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Boutique Fiduciary-Based Wealth Management

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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.

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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.

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Our Team

James W. Mader, CLU, ChFC Photo

James W. Mader, CLU, ChFC

Chairman and CEO
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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

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George R. Shannon

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®

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Bret Guillaume, CFP®


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
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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 is continuing his education by actively pursuing the Chartered Financial Analyst (CFA) and Chartered Market Technician (CMT) designations.  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
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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 Photo

Taylor Graham

Paraplanner, Client Services Coordinator
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Taylor Graham

Paraplanner & Client Services Coordinator

In April 2016, Taylor Graham joined Mader & Shannon as the Client Services Coordinator. Taylor oversees client relationships for Mader & Shannon, expertly guiding families and organizations through their engagements with the firm and continuously delivering upon our commitment to serving the best interests of our clients. She also plays an integral part in Mader & Shannon’s financial planning processes including gathering client data and building retirement projections. {due diligence, facilitating comprehensive, rigorous assessments of clients’ existing financial advisors.}

Taylor graduated from The University of Kansas with a Bachelor of Science degree in Business Administration. Taylor is also a member of the Financial Planning Association.

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


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:


        From CNBC:



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

Year End 2020 Market Update

Clients and Friends,

All of us at Mader Shannon hope that you were able to make the best of 2020 and that your first weeks of 2021 are off to a pleasant and productive start.  Our newsletters are frequently centered around the “what happened, and why?” types of questions that markets and economies are so skilled at producing.  But we anticipate that you are as sick of talking about last year as we are, so Austin and I will focus this note on getting ‘back to basics’ with an in-depth review of the inputs and themes that are sure to drive markets over the coming year.

We hope that our management provided you with some peace of mind during the tumultuous year.  If you would like to discuss your results or our outlook, please let us know.

  • Kyle

Fundamental Review

It was a tough year for U.S. businesses. In the midst of a global recession, aggregate revenues for the companies in the S&P 500 Index will likely post a decline of 3% compared to 2019 – the first decline in half a decade. The bottom-line impact has been more pronounced. An array of cost headwinds - including supply chain disruptions, staffing issues, and tariff implementations - squeezed profit margins, and index earnings are set to fall 14% for calendar year 2020.

The recovery, though, is well underway. The trend in sales, margin, and income has strengthened throughout the last 6 months, and all look set to continue rising in 2021. Should reality conform to consensus expectations in the coming year, earnings will grow more than 20%, exceeding the level reached before the recession hit.

With widespread lockdowns and high unemployment, the economic outlook last spring was anything but bright. But the pace of recovery since has exceeded nearly all expectations – except, perhaps, the expectations implied by stock prices. Index-level equity valuations have risen to their highest point since 2000.

We won’t be so bold as to say whether such high valuations are appropriate or not. They’re certainly out of the ordinary. But if you’re determined to find justification, allow us to present a few thoughts on the subject.  First, faster growth should be associated with higher multiples. After all, the decades old dilemma of growth vs. value stocks centers around the conundrum that fast-growing companies are more expensive than their slow-growing counterparts. Likewise, earnings growth in 2021 and 2022 is expected to accelerate from recessionary levels and is being rewarded with a valuation premium.

Second, interest rates are historically low. Low interest rates help businesses grow faster (see above), but they also force investors to take more risk to achieve their return objectives (e.g. invest in stocks instead of low-yielding bonds), which contributes to higher prices. This isn’t a new story. In a 2016 interview, Warren Buffett quipped “If you had zero interest rates and you knew you were going to have them forever, stocks should sell at, you know, 100 times earnings or 200 times earnings.” Of course, no one really believes interest rates can stay this low forever. But given the actions of the Federal Reserve over the last 12 months, they probably believe it more than they did last December. The Fed has committed to keeping short-term rates at 0% for the foreseeable future, with the majority of FOMC members expecting no hikes until at least 2024.

And finally, it’s hard to deny that current valuations are – at least to some extent – a reflection of the extraordinary efforts by fiscal and monetary authorities to suppress economic cyclicality. In recent years, both legislators and central bankers have shown an increased willingness to intervene when times get tough. Their coordinated response to COVID was unprecedented in terms of magnitude, and undoubtedly helped support markets and bring an early end to the recession. It seems a growing majority in Washington, with inflation now dead and buried for 20 years, have decided high levels of deficit spending and monetary stimulus are an effective and low-risk way to halt economic downturns. Time will tell whether their aggressive actions will have unintended consequences.


With abstract concepts, we tend to distill our views through the lens of our personal experiences.  The notion of inflation is a textbook example of this phenomenon.  A few examples of times and experiences:

  • A German living in post-WW1 Germany (Weimar Republic) would likely fear that their wages today might not cover the cost of a loaf of bread tomorrow, and that their savings may become worthless due to the dramatic increase in the supply of Reichsmarks.
  • Americans in the late 1970s worried that energy and food shortages might be imminent or that double-digit interest rates may stifle their ability to grow a business or buy a home. 
  • A young person in the United States today might wonder why their pack of gum has 12 slots but only 10 pieces.

Asking each of these people how they 'feel about inflation?' would understandably yield outcomes varying from outrage and disgust to ambivalence.  Due to that level of subjectivity, we will be sticking to high-level data that describes/projects the broad trend in consumer/industrial prices. 

Before reviewing the trends in inflation, let’s first make sure we grasp what that dreaded “I” word really means.  The overly simplified definitions of inflation are: ‘too many dollars, chasing too few goods’ or ‘a passing-on of rising costs to consumers.’ 

Put even more simply, you get inflation one of two ways – consumers are willing to pay any price (causing sellers to raise prices), or a seller of goods raises prices due to rising production or input costs. 

Those scenarios represent what is known as demand-pull and cost-push inflation, respectively.  And they embody the elementary economic principles that we all grapple with daily, such as the scarcity of resources, supply and demand, and economic regulation. (I promise, this concludes the Econ 101 material).

OK, so now that we have a firm grip on where inflation comes from…. how should we measure it?

Measure of Inflation

The gold standard of inflation measurement in the United States is the Consumer Price Index (CPI) published by the Bureau of Labor Statistics.  This index seeks to describe the annual rate of price inflation in the economy based on a set basket of goods.  The two most-watched versions of this index are Headline, which includes every item in the basket, and Core, which excludes the most volatile categories (Food and Energy).

No matter how you slice it, the Core basket of goods has been incredibly stable at about 2% annually over the past 20 years.  This remarkable stability in prices is somewhat unprecedented in the modern era and has arguably come from a few structural forces.

Structural Dis-Inflation

The most distinguishable driver of inflation over the past 50 years is the demographic shift in post-WW2 America.

As the Baby Boomers came of age in the 1970s and 1980s they formed households and fueled an explosion in the labor force.  Unsurprisingly, this boom in economic potential led to a meteoric rise in inflation and interest rates.  

Although, to be more comprehensive, a catastrophic rise in the cost of energy and a festering Cold War with the USSR also contributed to that generation's inflation spike.  Since the 'new entrant' share of the labor market has stabilized over the past few decades, so have inflation pressures.

The ever-shrinking cost and expanding availability of technology is another structural force on prices.  Since 2006, the CPI price component for I.T. Hardware and Services has fallen by about 50%.  And, as you can imagine, that is an extension of the trend lower since the late 80s. 

Cheaper technology hardware and services depress prices in two main ways.  It makes workforces more productive and markets more efficient, thus lowering input costs for businesses.  And in some situations, it diminishes the need for expertise in (or the outright existence of) specific fields, which reduces aggregate wages. 

How do we feel about low inflation?

The desirability of inflation is radically different depending on which type of entity you ask.  The four major groups and their high-level view of inflation are as follows:

  • Individuals:  Under both the cost-push and demand-pull inflation models, individuals tend not to be thrilled. Cost-push inflation is incredibly unpleasant because it implies rising costs for consumers without any assumed increase in wages.  However, some inflation is helpful for individuals with the prospect of rising wages and existing debt. 
  • Businesses:  The cost-push scenario is also generally unsavory for businesses because their margins are likely being squeezed by higher input costs (unless the company is selling inputs - think commodity producers).  Demand-pull inflation is acceptable for businesses so long as the firm has pricing power and can meet demand while satisfying their labor costs.
  •  Central Banks:  One way to think about how central banks view inflation is to consider the following: If the economy is a river, and businesses/individuals are boats/swimmers, inflation is the current.  Certain boats/swimmers may move faster or slower at times due to demographics or business cycles, but the underlying current keeps things moving forward.  Central Banks view their job as keeping the flow ‘just right’ because if the current is going too fast or too slow, undesirable consequences may follow.
  •  Governments: On balance, sovereign currency issuers don’t mind mild inflation so long as their currency is stable/respected globally, and social unrest is not a factor.  To the extent that a country issues debt to foreign holders, a bit of inflation is a good thing, as the debt can be extinguished with future, depreciated currency. 

Inflationary Signals – Where is inflation headed?

This multi-trillion-dollar question has been met by eager economists and forecasters with the rabid response of ‘HIGHER, HIGHER, HIGHER!” over the past ten years (with astounding failure).  And while I do not plan on joining them today with that prediction, inflationary trends are certainly materializing.

Let’s take a look at current market expectations and the policy realities that may drive those expectations.

There are many ways to gauge market expectations for future inflation.  I’ve selected the following for this review: Treasury Inflation Protected Security (TIPS) and US Dollar Swap Forwards.  Both are real financial products, with real money influencing their trends.

Detailed explanations of each market/security aren’t necessary for this exercise; instead, focus on the trajectory (rising = higher inflation expectations).  Both indicators are focused about five years into the future, and both are setting new highs versus their pre-pandemic readings.

Another way to gauge inflation expectations is to think about the purchasing power of a currency.  The US Dollar index is shown below.  If your currency is declining in value, it takes more of it to buy the same amount of stuff.  So all things equal, a falling value indicates higher inflation expectations.  

As you can see, the US dollar is making new multi-year lows versus our largest trading partners' currencies.  And while movements in currencies reflect far more than inflation expectations, it's an inescapable fact that a falling currency equals diminished purchasing power.

On the policy side, we need to check in on the US Federal Government and Federal Reserve.

In response to the pandemic, the US Government has provided immense accommodation to the US economy.  That accommodation has been paid for by issuing debt.  The chart below is the annual federal deficit (amount to be borrowed) versus the country's total output.  The more negative the number, the larger the debt issuance.

As you would expect, higher indebtedness levels also tend to correspond with a less valuable currency and the potential for inflation. In the first and second quarter of 2021, the US Government will issue nearly $2.1 trillion in debt – roughly equal to 2014, 2015, 2016, and 2017 combined.

The Federal Reserve has also gotten creative in the face of the pandemic by taking interest rates to 0% and embarking on the most aggressive asset purchase program in their history. In many ways, the Fed's actions are actually facilitating the massive deficit spending by the US Government. The Federal Reserve balance sheet is shown below. Higher values = more accommodation.

In addition to the current accommodative stance of monetary policy, markets are also being promised that interest rates will remain low for the foreseeable future.  And their policies are explicitly targeted at lowering the unemployment rate and keeping inflation at or above 2%.

This is not the first time our central bank and the federal government have charted an aggressive spending and accommodation path.  Previous such examples have tended to occur during and immediately after major wars.

The logic behind inflation spikes during wars is threefold: resources are diverted from the private sector to the war effort (steel, rubber, labor, etc.), raising/deploying a fighting force and rebuilding after the war are both paid for with debt, and a pent-up demand effect causes a surge in spending once the conflict is resolved. 


Over the next year, additional fiscal spending and a wave of pent-up demand are quite likely.  Simultaneously, lingering effects from the US-China Trade War and supply-chain bottlenecks during the pandemic have caused shortages in raw materials and intermediate goods.  As a result, it appears that all three criteria for a post-war inflation pop have been met. 

On the other hand, structural deflationary forces from an aging workforce and technology-induced productivity enhancements are likely to persist and might be re-joined by cooperative global trade policy (also deflationary). 

The wildcard in this balancing act is the will of global central banks to continue their accommodative stance in the face of what may look like ‘transitory pricing pressures.’ 

A few other fun facts/stats about inflation…

We anticipate a number of folks will say something to the effect of “yeah, but a coke used to cost 45 cents back in *whatever year*.”  So we thought it would be fun to include a simple table showing what your dollar back in *whatever year* would be worth in today’s dollars.  For example, if you made $30,000 in wages back in 1974, you should multiply that by 5 to convert 1974 dollars to 2021 dollars ($150,000).  OR if you are reminiscing about that Coca-Cola that cost a dime in 1943, multiply it by 15 to convert to 2021 dollars ($1.50).

Another anticipated point of discussion on inflation (that we’re very interested in as well) is the fact that some things ALWAYS go up.  Healthcare, childcare, and tuition are essentially a perpetual motion machine.  The charts below show the monthly increase (on an annual basis) for those CPI components.  For the first time in 20 years, we saw negative readings in each data set! (But I wouldn’t get used to it...)



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