Private Equity in 401(k)s: A New Era or a Red Flag?
by SGL Financial
Our 2 Cents – Episode #215
Private Equity in 401(k)s: A New Era or a Red Flag?
It’s time for a brand-new episode of Our 2 Cents! We’re kicking things off with some penny news and a little feel-good energy to start your day right. Then, we’re diving into the world of private equity coming to your 401(k)s. Listen in now using the link below!
- Gabriel’s ‘Quick Hits’:
- What happening with the penny? Will they be gone for good?
- Discover the countries where your dollar stretches the farthest—perfect spots to consider for your next vacation.
- Learn how some dogs are traveling… for school!
- Private Equity 401(k) Push:
- What exactly is private equity, and is it a smart addition to your investment portfolio?
- With private equity aiming to enter 401(k)s, what are the potential risks and rewards?
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Podcast Transcript
Announcer: You are listening to Our 2 Cents with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the President of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Hello, hello everybody. Welcome back to Our 2 Cents. And I’ve got a very interesting way to start the show today. I don’t know how long we can say Our 2 Cents because we just learned that the administration, the Trump Treasury Department, is going to officially begin phasing out the penny early next year.
Steve Lewit: When is the last time you spent a penny?
Gabriel Lewit: Well, hello Steve to you, by the way, sorry, I just jumped right in.
Steve Lewit: Well, good morning. Good morning, of course, good morning, welcome everybody.
Gabriel Lewit: Good afternoon, good evening, whenever you’re listening to our show here.
Steve Lewit: I was thinking about this, I said, “Man, I’m going to miss having pennies.” I haven’t touched a penny in I don’t know how long.
Gabriel Lewit: Well, we talked about this I think it could have been a year ago, I’m not sure, about the fact that they were discussing phasing out the penny, but that day has now arrived.
Steve Lewit: It has.
Gabriel Lewit: And I’m not sure what that bodes for the name of our show.
Steve Lewit: Well, we could-
Gabriel Lewit: I guess it’s a throwback, I think we’ll keep it for nostalgia.
Steve Lewit: We can’t say Our 2 Nickels.
Gabriel Lewit: Our 2 Nickels. No, that doesn’t make any sense.
Steve Lewit: No. I like Our 2 Cents.
Gabriel Lewit: It’s going to stay. I think it’s going to stay, folks. Even though, yes, the Treasury Department will begin phasing out the penny early next year, ending a run for the mainstay piece of American currency first produced by the federal government in the 1790s.
Steve Lewit: Yeah, it’s kind of historical that it’s … because money normally doesn’t change, money is a medium of exchange, people have trust in it. But what do we need pennies for?
Gabriel Lewit: Well, yeah, it’s apparently obviously falling out of favor. This month the Treasury has made its final order of penny blanks, the material used to make pennies. And its coin producer at the US Mint will continue to manufacture pennies while an inventory of penny blanks exists. But eventually it will run out and then that’s it.
Steve Lewit: There are certain benefits for this. For example, you’re online at the food store, and there’s a person in front of you that takes, it’s usually … takes her little purse out of the pocketbook, and takes all the change out and pays the exact amount to the penny.
Gabriel Lewit: You’re as old as those people that you’re referencing here, Mr. Steve.
Steve Lewit: It has nothing to do with age. I didn’t position it that way. It’s just some people are very fastidious about their change and their pennies and consume multiplicities of time. I don’t think that’s correct.
Gabriel Lewit: Are you done with this story? We get it.
Steve Lewit: Think of how much time this is going to save the world.
Gabriel Lewit: Okay. You don’t like waiting in line for people paying with pennies.
Steve Lewit: Absolutely do not.
Gabriel Lewit: Okay. We got it. Now you’ll just have to wait for them to pay in nickels.
Steve Lewit: What are they going to … they might be very upset.
Gabriel Lewit: It’s going to take the same amount of time just in nickels.
Steve Lewit: So, what happens now, does the store have to round up? Well, this is a good question that you just brought up. So if it costs me $18.22 and I pay in cash, what am I going to do?
Gabriel Lewit: Well, I don’t know the answer to that yet. The article did not tell us the answer to that very … I guess, that would be called a fundamental question of pricing in America, what’s going to happen there. So stores won’t be able to get new rolls of pennies, we did hear that. So maybe they are going to have to obviously round up and down to the nearest nickel.
Steve Lewit: Well, they better round down.
Gabriel Lewit: Okay. So yeah, they’ll probably, well, maybe they’ll round up.
Steve Lewit: No, no, no. Yeah. But yeah. Well, maybe.
Gabriel Lewit: Well, this is what’s confusing, Producer Katie and Gabby just brought me something else here that says they’ll actually … non-cash transactions are going to be priced at exact change, but cash transactions would be rounded up or down to the nearest five cents.
Steve Lewit: Well, wait a minute.
Gabriel Lewit: But what about the pennies in circulation, won’t they have these forever? This is just all very confusing.
Steve Lewit: Yes.
Gabriel Lewit: Is someone going to buy back all the pennies?
Steve Lewit: No.
Gabriel Lewit: I don’t know.
Steve Lewit: No, they’re not.
Gabriel Lewit: You should save your pennies because in the future they’re going to be worth more as collector items.
Steve Lewit: No, they won’t.
Gabriel Lewit: No, probably not. Too many of them.
Steve Lewit: Maybe in 2000 years they might.
Gabriel Lewit: 2000 years from now, yes, exactly, your kids, the grandkids, the great grandkids.
Steve Lewit: And the great, great, great, great, great grandkids.
Gabriel Lewit: Well, here was the other thing folks, the cost of making the penny was actually four cents.
Steve Lewit: Yeah, it is actually very expensive to mint coins.
Gabriel Lewit: Yeah. So anyways, you heard it here. Okay. You know now that’s the scoop. Get prepared, be ready for this, this is going to be a whole new world starting next year.
Steve Lewit: Get a credit card.
Gabriel Lewit: Okay. Oh man. Well, eventually, what’s interesting is some other countries, for us, you buy a house that’s $500,000, let’s use a round number, that sounds like a lot of money, some other countries based on their currency, you go to buy a house, I don’t know the exact country, it’s like-
Steve Lewit: $12 million. Whatever.
Gabriel Lewit: 14 million yen or whatever the currency, it’s like, just sounds, it’s just interesting how currencies and amounts of currencies and all this stuff changes over time based on inflation and other things. Yeah. But just interesting, thought you should know that. But I guess we’ve established here we will keep our show name the same.
Steve Lewit: Absolutely. I do not want to change the name. I think sense also has a reference historically about wisdom.
Gabriel Lewit: It does. Well, you just are figuring this out?
Steve Lewit: No, that’s why I don’t want to …
Gabriel Lewit: We can’t change it. Yes. Of course not.
Steve Lewit: Why is everybody laughing here at me? It’s not that I just figured it out, I’m bringing up a point to make this an interesting show here. That it has these other philosophical references. Never mind.
Gabriel Lewit: Okay. That was a good end. I like that.
Steve Lewit: I like that.
Gabriel Lewit: Well, now we’re going to move on here. Now, speaking of money and dollars-
Steve Lewit: Everybody’s laughing at me here. Do you realize if I didn’t have a healthy-
Gabriel Lewit: It’s encouragement laughing.
Steve Lewit: If I didn’t have a healthy ego, I would feel like I’m not worth anything, I would get depressed.
Gabriel Lewit: You’re worth many pennies.
Steve Lewit: Many pennies, many cents.
Gabriel Lewit: Don’t worry.
Steve Lewit: Because I have two cents?
Gabriel Lewit: Now, here we’re going to talk, we actually had a listener comment the other day that they liked our discussion point about, I think it was the lowest cost of living town or city in the United States, or best city for retirement I think it was actually. And they said they really liked that topic, they thought it was a lot of fun and asked for us to do some similar ones.
So today with this penny theme and this dollar theme we just started off with, we’re going to talk about seven countries where your dollar goes the furthest. Steve, you picked this out.
Steve Lewit: I did.
Gabriel Lewit: You said you liked this one.
Steve Lewit: I really do.
Gabriel Lewit: Give us a little intro, take us away here.
Steve Lewit: Well, as the dollar here, you can buy more in other countries, so you look at the exchange rate and see which country can I exchange my dollar for and get more money and spend it and get more for my money. On the top, I don’t know if this is ranked in order, but there are seven countries on this list, Gabriel.
Gabriel Lewit: There are, yes. I see seven listed right here.
Steve Lewit: So, there are Peru. Wow, these are interesting. Thailand. Japan, which I’m … oh, because the yen is really weak right now, so you can get a lot of yen for your dollars. Mexico. These are very interesting. Vietnam. Now here’s a place I’d like to go but I just don’t want to get on-
Gabriel Lewit: Australia.
Steve Lewit: Yeah, I don’t want to get on the airplane for a 23,000-hour ride. And Canada, which really surprised me. And Canada’s been in the news, of course, because of the quibble with the Trump administration. But Canada’s the place to go, your dollar will go further. So think of it, these are such interesting … How many of you have been to Peru, Thailand, Japan?
Gabriel Lewit: I have not been to Peru.
Steve Lewit: Mexico. I’ve been to Mexico.
Gabriel Lewit: I’ve not been to Thailand. I’ve not been to Japan. I have been to Mexico. Have not been to Vietnam or Australia. Have been to Canada. I’m two for seven.
Steve Lewit: Two for seven.
Gabriel Lewit: That’s not bad.
Steve Lewit: Yeah.
Gabriel Lewit: The two neighbors.
Steve Lewit: If you were a baseball player, you would not getting paid a lot of money.
Gabriel Lewit: Say that again.
Steve Lewit: Two out of seven. Two hits out of seven.
Gabriel Lewit: That’s actually pretty good for baseball. Baseball’s one of the few sports where when you’re hitting 250.
Steve Lewit: Two for seven, that’s less than two 50.
Gabriel Lewit: No. Well, two out of eight would be 250.
Steve Lewit: All right.
Gabriel Lewit: Two out of seven, I’d be like an all-star.
Steve Lewit: You would still be on the team.
Gabriel Lewit: Okay. I’d probably be starting on the team.
Steve Lewit: So, you’re not-
Gabriel Lewit: I’m laughing with you on this one.
Steve Lewit: Now, I have clients, and you have clients that are really well-traveled. And I would wonder how many of these they’ve been to. But I do have clients that have been to Thailand, Japan, Mexico, I think Vietnam. I have clients who just came back from Australia. Nobody’s ever said to me, “man, I just went to Canada and had a great trip.”
Gabriel Lewit: Canada’s great. I think Canada’s great.
Steve Lewit: Canada’s great.
Gabriel Lewit: Yeah. It’s just very cold up there. Hey. Sorry, I had to do that.
Steve Lewit: Yeah. Have you been to Quebec?
Gabriel Lewit: I have been to, hold on, because I used to, well, a couple of things, when I went to college, I was five minutes, well, not five minutes, 30 minutes away from the border of Canada, I went to school in Clarkson University in Potsdam, New York, which was very close to the Canadian border. We would do occasional weekend trips over the border. And then I think another time I took a trip to, hold on, I always get them confused, it’s not Montreal-
Steve Lewit: Quebec.
Gabriel Lewit: Vancouver, I think.
Steve Lewit: Vancouver.
Gabriel Lewit: I think it was Vancouver, which seemed like a really awesome city. I’d actually like to go back. Some of the bigger cities there seem really nice around my summer travel list to get to. Although I just haven’t had a lot of chances to get to them yet, they are very much up there.
Steve Lewit: My favorite Canadian city is Quebec, it’s just gorgeous, I just love the history there and so on, so on.
Gabriel Lewit: When have you been to Quebec?
Steve Lewit: That’s why I haven’t gone back in 40 years.
Gabriel Lewit: It probably doesn’t even look … what was it, huts when you went there last time?
Steve Lewit: It had little cavemen with, what do you call them, spears walking. It was very like homey.
Gabriel Lewit: You fish for your own dinner.
Steve Lewit: You fish for your own dinner, it was very natural. It was organic.
Gabriel Lewit: You’ve been to Quebec, yeah. All right.
Steve Lewit: I went to Quebec.
Gabriel Lewit: I’ve worked with you for 21 years, you’ve never gone to Quebec.
Steve Lewit: Everybody’s laughing again. I got a little note that they’re not laughing at me, they’re laughing with me.
Gabriel Lewit: Exactly.
Steve Lewit: Okay. I feel better.
Gabriel Lewit: All right, let me just touch on a couple of quick things here. Okay. Now, Thailand, if you watch the show, The White Lotus, shows this, it shows that you can get luxury at lower prices, five-star resorts, beautiful beaches, all that kind of good stuff. My mom went to Peru a couple of years ago.
Steve Lewit: But now I have to ask you another question.
Gabriel Lewit: What’s that?
Steve Lewit: If you went to The White Lotus hotel in Thailand, I think there is one there.
Gabriel Lewit: It’s not called The White Lotus, but yes.
Steve Lewit: Okay. But if you went to that place, wouldn’t you remember the-
Gabriel Lewit: Don’t spoil it for people.
Steve Lewit: No, no. You’ve got to remember, if you’ve seen the series, you’re going to remember all the events of the series when you go there.
Gabriel Lewit: Of course. Actually, I have it on my to-do list, I’ve already been to, well, my honeymoon was at the hotel, The Four Seasons that they filmed White Lotus season one at, a phenomenal hotel, just absolutely phenomenal. So I now have it on my life bucket list to go to the same hotels that they did for season two and then eventually for season three.
Steve Lewit: That’s great. I love that. I love that.
Gabriel Lewit: This is now on my to-do list.
Steve Lewit: I love that. That’s a great one.
Gabriel Lewit: All right. Now, yeah, a couple of things here. So Thailand, of course we talked about. Japan, we talked a little bit about here, US $1 equals 143 JPY or yen. So you can explore the fish markets, bars, temples of Kyoto. I don’t know if I said that right. Hopefully.
Steve Lewit: You did.
Gabriel Lewit: Majestic forests on the Kumano Kodo trail and plenty of other things. So yeah, could have a lot of fun there. Peru here says you spend about $12 for a terrific meal at restaurants. Well, I tell you, you don’t even get a hamburger in the US here for 12 bucks. So Peru’s got some good pricing there.
Steve Lewit: You go to McDonald’s, it costs you $14 for a meal.
Gabriel Lewit: Yeah, exactly.
Steve Lewit: So, let me ask you, Gabriel, of these that you haven’t visited in your well-traveled years, which one do you want to go to?
Gabriel Lewit: Well, on my list I mentioned I do want to go to some Canadian cities for maybe a short summer, four- or five-day trip or something like that.
Steve Lewit: Nice.
Gabriel Lewit: Would love to go to Australia. Love to, love to, love to. But would need to take two/three weeks off to do that, to make it worthwhile. I’d love to go to New Zealand as well as Australia.
Steve Lewit: Oh yeah.
Gabriel Lewit: Don’t say I currently have the time for that, nor would my five-year-old be able to go on a 24-hour flight. So I think I have to punt on that one. Same with Japan seems far away. So does Thailand.
Steve Lewit: Yeah, they all seem far away.
Gabriel Lewit: Yeah. So maybe we’re just going to go back to Mexico again. Which is why those are the two out of seven I’ve been to.
Steve Lewit: I’d love to go to Japan.
Gabriel Lewit: Yeah, you should, take a little trip over there.
Steve Lewit: I should. I should. My son’s going to give me three weeks off so I can go to Japan.
Gabriel Lewit: You get three days. No, I’m just kidding, just kidding. All right, well, yes, we’d love to hear your comments if you’ve been to any of these countries, you have any feedback to share for us, please write us info@sglfinancial.com. We’ll share your listener feedback on the next episode for any people that would be interested enough to get their voices shared here on the podcast.
Now, moving on of course, since we haven’t talked about anything financial yet, can’t give you the call-in information for us to meet. Normally around this time I’ll get a call.
Steve Lewit: No advertisement yet.
Gabriel Lewit: No. Oh, I forgot one other thing, because we talked about Mexico and Mexico City.
Steve Lewit: I was going to bring it up, but you moved on, so I didn’t.
Gabriel Lewit: Well, I didn’t mean to move on until I brought this up. Okay. So folks, recently we decided, you’re going to see this soon in our monthly newsletter or bi-monthly newsletter, we’re going to have a special of the pets of the office. So I’ll give you a sneak peek here. So everybody started sending pictures of their pets. Well, two things, I’ve realized that I’m the only one that doesn’t have a pet anymore, which is very sad.
Steve Lewit: I don’t have, both me and you.
Gabriel Lewit: Yeah, because my last puppy passed a couple of years ago. A lot of really cute pets in the office. My goodness. Okay. But also apparently here in Mexico City dogs ride buses to and from doggie school.
Steve Lewit: Yes, it’s a dog-friendly city.
Gabriel Lewit: Yeah. You’ve got to see the picture on this article, it’s just these five little dogs in a cart being biked around on a motorcycle, just heading on to school. Okay. Yeah. So apparently Mexico City’s a home to many doggie schools that teach basic obedience and how to get by in a rambunctious mega city. And of course that means you got to send them to school on a dog bus.
Steve Lewit: Absolutely, absolutely. They should not be walking to school.
Gabriel Lewit: Definitely not.
Steve Lewit: They get into a bad habit of exercising.
Gabriel Lewit: Yeah.
Steve Lewit: Yes.
Gabriel Lewit: And somebody was asked here, well, don’t they ever jump off? And the driver that they interviewed here said, “Well, the ones that do go in the cage.” So they have a cage for the rambunctious dogs that can’t stay on the cart. Well, that’s your fun news for the day. Very cute picture if you Google it. I guess, if you Google doggies and dog buses in Mexico City something would probably pop up. But the picture I’m looking at here is super cute.
Steve Lewit: Maybe they’re franchising.
Gabriel Lewit: Who knows? You could start something new.
Steve Lewit: Absolutely. In the US.
Gabriel Lewit: All right, well, onto our real financial topics for this week’s show. Okay. Topic for today is going to be, is private equity going to be invading your 401k soon? And is that a good thing or a bad thing if it does? That’s really the name at the heart of the question here. Okay. Because there’s growing momentum behind this idea of allowing private equity firms access to your 401k. Now why might this be a thing?
Well, number one, private equity firms have a lot of money and they have lobbyists, which are lobbying for this. Why? Because there’s, what, trillions and trillions of dollars, folks, in US retirement plans. I think 9 trillion.
Steve Lewit: 9 trillion.
Gabriel Lewit: As of last reporting.
Steve Lewit: They just want to get their greedy little fingers into that 9 trillion bucks.
Gabriel Lewit: Well, it’s a large pond of money.
Steve Lewit: So, explain, Gabriel, if you would, what is private equity?
Gabriel Lewit: Well, if you think about it, most people typically invest in the stock market, and the stock market is made up of publicly traded companies. And one thing that’s interesting about that-
Steve Lewit: Now, publicly traded means you can go on the stock exchange or some exchange, and if you want to sell your stock, you have somebody there that will buy it at some price.
Gabriel Lewit: Correct, you can go out there, you can buy shares in a publicly traded company-
Steve Lewit: So, that’s publicly traded?
Gabriel Lewit: Yeah. And I don’t remember the exact statistic, but I read something recently that said the percentage of companies in America that are public versus private is actually very, very small.
Steve Lewit: Small, yes.
Gabriel Lewit: The vast majority, it was like 85% or something like that, don’t quote me on that, were private companies, which nobody can invest in directly.
Steve Lewit: Well, like our company, if someone wanted to buy stock in our company, it’s like, well, how much are you offering?
Gabriel Lewit: Yeah, I mean, exactly, you can’t, Like Mr. and Mrs.-
Steve Lewit: But That would be a private equity.
Gabriel Lewit: Mr. and Mrs. Main Street Investor can’t go out there and just buy shares in SGL Financial or other private companies. You hear this term a lot, that big companies, public companies are being taken private by private equity, so you hear that phrase a lot. So point being is why are these private equity firms taking companies private, investing in private companies? Well, they’re doing it to make money.
Steve Lewit: You think?
Gabriel Lewit: And you via many private equity offerings, both currently outside of 401Ks, or if you happen to know the right person, you can invest in these private equity deals. And the goal of course is to get better returns over time than you would typically get with just an equity position in a publicly traded company.
Steve Lewit: That’s correct. Now, first you have to be what’s called a qualified investor.
Gabriel Lewit: Well, often, yes, you would need to be a qualified or accredited investor for many of these opportunities. Now, it doesn’t say here, if these were put into a 401k, assuming there would be some level of due diligence on the offerings provided, the thought is making them more available to mainstream Americans as opposed to just for the rich and wealthy that have access to these private equity offerings.
Steve Lewit: Okay. Sounds interesting.
Gabriel Lewit: That’s at the core of this. Of course, the private equity firms I think just want access to $9 trillion.
Steve Lewit: Yeah, absolutely. That’s how they make money. Okay. From you’re an investor point of view, okay, I can earn higher returns here. A lot of people is talking about private equity. What’s the problem?
Gabriel Lewit: Well, private equity investments are, well, let me phrase it this way, everyone here, for the most part, probably listening to the show, understands this concept of risk versus return. In other words, you want to get a higher return, you can’t get that typically with less risk. To get higher potential returns, you have to be willing to take potentially a slightly higher or much higher level of risk.
Steve Lewit: This is really, really-
Gabriel Lewit: This is at the core of all investing,
Steve Lewit: Very, very important because a lot of people think … they forget the risk side. They say, “I’m going to get a higher return.” And that’s great.
Gabriel Lewit: And keep in mind everybody, there’s no such thing as free lunch in the world, that’s the quote, there’s no free lunch. I’d like there to be free lunch for me, but McDonald’s and Chipotle are charging me two arms and two legs. There’s no free lunch.
Steve Lewit: I asked the other day, and guess what they said?
Gabriel Lewit: They said, “No, you got to pay for it.”
Steve Lewit: “No, you got to pay for it.” So if you’re in private equity, let’s start right there, you’re taking a high-risk investment.
Gabriel Lewit: The goal is higher returns, but that means you’re going to have higher risk.
Steve Lewit: Absolutely.
Gabriel Lewit: Okay. And 401ks are designed for people trying to save for retirement. Many people that invest in 401ks are not really, I would say, knowledgeable expert investors. They may or may not even understand things like diversification and risk versus return or any of these things that could allow them to more subjectively choose what to invest in here from a private equity perspective.
Steve Lewit: Yes.
Gabriel Lewit: Okay. So the question is, is it good for people and investors in 401k plans? Well, there’s arguments on both sides. For the more sophisticated investors, I have a 401k, I’d love to have some options in there that are beyond your typical 20 funds that you have available, whether it’s a Bitcoin cryptocurrency … That’s also being proposed, some alternatives in addition to private equity, things like cryptocurrencies and other ETFs, mostly Bitcoin at this point, inside of 401ks. Is that a good idea or a bad idea?
So with great power comes great responsibility, you have all these better options, better choices, but how do you mitigate the risk of investors and retirees shooting themselves potentially in the foot here with these more risky investments?
Steve Lewit: So I would reframe that a little bit, instead of saying better choices, we have more diversified choices.
Gabriel Lewit: If I said better, I didn’t mean that, but better range of options.
Steve Lewit: Better range of options. And the question is is what’s your goal? And how much money do you have? So for example, you put a hundred grand in a private equity, and they don’t do so well, and you tie your money up maybe for … some of them have, or you can’t get your money for seven or 10 years. Now you retire and you need the money and you want to get your hands on it and you can’t because there’s no public market.
Gabriel Lewit: Well, and that’s what we don’t know yet, if they made this world of private equity investments available to 401ks, maybe it’s a modified version, ones that have more liquidity.
Steve Lewit: I would think.
Gabriel Lewit: I would have to imagine that would be the case. Not ones that your money are locked up and you can’t get it back out. But traditional private equity deals, yeah, you get your money back out when there are exits. Private equity goes in. What do they do, folks? They buy big stakes of companies. Well, unfortunately, private equity doesn’t have a great reputation. It basically buys companies, strips them down, strips out all the costs, fires people, hires lower wage replacements, maximizes profits. And then sells it to the next buyer at a 5X or 10X multiple.
Steve Lewit: That’s the whole idea.
Gabriel Lewit: Okay. It makes money. Makes money, is it good for the companies? There’s a lot of arguments about that, that private equity is destroying many, many companies in the sake of profit. Should that be included in a 401k? Again, this is very controversial.
Steve Lewit: It’s an ethical question. And yet some private equity companies have longer term outlooks and they do a nice job of refurbishing a company.
Gabriel Lewit: Yeah, they could. I mean, but most are, they’re considered vultures of the investment and the business world.
Steve Lewit: Well, if I see a private equity company, for example, there are private equity companies that have come into the insurance business, and insurance is a very conservative business, but as soon as I see a private equity company take over an insurance company, I’m thinking in three, four years they’re going to sell that company. They’re going to want to milk everything out of that company, which is not good for the consumer.
Gabriel Lewit: Potentially, yeah. Now, some private equities will keep those companies around longer if they’re cash flowing well. You just don’t know. But the goal is, it’s all about the money when private equity gets involved. And if it’s not going to maximize their profit, well, they’re not going to care very much.
Steve Lewit: All right, so what’s your verdict, thumbs up or thumbs down?
Gabriel Lewit: I think it could be interesting, maybe there are options that are unlocked for people that have larger balances maybe. I don’t know. There could be some criteria around it. Maybe to unlock those in your 401k, you have to go through training courses. I mean, none of this is in the article. But if I were inventing this, I’d say take an accreditation course here, sign off, extra sign-offs that you understand the risks before you’re allowed to invest in it. But let people choose, I think there’s some value in that.
Steve Lewit: So, is that a thumbs up or a thumbs down?
Gabriel Lewit: I guess in general I would be thumbs up if these were well vetted, better opportunities, more liquid, training was provided, sign-offs were there. If all that was in place, I think it would be a thumbs up from me.
Steve Lewit: And I agree. I like freedom of choice. I think there are some people that are more aggressive, some people are more conservative. And why not play this game, as long as you understand it, play the game the way you want to play it.
Gabriel Lewit: Yeah, exactly. Now, timing-wise here, I did have another topic teed up, but it’s not going to be something we’d have enough time to get to here. So maybe just to round out today’s show, since we were talking about private equity, there’s also questions I’ve had of late from certain clients. Should I invest in private equity in my investments in general? Not just inside the 401k.
And there are a lot of different choices in this world of what we call alternative investments. Private equity tends to be one of those. There are structured products, structured notes, there are venture capital funds, which is a little different than private equity, what we call venture funds. There are private placements, there are reinsurance funds.
Steve Lewit: Reinsurance funds.
Gabriel Lewit: There are private credit strategies. There are all of these things that are not your typical stocks and bonds based mutual funds or your typical asset class like large, small, value, international. And more and more we’re getting questions around, should I have these or some part of these in my portfolio?
Steve Lewit: Yes.
Gabriel Lewit: Okay. So let’s talk about that.
Steve Lewit: Okay.
Gabriel Lewit: All right.
Steve Lewit: You start, because I don’t know where you’re going with this.
Gabriel Lewit: I’m happy to start. Well, the question is first and foremost, do you have the money-
Steve Lewit: I had this question yesterday.
Gabriel Lewit: Do you have the money available to afford to take a higher level of risk?
Steve Lewit: It was a new client, a potential client, the first question that she asked me was, do you do private equity?
Gabriel Lewit: Do you do?
Steve Lewit: Do you do?
Gabriel Lewit: Yes, we can do.
Steve Lewit: We can do.
Gabriel Lewit: All right. So that is again the question, should you do? And the answer to that is, it depends, of course like everything. Should you invest in bonds? I don’t know, it depends. Should you invest in stocks? I don’t know, it depends. It depends on where it fits inside your plan. Everything goes back to your plan.
What’s your risk tolerance? Are you an accredited investor? Many of these require you to have a very high net worth, have enough assets. Why? Because they know you could in theory afford to take some additional risk. And the fact that you’ve already accumulated a lot of money usually means that you’ve got some sense of navigating through more challenging or difficult financial topics.
And then the other question is, do you really need to take the risk to get the return you’re looking for? Some people, they like the thrill of the chase.
Steve Lewit: They do, they do. And that’s fine. If you put a hundred grand, I’m just using a hundred thousand dollars, private equity, I would say to you, “Well, if you lost that all, how would you feel about that?”
Gabriel Lewit: I’m smiling here because the topic I was going to talk about, I’m just going to give you a teaser of this. We’re going to talk about this next time, it’s about psychology of money.
Steve Lewit: You see, we’re on the same page.
Gabriel Lewit: All right. And one of them says, concept number two is never enough, there’s an issue in psychology of money where you could get 14% returns, which is great, it’s well above average, and you could say, “Oh, that’s not good enough, I want to get 16%, 18%.”
Steve Lewit: Yeah, Gabriel, when you ask people who are investing in the stock market, and you say to them, “How much are you looking to make on your investments in the stock market?” What do they always say?
Gabriel Lewit: 10% to 12%.
Steve Lewit: Or?
Gabriel Lewit: Or as much as I can.
Steve Lewit: As much as I can.
Gabriel Lewit: That’s the other most common option.
Steve Lewit: Yeah. How do you measure that?
Gabriel Lewit: Well, that’s an issue. There’s people out there, many, many millions and millions and billions of people out there, where they don’t understand when enough is enough. And they put themselves at risk because they always want more. We’re going to talk a lot more about this next time.
But going back to private equity, that’s one of those questions is, do you even need it? What are you trying to accomplish with it? Is it because you need the money? You just want more? Do you want to subject yourself to the risks of it?
Steve Lewit: You want to do better.
Gabriel Lewit: Do you want to sound interesting at the next party you’re at, “Hey, I got this private equity deal, I just 4X-ed my money.”
Steve Lewit: You want to do better than your neighbor.
Gabriel Lewit: Yeah. What’s the driver there?
Steve Lewit: All kinds of ego drive.
Gabriel Lewit: Sometimes it is a big part of it. So we’re going to unpack a lot more of this psychological element. But to wrap up our topic for today, private equity is of course an investment that’s available to the right investors. It may or may not be available in your 401k. And whether or not you should use it? Look, if you want to have a ultra aggressive slice of your portfolio pie, maybe it’s 5%, and you have the accreditation and the capabilities and the knowledge and the wherewithal to do this intelligently, yeah, we could help you with that. But in general, we don’t recommend it for a large or excessive part of your portfolio.
Steve Lewit: It’s just like buying a little bit of Bitcoin.
Gabriel Lewit: Yeah, to some extent.
Steve Lewit: Extremely high reward potential, but if you lose it, it’s not the end of the world.
Gabriel Lewit: Yeah, yeah, exactly.
Well, if you’ve got questions on this, everybody, anything we’ve talked about here today, where you should travel to next, how you can afford that trip, what you should invest inside your 401k, or assessing if private equity options are right for you and your plan, give us a call, we’re here to help. (847) 499-3330 or go to our website, sglfinancial.com of course and click contact us. Or most easy, just email us info@sglfinancial.com.
Steve Lewit: So many options.
Gabriel Lewit: So many choices.
Steve Lewit: So many.
Gabriel Lewit: Well, that’s it from your two pennies here. And we hope you have a wonderful rest of your day and week. And we’ll talk to you on the next show.
Steve Lewit: I feel like I’m losing a part of myself.
Gabriel Lewit: Yeah, you might be.
Steve Lewit: I might be, yeah.
Gabriel Lewit: All right, take care everybody. Have a great rest of your day.
Steve Lewit: See you later. Bye.
Gabriel Lewit: Bye-bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at sglfinancial.com. And be sure to subscribe to join us on next week’s episode.
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