New Book: Protecting Your Principle and the Coming Crash

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David J. Scranton talks about his new book “Return on Principle” to an audience at the book’s  launch in Ft.Lauderdale in late August.

David J. Scranton is on a mission. The seasoned market analyst and financial advisor’s recently published book has a title that says it all: “Return on Principle: Seven Core Values to Protect your Money in Good Times and Bad.” And, the book lives up to its promise.

No stranger to the financial arena, you’ll find 17 letters following Scranton’s name –CLU, ChFC, CFA, CFP and MSFS. But what you might not know, is that he also has a degree in mathematics. Add that extra bonus bit of education into the fold and it likely has given this investment pro a leg-up when it comes to analyzing and understanding the markets, corporate America and the ins and outs of the numerous products offered investors.

During his career spanning more than 30 years, Scranton has been recognized as a respected market analyst and is a frequent guest on a broad array of national TV business programs. Additionally, he is the founder of Sound Income Strategies, a registered investment advisory firm, and Advisors’ Academy, training and marketing organization for financial advisors.

More importantly, as one of the guests at his recent book launch in Fort Lauderdale, said, “ David knows his stuff plus he’s a nice guy.”

What follows is a Q&A with Scranton gleaned from a recent telephone conversation about his book:

Q: Your book speaks to the notion of investing the “old-fashioned way.” What do you mean by that?

Scranton: Years ago when people were approaching retirement, everyone knew that they had to invest for income.

But, during the 1980s and 1990s, people got away from that and started thinking they could spend their principle, sell some of their stock shares thinking that any principle lost would just grow back the next year. In the ‘80s and ‘90s that actually worked. But since the year 2000, the stock market hasn’t cooperated.

So going back to the “old-fashioned way” is really investing for interest and dividends. And, by the way, if today someone doesn’t need income yet, they can grow their money the old-fashioned way— or organically— by the reinvestment of those interest and dividends.

Q: Also suggested was the “overprotection” of money. What does that mean?

Scranton: Well, l the reason I’m a big fan of overprotection is because most people don’t realize that if you lose 50 percent (of your money) you need to make 100 percent to get back to even again.

That’s a roller coaster ride that people have been through twice since the turn of the century. So especially for those of the Income Generation, those over 50 and born before 1956, their first focus has to be overprotection. And, making sure they don’t take those major losses particularly in the 10 years before they retire and the 10 years that follow retiring.

Q: But everyone makes investment mistakes and there is no controlling the markets. So how is someone supposed to not make any mistakes or have losses?

Scranton: You (investors) have to try to minimize their mistakes at those times.

Here’s an example I always use to explain that: In Connecticut, everyone is a UCONN girl’s basketball fan. That’s because the team has been so strong and there have been so many games when the girls were up 30 points with 3 minutes left in the game.

Well, at that point, it’s no longer about (playing) offence. It’s about defense. Not turning over the ball, not making any mistakes, running out the clock because you already have enough points to win the game.

So the idea is to get yourself set up about 10 years before retirement so that you know that you are going to have enough points to win the game of life, without any heroics. Or have to go out and hit a home run (in the market) in order to be able to retire 10years down the road.

Q: How many people are able to do that before they are age 50-something or 10 years before retirement?

Scranton: Unfortunately, not enough. But what I will tell you is that the people that aren’t in that financial position by then, typically don’t get there in the next 10 years by trying to swing from the fences and hit a home run.

You can compound one mistake with another mistake by trying to do that (hit a home run).

Q: You write about a coming market crash. Do you expect that?

Scranton: Absolutely.

Here’s why in a nutshell: In 2013, the market finally broke above the levels that it established in 2000 and 2007. And between 2000 and 2007 we had the first major drop and recovery and then from 2007 to 2013 we had the second. And in 2013 the market broke through that partial black ceiling, if you will.

So the question is, is this a permanent break above that level or will we go back down below those 2000 or 2007 and 2013 levels?

Well, here is the bottom line: If it is a permanent break above that level, and if we do not end up going below that level again we will literally be breaking three world records regarding the market.

Number 1: And a lot of people don’t know this exactly, it will be the first time we have recovered from what’s known as a secular bear market in only 13 years. That’s never happened before.

Number 2: It will be the first time we have recovered from a secular bear market without having three or more major drops in the middle of it. Usually there are three, four, five or six drops. This time we only had two major drops in the middle of it; one was when the tech bubble burst and the second was the financial crisis.

Number 3: It will be the first time ever that we have recovered from a secular bear market before the price to earnings (ratio) on the overall stock market got down into the signal digits.

Q: So what are investors, including those of the Income Generation, to do?

Scranton: Understand you own (investing) strengths and weaknesses.

For example, if you’re going to be a stock market investor, and you know you are fear based, and you know that as soon as the market drops you are going to panic and get out and sell when its low, you know that’s a limitation of yours and you shouldn’t be investing in the stock market by yourself. Get the help of an advisor.

But not all financial advisors are the same. That’s why, in the book, I have questions for the reader to ask their advisor to make sure the advisor’s specialty matches their (the investor’s) needs and stage of life. And, are appropriate for them.

Investors need to realize that there is no Hippocratic oath for financial advisors, so they have to dig to find the right one for them.

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