Warning: Advisor “Red Flags” Ahead

Our 2 Cents – Episode #104

Warning: Advisor “Red Flags” Ahead

Welcome back for another episode of the Our 2 Cents podcast!

We’re helping you spot “red flags” when interviewing potential financial advisors, or even when reviewing your current advisor. Then we’re answering some very thoughtful listener questions today. Listen in now!

  1. Financial Advisor “Red Flags”:
    • Biases and the way advisors think
    • Not getting what you need from who you like
    • Too much technical jargon, not enough valuable communication
    • Overconfident market predictions
    • All upside, no downside
    • Family ties
  2. Listener Questions:
    • “According to Terry Savage, Suze Orman, and my tennis partner, I should be buying I Bonds. I’ve never done anything like this before. What do you think?” – John
    • “I am curious how Savant is fairing during this Bear Market. Is their level of diversification standing up better than most?” – Tom

Tune in now to join us for this discussion!

Request Your Free Consultation Today

Podcast Transcript

Announcer: You’re 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: Good morning, everybody. Welcome to Our 2 Cents. This is Gabriel joined with Steve.

Steve Lewit: Steven.

Gabriel Lewit: Steven.

Steve Lewit: Gabriel, I always call you Gabriel, but you always call me Steve.

Gabriel Lewit: I think I call you dad, Steve, Steven. One of those three.

Steve Lewit: Some people are very formal. It’s Steven.

Gabriel Lewit: Yes.

Steve Lewit: Some people will call you Gabe. Do you mind that?

Gabriel Lewit: I like Gabe.

Steve Lewit: Oh, you like Gabe?

Gabriel Lewit: I like Gabriel.

Steve Lewit: All right, Gabe.

Gabriel Lewit: I like the dude.

Steve Lewit: Good morning, everybody.

Gabriel Lewit: Whatever it is, I’m good.

Steve Lewit: I’m going to move us on since I took us on a thing.

Gabriel Lewit: You sure certainly did. Well, good morning. It’s a nice, sunny day here. A little bit hot this week, also, as you’re probably aware if you’ve been out and about. A little hundred-degree heat never hurt anybody. Just maybe cause you to sweat a little bit.

Steve Lewit: Just be careful.

Gabriel Lewit: Watch out you don’t get burned when you get in your car. So, the interior of my car gets very hot to the touch.

Steve Lewit: We went out for lunch yesterday. I usually drive and Gabriel says, “Oh, I’ll drive.” And I said, “Great.” So, I sit down in his car, and I feel like I had roasted behind.

Gabriel Lewit: It seemed extra hot.

Steve Lewit: It was really, like, are you kidding me?

Gabriel Lewit: Yeah, it was nuts. Well, we’ve got a good show lined up for you today. We’ve got a few different topics here. We want to talk about picking an advisor and red flags, things that you may want to watch out for. I think we probably talked about this before, but we’ve got some new key talking points on this that might be relevant and helpful and timely.

Steve Lewit: Yeah, we always kind of talk about it, Gabriel. I think this is a little bit different, because of the world changing. And life ain’t what it used to be.

Gabriel Lewit: Yes, yes. I would say that’s true. Very different this year. And speaking of that, that was going to be our separate second topic. You spoiled some of my thunder there.

Steve Lewit: Oh, I’m sorry.

Gabriel Lewit: Was that retirement isn’t what it used to be.

Steve Lewit: Yeah, psychic.

Gabriel Lewit: And we’re going to talk a little bit about some of the reasons why here in just a couple of minutes. So, I figure we can go ahead and dive in. Then we’ve got a couple of listener questions for you, too. So, stay tuned for those and we’ll make sure we get everything covered here on today’s show.

Steve Lewit: Yeah, the good ones. They are good ones.

Gabriel Lewit: Yeah, got some good ones there. So, all right, let’s go ahead and dive in. Red flags when choosing an advisor, well, there are some good things, obviously, that you could see some good signs. But there are also some things to be on the lookout for when you’re interviewing an advisor, or if you’re already working with an advisor. So, dad, obviously, people have a lot of different choices of who to work with and who to pick. And sometimes people find it hard to change because they’re in their comfort zone. But what are some of the signs that the advisor that you’re working with maybe is not doing perhaps what they should be doing, or not going above and beyond, or not putting your best interest first? All the things that an advisor should typically be doing on a general basis.

Steve Lewit: Yeah. So, I always suggest, and I gave a seminar last night, we were talking about this a lot, is who is this person that you’re talking to that calls him or herself an advisor? Who are they as a person? And how do they see the world? Because I think at the end of the day, Gabriel, everybody has the same choice of products, even though some advisors will only use market products. And insurance guys will only use insurance products. But if I were interviewing an advisor today, I’d be asking myself, “How does this person think,” because that’s what’s going to separate that person from somebody else. “And do I like the way they think? And do I like them?” And how people think is really quite different in our industry. Some people are very biased towards certain things and against others.

Steve Lewit: If you go to the big wire houses, if you go to Fidelity, or Vanguard, or Fisher, and you say, “Hey, I got a million bucks. Where should I put it?” They’ll say, “Oh, we’ll make a nice portfolio for you.” So, they don’t do insurance products. But if you go to an insurance guy, he’s going to just sell you an annuity, tell you not to go in the market. So how does this person think? Do they think holistically? Do they work mostly with anybody, young people, old people, middle aged people? Do they have a focus? Do they have a specialty?

Steve Lewit: We have a specialty. We work mostly with folks who are thinking about retirement or in retirement. That’s our specialty. I’ve been doing that for 30 years and you’ve been doing it for 18 or 17 years. That’s what we do. Not that we don’t have young clients, but everything to us is about retirement. So how does this person think, I think, is the magic question. And you can’t just ask them, how do you think, sir, or ma’am? You have to kind of-

Gabriel Lewit: I think somebody would say, “What do you mean?”

Steve Lewit: What do you mean? You have to see what they offer you and how they talk to you. And ask them, “If I have a million dollars, where would you put my money?” And see what they say. And have a good list of questions to ask.

Gabriel Lewit: Yeah. Yeah. I think the challenge there is, like you said, sometimes you can’t just come out and ask a question. You’ve got to figure out the answer to an unasked question like that via just observation, conversation, materials, perhaps. But definitely, it’s going to come down typically to the types of meetings that you’re having with your advisor, I think, and what they’re talking about, and what they bring up in a review, and what items they’re mentioning when you express concerns.

Steve Lewit: The content.

Gabriel Lewit: All of that’s going to help you get a better sense of how that person thinks. And I think what’s challenging, you mentioned it, I think, a little bit there, but people oftentimes have good relationships with their advisor that they like. And they start to realize that maybe I’m not getting everything I need from this person that I really like. And so, I would actually call that a red flag. If you ever have said that to yourself, folks, “I really like this person, but deep down, I don’t think they’re right for me. But gosh, I don’t think I can leave them, because I’ve been with them for 20 years,” that is a red flag. Because look, it’s really great that you like that person. They’ve done a good job for you. They’ve helped you get up to where you are today. But you might have outgrown that person.

Steve Lewit: Well, yeah. Do you remember back in high school? I remember, I had one teacher in high school. I was a senior. I loved this teacher. I mean, she was an English teacher. And I wasn’t big on English. I wasn’t writing back then. But she had stories, and she was interesting, and she was great at English. And then I had to move on and go to college. And that was really hard, because I really liked her, but I had outgrown her and needed to move on to a wider and broader education, at a higher level.

Gabriel Lewit: Well, just, yeah, exactly, someone that specializes in a more advanced version of English, or mathematics, or whatever the subject might be. It might be helpful to think about your advisor that way. And typically, it presents itself in an advisor that perhaps just focuses on the investments and doesn’t do as much outside of that, for example. So, he might just talk to you about your portfolio. You ask them “Hey, how am I doing?” And they say, “Good. Portfolio’s doing pretty good.” And that’s about the extent of the review.

Steve Lewit: Oh, yeah. But they may say, “Tech is not doing well. And financials are doing great. And I think I’m going to move this here or this there. And you did good last quarter, better than last year.” And it’s all numbers. And all mainly good news, even if the market’s down. “Well, we’re holding our own.” And that’s what the meeting is about. But that person doesn’t bring in, especially when you retire, the other areas of concern, which is cash flow and income. I mean, really cash flow and not just running a superficial report that says, “You’re going to have enough money.”

Steve Lewit: Cash flow doesn’t take into consideration taxes, which I don’t want to beat this horse, because I’ve always been beating it, taxes are huge. There’s so much wealth building that can be had in taxes and doesn’t bring in how money is going to get transferred to your heirs. So, most advisors is what I call investment advisors. They only talk about investments. And that’s great while you’re in the accumulation stage, but once you retire, there’s so many other dynamics that come into this.

Gabriel Lewit: Well, I would even say, if you’re in the accumulation stage, you need tax planning as well. You need possibly some estate and legacy planning, some life insurance. So, there’s all sorts of other things you could need, even at the younger ages of investment. And I think it’s just one of the limitations of being at some of the bigger banks and bigger firms. That’s all somebody does, is just investments. So those could be some red flags there. A few others that could be very relevant and timely right now is, does your advisor put out any meaningful communication about market updates? And not just very boiler plate how the market is doing year to date. Anybody can go online and there’s dozens of companies that sell market commentary, where you just put out a bunch of technical jargon.

Gabriel Lewit: But I really mean someone that helps you understand, deep down, what’s really causing the market issues, historical data about market recoveries and declines. But more importantly, how does that fit into your plan that they’ve built for you? Because ultimately, that’s what’s going to give you better confidence and peace of mind during challenging times.

Steve Lewit: Yeah. To your point, Gabriel, I had a client, gave me a big compliment, which I was very happy to get. And said, “Steve, I love talking to you. You’re so clear about things. My old advisor, all he talked about was… I never understood what he was saying. He was talking about alpha, and sharp ratios, and asset class of… I had no idea what he was talking about, but it sounded great.”

Gabriel Lewit: Yeah, exactly. So technical jargon is something maybe to watch out for. Communication style, what’s the flow of your communication? Do you just communicate well? And responsiveness, I think is a big one. If you do call in, because you’re worried or concerned, do you get a call back the same day from the advisor or team member? Is it really easy to schedule appointments? And all these things that you need from a servicing, and a relationship, and an ongoing planning perspective, making sure you’ve got those at the tip of your fingertips.

Gabriel Lewit: And I’ll give you an example. I just had someone the other day, a new potential client of ours, and she was saying she was frustrated, because her current guy, she’ll call in to get money withdrawn from a portfolio and he’ll say, “You’ll have that tomorrow.” And then tomorrow comes and it’s just not in her bank account. And she’s like, “This has happened many times, where he tells me he’s going to get me money on X date. And then it’s not there. I’ve got to follow back up with him and find out where it’s at.” Someone that doesn’t follow through on some of the things that they talk about is also a challenging thing, especially when it comes to your money and getting access to the funds that you need.

Steve Lewit: Yeah. That’s why I think people fall in love with their advisor, because some advisors, many advisors, are really good at that, Gabriel. They communicate well, take people out for lunch or dinner, really nice people, good intentions. And it’s a nice person and you don’t want to leave that person, even though you’ve outgrown them. And that puts people in a pickle. Is a pickle… How do you get into a pickle?

Gabriel Lewit: Well, I think you’d slice off the ends first. And then you’d carve out a hole in the middle, climb in. It’d have to be a large pickle, but…

Steve Lewit: But it gets them in. It gets them into a pickle.

Gabriel Lewit: It does. Yeah, it does.

Steve Lewit: Or a noodle soup.

Gabriel Lewit: Well, yeah. And I think that’s a hard one. We mentioned that a few times.

Steve Lewit: You did. You started that way.

Gabriel Lewit: Yeah. It’s hard to leave somebody you like. But again, you just got to look at the totality of everything. But the last flag here we wanted to talk about is an advisor that is ultra-certain or adamant that they know the future. And why is that a red flag, folks? You know it, deep down. We say it all the time. You can’t predict the future. Nobody knows. In fact, I had another client came in the other day, a potential client and was saying his other advisor keeps calling him, two, three times so far this year. And one of the questions he asked is, “What’s going to happen with the market?” And this other advisor keeps saying, “Oh yeah, our firm keeps changing our forecast for the year.” It’s like, “Well, hold on a second!” And we started talking about it.

Gabriel Lewit: Back at the year, they thought it was going to be an up year. And then the market went down. So, then the firm changed their forecast, said it’s going to be a level year. And then the market went down more. Now, they changed their forecast again, it’s going to be a down year. And it’s like, “If you’re going to change a forecast three times in three months, as you see market data, what good is the forecast?”

Steve Lewit: It’s like, you turn on the weather in the morning and it says, “It’s going to rain.” So you say, “Okay, I’m going to take my umbrella.” Then you turn it on 10 minutes later and it says, “No! It’s going to be sunny.” “All right, forget the umbrella. Oh, no! It’s going to be cold. I need a jacket.” “Nope, you don’t need a jacket.” How do you know?

Gabriel Lewit: So why is that dangerous? Because if it were a red flag, I should say, or it could be dangerous to your planning, because if you’re making all these financial decisions based on some magical forecast that nobody really knows… I was just reading an article last night about a guy. I forget his name. Some guy that had a big hedge fund that had a really good run back in the ’90s, but he’s made year after year wrong predictions for the last 20 years.

Steve Lewit: He got one right. He got one right.

Gabriel Lewit: And this year he’s saying, “I think the market’s going to go down this year. I told you guys.” And he finally is right. It’s the old phrase, a broken watch is right two times a day.

Steve Lewit: That’s correct. Yeah, it is. Yeah.

Gabriel Lewit: So, you just want to be careful there. And we’ll be the first to admit that nobody has a crystal ball. And our crystal ball isn’t any better than anyone else’s. And you’ve got to build a plan that’s going to be successful, regardless of that.

Steve Lewit: Yeah. It brings me to another thing, Gabriel, is what do you think of advisors? When a person sits down with an advisor and the advisor is saying, “Well, this portfolio over time, will do 6 or 7%. We’ve done 8 or 9%,” and they’re always talking about the upside, but never talks about the downside.

Gabriel Lewit: Well, I guess, today’s my day of client examples. Another person came see me other day. I think maybe due to the market being down, we’re getting a lot of calls from people with other advisors that are looking for our opinion. But she said, “I’m in a conservative portfolio.” And we went through her statements, and I said, “Well…” Oh, no! She actually went further. And she said, “My advisor told me I’m in the most conservative portfolio that they have there.” And we go and look, and she’s in, as a whole, almost 70% stocks, 30% equities, I mean 30% bonds. And some of the stocks and some of her accounts were all individual stocks.

Gabriel Lewit: And so I’m saying, “Well, I hate to be the bearer of bad news here, but this is very much not a conservative portfolio.” And she was really floored by that. And to your point, probably talking about, “Hey, this is going to make 5, 6%,” not letting her know that that portfolio could lose 25, 30, 35% if the market goes down.

Steve Lewit: In a bad market. As you know, when we talk to you, we’re always saying, “Look, in the worst year, this portfolio was down 30% or 28%. Are you okay with that?” So, you know what the downside looks like. But if you only see the upside and you don’t know the downside, it’s like getting in the car and you don’t know where the gas stations are.

Gabriel Lewit: Ah, yes, indeed. I just thought of one other one here. I know that we’re running a little long on this one. They just keep kind of coming to the surface, but a red flag would be if your advisor is your family member.

Steve Lewit: Oh, whoops.

Gabriel Lewit: Whoops. So, I was just talking to someone a few weeks back. And she really wanted to work with me, but she was really struggling, because her current advisor, if you will, was her sister. And her sister is very strong willed and telling her, “Buy this. Don’t buy this. Don’t do this. Don’t sell that stock. Do this. Don’t do this.” And she really, at the end of the day, she didn’t come on board with us, because she couldn’t get over this thought that she was going to have to tell her sister, “No, I want to do this on my own.”

Steve Lewit: Well, I understand.

Gabriel Lewit: That’s hard.

Steve Lewit: You ditch your sister.

Gabriel Lewit: It’s a family member. It’s a family member.

Steve Lewit: And then over Thanksgiving dinner you got to look at her. That’s really tough.

Gabriel Lewit: That’s really tough one, folks.

Steve Lewit: So the rule is… I won’t manage money for anybody in my family. I know you won’t either, Gabriel. It’s just a bad… Well, you do for your mom. But she doesn’t listen to you.

Gabriel Lewit: Well, I will do it for a family member under one condition, which is a very strong, upfront agreement that, “Hey, we’re not going to talk about this at the family dinner table. When we have family events, we’re family. If we want to talk money, you schedule an appointment, just like any other client and come in.” Because I don’t want to have that messing things up.

Steve Lewit: It’s like talking politics over dinner.

Gabriel Lewit: Yeah, no good. No good.

Steve Lewit: No. No good. No good.

Gabriel Lewit: So folks, those are some of the red flags. If you’ve caught any of those and you’re thinking, “Maybe I’ve got some of those here in my situation,” it’s just something for you to think about. And it doesn’t mean that your advisor is a bad person. It just means you want to be careful of these things and how they might impact you. All right, so if you got questions, of course, as you might, or ever will, just give us a call at (847) 499-3330 or go to SGLFinancial.com, click contact us. And I also want to put out there, because I always forget to do this, we have a few books here. Steve’s written a book called The Perpetual Retirement Income Machine.

Steve Lewit: Steven.

Gabriel Lewit: Steven R. Lewit. My goodness, you’re hung up on your name today.

Steve Lewit: I don’t know.

Gabriel Lewit: Papa bear-

Steve Lewit: Papa bear!

Gabriel Lewit: … has written a book. If you’d like a copy of that for free, if you have not received one, go to our website, SGLFinancial.com/contact, or you can click the contact us button. Just write in there, “I’d like a free copy of the PRIM, or the Perpetual Retirement Income Machine book.” And we’ve also written a book called 123 Annuities. If you’re interested in the world of annuities and how they fit into your portfolio, I’ll get you a free copy of that as well. So just thought I’d put that out there in case that’s something that you haven’t yet received.

Steve Lewit: Yeah. We wrote the annuity book because we meet so many people that are misinformed about annuities. They go on the internet, and they think this, this and this. So, we decided to write a book, Gabriel and I, that really says it the way it is.

Gabriel Lewit: Yes. A little more of a technical manual, really, if you’re interested in the nuts and bolts of how they work. All right, so let’s talk a little bit about some listener questions here. I want to do those first. We may actually not have enough time to get into the old ways of retirement. But we’ll see how things go. I see a question here that came in via email from John. And John says, “Steven and Gabriel, wanted to let you know I enjoy your podcast.” Thank you, John.

Steve Lewit: Thank you, John.

Gabriel Lewit: And I have a question for you. “According to Terry Savage, Suze Orman and my tennis partner, should I be buying I Bonds? I’ve never done anything like this before. What do you think?”

Steve Lewit: Well, I think the first thing is, what level is your tennis partner at? Is he a good player or a lousy player? If he’s a lousy player, don’t listen to him. How is that for a technical answer?

Gabriel Lewit: I’m not sure that tennis equates to financial knowledge.

Steve Lewit: Yeah, you might be right.

Gabriel Lewit: But just a quick thought there. So, what do you think? Yes, John, I Bonds, you’re hearing about them all over the place. They’re the “it” investment so far this year. Well, why are they the it investment? Because they’re tied to inflation. The interest rate that you receive is tied to inflation. Inflation is high right now. So, I Bonds are offering an above typical current interest rate of nine point, I don’t have it in front of me.

Steve Lewit: Nine point something.

Gabriel Lewit: Yeah, nine point something percent.

Steve Lewit: Which is incredible.

Gabriel Lewit: Which is great. And now, what’s not great about it, you mentioned this in your email, John, so I think you’re aware of this, but in case other people aren’t, you can only invest $10,000 per person, per year.

Steve Lewit: That’s correct.

Gabriel Lewit: So if you have a million dollars and you want to get 9% in I Bonds, well, you’re going to be waiting a while to invest all that million dollars. 20,000 a year for many years will finally get you into all the I Bonds.

Steve Lewit: Yeah. And they’re 30-year bonds. You have to wait five years, otherwise you get penalized six months of interest.

Gabriel Lewit: Yeah, and you have to wait a minimum of one-year period to be able to redeem it.

Steve Lewit: That’s correct.

Gabriel Lewit: So if you need it in three months, in six months, in nine months, not the right investment vehicle for you.

Steve Lewit: You ain’t getting it.

Gabriel Lewit: But, to be honest, it’s definitely not a bad thing to include in your portfolio.

Steve Lewit: Absolutely. If you have 10 grand or 20 grand sitting around for you and your wife, go out and buy it. Now, where do they get it, Gabriel?

Gabriel Lewit: Well, you can go to us, because we can buy them in your portfolio, if you’d like. You could also go to TreasuryDirect. We won’t buy them just standalone for you. It’s part of an overall model portfolio. But if you want them just standalone, just go to TreasuryDirect or Google I Bonds, TreasuryDirect, and you’ll see the link there. Or email me, I’ll send you the link. Set up account.

Steve Lewit: It’s pretty easy to do. So John, in answer to your question, absolutely, if you have some cash sitting around you don’t need and you just want to park it, it’s a pretty attractive investment, from a lot of points of view. We wish we could buy more, but it’s 10 grand each and that’s the limit.

Gabriel Lewit: Yes. Yes. So definitely, a quick answer there. Yes. But go ahead. Can’t really go wrong if you’re okay with the time horizon. Let’s see, the next question we’ve got here, let me pull up my notes, is, let’s see, a client from here, Tom, was saying, “Curious how your money manager Savant…” Folks, if you’re not aware, we use a third-party money manager, Savant Wealth, to be our trading team and our investment research committee. “Curious how they’re doing in this bear market. Is the diversification level that they’re using standing up better than most?” Good question.

Gabriel Lewit: Now, Tom and listeners, we can’t use performance figures on a podcast like this, because compliance won’t let us. And the disclosures would be 10 minutes long to have to read those. But we can talk conceptually about the level of diversification benefits that we’re seeing with our portfolio models compared to what I’d call a more standard or lightly-diversified portfolio or what people typically have in a target date fund, in their 401ks or individual stocks. And the quick answer is, yes, our portfolios are actually holding up very well. And I would like to just put out there that this was what they were built for, was challenging markets like this.

Gabriel Lewit: And in fact, if you were to rewind a year or two, people would be saying the opposite things, like, “Man, why is your heavily-diversified portfolio lagging the S&P 500, that had a booming year?” Well, because folks, when you’ve got a diversified portfolio, let’s just reiterate what that is, you might have with us 20 different ETFs or mutual funds, each one of them representing a different asset class. And every one of those asset classes is going to perform differently in this current bear market environment.

Steve Lewit: In every market.

Gabriel Lewit: In every market environment. But especially, in this current bear market. When you have a lightly-diversified portfolio, say just the S&P 500 and the AGG Bond Index, or maybe a little bit of international splashed into there for fun, you’re hanging your hat on only three index benchmarks or three indexes and their performance. And so, if each of those three indexes are down, the S&P is down 22%, NASDAQ’s down 30, internationals are down, I think, a little less than 20, you’ve got bonds down 12%, well, that’s going to be your primary driver of your portfolio. And if you look at our portfolios, we’ve got five or six or seven different asset classes, depending on the exact model, that are down less than 10% and some even up on the year.

Steve Lewit: Some are positive.

Gabriel Lewit: Yeah. Some are even positive or neutral. And so those different asset classes, the ones that aren’t down as far, are helping to buffer the downside drawdown of the parts of our portfolio that are down, like the US large cap portfolio component.

Steve Lewit: Yeah. So Gabriel, I just want to make it clear. When you say our portfolios are holding up well, that means we are outperforming our benchmarks. It doesn’t mean we’re making money in this market.

Gabriel Lewit: Well, right. Folks, if you know a little bit about our investment philosophy, we don’t believe in active or tactical market trading where you can say, “Hey, I’m going to predict the future. I’m going to get out. I’m going to avoid losses. I’m going to get back in at the right time.” History shows that you cannot do that. It does not work. And people that do say it works are really just getting lucky every once in a while.

Steve Lewit: It’s not a repeatable thing that you can do. You can get it right once or twice, and then you lose it the next time around.

Gabriel Lewit: Because it’s mostly luck, that’s why it’s not repeatable. But on the other hand, diversification and really broad, heavy global diversification, with the inclusions of alternatives, which we’ll talk about in a second, that’s a big part of our allocation model, can really help improve performance and reduce volatility, or what’s called standard deviation of a portfolio. And that’s really what it’s all about. When we talk about building a better portfolio, creating a more efficient investment model or asset allocation mix, that’s what we’re aiming to do. And what we are doing is we’re improving results longer term. We’re reducing our risk. And we’re giving us better performance over a wider range of market conditions.

Steve Lewit: Yeah. So, I just want to tag onto that, Gabriel, is that we didn’t make this stuff up. And Savant didn’t make this stuff up. This is all based on Nobel Prize winning research, independent research, that started back in 1965 and has been updated as it’s going along called Modern Portfolio Theory, which by the way, we were talking about advisors earlier. If I was sitting with an advisor, I’d always ask him, “Where is the independent research that backs up what you’re telling me? Where is the independent research?” So, the data shows that if you have a well-diversified portfolio, rather than a lightly-diversified portfolio, and you give it time, it will outperform any active management, or trying to time the market, or algorithms, or anything like that.

Gabriel Lewit: Right. And there’s a lot of hedge funds, really expensive big names. What’s her name, Cathie Wood, ARK Fund, ARK Invest Funds, big hedge funds, lots of them that are down a lot this year, because they take outsize risks, and outsize bets, and heavy, heavy fees. And they’re drawing people in, because people want to believe that there’s somebody out there that can predict the future, and time the markets, and prevent them from losing money, and make them huge over above market returns. I think more honestly, experience and sophisticated investors start to realize that it’s a lot of lipstick on that. Not so good looking, whatever. And that’s something that they realize. There’s not a lot of meat there.

Steve Lewit: Well, I had a question last night and pretty challenging. So, what are you doing about the down market in your portfolios? And I said, “Well, we’re not doing anything. We make minor adjustments.” “So, you don’t do nothing? And you get a fee for doing nothing?” Well, how do you answer that question?

Gabriel Lewit: Well, I would go back to one of my favorite analogies you use, which is if you live in a place in the country that’s going to an experience an earthquake at some point, you would pay a contractor well in advance to earthquake-proof your house. And so, when the earthquake is happening, you’re not calling that contractor, saying, “What are you doing right now to avoid the earthquake?”

Steve Lewit: Where were you last night when I needed an answer?

Gabriel Lewit: “What did I pay you for if you’re not doing something?” “Well, you paid me to build your house so that it’s going to be the only one standing after the earthquake is coming.”

Steve Lewit: I’m going to call that woman who asked that.

Gabriel Lewit: So that’s the idea. I mean, a lot of times people are coming to us, not just because they’re looking for an emotional, quick reaction when the market’s doing something crazy, but because we’ve built their portfolio. We built their plan. We built their buckets. We built their tax plan. All these things we’ve done for them and we’re continuing to guide them. And in fact, the big thing that I’d say we earn our keep with, with our funds and the fees that we charge, is making sure you stay on course with your plan and don’t do something emotionally volatile, or something that’s going to be detrimental for you in the longer run with your plan. If you look, there’s a lot of, to your point, independent data that says, “Advisors help their clients not do things that would ultimately hurt their portfolio.”

Steve Lewit: Yeah. No, well, who, what… I’m sorry, Gabriel. I forgot the name of the person who asked the question.

Gabriel Lewit: Tom.

Steve Lewit: Tom. So Tom, Gabriel’s going to now teach you about alternatives, which is a major reason why our portfolios are doing as well as they’re doing.

Gabriel Lewit: Well, and I can’t spend too much time here, because we’re running up on our minute cap, but certainly can dive deeper. We’ve got loads of data on alternatives, but a big slice of our portfolio anywhere from five to 10% is invested in alternatives to stocks and bonds. And people traditionally will build a portfolio that just has stocks and bonds in it. Various asset classes, for example.

Steve Lewit: So, a 70/30 portfolio would be 70% equities and 30% bonds.

Gabriel Lewit: Yeah. We’re more of, I’d say, a 70, 20, 10, where you’re 70% equities, 20% bonds, various types of equities and bonds in there. Of course, that’s further diversification in those two broad asset glasses. But the other ten’s going to be alternatives. And these are things that have what are called zero correlation with the performance of stocks and bonds. So, when stocks and bonds go down, a non-correlated asset means it could be level. It could be up. There’s no distinct historical correlation between performance of how they react to one another.

Steve Lewit: It doesn’t mirror the market. It could, but it could also go up like some of our alternatives have.

Gabriel Lewit: And so, these are things like reinsurance. These are things like managed futures. They could be things like commodities. They could be REITs. In some cases, REITs will trend a lot with equity markets. But they could be-

Steve Lewit: Some trend following.

Gabriel Lewit: … trend following. They could be timber, real assets, farmland. There’s all these other things.

Steve Lewit: Momentum.

Gabriel Lewit: Now, we don’t do this in our portfolio, but some people will be like, “Can I buy artwork?” And that’s a whole thing. People buy and trade artwork inside portfolios. There’s funds that do that now. But those are some of the more exotic ones. But at the core here, you’re looking for alternatives that don’t react the same way that stocks and bonds do. And you typically want to have those as a light amount of salt on the meal. You don’t want to over salt your meal with too much alternatives, because that’s too expensive. It’s not going to give you the long-term performance. They’re not designed to beat equities long term. They’re designed to be a buffer component as an alternative to just bonds.

Steve Lewit: As an alternative to bonds, because bonds in a rising interest rate environment especially, are suffering. So, we added alternatives a few years ago, expecting interest rates to rise and acting as a buffer for a potential down market. Thus yes, we are not making major changes as the market goes down, because we already earthquake protected-

Gabriel Lewit: Earthquake-proofed.

Steve Lewit: Proofed our portfolio.

Gabriel Lewit: Well, if you make major changes right now, what you’re saying is you believe in active trading, meaning you think, what are you going to move to? You have to then be able to predict what’s going to do better, which we have talked many times about, nobody can predict the future. And so really, it’s about understanding the philosophy and where things fit in, and why we do what we do, and how that works into the long-term plan.

Steve Lewit: Cool. Cool. Well said.

Gabriel Lewit: All right, folks. Well, great questions. I’m glad you included them. Please send more over if you’re ever interested in having us answer them on the show here. It’s our favorite thing to do. Give us a call if you have any questions, (847) 499-3330. Go to SGLFinancial.com, click contact us and let us know if we can help you schedule an appointment to talk. If you’re a client of ours and you’d like to do another review for any reason whatsoever, give us a call. We are always here for you. In the meantime, have a very wonderful day.

Steve Lewit: Stay cool.

Gabriel Lewit: Stay cool. And we’ll see you on the next show.

Steve Lewit: Stay well, everybody.

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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