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
Read Bio

Tyler Zimmerman

Equity Research Assistant

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

Third Quarter Market Update


The harsh market environment of 2022 continues to challenge us all. Most financial commentary this year naturally has primarily bad news to share. We won’t break with that trend at the outset of this newsletter, but we try to include a few glimmers of hope in our task to deliver context.

Stock market declines typically steal the front-page news coverage, and why shouldn’t they? The S&P 500 fell -24.77% through the end of the third quarter, and growth-oriented and international stocks declined more than -30%. Historically speaking, that’s a rough year, though still a far cry from other bear markets in recent history.

In our opinion, the main story lies not in the challenging year for stocks but rather in the unparalleled decline in bond markets. As measured by Bloomberg, the aggregate US bond market declined -14.62%, and corporate bonds fell -18.72% through September 30th. Those returns for typically revered ‘safe’ assets have never been seen before. Through the end of the third quarter, the vaunted Bloomberg 60/40 stock/bond portfolio was down -20.93%.

Throughout the year, we’ve held substantial positions in cash and gold. By doing so, we’ve managed to preserve capital and put portfolios in a position to capitalize on the next phase of this bear market.

We understand that this economic/political/geopolitical backdrop can be nerve-wracking. Please let us know if you would like to schedule a more in-depth review of our strategy and outlook. We feel that our approach is uniquely suited in times like this to preserve assets and peace of mind.

Intermarket Dynamics

To comprehend past periods of market stress, you’d often have to understand a wide range of acronyms or convoluted economic concepts. The more notable have been: systematic trading, stock insurance, C/R-MBS, synthetic CDOs, investment trusts, balance of payments crises, sovereign defaults, irrational exuberance, etc.

This episode of market instability, on the other hand, is very straightforward. The equation goes something like this: HIGH AND RISING INFLATION = HIGHER INTEREST RATES = SLOWER ECONOMIC GROWTH = FALLING STOCKS (AND BONDS) = FINANCIAL CALAMITY (SOMETIMES).

The inverse relationship between interest rates and economic growth/stock prices is foundational to modern finance. Yet after a decade of interest rates near zero, market participants had become complacent.

Let’s start our review with the trajectory of interest rates over the past 50 years. The chart below represents the borrowing costs for the US Treasury when they borrow money for a 10-year term.

Higher borrowing costs make businesses less efficient or restrict their ability to expand, and they also offer investors an alternative to risky assets. Both the level and rate of ascent/descent matter. A 10-year treasury yield of 3.9% is not inherently negative or positive – it’s effectively the average long-term yield. It's the pace of rate rises that's the proximate issue for markets. So, are rates headed even higher from here?

Stock markets around the globe sure hope not. Each rate surge this year has been met with a bout of selling in equities.

Interestingly, the S&P 500 has set only marginal new lows on the most recent rate surge. If the market finds the ability to acclimate to higher rates, that might cause optimism.

Yet, we know there must be a breaking point where economic growth succumbs and investor capital is lured away from stocks and into bonds. In the short term, somewhere between 4-6% is a decent guess of where those pressures increase. Only time will tell.

Although, keep in mind that, like the proverbial frog in a pot of water, the temperature matters, but the time spent in the water matters more.

The world’s central banks will dictate the duration we must spend in a restrictive interest rate regime. And they’re singularly focused on one thing: inflation.

Whichever your preferred measure of inflation might be, it’s telling the same story – inflation is persistently high.

So long as inflation is high and rising, you can expect a challenging investing world. But don’t get trapped in an echo chamber – that’s been the story all year. Any hint of relenting inflation is all market outlooks need to snap right back to the bullish thesis of low-interest rates = stable economic growth.

In 2022, the story of the markets really is that simple. Unfortunately, simple to describe doesn’t mean easy to navigate.

How Much is Enough?!

Sometimes once we’ve had enough, we just can’t take any more. Other times, we want so much that we just can’t get enough. So, when do we know that enough is enough? 

Consumers have had enough inflation. Two months ago, consumers (as surveyed by the University of Michigan) were as pessimistic about their situation as they’ve ever been. Luckily, gas prices fell, so they feel a bit better. Let’s hope the trend persists.

The Conference Board indicates that consumers are depressed, but not exceptionally so. The University of Michigan data set correlates more strongly with feelings surrounding big-ticket purchases and inflation. So the deviation between the two data sets makes sense.

Investor pessimism is palpable; measured by the American Association of Individual Investors, the spread between optimistic and pessimistic survey respondents has reached levels that in the past have signaled extremes. For every bullish (optimistic) respondent, there are more than three bears (pessimists). That’s a level scarcely seen in history.

Ironically, investors throwing their hands up and saying they’ve had enough can indicate that enough damage has been done to warrant market stabilization.

Stock market valuations have taken a beating due to higher interest rates. The 100 most egregiously expensive stocks (represented by the top of the grey shadow) have fallen dramatically. The 100 cheapest stocks (represented by the bottom of the shadow) are now at levels not seen since the financial crisis of 2008. The valuation for the median stock sits only slightly below its long-term average.  

If you’re going to make the case that enough damage has been done to individual stocks to warrant a bargain basement buy, you’ll need the support of interest rates (see above) or confidence in a stable earnings outlook.

Lucky for your bullish case, companies are earning record profits and revenues with historically high margins. Although, market strategists fear we’ve seen the best of the earnings growth for this cycle, and falling earnings could undo some of the valuation correction we’ve seen this year.

Earnings are being revised lower, but expectations remain that they’ll continue to grow over the next 18 months. As the third-quarter earnings reporting season plays out over the next few weeks, we’ll hear directly from company management about underlying business trends. That will go a long way towards alleviating or exacerbating the economic slowdown narrative.

Signs of Hope?

Throughout this inflationary saga, we’ve stuck to two themes - first, that a post-war inflation boom was likely, and then that it would take a good bit of time to work through. We’re still in the ‘working through it’ phase and probably will be for many more months.

Dealing with inflationary pressures is a cycle of people addressing ‘me’ problems. We’re all just trying to defend our margins. Manufacturers pass on higher input and transportation costs, car dealers mark up prices due to elevated inventory costs, business managers boost invoices to meet corporate targets, and workers everywhere demand cost of living increases. Around and around we go.

That interconnected process of defending margins is cyclical. The hope is that each subsequent wave of solving ‘me’ problems results in a diminishing rate of price increase. While it’s still too soon to declare dramatic progress in the inflation fight, there are signs that the initial inflationary impulse from the pandemic may be subsiding.

Lumber prices were front and center not too long ago as an indicator of supply chains gone awry.

Now they’re back to the high side of normal.

Freight rates also took center stage in the ‘can you believe it?’ pageant.

They, too, are back to the high end of normal.

If you’re in the market for a house or a car, I imagine you’re not pleased with the pricing. But signs are beginning to emerge that those assets are also starting to normalize.

Many other single-item examples of easing supply chain stresses or one-off commodity shortages are out there. On a broader basis, the Institute for Supply Management surveys businesses on the pricing trends they are seeing. The data set tends to correlate highly with inflation reporting from the government.

The survey results paint a picture of receding pricing pressures, especially in manufacturing businesses. A reading above 50 indicates rising data, so we have yet to see any outright deflation, but this is a clear sign of healing at the wholesale level of our economy.

The Fed

For all you Fed junkies who would feel slighted by a lack of outright monetary policy coverage – here’s the projected path of tightening as laid out by the members of the Open Market Committee. Markets continue to fall over themselves to predict an eventual pause at a terminal rate, although each time they do, they’ve had to reprice their terminal rate higher.

If that path were to play out, the white line and dots on the following chart are how this tightening cycle would stack up versus the previous eight cycles. We’re on a truly historic pace of tightening.

Thanks for taking the time to review our newsletter. As always, if you’d like to continue the conversation, please let us know. We always have more charts and storylines ready to present.

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