Wealthway Financial Advisors Investment Management Philosophy and Principles

In this podcast we unpack the prevailing Investment Management Philosophy and Principles we ascribe to that position you for optimum long-term financial growth. Learn about the best vehicles to use or avoid as your dollars work to accumulate wealth and outpace inflation.
Older Couple Reviewing Finances

Kevin Zywna, Wealthway Financial Advisors: Tonight, we’re going to talk about the Wealthway Financial Advisors’ investment philosophy and principles. So you know, the majority of our time spent on the show, 90 to 95%, is spent talking about financial planning and financial planning concepts. But a core competency of ours is expert investment management. Investment management is important. But the variability and unpredictability of annual market returns is a reminder that investment management is of limited value without financial planning. Financial planning is that next service that we think everyone needs, and everyone should have, that they don’t know. You know, everyone kind of knows, I should save. And I should have done best if I want to have more money sometime down the road. But I don’t know how much. So everyone kind of it’s been ingrained in the American culture that saving investing is good. But all we get out of Investment Management is just the rate of return. And rate of return doesn’t tell us are we saving enough? How long do we have to save for? How much is enough? How much can we spend in retirement without fear of running out of money? You know, what about the potential costs of long term care expenses? And the last big potential expense we all face? You know, those are financial planning questions. And so that’s why we spend the bulk of our time and attention on that here in the show because that those the answers to those questions in the strategy surrounding financial planning are even more important than Investment Management.

The Wealthway Financial Advisor Investment Management Principles

But investment management is important. And I’m here tonight to talk about some of the ways that we go about doing investment management for our clients. And I think you will find as the show goes along that they differ to a certain extent from conventional wisdom, as well as I guess most of what you may read in financial literature or see on TV, or maybe hear from your own financial advisor.

When Is The Preferred Time To Take Social Security?

But before I jump into that, as promised, when we get a caller on the line, we’re going to go speak to that caller right now we’re going to go out to Norfolk and speak with Eddie. Good evening, every year on Dollars & Common Sense. Good evening, sir. How you doing tonight?

Caller: Yes, I’m doing great. I’m calling in reference to my Social Security, my Social Security will be fully mature at 66 and eight months. And thus, my intention is to collect Social Security at that age, and perhaps, continue working for approximately another year or so. It’s that a good idea?

Kevin Zywna, Wealthway Financial Advisors: Well, what are you trying to accomplish, Eddie?

Caller: I think I already accomplished, you know, what I wanted to accomplish, you know, and that’s to be debt free and enjoy my life – do a little traveling. Waiting to the age of 70 to elect my Social Security is out of the question. Absolutely. I’m not one of those. I just wanted to hear your opinion.

Kevin Zywna, Wealthway Financial Advisors: Well, it sort of sounds like when is the preferred time for me to take Social Security. So I’ll give you some general thoughts around that, that we provide to all our clients really.

So if you are going to continue to work, then it is rarely a good idea to take Social Security early or take it before your full retirement age. And you said that you think your full retirement age is 66 years and eight months. So while you’re continuing to work, probably not the best idea to take it before 66 and eight months. It can be taxed, there can be some reduction in the benefit. You do get it back later on. But it’s kind of an administrative hassle. So we usually say, as long as you want to work, then delay Social Security, at least until your full retirement age. So that’s kind of your thought process right now.

And once you reach full retirement age, the Social Security quote unquote, full retirement age for you at 66 and eight months, then you can continue to work and earn any amount of money and your Social Security benefit will not be reduced, now most likely will be taxed. But that’s sort of a minor quibble, because you do get that additional income that comes into your house and is available to do the things that you said you wanted to do, like maybe travel and enjoy yourself and maybe do some home improvements and that type of thing. So taking Social Security at full retirement age while you continue to work, I think can be a good strategy and sounds like it might fit for you.

Caller: Okay. Yes, I already confirmed my full retirement age is 66 and eight months. But to be more specific, I will apply for my Social Security once I’m 67, you know, and perhaps no more than a year after that, I would like to work for no more than a year,

Kevin Zywna, Wealthway Financial Advisors: Right. And you certainly can delay receiving your benefit past full retirement age. When you do that, then the benefit increases a little bit every month after that full retirement age. So you eventually get more money by delaying and waiting to take the benefit. And typically speaking, if you’re in good health, and you’re making substantial income to satisfy your main wants and needs, then delaying Social Security can be more beneficial long term.

But there’s also value judgments to make as more valuable in terms of doing a straight hard numerical financial calculation. But there can be good psychological reasons or lifestyle reasons for wanting to take Social Security before the maximum benefit age of 70, which you said you really didn’t want to wait to anyway. So it sounds like that sweet spot for you might be about 67 to 68 and then enjoy that extra income.

Caller: Okay, that was my question. Thank you for taking my call. And we’re enjoying the rest of the show. Okay.

Kevin Zywna, Wealthway Financial Advisors: Thanks for the call. We appreciate it. Tonight, we’re talking about the Wealthway Financial Advisors investment management philosophy and principles that guide us. We’re going to get back to those in just a minute. But first, we’re going to run out to Chesapeake and speak with George. Good evening, George, you’re on Dollars & Common Sense.

Caller: I am absolutely fascinated by what you’re doing tonight, really. And I just want to real quickly, I want to thank you. You helped me in the past in what to do with my required minimum distributions from IRAs – to give to a caring non-taxable organization and you told me how to do that. And I really appreciate it.

Kevin Zywna, Wealthway Financial Advisors: Well, thanks for the compliments. George. I really appreciate that happy to help.

Caller: Thanks again. Appreciate it.

Our Prevailing Investment Principle

Understanding the Purchase Power of Money

Kevin Zywna, Wealthway Financial Advisors: You’re welcome, George. Thanks a lot. We’re talking about investment management, philosophy and principles. So start off by saying that the idea of money itself is actually relative, and that the primary purpose of investing is trying to grow the relative purchasing power of your money so that you can purchase more future goods and services with it. That’s the primary way that we go about doing it. And that is most accessible for most all of us is to invest in common stocks, equities, large companies piggyback on their success, enjoy their profitability, become an owner of those firms by being a stockholder and that by holding stocks, long term, they are far superior investment vehicle than bonds.

A Word On Bonds

Even though bonds are widely used in most investment portfolios, especially as people approach retirement and as they transition into the later stages of their life. There’s this idea still prevalent in our industry, that I think is outdated and antiquated, that bonds should make up a big portion of people’s investment portfolio later in life because they’re perceived to be safer than stocks. But the true test of an investment’s long term safety is its long term total return in excess of inflation. And stocks return on more than twice as much than bonds do in excess of inflation. It allows you to buy twice as much future goods and services than bonds do. But bonds are typically somewhat less volatile than stocks. And the return of stocks has been considerably more random around its long term uptrend line than that of bonds.

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Understanding Stock Volatility

Now, that just means that stocks have higher highs and lower lows, or what we the technical term in the industry with volatility. Ups and downs around a trendline. Short term ups and downs around a trendline stocks have higher highs and then lower lows, but their trendline is higher and steeper than that of bonds. So here’s some things that you have to accept if you want to be a good long term investor and grow your wealth, fastest over time, you have to put up with some downturns with stocks. That’s the reality. And so what does that look like?

An Example of Stock Volatility

Well, the average annual peak to trough drawdown over the last 100 years in any given year has been about 15%. So in any given calendar year, you have to accept the fact that wherever the high point of the year of your investment portfolio that is usually, at some point that you’re going to be down about 15%. So that’s $100,000, that’s going to be about at some point in the year, it’s going to be at $5,000, that’s a million dollars at some point in the year could be $150,000. And that’s just on average, that’s normal. That’s usual, that’s customary.

Avoid Selling Low – Work With A Qualified Financial Planner

If that scares you, if that frightens you, if you can’t handle that, and you’re prone to maybe make a bad panic decision, sell out at a low point, then maybe you shouldn’t be invested in first place, because that’s how people lose real money. Or if maybe that’s not your temperament, but you can get yourself aligned with a good, competent, honest, ethical, financial advisor who understands these principles. And you are and you can delegate the investment management to that person, then they can handle then they can worry about that for you. So you don’t have to, if you can try to keep your eyes off the daily movements of the stock market and, and the investment accounts. So you have to put up with more short term ups and downs on stocks, and you do have bonds, that’s true, but your reward for doing so is a higher average long run rate of return.

So there’s also a couple other considerations. 5% might be the average downturn in any given year. But there’s also been some Whoppers right. And we’re all aware of that. So, you know, since the end of World War Two, there have been three declines that have averaged 50% 55, zero decline, your 100,000 became worth 50,000, your million dollars became worth 500,000. That’s gut wrenching. That’s knee buckling. I understand that. But the longest time to break even when you consider including investing dividends, was five years and eight months, the longest time to break even from that 50% decline. Five years, eight months, almost six years. Now, that’s the longest time it ever took. And I can see six years is a long time to wait to get back to even but that was the worst over that period of time. So that’s not quite typical either. So if so these are the things we have to understand and endure in order to reward ourselves with the after inflation long run rate of return from stocks of about 7%. You have to be able to go through those downturns and not panic and not sell out. You have to wait, endure that period of time and wait for the eventual recovery in order to enjoy the long run rates of return. And most people left to their own devices do not have that temperament.

No Matter The Market, You Don’t Lose Money Unless You Sell

Human nature is somewhat of a failed investor, Human Nature says, I see my account value going down, I see my investments becoming worth less, I’m starting to worry about what this means to my future. I, this is painful, I’m starting to lose sleep, I don’t know how to deal with it, I want to make it stop, I’m going to sell and just cash out and move all my money to the bank where I don’t have to put up with this downturn. And then you lock in your losses, you’ve done the wrong thing at the wrong time, and you’ve lost real money. Remember, you don’t lose the money until you sell. All you’ve done in a market downturn is suffered a temporary decline in value. Okay, but a temporary decline in value is not a loss until you sell out of your investments and lock in those losses.

Endure The Temporary Downturns For Long Run Rate Of Return

So you have to be able to endure those temporary downturns. And if you can, then the long run rate of returns always catches up to their long term trend. So you must accept short term volatility in excess of the volatility that you get bonds in order to enjoy the rate of return double that of bonds. And if you can do that, then that’s how you grow your purchasing power long term.

Over time you grow your net worth, you become wealthier, you get to take more trips, you get to go and sit in first class, you get to buy a bigger house, you get to drive a nicer car, you get to give more gifts to your family, you get to give more donations to your church, you get to give more money to your school, you get to send your kids to private college, you get to have a bigger, richer, fuller life. By enduring those occasional downturns and enjoying a higher long run rate of return made up entirely of equities. No matter what age level you’re at, no matter what stage of life you’re at.

Best Vehicles For Long-Term Growth

We at Wealthway do not believe that bonds have any significant role in long term investment portfolios, and we have largely reduced substantially or eliminated across our entire client base bonds as a component of our clients’ portfolios. And that goes for some little old ladies who are in their 70s. They have some, most of them have 100%, equity stocks, portfolios, because that’s what will get them the best long run rate of return. We do use bonds in some targeted cases. So it’s not complete elimination. But overwhelmingly, we are far more equity heavy than the rest of the investment world would say that the rest of the investment world is doing because they’re still stuck in antiquated notions and principles. 

The Point Of Investing: Grow The Purchasing Power Of Money To Outpace Inflation

We’re going over the Wealthway investment management philosophy and principles. We started with the idea that money is relative, it’s all comparable to the current level of the current costs of goods and services. And the point of investing is trying to grow the purchasing power of money to outpace the corrosive effects of inflation of those goods and services. So the best way to do that, for most people, the easiest, cheapest best way to do that is to piggyback off the profitability of some of the best run mess manage the most profitable country of companies in the world. And you do that becoming by becoming a fractional owner of those companies, by purchasing stock in those companies and the value and by being an owner of the company as opposed to a loner of the company, that would be a bond holder, then long term, you should expect to enjoy rates of return all over double the rates of return that the bond holders enjoy.

And so long term, then the true test of investments, long term safety is his long term total return in excess of inflation, it’s safer to own stocks long term, because they because they earn you more, they grow faster, they stay ahead of inflation better than bonds, that’s the true test of safety. But in order to get there in order to enjoy that, you have to accept more short term volatility more a greater price swings in the prices of stocks than you do bonds.

The Economy Cannot Be Consistently Forecast Nor Market Timed

And in fact, on average, about 15% decline in any given year, you have to get used to that you have to get comfortable with that or you have to not look at your statements, you know, every month or check your account balance every other day. Let the growth effects do their job. So if you’re able to, and if you’re able to do that, then some other wraparound principles that are important when developing your investment portfolio, your investment plan is that you have to accept the fact that the economy cannot be consistently forecast, nor can the equity market be consistently timed.

So you know, CNBC is hazardous to your wealth, we like to say because they want you to think the opposite know the economy cannot be consistently forecast. And the equity market cannot be consistently timed by anyone on this planet. So give up trying. And a lot of people like to wrap the idea of they like to hide the idea of market timing and other fancy words like tactical allocation or sector rotation, those type of things. They’re just all sort of forms of market timing. So accept the fact that economy can’t be forecast stock market can’t be timed, and that the only way to be sure of capturing equities, premium long term return is to remain invested at all times, and endure those occasional pullbacks throughout the course of the year, and even brace yourself for the biggies up to 50% that have happened three times since World War Two.

But every time they have happened, the stock market has always bounced back towards his long term trend. And that’s where you get the highest long run rates of return. So how the investment portfolio though must follow it is does not lead the investment portfolio follows a plan of action, which follows the goals of the individual and what they’re trying to achieve all successful long term investing is goal focused and plan driven, driven. And investing must at all times be driven by the plan and never by current events. And investment policy that is based on a view of the economy and or the markets will fail in the long run.

These are the ageless principles that endure through all economic conditions, all geopolitical events, wars, famines, all kinds of chaos, including presidential administrations, by the way. So they’re ageless principles, they form the bedrock on which all investment portfolios that Wealthway are built. And I’ve just let you in behind the curtain on how we do what we do and why we call that expert Investment Management. And we build those investment portfolios, either in advance or simultaneously with developing our ongoing financial planning that we do for all our clients because that’s the order that it has to flow in order to make things work.

What is the client trying to accomplish? What are his or her goals? Then once you figure out the goals, then you can devise a plan, a strategy on how to get there. And then once we know that, then that determines the makeup of the investment portfolio, the asset allocation, the different categories that make up the portfolio, goals, plan, portfolio, that’s how it must be. Back in three weeks.

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