock prices move erratically on an hourly, daily, or weekly basis, market averages experience long term trends with respect to intrinsic value. Understanding the state of the markets with respect to this persistent trend of overvaluation or undervaluation is the primary key to implementing an effective active management investment strategy. 

The basic strategy of active money management is to reduce the risk associated with bull markets during periods of overvaluation, and to be opportunistic during bear markets that persist during periods of undervaluation. This combination enables clients to fully participate in the long-term capital growth the markets have historically provided. 

Active portfolio management does not conflict with the concepts of long term investing. Most of our clients are in fact long term investors dependent on income and growth from their portfolios. 

Take a tour of our Trading Room



Mader & Shannon Offers 529 College Savings Plan Management Through TDAmeritrade

 Mader & Shannon manages 529 College Savings plans on the TDAmeritrade platform. The plans are sponsored by the State of Nebraska and Union Bank & Trust Company serves as the Program Manager.

The benefits for our clients are as follows:

  • Mader & Shannon can continuously monitor the plans and make allocation changes periodically through primarily Vanguard funds (currently the IRS restricts changes to twice a year).
  • Tax parity laws in some states (including Missouri and Kansas) make the state tax deductions available even though the plan is in Nebraska.
  • Eligibility for tax-free withdrawals for qualified higher-education expenses applies to any nationally accredited school, not just those in Nebraska.

 

Contact Bret Guillaume at 816.751.0575 or bret@madershannon.com to open an account or transfer an existing 529 balance.
For more information on College Savings Plans visit www.collegesavings.org

Philosophy

At Mader and Shannon, we believe that an effectively implemented active management strategy can help clients achieve reliable upside participation while also providing excellent downside protection.  By dampening the volatile swings in the market, our strategy seeks to provide both a sustainable long-term rate of return as well as peace of mind to our clients.


Strategy & Daily Routine

We take a top-down approach to asset allocation and a bottom-up approach to security selection. We monitor global economic indicators like GDP, employment, wage growth and a host of survey data to determine overall economic health.  Interest rates, currency dynamics, and inflation are direct inputs to the valuation of markets, and must be incorporated to a comprehensive global evaluation. Finally, an appraisal of the fundamental health of broad indices like the S&P 500 aids in our assessment about the overvalued or undervalued state of markets.

From that baseline, we select securities that we believe provide the best risk-reward opportunity in the current economic environment. We seek to invest in companies that have good fundamental prospects and are, in our opinion, undervalued. Company-level research centers around earnings and revenue growth, valuation multiples, cash flows, and balance sheet health. Our investment universe consists only of highly liquid, exchange-traded securities.

Because we are an active manager, our outlook and positioning are flexible and dynamic. The only responsible way to make investment decisions is to base them on the most up-to-date and accurate information available. Our task each day is to gather market-related news and data, use it to develop an investment thesis, and then decide whether our current portfolio is ideally suited to perform in a given market environment. Such a task requires discipline, and over the years we’ve developed a daily routine that helps us accumulate and digest an unrelenting supply of information.

The Kansas City Trading Room opens an hour and a half before the US exchanges each morning. By that time, we are already up to date on the developments in Asian markets overnight, how the European markets are trading, and where the U.S. indices are expected to open.

Our first task on site is to download the previous day’s transaction and position data from our custodian. Once imported into our portfolio management accounting platform, we can generate performance and view holdings at the firm, strategy, and client levels.  The integration of the accounting platform with our Bloomberg and Level-2 quoting systems allows us to aggregate our discretionary assets and constantly monitor them on a tick-by-tick basis, each and every day.

By 8:00, our portfolio management team has scanned our various research platforms for developments on current or prospective holdings.  We then discuss our findings and develop our expectations for the coming trading session. If any team member believes a portfolio change is needed, that too is discussed, and before the opening bell rings, we have a plan for the day. From the opening bell, until the market closes at 3:00, the Trading Room constantly monitors holdings and the markets, regularly meeting throughout the day to discuss ideas and potential adjustments. 

The Mader & Shannon trading room operation is an intense environment staffed by dedicated professionals who relish the daily opportunity to help clients achieve their financial goals. 

As a wholly transparent money manager, we regularly host current and prospective clients in the trading room for market reviews and strategy orientations.

Wealth Management

Simply put, wealth management is the process of a team of experts providing the highest quality of financial products and services to improve the financial health of client.  In other words, it is the delivery of a full range of services tailored to solve for a specific financial objective or goal.

Wealth management incorporates a full suite of services that include financial planning, portfolio management, tax services, retirement planning, and estate planning. This provides a holistic approach allowing each scenario to be analyzed from every angle to achieve a successful outcome.

Typically, a wealth manager acts in a consultative manner and is focused solely on the client’s behalf. A wealth manager should be a fiduciary, working only with the client’s best interest in mind. Upholding the standard of a fiduciary in the financial service industry must include putting a clients’ interests before your own, acting in good faith and providing all relevant facts to clients, remaining free of conflicts of interest, and ensuring the accuracy of advice given.

Accomplished wealth managers should also hold credentials within the industry such as Certified Financial Planner (CFP®), Chartered Life Underwriter (CLU®), and Charter Financial Analyst (CFA®). The criteria that one must meet to hold these designations demonstrates not only their competency but their commitment in that respective field.

Here at Mader Shannon, we believe it is crucial to understand our clients and what is important to them. The services we provide are structured around our client’s investment objectives and tolerance for risk. We take the time to not only identify but understand our client’s aspirations. We then analyze the information and engage other professionals when appropriate to develop suitable recommendations. Our work is far more comprehensive than simply providing investment advice.

Our services are designed to offer objective advice and set reasonable expectations. We educate our clients on the suitability of our financial solutions, carefully exploring risk and performance expectations.

Typically, when a wealth manager acts in a consultative manner and is focused solely on the client’s behalf they are considered a fiduciary financial advisor. A fiduciary is a person or legal entity that has the power and responsibility of acting for another in situations requiring total trust, good faith and honesty.

Acting as a fiduciary has a very important meaning within the financial services industry. Much has been debated and written as the industry struggles with a self-imposed standard of care. It is often assumed that when choosing a financial advisor, they are all required to do what’s in the client’s best interest, but that is not the case. There are those that are held to a higher standard, and those that are not.

A fiduciary financial advisor is an investment professional who is licensed with the SEC or a state regulator and who are legally required to put their clients’ interests before their own. Having a fiduciary duty to your client should eliminate conflicts of interest and theoretically make a fiduciary’s advice more trustworthy. It is Mader Shannon’s obligation to uphold this standard as an SEC registered RIA (Registered Investment Advisor).

In addition to regulatory bodies requiring a higher standard of care, all the principals at Mader Shannon hold designations that, within their Code of Ethics, require that they adhere to or go beyond the fiduciary standard of care. Fiduciary financial advisor’s often hold credentials within the industry such as Certified Financial Planner (CFP®), Chartered Life Underwriter (CLU®), and Charter Financial Analyst (CFA®) all in which require that professionals act within this standard.

The luxury of being able to maintain our independence translates into a better relationship with our clients. Being able to think and act strategically in the interest of clients and not beholden to a parent company allows Mader Shannon to offer a more fiduciary centric service. Being a fiduciary financial advisor affords our clients a higher level of transparency in the way we provide our service, and perhaps more importantly, in how we are compensated for our service.

The following articles provide additional information on fiduciary standards within the industry as well as questions to ask and things to look for when choosing a financial advisor.

        From U.S. News and World Report:

https://money.usnews.com/investing/investing-101/articles/what-is-a-fiduciary-financial-advisor-a-guide-to-the-fiduciary-duty

        From CNBC:

https://www.cnbc.com/2015/06/16/is-your-advisor-a-fiduciary-chances-are-you-have-no-idea.html

 

Retaining an independent financial professional is as important for planning as it is for asset management. Mader Shannon has no commitment to any product or service that will in any way conflict with the best interests of our clients.

Our services are designed to offer objective advice and set reasonable expectations. We take the time to educate clients on suitable financial solutions, carefully exploring risk and performance expectations

Our Planning Services

We provide the following services for helping clients achieve their financial goals:

  • Comprehensive Financial Planning
  • Asset Management
  • Complete Portfolio Analysis/Review
  • Pension Plans
  • Company 401k Plans
  • 529 and Education IRAs
  • Qualified Plan Rollovers
  • Retirement Cash Flow Planning and Projections

 

Society of Financial Service Professionals Member

Financial Planning Association (FPA) affiliation


Why an Independent Agent?

There are two types of licensed agents in the life and health insurance industry: a “captive agent” representing one company and an “independent agent” representing multiple companies. Independent agents are also commonly referred to as “brokers”.   Captive agents are limited to the products offered by their company while independent agents can select from countless products to fit a clients needs. Obviously, an independent agent is most often going to offer more suitable solutions.  

In addition to a professionals independent status, it is important the representive be licensed to offer advice on securities, tax planning, estate planning, to tailor the most suitable solutions.   This becomes important for two reasons. Any good financial plan starts with a careful assessment of a person’s objectives, income, assets, and potential inheritance. Unfortunately most insurance agents are not licensed, trained, or qualified to do financial planning, instead they are trained to be transaction driven for commissions rather than driven by the customer's best interest.   Sales activity, with little regard for suitability and actual customer objectives, is counter productive and gives the industry a bad name.

A true independent financial planner must be licensed and have advanced training in many disciplines. Unfortunately, most insurance agents/financial advisors are only licensed to sell insurance, annuities, and mutual funds. Such limitation would make comprehensive planning difficult and expensive compared to a more comprehensive approach by an independent financial planner who works in a fiduciary capacity, or solely in the clients best interest. Such a professional is focused on plan design, researching suitable solutions, and performance, versus being product and transaction driven.

Mader & Shannon Wealth Management has always worked as a fiduciary putting our client’s needs first at all times.

Life Insurance As An Asset and/or Retirement Supplement?

In the current environment of low interest rates and bond yields one might ask, “How about life insurance as safe money investment?” For 99% of the 800 plus insurance companies a reliable investment return is not likely. However, a few top rated companies have produced internal rates of return (IRR) in the plus 2% range ten years out and plus 3% range 20 years out.

These returns won’t compete with the S&P 500, but keep in mind, there is a death benefit value permanently attached to this investment. Therefore, one can own a life insurance contract that is an asset as a conservative investment and at the same time provide a significant death benefit. In addition, properly managed, this asset can work favorably as a supplement to retirement.  

To sustain a suitable outcome using this strategy working with a professional independent agent is a necessity for a number of reasons. Insurance policies are long term, complex legal contracts with both guaranteed and non-guaranteed provisions which you would want fully disclosed and understood. You must pick an insurance company that has the financial strength and history of supporting a contract of this type. In addition, you want to thoroughly understand the taxation of life insurance proceeds since the are different from other investments.  

Like most successful investments, this investment requires management by a knowledgeable owner and a qualified professional. In this case, an insurance professional and a qualified investment advisor should be utilized for the life of the contract. To summarize, a well designed and managed life insurance contract, issued by a top rated company, can serve as key building block to a sound financial plan.

Types of Insurance

Term Insurance vs. Permanent

There are two basic forms of life insurance, term and permanent policies. Each one breaks down into subcategories based on different options designed to meet the needs of the consumer.

Term Life Insurance

As the name implies, term life insurance is issued for a specific period of time from one year to age 100. The purpose of term insurance is to cover a need within the issue period such as protecting an income stream while raising a family, or to pay off a mortgage or business debt in the event of an untimely death. Some term insurance policies offer a guaranteed conversion feature. This policy provision guarantees that the policy owner can convert the policy to a permanent insurance policy at the same underwriting status as assigned to the term policy. Consequently, term insurance can be utilized to fulfill a current insurance need at a low cost until the need for insurance diminishes or cash flow is available for permanent insurance.

Permanent Life Insurance

Permanent life insurance is designed and priced to pay a death benefit or be surrendered for the cash value when the insurance is no longer needed. There are three types of permanent life insurance: whole life, universal, and variable universal life.

Whole Life is the oldest of these policy types. It features guaranteed minimum premiums, guaranteed minimum interest rates credited to the cash value, and guaranteed death benefits payable at death. Whole life issued by a top rated company can still be a very good value even though it is not as flexible as the more recent policy types.

Universal Life

This policy type is a product of the computer age and is often referred to as Flexible Premium Adjustable Life. Due to the capacity of computers to conduct and maintain countless calculations, actuaries are able to expose the moving parts in a life insurance policy. Interest crediting rates, mortality costs, even expenses and premium taxes can be illustrated with ease. This allows for flexible premiums and face amounts, along with interest rates that reflect current portfolio yields. For the first time, policies could be designed to better fit changes in insurance needs and family budgets.

Universal life policies illustrate two interest rates, the “guaranteed minimum” and the “current” rate. The “minimum” is a contract guarantee while the “current” is credited as a product of the insurance company’s return on assets. The current rate is the basis for the “projected benefit” column in the illustration. It is important to understand that the cash values of the whole life and universal policies are invested as a general asset of the insurance company until surrendered or paid as a death benefit, therefore the financial strength of the company is very impotant.

Today the most popular feature of universal life is the guaranteed death benefit feature. Although this feature is only available from a handful of the strongest companies, it provides the lowest cost guaranteed benefit ever offered in a permanent life insurance policy. In addition, these guarantees can be structured for varying life expectancies.

Variable Life and Variable Universal Life

Variable policy cash values are not an asset of the insurance company and are managed as a separate asset in select funds much the same as a 401(k) portfolio is self managed. Although the insurance company is the custodian of the funds, the policy values are segregated from the general assets of the company and not subject to their creditors in the event of insolvency.

There is a critical difference however from managing a 401(k) allocation versus a variable life allocation. Variable Life policies have significantly higher expenses due to monthly insurance costs. As a general rule, monthly expenses of 2% to 4% or more are charged for insurance and administration costs. Consequently, a 10% return for 401(k) allocation could net one-half that in a VUL policy with a similar allocation. As a result, asset management is more difficult with variable policies than a typical 401(k) or an IRA. We recommend two rules of thumb for successful VUL ownership:

First, over fund the policy in the early years to maximize tax free growth inside the policy. Second, manage the portfolio as a sophisticated investor or retain a professional asset manager to assist you.

The obvious benefit of variable universal life is that assets can be grown in a most favorable tax environment, which, if successful, can reduce long term insurance costs or grow the tax free death benefit to larger amount than the original amount. However, there are no guarantees and the margin for investment failure is narrow. One must weigh the risk of investment results in variable life policy against the guarantees offered by competitive universal life policies.

How Much Insurance Do I Really Need?

In the vast array of information regarding life insurance there seems to be no one consistent way of determining how much you need. We believe client's should take part in determining what's necessary and understand the process rather than rely on internet 'calculators'. The following article was written by Brian P. Daley CLU. It was published in the Society of Financial Service Professionals' Life, Health & Disability newsletter, of which Mr. Daley is the editor.

Four Simple Steps

Step One

Determine the amount of annual after-tax income your survivors will require to maintain their current standard of living if you were to die today.

Step Two

Subtract from that amount the annual after-tax income earned by your surviving spouse if your spouse plans to work outside of the home if you were to die today. The difference is the family's annual shortfall.

Step Three

Divide the family's annual shortfall by 5 percent, as we assume that over the long term your survivors will be able to earn somewhere around 5 percent net after income taxes, transaction costs, and management fees on whatever cash they have available for investment after your death. (One may select 3 percent, 4 percent, or even 7 percent for that matter, but 5 percent is generally fair).

The resulting figure is the approximate amount of cash required, from whatever sources, at the time of your death to provide sufficient annual income without invading the principal until the eldest child is ready to begin college.

Step Four

Adjust this amount to reflect your unique and specific circumstances.

For example:

Will the surviving spouse's career plans or income needs change significantly following your death?

Will your spouse be receiving any imminent inheritance or income from elderly parents or from another source?

Are the children's education costs already fully funded, or are they beyond school age? Is there a special needs child who will require lifetime care?

What is the likelihood and what are the probable financial consequences of remarriage?

How long will it be until the surviving spouse will have access to tax-qualified monies such as 401(k) assets?

Such factors can increase or decrease survivor's dependency upon income from the estate and, therefore, are appropriate for you to consider when estimating the amount of coverage required by your survivors.

An Example: Assume a survivor will require $100,000 of annual after-tax income and that the spouse does not work outside the home. Dividing $100,000 by 5% equals $2 million. Thus a principal of $2 million would be required to generate uninterrupted annual after-tax income of $100,000. Depending upon your age and circumstances, the principal might be comprised of qualified and/or non-qualified investments, partnership capital, trust funds, and any current group or personal life insurance proceeds. The difference, if any, between the $2 million and the total of these other monies is the amount that may be necessary to make up through the purchase of new individual life insurance.

Portfolio Management Newsletters

4th Quarter Client Newsletter

Clients and Friends of Mader Shannon,

After a grueling 2022, the prospect of a fresh start is an opportunity for a glass-half-full moment. In this newsletter, we'll briefly recap what worked and what didn’t in 2022. Then we’ll spend the heft of the newsletter providing a breath of fresh air, economically speaking.

Last year's defining characteristic for the markets was the dramatic decline in bond prices. By the close of the calendar year, the Bloomberg US Aggregate Bond Index (the standard for defining ‘the bond market’) posted its worst performance in its 47-year history, losing -13.01%. Investment-grade corporate bonds posted a -20.44% return. The havens often used to protect investors paradoxically declined alongside in near equal magnitude to their risky asset-class peers.

The carnage in bond land reverberated through equity markets, claiming the highest growth and most expensive stocks as their primary victim. The Nasdaq 100, typically the benchmark used to define those types of ‘growth’ stocks, fell -32.97%, while the more diversely constituted S&P 500 fell only -19.44%. International stocks produced similar declines, although they ended the year with impressive relative outperformance.

US Dollars, gold, energy, and a few other commodities were the only assets that made it out unblemished in 2022. Pockets of stocks in sectors like healthcare and consumer staples produced gains in 2022.

We say good riddance to 2022.

The tough years are the reason why we’ve developed the strategies we offer. We feel fortunate to have avoided much of the year's widespread destruction.

We’re always here to discuss our outlook, strategy, and positioning whenever you’d like. Please do not hesitate to set something up.

Best of luck in the new year,

- Kyle and the Portfolio Management Team


What Could Go Right?

Negative scenarios are simple to conjure and can be so logically captivating that they claim the entirety of our focus. It's not always our fault for falling victim to their spell. Risk aversion is an evolutionary skill. After all, if our ancestors tempted fate by foraging too close to a bear den… they became dinner.

Financial markets push our paleolithic brains down that same path – to survive is to understand and respect risk.

That said, I've never been more confident that our readership is acutely aware of where things can go wrong. So if you feel pessimistic about the state of markets and maybe the state of the world, take comfort in knowing that you have plenty of company.

When sentiment gets as extreme as it has become, it's worth assessing the opposite view. Even if you’re convinced all hope is lost, let’s play the game 'what could go right?'

Before jumping into the details, let’s review some readily agreeable, overly simplified facts about where we are in the cycle. Listed roughly in chronological order:

  • Inflation is too high,
  • In response, the Federal Reserve and other central banks are tightening monetary policy by raising interest rates,
  • Interest rates have reached levels not seen since the mid-2000s/1990s,
  • Economists expect high-interest rates to eventually weigh on economic growth,
  • Slower economic growth means businesses will be less willing/able to raise wages or maintain current staffing,
  • Stagnant wage growth and rising unemployment will slow consumer spending, solving inflation. 
  • - OR -
  • The threat of such a dire economic outcome will cause you, the informed consumer, to cease or slow discretionary spending, solving inflation. 

It's not hard to see why pessimism rules the day. In the simplest terms, central banks can curtail economic growth with their words and actions. And for the past 8+ months, they've been stating in no uncertain terms that inflation is unacceptably high, and they must act.

One critique of the timeline above is that maybe wage growth isn’t what’s driving inflation. That line of rebuttal would probably include a discussion of supply chain chaos, goods/services demand differentials, etc. But that time has passed, and the Federal Reserve no longer has time to care about transitory/lingering pandemic relationships. To maintain credibility, they think they must stay at a restrictive policy rate for the foreseeable future.  

Let's turn to the data and see if we can apply any 'yeah, but' optimism to how the current economic dilemma translates. It only makes sense that we start with inflation.

To measure the inflation rate, we can relate the current prices to one month ago or one year ago. Or we can use survey data to tell us how suppliers and consumers feel about future prices.

Inflation related to specific types of goods and services has been an excellent way to gauge where the most significant demand/shortest supply has been during the pandemic. The gyrations have been dramatic.


Prices for a basket of goods in November 2022 rose 5.9% versus November 2021; services prices rose 8.9% over the same period. There is zero room for debate that both year-over-year readings are unacceptably high relative to central bank targets.

On the other, more positive hand, why should we be hyper-focused on year-over-year inflation?

If a student gets straight A's this semester, would you still yell about their failing grades from November 2021?


The annualized trajectory of monthly and quarterly inflation data is nearly at central bank objectives, and upcoming Consumer Price Index data is expected to begin posting negative month-over-month readings. So, our lackluster student from a year ago might be well on their way to the top of the class.

The most frightening prospect for a central bank is that inflation expectations might become entrenched. Once consumers and producers expect inflation to be high and stay high, it tends to do just that (see the 1970s).

Consumer survey data do not indicate inflation expectations have become unanchored from Federal Reserve's targets. Regional surveys of business leaders also show expectations that prices will continue to fall.


That’s good news!

The first 11 months of the Federal Reserve tightening cycle that began in 2022 have been the fastest on record. Hikes at every meeting of the year took overnight interest rates from 0.25% to 4.5%. They’re likely on their way to 5%-5.5% this year.

Relative to all other restrictive policy cycles, the 2022 iteration stands out in speed but not magnitude. The experiences of 1972 and 1976 remain potential nightmare scenarios; luckily, inflation data does not look like it did back then.

 

Will a 5.5% federal funds rate kill the economy? We'd guess probably not; It's about average. Yields on longer-term government debt have also remained below long-term average levels. Larger debt loads worldwide will make these 'normal' interest rates more burdensome, but that's unlikely to be a problem in the next few years.

Spending money on higher interest expenses isn't very much fun, especially if you're accustomed to the lowest rates in the history of man. But the marginal difference between zero and a less-than-average level of interest isn't likely enough to break the back of many businesses or consumers.

In the past, we've felt that somewhere between 4% and 6% on intermediate-term US treasury bonds is likely where things get more difficult economically and for markets. Interestingly, that's about where rates peaked in early October; since then, markets have found a more resilient temperament.



The negative correlation between 2yr interest rates and the S&P 500 remains as strong as ever. It might be a new year, but the relationships of 2022 are holding firm in the first weeks of 2023. Asset allocators will be wary of another year of falling stocks and bonds; traders will rejoice.

Despite overwhelmingly negative earnings outlooks from the strategist community, bottom-up earnings are currently slated to grow more than 4% in 2023. If estimates are revised lower throughout the year at a typical rate, we should expect S&P 500 operating earnings will be roughly unchanged from 2022, at around $219/share.

 

Index-level earnings are tough for us to put a positive spin on. The inflationary impulse of 2021/2022 allowed companies to aggressively raise prices, while fiscal stimulus and a capital spending boom drove revenues. Those broad-based catalysts are receding, so a stagnant year of corporate earnings is the most favorable outcome we can champion. However, don’t forget that profits have compounded at a whopping +14% per year since the pandemic's onset.

Forecasting markets one year out is a notoriously tricky task that routinely makes intelligent people look like fools. Still, come January every year, strategists, asset managers, and analysts put pen to paper on their predictions.

Our highest probability prediction for 2023 is the same as it was it 2022 - keeping a close eye on inflation will be the most effective way to not lose your head.

As of 12/31/22, the S&P 500 would need to rally more than 24% to regain its previous all-time high of 4793. Conversely, a fall of 9.1% would result in a retest of the intraday low made on 10/13/2022. If we stay between the high and low of 2022 and (optimistically) assume $219/share of 2023 earnings, we’d experience a price-to-earnings ratio of between 16x and 21x.

Neither of those is a particularly cheap valuation multiple. The S&P 500 has only sustained a 20x multiple in two periods: one was the Dot Com Bubble of the late 1990s, and the other was during the stimulus-induced frenzy two years ago. Justifying a 20x multiple is going to be very difficult. So. What can we expect?

Remember, we’re being optimistic… Here are a few market scenarios for the year, two are favorable, and one isn’t.


  • Door number 1: Back to Normal -The drivers of inflation turn out to have been transitory after all. The Fed realizes they’ve won their war with inflation and pauses rate hikes before having inflicted too much damage on the global economy. Stock and bond markets anticipate a return to the stable growth and low-interest rate regime that precipitated the 2010-2019 bull market. The roaring ‘20s have a belated beginning, and a new secular bull begins. S&P 500 sets new all-time highs in 2023.
  • Door number 2: Consolidate and Confound - Inflation continues to fade, but not quickly enough to keep the Fed from continuing its march towards more restrictive policies. The cumulative effect of their tightening causes sluggish growth and a shallow recession. Investors lack confidence in stocks throughout the year as fixed income offers a ‘good enough’ yield to warrant haven demand. Despite investor gloom, no concerted selling pressure materializes. S&P 500 meanders in the trading range from 2022: much like the consolidations in 2011/12, 2015/16, and 2018/19
  • Door number 3: Optimism is Pointless – At the end of the newsletter, you’ll find a table that details the economic and market declines experienced in prior recessions/bear markets. It’s a choose your own negative outcome adventure. But as you do, keep in mind that the S&P 500 already experienced a -26% drawdown in 2022.  

Whatever your outlook for the next 12 months, buckle up; it’s likely to be a wild ride. 


Recession Watch – From Great to Good… Now what? 

In September of 2021, we wondered if going from ‘great to good’ had to be ‘all bad.’ What might happen when the stimulus-fueled economic boom receded? Would returning to average, real-world-driven economic growth feel like a recession? Even in the face of what would have been viewed as normal growth five years ago?

Eighteen months later, we can confidently say that yes – by all measures, people feel like the US economy is or has been contracting. That’s interesting since at no point since the pandemic shutdown has the US economy posted negative year-over-year economic growth. Even more interesting, unemployment in the United States is at a 50-year low, and the US Economy likely grew real GDP by nearly 4% in the 4th quarter!

Yet here we are, on the cusp of the most anticipated recession of all time.

Forty-three percent of economists see a recession coming in the next 12 months. The highest ever.


Market-based measures like inverted yield curves are among the few indicators that have predicted every recession, though their use as a recession timing tool has been less than stellar. Either way, nearly the entire front of the US yield curve is currently inverted.

Yield Curve

A composite of leading economic indicators has been used to predict the economy's direction accurately. As you probably guessed, the index is signaling contraction (blue).

Surveys of business managers have also had some predictive value. Again, below 50 signals contraction. And they’re below 50.

Once people lose their jobs and collect unemployment for an extended time, you can be pretty sure the economy is in contraction. While the absolute number of people collecting unemployment insurance remains quite low, the recent increase has reached a magnitude that has always signaled a recession. Historically, the labor market doesn’t move in small increments – things are always getting much better or much worse.


Flashing red lights for an incoming economic contraction are found all the way down the flag pole: Economist predictions, fixed-income markets, a composite of leading economic indicators, business manager sentiment, and rising unemployment claims. It’s truly an unprecedented setup.

It’s rare in financial markets/economics that all indications point to one outcome. When it happens, market participants tend to take the warning skeptically; many folks will even take the opposite side of the signal entirely. Maybe in some cases, it’s arrogant self-confidence. But more often than not, it’s because preparations are already underway to deal with that potential outcome. Knowing something scary is on the way can be half the battle.

In this case, the drawn-out always-right-around-the-corner recession may have allowed business leaders time to plan for slower growth. While firing staff and cutting expansion projects could lead to a self-fulfilling economic slowdown, fewer businesses caught off guard by the slowdown should help offset the risk of a more protracted decline.

It’s also worth considering the nature of the industry-specific booms and busts over the past three years. Deep contractions in one industry tended to coincide with massive expansions in others. Historically, recessions don’t work that way.

Perhaps this unique way of having an economic slowdown will stave off a textbook broad-based slowdown in economic activity. It wouldn’t be the craziest thing that’s happened in the past three years.

The Lifting Fog of COVID:

  • Initial health-related shutdowns (3/2020-7/2021) – Reopened.
  • Urge to buy a peloton, make sourdough, and watch Tiger King (3/2020-4/2020) – Over, hopefully.
  • Sharpest and fastest recession/recovery in US history (3/2020 – 4/2020) – Ancient history.
  • Stimulus payments, PPP, and expanded unemployment benefits (3/2020-9/2021) – Spent, mostly.
  • Port congestion from the surge of goods demand (6/2020-9/2022) – Ports open, costs normalized.           
  • China lockdowns and resulting supply chain issues (3/2020 – 10/2022) – Reopened.
  • Imminent Global Recession (9/2021 - ???) – Pending 


What if indications of an unavoidable deep recession are simply the final pandemic distortions playing out? Could the last traces of fog lift off the road to reveal the world we knew before?

An optimist might say maybe.

Conclusion

Thank you for taking the time to review our 4th quarter newsletter. We hope we were able to convincingly convey some positive perspectives on markets and the economic outlook. Optimism doesn’t solve everything, but it feels like an excellent place to start the year.

We expect the coming year could be just as challenging as 2022. And we’re prepared to continue making good on our risk management mandate(s).

As always, if you’d like to continue the conversation, please let us know.

Resources

Contact

Mader & Shannon Wealth Management is located just East of the Country Club Plaza.

Address

4717 Grand Ave. Ste 800, Kansas City, MO 64112, USA

Phone

1.800.838.9988 / 816.751.0585

Fax

816.343-5997

Email

contacts@madershannon.com

Client Relationship Summary