What’s Hiding in the Fine Print?
by SGL Financial
Our 2 Cents – Episode #114
What’s Hiding in the Fine Print?
On today’s episode of Our 2 Cents, we’re delving in to the world of the fine print, and what hidden or not-so-hidden information you should pay attention to. But before we get to that, we are talking about the interest rate hike we saw last week and the continued efforts to reduce inflation.
- Three 75-Basis-Point Interest Rate Hikes in a Row:
- The Fed raised interest rates yet again in another attempt to rein in inflation.
- What can we expect over the next few months and quarters? Should we anticipate more rate hikes?
- Are we in a recession right now? And what are the major drivers of a recession we should keep an eye on (e.g. unemployment, mortgage rates)?
- How does all of this impact the stock market and your investments?
- What’s Hiding in the Fine Print?:
- Does your traditional Long-Term Care policy have premium rate increases?
- Are there any hidden fees in that variable annuity?
- Watch out for mutual funds with a performance history that is “back-tested.”
- Can you ever get your money out of that REIT?
Tune in now to join us for this discussion!
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Announcer: You’re listening to Our 2 cents with a 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: Hey, good morning, everybody. This is Gabriel Lewit and Steven Lewit coming to you live from Our 2 Cents here in the studio, AKA the conference room of our lovely sunshiny office this morning.
Steve Lewit: I wonder why people say coming to you live, I mean it would be terrible, the alternative. That wouldn’t work out too well.
Gabriel Lewit: I don’t think it means live as in alive, Mr. Lew. I think it means live as in technically we’re recording this live.
Steve Lewit: Okay. I don’t want to get us off the topic like I usually do. So go ahead, Gabriel.
Gabriel Lewit: Well, technically when you’re listening to this, it’s not coming to you live. It’s coming to you from Wednesday.
Steve Lewit: Yes.
Gabriel Lewit: So, coming to you from Wednesday. Yeah, we’re excited to talk to you here today. We’ve got a fun little show lined up for you. We’re going to talk about the famous one and only TV star, Mr. Steven Lewit.
Steve Lewit: We are?
Gabriel Lewit: Well, because you were on the news.
Steve Lewit: Ah, again. Yeah, WGN keeps calling back.
Gabriel Lewit: Hey, that’s a good thing. So yeah, Mr. Lewit, other cent over here was on the news for discussing the inflation-
Steve Lewit: Well, the interest rate increase.
Gabriel Lewit: Interest rate adjustment to attempt to rein in inflation. And so there was quite a bit of stir about that last week. So we’ll talk to you a little bit about what he discussed on the show as well as some of the specifics so you can learn a little bit more about that. Then we’ve got some good topics here about basically … Well hold on. Where was it here? Reading the fine print.
Steve Lewit: You didn’t read the fine print on the topics.
Gabriel Lewit: Right. So what should you watch out for before you get into something? We’ve all had those scenarios where you buy something and only to find out something you didn’t like later. Yep. Well how do you avoid that with your money?
Steve Lewit: Hard to do.
Gabriel Lewit: But important.
Steve Lewit: Very important. Lots of fine print.
Gabriel Lewit: Now, one other thing before we dive in. Can you believe the summer is over?
Steve Lewit: No.
Gabriel Lewit: It is now officially fall.
Steve Lewit: Well, I have to-
Gabriel Lewit: And it was cold this morning. It was 55 degrees.
Steve Lewit: I love this cool weather. This is my weather. I love this. If it could stay this year round, I’d be really, really excited.
Gabriel Lewit: Somewhat what California is like, right? It gets down into the 50s, low 60s, and then it warms up in the day.
Steve Lewit: Yeah. San Diego, steady 70 degrees.
Gabriel Lewit: So hopefully you got yourself bundled up and get your fall wardrobe out of the closet.
Steve Lewit: Stop, stop, stop. Stop, you’re depressing me. Stop you’re depressing everybody, probably.
Gabriel Lewit: Get your winter boots ready.
Steve Lewit: Get ready for the snow.
Gabriel Lewit: Tune up the snowblower. Actually, I got to buy a new snowblower.
Steve Lewit: Oh my.
Gabriel Lewit: Because mine broke last year.
Steve Lewit: Yeah, I got a guy. I got a guy. If you need a guy.
Gabriel Lewit: That knows how to fix Ego electric snow blowers?
Steve Lewit: No, that does your driveway. Don’t have to worry about it.
Gabriel Lewit: No, it’s not big enough to get a plow.
Steve Lewit: Yeah, it is.
Gabriel Lewit: Snowblower.
Steve Lewit: Doesn’t cost that much.
Gabriel Lewit: I ain’t going to move the car. That’s a pain.
Steve Lewit: Oh my. Oh man.
Gabriel Lewit: Okay, well let’s go ahead and dive in. So Mr. Lewit, you were on TV.
Steve Lewit: I were, yes.
Gabriel Lewit: And what were you talking about?
Steve Lewit: Well, the Fed raised the interest rates in other 75 bips and.
Gabriel Lewit: The bip is a? For someone that doesn’t know.
Steve Lewit: Called a basis point. So a basis point is like 0.75% interest.
Gabriel Lewit: So, 75 bips is 0.75%.
Steve Lewit: Interest. Yes. Thank you for that clarification. My mind is not working this morning. So I got a little distracted this morning because I had to get some emails out this morning, really, really late in the morning and they were important. So I got involved in that and then I was rushing to get here and then I had hit a cop car, was in the middle of the road with his lights blinking and everybody was jamming on their brakes. And then I got in here 10 minutes late and then I had to get my coffee and the coffee machine didn’t work and now we’ve got snow to worry about.
Gabriel Lewit: So, you were talking about interest rate.
Steve Lewit: So, inflation, 75 bips. I’m driving Gabriel crazy this morning. So yeah, inflation is up. Why? Because people have too much money to spend. It’s very simple. Supply and demand. When the demand outstrips supply, you have more money than there are goods and people are spending it. It drives prices up. Interest rates is what I talked about, is supposed to cut back your ability to spend and how that works is when interest rates go up, you borrow less, companies borrow less and with less money you’re supposed to have less inflation. Except that really hasn’t happened yet. There is less money, but inflation is still pretty high at 8.4%, which is still almost double what it was a year ago. And so I expect to see more rate increases. They actually asked me to do a prediction on TV, which is unusual and my crystal ball is as good as anybody’s crystal ball. But I think inflation will continue, it’ll come down. But we’ll see interest rates go up at least until a probably second quarter of next year.
Gabriel Lewit: So, in short, the interest rate increase is designed to help cut back inflation. But that doesn’t happen immediately.
Steve Lewit: No. There’s a lag in there. And the problem is, Gabriel, is that people are sitting with lots of extra cash still layover from all the giveaways that were given during COVID. And so there’s still a lot of money in circulation and even though inflation is up, spending is still good. The other part of that that I didn’t talk about is people are saying, “Well, are we in a recession or aren’t we in a recession?” Well, the standard definition of recession is two consecutive quarters of negative GDP, which we’ve had. However, the NBER, which is the National Bureau of Economic Research, are the people in the country that deem things at recession. They say this is a recession, but they haven’t deemed it yes, because there are six or seven other factors that they bring in unemployment and real income. And what’s happening now is unemployment is still very low and real income is still very high. So even though we’ve had two consecutive quarters of negative GDP, the other factors are very positive. So the NBER says, “Well we haven’t defined this as a recession yet.”
Gabriel Lewit: Well, so you’re thinking there’s going to be additional interest rate increases, which of course Fed is implying there’s going to be. I agree with you there. I think that’s going to continue really until the Fed gets things under control. And we’ve talked about it a little bit on the show. They’re aiming for what’s called the soft landing where they try not to trigger a recession, even though by all technical, traditional measures, we’re pretty close to one. So it’ll be interesting to see. Now in the meantime, the effect on bringing down inflation, long term lags interest rate increases. So we’ve got to factor to that in, But some things don’t lag. I mean, what are some of the things you’re seeing change right now due to the interest rates being hiked up another 75 basis points?
Steve Lewit: Well look, mortgage rates are up, the housing prices are coming down.
Gabriel Lewit: Speaking of that producer Katie, good morning. Could you Google current 30 year fixed mortgage rates? We’ll tell you what they are, folks. Creeping up there pretty good. Let’s see what we can see here. Just click one of those there, producer Katie. What do we see? Okay, we’ve got somewhere around six point whew. 6.263 to 6.5%.
Steve Lewit: I was going to say six.
Gabriel Lewit: Almost seven on some of these. Wow.
Steve Lewit: I didn’t think it reached seven yet. So what does that mean? It means people stopped buying houses.
Gabriel Lewit: Yeah, I mean just think about it. These are more than double what they were almost six months ago.
Steve Lewit: Almost triple.
Gabriel Lewit: In some cases. Yeah, yeah. You could get a 15 year for 2%.
Steve Lewit: That’s correct.
Gabriel Lewit: Almost six, eight months ago. Yeah.
Steve Lewit: So, the housing market has softened, and the housing market is a huge driver of whether we’re in a recession or not. And we’re going to see that continue to soften. I believe I’m taking out my crystal ball today, Gabriel, and what I think is going to happen. So I think there’s a lot of gray in the future, but the question, I gave a seminar last night, I know I’m going on a little tangent here, but I gave a seminar last night and I got three questions in different forms that said, “Well, it looks like the market is going to continue to go down. Why wouldn’t everybody just go to cash?” Right?
Gabriel Lewit: Yeah. Well we’ll circle back to that in just a minute here. Actually I’ll make sure I don’t forget about that question. I just don’t want to get too far off topic on the interest rate. We can talk about some of the impact on the market maybe as our last point there.
Steve Lewit: Okay.
Gabriel Lewit: And what’s the general feeling that’s out there right now? But yeah, I mean what do you do if you’re looking to buy a house? I mean, let’s talk about some of the impacts that this level of interest rate raise is having because people haven’t … This has been a long time since we’ve seen interest rates start to creep up higher like this it’s been what, over a decade?
Steve Lewit: Over a decade, yeah.
Gabriel Lewit: And so, this is shocking a lot of people because it’s been so long since they’ve seen things this high.
Steve Lewit: Well, a lot of folks have accumulated credit card debt because they were getting it so cheaply or borrowed money at very low rates and variable rates. So if you have anything with a variable rate, this is the time to really take some of your savings or make sure you save and pay off those balances. And a lot of folks do not have wealth. 60% of the country lives hand to mouth and has very little savings. So this is the time to really budget. This is the time to make sure you’re paying down your debt as best as you can. And this is the time, especially coming into the Christmas season or the holiday season where spending goes up, is to really be careful because if you take on more debt and a rising interest rate environment, it’s like selling stocks in a down market to get income. It’s just a bad move to make.
Gabriel Lewit: Yeah. Yep. Well and if someone’s looking to buy a house, you just have to factor in the lower, maybe a lower housing amount because now the good news is hopefully housing prices are coming down because of the softer demand. So that should help a little bit. But you’re going to be paying quite a bit more in interest with the higher rates.
Steve Lewit: With higher interest rates, Gabriel, it’s harder to qualify income-wise to get a mortgage loan. So that gets tighter too.
Gabriel Lewit: So, lots of impacts here. Now how about on the positive side? Any positive news from rising interest rates? I can think of a couple. I’m quizzing you.
Steve Lewit: Then you go.
Gabriel Lewit: Put you on the spot there.
Steve Lewit: Yeah.
Gabriel Lewit: What’s positive about it?
Steve Lewit: Inflation goes away.
Gabriel Lewit: Well, that’s the main goal, of course. Well if you check the payment rates on your money market accounts.
Steve Lewit: Oh sure. Yeah.
Gabriel Lewit: Okay. Those are now creeping up past 3% on some money market accounts that are out there, 2.5, 3%. So that’s really positive.
Steve Lewit: Social security increase.
Gabriel Lewit: You’re going to see a big social security bump next year. MYGA rates, those MYGA folks, multi-year guarantee annuities.
Steve Lewit: They’re like CDs.
Gabriel Lewit: Like CDs. But better. You’ve got now five years that are paying almost 5% fixed. Right. Guaranteed for five years.
Steve Lewit: Think 4.6.
Gabriel Lewit: 4.6 is the top. But I think they’re going to go up a little bit more with some of the recent rating.
Steve Lewit: Yeah, there’s one out there at 4.8. So just under five.
Gabriel Lewit: Yeah. So that’s pretty good. I mean if you’re thinking, “Hey, I might as well lock in a fixed rate, I’m worried about what the market’s going to do over the next five, seven years.” That’s another option that you can keep in your toolkit. So lots to think about here. We’re going to continue to monitor this. I know the last thing we had wanted to circle back on is how does this impact the market? Well, we saw last week market reached new lows right on the year or almost tied or just barely surpassed it prior low in June. And a lot of people, as you said at your seminar are asking you, they think this is the beginning of more market pain to come. And the allure is, “What should I do? Do I just go and sell everything to cash?” Well folks, this is where people tend to capitulate when they try to do market timing. The first rule is we have no clue exactly what’s going to happen.
Steve Lewit: Well wait, I’d like to back up on that one little bit because this is one of the emails I was addressing this morning is I got this long email from a client who’s got a plan, who has, we have all these losses built into his plan and his email. We don’t get many of these folks, but we are very concerned when someone’s upset, “I’m losing money, Steve, why don’t I go to cash?” I mean basically that’s what it boiled down to. And I understand emotionally how that could happen and it could work out. The market could go down and you might figure out when to buy back in, but all the research says that doesn’t work. You know, might luck it out once, but if you miss the best day as you miss the whole game back in the market.
Gabriel Lewit: So, I think to address that on a bigger scale, it always goes back to there’s two methods of investing high level categories. You can be what’s called a tactical or an active investor, which is much more speculative. And speculative means it carries enhanced risk. And then you’ve got more tried and true, which is the philosophy you can’t note, You can’t guess or time the market and the allure of, actually, funny enough, the allure of selling to go to cash is actually, it seems safer, but long term it’s riskier because the data shows you’re going to be behind. And when we say the data, there’s research study after research study that shows that individual investors that tend to try to time markets and sell and go to cash and then buy in later, miss on the recovery and do so, they just stay in cash for so long waiting for the recovery to finally prove that it’s recovering.
Steve Lewit: Well, you never know if it’s a temporary recovery or it’s going to go down further.
Gabriel Lewit: So, you wait and wait and wait until you’re so sure that the market’s recovered.
Steve Lewit: And then it’s too late.
Gabriel Lewit: And then it’s too late and then it’s too late. And this is what happens. But as humans, we say, “Hey, the safe idea right now feels like getting out of the boat onto some land,” but it ends up long term being a poor financial decision.
Steve Lewit: Well, you said the key word long term. Because the market is not a short term play. It’s not a short term game.
Gabriel Lewit: We can’t reiterate that enough. And so many people think, “Wow, I went into this and now I’m down this year, what should I do?” Well, we didn’t go into this to definitively be up this year. We know that when we get into the market, the price you pay for entering the market is that you have to go through some volatility. It’s not all up years. And we’ve got to understand the rules of the game before we get into it, and that’s what we’re seeing right now.
Gabriel Lewit: But it’s really tempting, and it makes sense because of that short term, “Hey, if I go to cash, I’m going to protect any further losses.” But it doesn’t necessarily mean that it’s in your long term best interest. It just ends up being, we have this bias that we’re smarter as humans than maybe if we did nothing. So we say, “Oh, we’ll find the right time to get back in.” we’ll find the right time. So that’s where, look, we don’t know when the bottom is going to be here. What if you sold today and by October, because there’s data that historically says the holiday effect markets start to go up. What if we’re close to the bottom and you sell now and then you miss the recovery. So you just don’t know. And it’s not a good idea typically to try to time the markets with big chunks of money.
Steve Lewit: Gabriel, but I understand. Look, we’re human beings, most of us, and-
Gabriel Lewit: I’m not sure if Mark Zuckerberg is.
Steve Lewit: Right.
Gabriel Lewit: He, you’ve, seen those jokes, right? Yeah. The pictures of the memes, he just looks like an alien robot.
Steve Lewit: Well, I know he does.
Gabriel Lewit: He truly does.
Steve Lewit: But I’m not going to personally attack him.
Gabriel Lewit: I don’t mean whatever. Zuck. I’m just saying he looks like alien.
Steve Lewit: Well, okay. I’m not going to go there. But listen, Gabriel and everybody, there’s something in us that when something goes that we don’t like, we want fix it. So we always want to fix things. If you have an argument, if I have an argument with my wife, I want to fix it. I want to make it better. And if something goes wrong with my car, I want to fix it. Everything I want to fix. And I think it’s human reactions to say, “The market is down, I want to fix it, I want to make it better.” And it’s very hard to sit on the sidelines and say, “This is my plan.” Fixing it is the bad thing to do in this case because I don’t know how to fix it really. And I just got to leave it alone because that’s how a diversified portfolio wins in the market over time. But it’s very hard to sit back and just leave things to take care of themselves, I think.
Gabriel Lewit: Yeah, it is it. So if you’re out there and you’re on that fence, well you certainly know our take on it. Right?
Steve Lewit: You think.
Gabriel Lewit: If you’re, but if you want to talk it through with us, give us a call and we can help you with that decision. 847-499-3330. Now if your portfolio, if you’re not with us and you’re wondering if your portfolio is well allocated to ride through choppy, difficult markets. So that’s a different question altogether. So we can also talk to you about your portfolio allocation and you can email us email@example.com anytime. We schedule a time just to chat and see how things are going with you and how we might be able to help.
Steve Lewit: These are folks that are managing it themselves, Gabriel?
Gabriel Lewit: Yeah, correct.
Steve Lewit: Yeah. We could do a portfolio. We do a lot of portfolio reviews and analysises with, analysises?
Gabriel Lewit: Analyses.
Steve Lewit: Analyses where we’re looking at the fees, where we’re looking at performance at different asset classes and sector classes and can really show you the difference between our portfolio and your portfolio and give you really good information upon which you might make a better decision for yourself.
Gabriel Lewit: Indeed. Indeed. Okay. So let’s talk about the fine print.
Steve Lewit: Oh my.
Gabriel Lewit: Okay. Switching gears just a little bit here. And as I said earlier, you’ve probably all bought something that you didn’t read the fine print and then, well for example, I don’t know, somewhere Xfinity probably has fine print that says they can raise their rates anytime they want to because they always do. And then six months later I look and my bill is $10 a month higher than it was six months ago when I signed up those stinkers. Well
Steve Lewit: I like the fine print that says by pressing-
Gabriel Lewit: How dare they?
Steve Lewit: By pressing this button, this is an auto renewal on your subscription.
Gabriel Lewit: Oh, there’s those ones too, right? Yeah. So how about with your money, right? There’s bigger purchase decisions that you want to know the fine print on and as the phrase goes, the fine print giveth and the fine print taketh away. So how about people that get surprised? Well I’ll just throw one out here that they got a huge rate increase on their long term care insurance. Well what was probably buried in the fine print that they maybe didn’t read unfortunately.
Steve Lewit: Yeah. So they have the right to raise the rates. I mean if you read the fine … But here’s the thing.
Gabriel Lewit: Well, okay, so let’s say you’re 40 years old and you look at this long-term care quote and it looks terrific, it’s like it’s $75 a month and you’re like, “Oh cool, I’m going to get the few thousand dollars a month worth of coverage when I’m 85 years old and I’m only paying $100 a month. This is a great deal.” But why is it not a great deal?
Steve Lewit: Well, it may not be a great deal.
Gabriel Lewit: We’re pretty stronger on that. Usually traditional long term care ends up for many people being a very, very bad deal.
Steve Lewit: Eventually you get a cost increase that says you can either pay more or cut your benefits back. Yeah. That’s traditionally what has happened. So that’s a risk. I mean everything … But, Gabriel, here’s the deal. If you read the fine print on anything, it’ll scare the daylights out of you. Read the fine print on mutual funds, right?
Gabriel Lewit: Sure. Well I’m not talking about that. I’m just talking about what are the big things that people should probably be looking for in these fine prints if you’re reading through them?
Steve Lewit: Yeah. Well first there are different fine prints. If you’re reading the fine print of a mutual fund, you’re not going to find out much in the fine print of a mutual fund except that it’s a high risk investment. That’s all you’re going to learn. But if you are taking a credit card debt, can they call the loan? Can they raise the rates on you?
Gabriel Lewit: Well, no. Yeah, so I was thinking about-
Steve Lewit: What am I missing here?
Gabriel Lewit: Well, we were talking about the long-term care insurance one right there. So I just wanted to finish putting a bow on that one before we move on to maybe a different type of fine print that you might want to look at.
Steve Lewit: And bow it up.
Gabriel Lewit: So, the bow there if you will, is that yes, if you are looking to buy a traditional long term care insurance, one of the things you want to make sure of is how and what would cause your rate to increase and make sure that you really understand that before you get into it. So that was the goal here. I wanted to talk about things where the fine print is commonly not read and talk about the key things you might want to look into with the fine print.
Steve Lewit: Well then you have to talk about annuities fine print, because annuities have on the anniversary date, there are things that can change. So what you have to do there, So if you look at the fine print in annuities, how they could change, there are some pretty abrupt possibilities in there. However, the history, then you’ve got to look at the history and say, okay, it says they can lower this to this, but what is the history of this? Have they ever done that? And what would happen if they actually did lower, let’s say, a renewal rate to some absurdly low number? Well, they would lose all, the people would just sell and get out of it. So that which is death for an insurance company. So even though the fine print may have things there that are scary, the likelihood or possibility of that happening may be extremely low. So you have to weigh those two things together.
Gabriel Lewit: For sure. And so I think part of the challenge is even when you do read various fine print items is knowing how likely they are to occur, not to occur. And that’s where working with someone that’s got just more familiar, more familiarity and expertise and experience with some of these items can really be beneficial for you. So as you mentioned with annuities, you certainly want to understand how they work. One of the other things we hear most commonly with variable annuities is people are surprised later on about the amount of fees that they pay. I just had a client two months ago, we called in to learn about his current variable annuity and he was unpleasantly surprised to learn he was paying 3.86% in fees.
Steve Lewit: And those, they’re in there.
Gabriel Lewit: Well, they are hidden because you don’t see them on your statement. When you get your statement, they don’t tell you what those fees are.
Steve Lewit: Well, they’re hidden and they’re not hidden because can, if you read the fine print, you would see all those fees. You would.
Gabriel Lewit: Correct. Generally when something is hidden, they say it’s hidden in the fine print. So not to get into semantics, is it hidden or not hidden? But yeah, it’s not front and center. And I would argue that that is hidden if you know that are you, if you have no clue, you’re being charged 4% in fees and then you get your statement and your statement doesn’t say anything about any fees. Even then when you call the insurance companies on the VAs and you say, “Hey, what am I paying for a fee?” They’ll say, “Oh, you’re paying a M&E fee of 1%.” And then you have to say, “Anything else?” Oh yeah. Now you’ve also-
Steve Lewit: They don’t list them out.
Gabriel Lewit: You got to say anything else like 12 times before they give you all the fees. So yeah, there’s a difference between being front and center and being hidden in the fine print.
Steve Lewit: So, this is where I think that many advisors fall short, Gabriel, because people aren’t going to read the fine print. I think it’s really hard for somebody to sit down, especially, I mean we have some economic numbers, people that read fine print for sure, but most people don’t read fine print. Why? Because they’re counting on you and me and the advisor to be truthful with them and tell them what’s in the fine print that they should know. And unfortunately doesn’t happen all the time.
Gabriel Lewit: It does not. In fact, I’ve got another example recently with a client that had an old REIT real estate investment trust that he had purchased prior to coming over to SGL Financial and he wanted to know if we could transfer it out because it wasn’t performing well. So Joe, who’s on our service team, got on a call with him to call the REIT company. And guess what they discovered, Mr. Lewit?
Steve Lewit: They cannot sell their shares.
Gabriel Lewit: Ever.
Steve Lewit: Ever.
Gabriel Lewit: Is what they found out. Now do you think he would’ve bought this? And I can tell you what he thinks because he wouldn’t have, if he had known, “Hey, once you buy this, the only way you can get your money out of it is upon passing away.”
Steve Lewit: I’m sorry, just took a drink of water. That’s crazy. I’ve never heard that before. I’ve never heard that.
Gabriel Lewit: He was pretty surprised. So were we. Because that’s pretty unusual. Usually their redemption periods, once a year offering periods.
Steve Lewit: Something.
Gabriel Lewit: But no, they flat out on the phone said, “You can’t access this money until you pass away.”
Steve Lewit: That’s crazy. Even on redemption periods, they can suspend a redemption period. They say, “Well we have four redemption periods a year,” but they have to authorize the redemption period. And right now lots of them are not redeeming.
Gabriel Lewit: Right. Yeah.
Steve Lewit: I have a lot of REIT stories thing about REITs, this is where you need to read the fine print. A client came in and said, “Well, I own REITs from another advisor.” And I said, “Well that’s interesting. And what made you decide?” “Well, he said they were very safe. They were real estate and backed by real estate.” And then we pulled out the perspectives and you know what the first words on the prospectus are?
Gabriel Lewit: What?
Steve Lewit: This is a high-risk investment.
Gabriel Lewit: Well, most people think or hear real estate and they think something’s less risky, but that’s not necessarily the case. So yeah, just you again, fine print, fine print. Another example is somebody that buys a mutual fund and they find out later on that all the performance history of the fund, it didn’t perform as they were expecting. Oh, guess what? It was a brand new fund and all the performance history was back tested.
Steve Lewit: So that happens a lot.
Gabriel Lewit: Yeah. So what is back tested means? It means when something hasn’t been around very long at all and they would show you how they think they would have done had they been around in prior market conditions based on the approach they currently use. Now this is very common in basically actively manage strategies where you are very algorithmically based and you say, “Okay, had I apply that algorithm back on that day or time, here’s how it would’ve done.”
Steve Lewit: Well, it gets worse than that, Gabriel. The dirty little secret is that active managers are known, they incubate funds, so they might have 10 different algorithms and they test all these algorithms and then they say, “Oh, this one worked really well.” And that’s the one they bring to the public.
Gabriel Lewit: Right. Yeah. So you want to be careful there. Now that’s very different than the approach we use for the core of your funds is index fund based. So we know how those indexes have performed and the funds have relatively tracked those and then they’re just building blocks that we can assess how our portfolio’s built. So very different than a newfangled – not tried and true – strategy that somebody’s trying to employ. So you always want to be careful when you’re reading rates of return and performance histories. There’s something in the fine print that says whether or not something’s been back tested or whether or not the strategy really existed.
Steve Lewit: Yeah. One more I’d just like to add on if we do we have a minute, Katie? We’ve got a minute.
Gabriel Lewit: Yeah, we’ve got a minute.
Steve Lewit: Is cost in life insurance, people are unaware of that too because we buy life insurance as you get older, it’s like, “Wait, wait. This is getting more expensive,” and yeah, it is because you’re getting older and the likelihood of you passing away is higher, which makes things more expensive. So inside life insurance, there are a lots of moving parts and I mean understanding what’s inside a life insurance is nearly impossible for the layman because there’s so much going on in there. So that’s another place where the fine print is important, but your agent is more important because that’s the only person that can really explain it to you, I think.
Gabriel Lewit: Yeah. So in general with all of these examples here, the key is really making sure you take the time to understand the products, the options, what’s the details. And to your point, making sure you’re working with someone that you’ve got along and established history with that isn’t going to lead you astray. So just something to keep in mind. And I jokingly would say, or not so jokingly, but call ourselves the fine print readers if you’d like for us to read any of your fine print.
Steve Lewit: I know you do, Gabriel. I do.
Gabriel Lewit: Send us the fine print our way and we will gladly read through it for you. We have people do this all the time. I had someone send me the other day, “This thing says that it’s backed by government X, Y, Z and it’s totally safe and it’s going to pay you X, Y, and Z 10%.” And she sent it to me, I sent it to my compliance guy. We read all the fine print and it was absolutely not backed by the government and it was just totally risky and unproven and that was all just buried in the fine print.
Steve Lewit: So, you betcha.
Gabriel Lewit: Yeah. All right. So folks, that’s our show. We’re going to wrap here for today. If you have any questions, give us a holler at firstname.lastname@example.org or call us at 847-499-3330. Thanks for tuning in. Share the show with your friends. Keep the positive feedback rolling. We love it. We do. And do have yourself a very wonderful weekend. Weekend.
Steve Lewit: Stay warm and stay healthy.
Gabriel Lewit: Amen.
Steve Lewit: Amen.
Gabriel Lewit: All right, see you soon.
Steve Lewit: Bye now.
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