March-April 2013 | A FINANCIAL "SWAN" SONG

A FINANCIAL "SWAN" SONG
A FINANCIAL "SWAN" SONG

MONEY MATTERS

A FINANCIAL "SWAN" SONG

After receiving a wake-up call of his own, PKS Investment Advisors' Matt Repass shares sound advice that could enhance your portfolio

Written By: | Photographer: Grant L. Gursky

This month marks a significant point in my life. I have now spent more than half my years on this earth in my chosen profession: financial planning. However, I began my pursuit of becoming a nationally recognized leader in the specialized discipline known as retirement-income planning in the late 1970s. 

Having been awarded a settlement as a result of an auto accident, I was faced with the daunting task of what to do with the money. With very little knowledge of the world of investing, I trusted my enormous sum (at least to me at the time) of $18,000 with a broker and invested in a 10-year bond that was paying 12% interest. Remember, this was the late 70s, folks; interest rates were a little different then than they are today. 

Three years later, I was getting married and buying my first home. To help with the down payment and furnishing, I’d decided to cash in my bond. My thought was that I would get back my initial $18,000 plus 12% interest for each of the 3 years. On that basis, I had expected a check for somewhere around $24,600; however, when I opened the envelope from the broker, I was surprised to find a check for only $12,600. I laughed as I called the broker to inquire why I would be getting two checks instead of just one, but as we spoke, my laughter turned suddenly to that sick-to-your-stomach feeling people get when hit with unexpected bad news. Unfortunately, the amount of the check I received, he informed me, was correct. Pressing for more answers, I was told, “Oh, you don’t know about the inverse relationship to bonds and interest rates?” Obviously, I answered no but felt I was about to be educated, after the fact, on the subject. He explained that had I held my bond for the full 10-year period, I would have received back my entire $18,000 plus the 12% per-year interest. However, because I sold my bond after only 3 years, I subjected my money to this “inverse relationship” he’d mentioned. He went on to say, “You see, since interest rates have increased on current bonds to 14%, investors really don’t want your 12% bond. As a result, your bond was sold at a discount, and that discount means your check for $12,600 is the entire amount.” He did tell me that had I sold my bond with the current interest rates at 8%, everyone would have rushed to buy my bond paying 12%, and that I probably would have received $26,000. Nice guy; unfortunately, that was not the case for me. 

That “lesson” became one of the driving forces for me entering this profession and remains the driving force behind my philosophy of educating prospective clients before they begin working with me. In fact, most of my clients tell me it’s because of the time and effort I place on not speaking over our heads that they chose to work with me in the first place.

I give you this personal account of my “investment education” for two reasons: 
1). It provides an excellent basis for the challenges facing investors today. 
2). Investor education is more critical today than ever before. 

As to my first point: Basically, by understanding that when interest rates fall, bond values rise and when interest rates rise, bond values fall, we can gauge where investors might be today. While I had plenty of room for interest rates to rise or fall holding a 12% bond, I think we can all agree that there is very little chance interest rates can go lower than they are today. Consequently, what happens to a bondholder’s principal when rates rise? Answer: Read my story again. You may ask, “Why the big deal about bonds?” Well, after two significant stock market crashes since 2000, many people, retirees especially, fled the volatile stock market with billions of dollars for the “safety” of bonds, vowing never again to subject their respective principals to those types of losses. Fear drove investors from the stocks and to the perceived safety of bonds. And when interest rates begin to rise, greed will cause many to leave their low-paying bonds for higher-yielding, current bonds. 

Once again, what happens to their money? That, too, is in my story. This simply does not have to happen; there are investments that can manage all these risks. That brings us to my second point: education.

People often ask me about managing money. It is an enormous responsibility given that for the past 20 years, 90% of the people I work with, those in or near retirement, entrust me with all the money they have to last the rest of their lives. But their faith is well placed, as retirement-income planning is my passion. I have said before, including in this magazine, that if you love what you do, you will never work a day in your life. I certainly believe that to be true. With regard to education, my answer to those who ask about what I do is that I really don’t manage money; I manage emotions. And those emotions are fear and greed.

Huge amounts of statistical data tell us that investment returns are significantly different than investor returns and that investment expenses and managing investment risk are truly the only thing an investor can control. Data reveal that the S&P 500 stock index over the past 100 years has returned an average of 9.8% per year (that’s investment). However, investor return in the very same S&P 500 over the very same 100 years has averaged less than 3% per year. Why this enormous difference? Fear and greed.

Data regarding investment expenses tell an even more costly tale. It has been estimated, and these figures are part of a current ad campaign on television, that the average married couple lose over $155,000 of their combined 401k balances to excessive fees over the course of their careers. Additionally, reducing the fees and expenses of managing your investments over a 30-year retirement from 3% annually to 1% results in a whopping 82% increase in money — YOUR MONEY! How can such losses to investors occur? The culprits are, in my professional opinion: investors’ lack of education and excessive fees from the Wall Street crowd. 

Most people who meet with me for the first time haven’t a clue about the expenses they pay to have their investments “managed” each year. When I explain to them that not only should they know exactly what it costs to manage their money annually, down to the tenth of a percent, they should also know that it is possible to reduce their investment costs by 60% or more. Think of it this way: If you own a business yet have no idea of what your overhead expenses are, you have no clue about the profits you’re making. Treat your investments just as you would a business, by being the CFO of your own personal finances.

My story, understanding these vital investment principles and much more have been taught in the multisession, five-hour classes I’ve conducted since 1992 for people concerned about their money. While we can’t control the markets or the economy, we can be armed with valuable information to help us weather any financial storm. I call my specialized manner of financial planning “SWAN,” an acronym for Sleep Well At Night. The truth is, though, that it’s not special at all. It’s simply the way I believe a relationship with a financial advisor should be — clear, concise, education- based and with total transparency of costs. It’s been said that thinking about money and peaceful thoughts are rarely connected, but for people utilizing the SWAN approach, connecting these thoughts is not so rare at all.
 

PKS INVESTMENT ADVISORS
410-546-5600   


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