Ira Work: Welcome to “The Investor Coaching Show.” My name is Ira Work and I am sitting in the Paul Winkler chair today. Paul took off.
Financial Coaching and Myths of Investing
Anne Sawasky: What an honor.
IW: I feel very honored. And I’m here with Anne Sawasky, one of our coaches here at the Paul Winkler Company.
AS: Good afternoon.
IW: What we do with this show is we talk about everything money. We’re talking about investing, we’ll talk about insurance and financial planning — maybe not all these different topics today. But as an investor in a coaching company, I thought we’d talk a little bit about coaching this first part of the hour.
AS: Great idea.
IW: One of the things that I think would be good to lead off with is what we call the myths of investing. This was something that I actually became introduced to about 17 years into my career. Stuff that the industry knows, but the industry doesn’t teach because there’s not as much money for the industry to make because the money stays with the clients.
AS: Right. I always tell people, if they really teach you this, then most of the time the clients realize that what they’re trying to sell you probably isn’t the best thing.
IW: No.
Because what they try to do is they try to sell you on fear and greed.
AS: Right.
IW: “You can get these better returns” or “You won’t lose your money.”
So when we’re talking about a myth, what is a myth? A myth is a commonly held belief that might not actually be true.
If you think back to the times of the Salem witch trials, there was this myth that these women possessed the power to actually put curses on people. And as a result, people lost their lives. People were burned at the stake. And unfortunately, we can see the same thing happening with investors who buy into the myths.
So what are the myths?
The Myth of Stock Picking
IW: What’s the first myth, Anne?
AS: Stock picking. It’s that idea that there are certain people or companies that have a special ability to pick what the best stock is in the future.
IW: Absolutely. And that they have the ability to identify stocks that are undervalued, which they believe, and they’re going to tell you and sell you as they’re going to go up. Or they believe they’re overvalued, and as a result, you should be getting out of them because they’re going to go down.
What we see from the research, because we’re an academically driven research firm, is that money managers cannot do this.
AS: Yeah. The key is they can’t do it consistently.
IW: Or predictably.
AS: Right, right.
IW: So you look at the research from DALBAR, which is a company that is not actually in the investment business; they don’t really have a dog in the fight. What they do is they study investor behavior.
They have found — and they update this study every year; it’s a 30-year study — it is remarkable how close the returns come out year after year after year after year. And typically the market, based on the S&P 500, outperforms the individual equity investor by about 3%. When you look at a 3% loss every year over a 30-year period, that could be the difference between accumulating $2.1 million versus $700,000.
AS: And think of what a difference that makes for you as a retiree. What would your life be like with, I mean in that case, three times the amount of money?
IW: Three times the amount of money in retirement.
AS: Right.
IW: With the ability for that money to grow.
AS: Right. That’s an even bigger point because it’s going to keep growing if it’s managed properly.
IW: Right. In addition, that money continuing to grow in the portfolio could give you the opportunity to increase the income in your household, which helps you stay ahead of inflation, thereby always maintaining the same lifestyle and perhaps leaving a legacy in addition to that.
AS: Right.
IW: Without the fear of running out of money.
The Myth of Track Record Investing
IW: With the second myth that we want to talk about, what we’re going to do is we’re going to look at some articles to hopefully get you to start seeing things a little bit the way we see them. Let’s call it training, because what does a coach do? A coach trains.
We don’t train you to do what we do. We don’t train you to manage portfolios. But what we train you to do is to be able to identify those things that are actually working against you as an investor and that keep you from earning the money that you can possibly be earning in your portfolio.
So the second myth that we’re going to talk about now is track record investing.
Track record investing is trying to identify what’s going to do well in the future based on past performance.
Now, I’ve sat here enough with Paul and heard his analogy, and it’s a great analogy. It’s like Anne and I leaving the radio station today and getting in our cars and trying to drive to our houses or to a company Christmas party, and just looking in the rearview mirror. Probably wouldn’t be very successful.
AS: Especially in Nashville traffic.
IW: Especially in Nashville traffic.
We want to look at a 10-year period because you hear people on the radio say you want to find funds that have a good 3, 5 and 10-year track record. So if we looked at a period from 2003 to 2012, there were 3,896 stocks that you could have chosen from. The top 30 managers did an annualized return of 18.01%. You’d have to be happy with the 18.01%.
AS: Right. And especially considering that was over double what the market did.
IW: That’s correct.
AS: Yes.
IW: However, the average equity fund or stock fund is 7.67. Less than half.
AS: Yeah.
IW: The S&P 500 was at 8.8 during that time. And there’s another benchmark that we looked at that was designed by the Center of Research for Security Pricing — another organization that is not in the investment business as far as having a dog in a fight trying to sell you stuff. They just track investments. Their return for that 10-year period was just shy of 10%.
Now, if you were looking at investing in January of 2013, you might have gone to an advisor and that advisor might have said, “Well, I’m using these top 30 funds. Look at what they did for the past 10 years. They did 18%.”
AS: Right. They beat the market for 10 years. So it’s so tempting to think that that would be the smart move.
IW: And then you would run into the advisor next door and they might have said, “Well, we like these funds that try to benchmark and we’re using the S&P 500 fund, and they did 8.84% for the last 10 years.” Which advisor do you think most people would go with?
AS: They’re going to go with what did well lately. It’s tempting.
IW: The one that just had that 18% return.
AS: Yeah.
Magical Thinking
IW:
One of the things I’ve experienced in my nearly 40-year career is that most investors seem to believe that they’re entitled to the highest rate of return.
AS: That’s true, that’s true.
IW: And that there’s an advisor out there who can actually identify which funds are going to be the best funds going forward. We like to call it magical thinking.
That’s what you might kind of think if you’re not from this area. Like me — I didn’t grow up here in Nashville. But you often hear people talk about people who grew up here in Nashville as unicorns; you don’t run into them very often.
AS: That’s true.
IW: And that unicorn advisor really doesn’t exist, the one that can identify, of those 30 funds, which ones are going to be the best ones.
Maybe he’s honest enough to say, “I don’t know which one of these will be the best going forward, so let’s just spread your money out of all 30 of them. We’ll get you diversified and we should really do well.” How do you think those 30 funds did?
AS: In the next period of time, the next 10-year period?
IW: Yeah. From 2013 to 2022. Yeah.
AS: They underperformed the market.
IW: That’s right.
AS: Yeah. By a significant amount.
IW: By 3.5%.
AS: 3%. Yeah.
IW: Yeah. So over the next 10 years, once again, we see a return of less than 3.5% of the market, which falls right in line with the DALBAR study.
AS: Which is that investors typically underperform the market by about 3%, right?
IW: So the S&P did 13.7 and that other index from the Center of Research for Security Pricing — which we simply call CRSP since it’s a little bit easier than that big long name — did 13.4%. But what’s really interesting about that is it’s much more diversified than the S&P 500. And as a result of that, it’s a lot safer. Julie got better returns with less risk.
Time Horizon When Investing
IW: The thing to kind of understand from this is that a manager’s ability to pick stocks in the past has little to no correlation with his or her ability to consistently do it in the future. One of the best ways to invest is in a portfolio where you can look at diversification, understand the goal rate for a portfolio and understand the time that it will take for the portfolio.
Because, depending on how much risk you’re taking based on the level of stocks that you have, whether it be 60% or 85% or 95%, the fluctuation in those portfolios can vary widely. And as a result, it might take a few more years for an aggressive portfolio to have the goal rate returns than a portfolio that’s 60%.
AS: Right, right. And so that’s why your time horizon when you invest is very important.
IW: Yes, absolutely. And the thing that most investors do, which we find, is that they tend to look at what is going to pay them the highest rate of return going forward.
I see this with a lot of people when they come into the office, and I don’t know if you see this as well, Anne. If they’re anywhere between let’s say 50 and 60, maybe even to 62, they’re saying, “Look, I know I need to take more risk. I’m willing to take more risk because I’m a little bit behind and I know I’m behind.”
AS: “I need to catch up.”
IW: Right.
AS: Yes.
IW: And is that a wise thing to do?
AS: No.
IW: Why?
AS: No.
There’s a sequence of returns risk, which basically means that you need to have enough time for the portfolio to obtain the goal.
And if you end up having a bad market in the couple of years before you retire, you can affect your long-term retirement income by it. I think it’s 20%.
IW: Yeah.
AS: Less. Less.
IW: Yeah. So if you think about a portfolio — I know one of the aggressive portfolios that we work with has the potential of dropping 54% any given year if we had, for example, another 2008 worldwide financial crisis — and if you’re coming up on nearly a million dollars a year or two before retirement, and you have that type of correction, you could have half of your assets lost.
AS: Right.
IW: And now you need about 140% return to make up that 50% loss.
AS: Right.
The Myth of Market Timing
IW: Now we’re going to unfold myth number three: market timing.
AS: Right. The hardest myth to break.
IW: And why is that? Why do you think that is?
AS: It’s so tempting because they plan your fear.
IW: Well, even if the industry itself doesn’t plan on the fear — let’s say you’re sitting at home, and you’re a self-investor. It feels right.
AS: Right, it does.
IW: If the markets are going down, if I get out now, I’m going to keep from losing money.
AS: Right. I mean, it’s very tempting to think that you’re protecting yourself because people inherently want to flee from pain and it’s painful to see your portfolio go down.
IW: Absolutely.
AS: Especially in 2020 and January through March when the world shut down. Or in 2008.
IW: So the definition of market timing is any attempt — any being underlined in bold — to offer or alter or change the mix of investments based on a forecast or a prediction about the future. And the thing is, nobody can forecast it.
Nobody was able to tell 9/11 was going to happen. No one was able to tell that the Ukrainian war was going to break out.
No one was able to foretell or predict that we were going to have a worldwide pandemic. No one was able to foretell what happened in Israel. No one can foretell what the weather’s going to be tomorrow with any real accuracy.
AS: No one could foretell that last Saturday there would be 13 tornadoes in the Nashville area.
IW: Was it that many?
AS: 13, yeah.
IW: Wow.
AS: Yeah. So I mean, yeah, they knew there was going to be weather, but they couldn’t foretell the kind of devastation. I live up in the area that was hit very hard. So you can’t see these things coming in order.
The danger about market timing is you’re more likely to be wrong than you are to be right.
IW: Well, in order to be right with market timing, you have to be right twice.
AS: Right, exactly.
IW: You have to be right, that you’re getting out at the high and that you’re getting in at the bottom.
Dead Cat Bounce and Taxes
IW: I think the biggest problem is trying to get back in at the bottom because when you’re seeing the market go down, you don’t really know that it hit the bottom.
There’s something that we refer to on Wall Street called a dead cat bounce. I know that sounds kind of not nice, a dead cat bounce, but that’s when the market goes down. Then it starts to go back up and the players of Wall Street will call that a dead cat bounce — anticipating or predicting or forecasting that that’s not a real market upturn, that it is going to drop once again.
People will hang out on the side trying to watch it, and then it continues to go up. And now you didn’t get to the bottom. So you miss that move and most people don’t get out at the top. Why do you think that is?
AS: I don’t know. I guess they don’t get out at the top because, I don’t know, people see patterns and they want to keep seeing that pattern going forward. It’s up so, oh, it’s going to keep going up. It’s going to keep going up.
IW: I attribute it to greed.
AS: I think so.
IW: Why would I want to get out now when my portfolio is going up or my stock is going up and I’m making money? I bought it at 20, it’s at 50 and I have 150% gain. You know what? Let me wait until it gets to 55 and then I’ll get out.
AS: Well, and fear of missing out too. “Oh my gosh, what if it goes up another 100% and I sold?”
And I also think about taxes. “Oh, I don’t want to pay taxes.” You do hear that a lot too.
IW: We do hear that a lot.
AS: Yes.
IW: And that is the tax tail-wagging the investment portfolio.
AS: Right. Right.
IW: Right now, we happen to be in a very good period of time when it comes to taxes. We should really be looking at taking money off the table, paying those taxes, repositioning the portfolios perhaps so that we can take advantage of this because the Tax Act that was signed by President Trump at the time is actually going to expire at the end of 2024.
So in 2025, unless Congress does something — which I don’t think they will, but this isn’t a political show — we’re going to see higher taxes.
AS: Right. And that’s a great point.
People are afraid to pay taxes now when it’s actually at the lowest it’s been in many years.
So my gosh, if you’re not going to pay them now, when are you going to pay them? Probably not at a good time.
IW: So with market timing, it’s trying to time your taxes, trying to time the market. There was a gentleman by the name of Dr. Charles Ellis, and he wrote in a book called “Investment Policy” that everybody should have an investment policy statement with their financial advisor. He said it was how to win the loser’s game.
And he said, “The evidence on investment managed success with market timing is impressive and overwhelmingly negative.” And Dr. Ellis actually consults pension plans for companies around the world. So I think he has a very, very good insight as to what advisors and investors are doing and what these money managers are doing and how they are actually hurting the individual investor.
The Myth of the Costs of Investing
IW: Which then brings us to the last myth, myth number four. There’s actually a lot more, but these are the four biggest myths that we find.
Myth number four is the costs of investing, and that with the cost of investing, what you don’t see can hurt you.
It’s the myth that what you don’t see can’t hurt you.
AS: Won’t hurt you. Yeah.
IW: Kind of like sticks and stones will break my bones, but words will never hurt me. Words do hurt. Sometimes you can’t get over the words that were spoken to you. And sometimes if your investments are not doing what they should be doing, you might not be able to have the retirement that you plan to have.
AS: Well, and even with the costs, the investment industry is so good at hiding them.
IW: Oh yes.
AS: So really, they’ll advertise, “Oh, it’s a very low cost fund.” But they don’t tell you the hidden costs in that fund that would come from all of the trading, the taxes you pay on the trading, the bid-ask price.
IW: Well, explain the bid-ask price.
AS: Well, there’s a difference. Basically, there is a cost to sell and to buy, and there’s a difference in that cost. So when you are buying, you’re buying at a higher rate than you’re selling. So you could actually buy and sell the exact same stock within seconds.
IW: At the same second.
AS: And you would lose money.
IW: Right. So one of the easy ways that I like to teach investors about the bid and ask is this. You can go into CVS, you can go into Walgreens or Target, and you could buy your favorite toothpaste. They buy it from the manufacturer at one price. They sell it to you for the other price, for the retail price.
The difference between the two is what we call the spread. And the spread is what we have in stocks with the difference between the offer price and the bid price. The offer price is what you’re buying it for. The bid price is what they’re paying you for it.
Every time you buy and sell a share of stock, it’s not going directly to the other person. So for example, if I was selling Facebook and Anne was buying Facebook, there would be somebody in the middle between Anne and myself handling the transaction.
And that spread, maybe she’s buying it — I don’t even know what Facebook is selling for because I don’t follow individual stocks, but maybe it’s selling for $200, and maybe the bid they’re paying me is $199.90. So there’s a 10-cent spread.
AS: Per share.
IW: Correct, per share. So that stock trades millions of shares a day.
One of the problems is that the mutual funds, there is a hidden cost because it’s not published anywhere. The mutual fund companies actually pay the bid spread. The mutual fund companies also pay commissions when they sell or buy stocks.
Now, because they’re trading millions of shares, they may end up paying a lower commission than you or an individual investor may pay. But those are just two of the many costs that mutual funds have.
Part 2
Ira Work: Welcome back to “The Investor Coaching Show.” This is Ira Work with Anne Sawasky. We’re coaches here for Paul.
What I want to do now is I want to talk a little bit about some articles that we’ve come across. As we go through the article, you can begin to identify what people should be looking for, and why we coach our clients and how we coach our clients.
Anne Sawasky: And identify the myths that we just talked about.
IW: Yeah.
Certificates of Depreciation
IW: There’s another part to the presentation that we were just talking about with the myths, where we introduce you to the science of investing. Because there is a science of investing based on over 70 years of academic research.
And the really amazing thing about it is a lot of the research that we use has actually won Nobel Prizes because it’s being used by institutions and it’s being used by pension plans. It’s the way Vanderbilt manages their endowment. So this information about the science of investing is the way we help clients. We think you should be investing whether you’re using us or not, but you need to know what that science is in order to have peace of mind about investing, which can allow you to relax about your money.
So there was an article that Anne had come up with, titled “Interest Rates are Paused: Here’s Why You Should Open a CD Quickly.” Now, CDs, in my opinion, stand for Certificate of Depression or Certificates of Depreciation because when you think about them, they pay a lower interest rate right now than what inflation is.
You’re actually losing purchasing power. I would say that you’re going broke safely.
AS: Right. And then you’re paying tax on it as you go typically. So it’s even less really.
IW: So you’re losing money to inflation and you’re losing money to taxes. That’s why it’s a certificate of depression. So take us away with this, Anne.
AS: Well, in this article by Ben Gear, he said, “Interest rates are paused. Here’s why you should open a CD now, because the Fed announced it was leaving the Fed rate paused for the third time.” And they believe one of the ripple effects of that could be a drop in interest rates for CDs because CD rates have been relatively high recently.
I don’t know about you, Ira, but I’ve had a lot of clients say, “Hey, shouldn’t I get a CD because that’s safer and it’s paying 5%?” I mean, there’s been a question in people’s minds about whether that’s a good thing. Now they’re thinking they’re going to drop in 2024.
So this article is saying, “Oh, you should run out right away and lock in the higher CD rate so you can get the best possible return.” And of course, currently, what is it? About 5.5% in a 5-year and about 4.5% is pretty typical, but they’re talking about dropping from there.
And then the irony is, there was another article by Yahoo Finance that said, “How To Navigate a Fed Pause: Get Out Of Cash Now.” So you had two polar opposite things, and you just go, “Okay, well if we look at this, first of all, one of them is going to be wrong because they’re polar opposites.”
IW: Correct.
AS: So somebody’s got to be wrong.
Using Promissory Words
AS: But the question is, what do they both have in common? What they have in common is it’s a prediction about the future.
IW: That’s right.
With the predictions, like Anne said, one of them is going to be right, and one of them is going to be wrong.
If you’re doing what, the person who ends up being wrong says, “You’re hurting yourself.”
Now, whichever one you follow, the reality is either way, you’re either getting lucky or unlucky. Because there is no way to know which one of these people is going to be right.
But the thing is they’re using words, and the words they’re using are “might”, “could” and “may.”
I know Anne, you sat in our compliance tier for many years before you even came to us. You worked for a big insurance company in the compliance department.
When I was working with Lehman Brothers or Smith Barney, I had to deal with the compliance people and we had to submit everything that we were going to write and send out — newsletters, letters to more than one client. And even if it was to one client, the letters were supposed to be approved. Because the compliance people were making sure that the words that we were using were not promissory.
AS: Right.
IW: I would go back and forth with a compliance officer. One of the sentences in our investment policy statement says, “Prices may fluctuate.” And I point out to my clients that no prices will fluctuate. There is no doubt about that.
AS: That’s a pretty clear “will,” except they’ll still put the “may” in just in case.
IW: Anne being a recovering lawyer, would tell us, “No, it’s a promissory word. You cannot use that because even though you’re sitting out there in the listening audience, you know the markets are going to fluctuate up and down.
“There’s no argument about that. You’ve seen it every single day of your life when you became aware of what investing is and perhaps started to do it. So you know it’s fluctuating up and down.”
The Investment Policy Statement
IW: But that document, the way that I like to describe any legal document is it’s a document written by lawyers for lawyers to protect lawyers because lawyers get to make more money when they have to go defend those documents.
AS: Well, and to protect the company too really.
IW: Well, and it’s really to protect everybody, not just the company. But the investment policy statement, like I said, is a document that is required by the Department of Labor for your 401(k) plan, for pension plans.
We believe every investor, wherever you’re investing, should have an investment policy statement.
Your advisor should have provided you with a statement that addresses these questions: How is your portfolio going to be managed? What’s going to be the level of stocks? What’s going to be the level of fixed income?
With treasury bills, treasury notes and bonds — what’s the maturity of those going to be? How are they going to rebalance the portfolio?
What’s that going to cost? How much cash is there going to be in the portfolio? What is the portfolio going to be designed by? What’s the basis or the investment philosophy for that policy statement?
AS: We have that for all of our clients. And you’re right, insurance companies and pensions and so on have that. But the average investor coming in the door doesn’t have it.
IW: No. I have never in my 40 years — 40 years in March — I have never had another investor come in and say, “Well, here’s the investment policy statement from my current guy.”
AS: Yeah, no, they don’t have it. Which makes you think.
Because if you don’t have a method or a belief or a system outlined of how you’re going to manage your money, what assurance do you have that you are going to be consistent and thoughtful about it and that you’re not just throwing spaghetti at the wall, which is kind of what a lot of people, I think, do? “Let’s see if this works. Let’s see if that works.”
IW: Well, there’s also another reason for it. It’s so that you know how the manager is going to be managing the money.
AS: Oh, absolutely.
IW: It actually lays out the responsibilities for both the investor and the managers and advisors that the investors are working with. So it’s kind of like, let’s say football. The players have a playbook and they know what the plays are.
There are rules when it comes to football. There are rules when it comes to soccer. There are rules to every game, but most investors are not working with a set of rules.
AS: Right. And I don’t know how many times you’ve had this happen, but a number of times I’ve had clients have come in and they said, “My guy put me in an annuity and I didn’t even know it.” Or, “My guy bought me crypto,” and they’re upset about it.
But that would be something that the investment policy statement should be addressing. What are the types of investments I’m permitting and that I believe in or want to be in my portfolio, and what do I not want to be in my portfolio? That’s important.
IW: And fortunately, I haven’t had anybody come to me and tell me, “My advisor put me into crypto.”
Promises From Advisors
IW: So we’re talking about the investment policy statement and why it’s important, and Anne had mentioned that she’s had people come in and tell them that their advisor was buying crypto.
AS: Yeah, buying crypto, buying annuities and all sorts of things they didn’t want.
IW: Yeah. Now I have had clients come in with annuities. They didn’t understand what they bought. So that leads me to the conclusion that the client was sold based upon fear and greed.
The greed part is that you could get stock market returns without the risk. Everybody wants stock market returns without the risk. That’s the fear. With your portfolio — if the market goes down, you won’t make anything, but you won’t lose anything.
Well, I will say that I was guilty of selling these back before the year 2000. And not one of those annuities, especially the index annuities that seem to be very, very popular right now. Most of the people that come in, that’s what they’re showing me they have purchased. Not one of those annuities actually did what the illustrations — those pretty slick brochures — showed with the historical rate of return.
Part of the problem with that is that the brochures are actually cherry-picking certain periods of time.
The one thing about investing that is consistent is that it’s inconsistent.
AS: Right. Now, back when I was at the insurance company and I would look at these things because we sold them, they at that time just said, “Oh, they’re going to make 12%.” 12%.
And subsequently, when they didn’t deliver that, there were all sorts of lawsuits because people were promised something that they didn’t come anywhere near. So now what they do is they give you three rates in these brochures. I don’t know if you’ve noticed that.
IW: Oh yeah.
AS: So the interesting thing is now they give you a “what if it doesn’t make anything” rate, so pretty much zero. And then they will cherry-pick what they looked at and piece together as the best rate, and then they’ll do something kind of in between.
But what I tell people is they’re really not promising to do anything. So you should be looking at the lowest. You better hope that you can be happy with that because there’s no real promise you’re going to get any of those other rates.
IW: That’s right. And that’s what they show you in the brochures. Then when you get your statements, you see three different values.
You see an account value, which is what the money is actually doing. You see an accumulation value, which is actually a phantom value unless you completely give that money to the insurance company and take an income from it. And then you have your surrender value. What will you get if you decide you don’t want to wait eight years and pay a surrender charge?
AS: Which is always the lowest.
IW: Which is always the lowest. I love when you read these contracts and they say, “Well, they told me I couldn’t lose any money.” And the first page, it says there’s a 13.5% or a 12.5% surrender charge in the first year. So if you surrender your policy, you’re going to get 87.5% of the money you put in.
Paying Penalties
IW: I believe that your money should be 100% liquid at all times. The only penalty that you should have to pay on your money is if you decide to sell and the market is down, which is no fault, no control of the investment advisor that you’re working with. Or taxes because you happen to have sold after the money, after the asset increased in value, which again is no control of the advisor of the market. And that’s just it.
Other than that, those are not penalties that the advisor or the advisor’s company is putting on you. That is the penalty for making a decision without really fully understanding the decision that you’re making.
I don’t have a problem with paying taxes. We’re blessed to live in this country that allows us the ability to create wealth. So the blessing also comes with a curse. The curse is you have to pay taxes.
You can’t have one without the other. There can’t be good if there’s not bad.
AS: Right.
IW: So another thing that I see people come in and buy — which your investment policy statement may have in it, may not have in it — are real estate investment trusts.
AS: Right. Right
IW: Now I just went through a thing with a client that got a letter from the company for the investment trust, willing to pay him about 60 cents on the dollar. It had suspended dividends for three years. So for three years his money was tied up and he didn’t make any income from it, but he was promised income.
And then they offered to give him some money, but about 60 cents on every dollar that he invested. So we don’t really like real estate investment trusts, especially the private ones. If you’re buying one that’s traded on the exchange, it’s a liquid asset. You can get in, you can get out, you may or you might not make any money with it.
The Importance of Investment Policy Statements
IW: Now here’s the importance of an investment policy statement. There was a gentleman that went to an institution and he showed them the returns of what he was getting for his clients. And the investment committee was looking at what he was doing and looking at their investment policy statement, and they were trying to do the best they could for the institution, and they looked at the returns that he was getting and they looked at his investment policy statement.
They went back to the gentleman and said, “As much as we would like to get the returns that you’re showing, we don’t understand what you’re doing. And from what we can piece together, it is not in line with our investment policy statement.” And that saved this institution from Bernie Madoff stealing millions of dollars from them.
AS: Right. So the reason that big insurance companies and pension funds and trusts and so on have an investment policy statement is exactly that — they have a policy that they will invest in a certain fashion that, typically with those institutions, will be well-thought-out and have less risk. It stops them from doing things that would be counter to that because especially if you’re in a trust situation, you’re a fiduciary and you’re obligated to manage that.
And with pensions, it’s the same thing.
So they’re obligated to be prudent investors.
That particular institution was following its investment policy statement and acted prudently to protect its investors.
IW: That’s the purpose of the investment policy statement and why we believe you should have one. Our clients do get them so they know — and I go through it line by line with my clients — exactly what they can expect through the relationship they have with us and their money when it comes to investing. It can’t be stressed how important it is when these institutions have it.
There’s an investment policy statement with the state of Tennessee for their retirement plan, and I’m very happy to know that because my wife works for Metro National Public Schools and she will be getting a retirement plan or a pension from the state. We’ll talk about more in the next hour — about the importance of that and how well the investment policy statement does and why they should have it.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
