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Big Hat and No Cattle – 5 Financial Lessons from Cowboys

August 11, 2022
Finances, Financial Lessons, Financial Planning, Wisdom

Those that know me, know that I love horses…I might have always been a bit obsessed with them. Life in western times seems idyllic to me in many ways. There were hard times, but there are financial lessons we can learn from the ponderosa. Here are five financial lessons:

Don’t be afraid to fall

Few things in life are accomplished without taking some risk. If we sit back and coast easy through life, we will miss those moments of thrill with achievement. “Courage is being scared to death and saddling up anyway.” – John Wayne

In investing, I believe this risk should be considered within the context of a solid financial plan. I often refer to the terms “risk capacity” and “risk appetite”.

Risk capacity refers to the range between the minimum amount of risk you must take to have a reasonable chance of meeting your goals and objectives, and the maximum amount of risk you should take to still have that reasonable likelihood of success. Some clients would love to take all of their money and stuff it under their mattress, and others would love to take it all to the casino and bet on black; neither of those is likely a good option, nor is either of those likely to help them accomplish their goals.

Within that range of risk capacity falls a client’s risk appetite. Once the financial plan has been established, it should be stress tested at varying risk levels to evaluate the risk/reward trade-off of varying allocations. How much potential growth are we giving up if we maintain a lower equity allocation? How much sleep are we going to lose if we go after that extra return? There is a place on that spectrum for each individual, and it is part of the advisor’s job to help guide you to finding yours.

Get back on the horse

Unfortunately in life, things do not always go as we plan. We set off in the morning with hopeful expectations of the ride ahead of us…the glow of the sunrise, the breeze in the air, the sounds of the birds. However, as we gallop around the next corner of the trail, we (and our horse) might’ve forgotten about that rain shower from yesterday…and the resulting water puddle showing our reflection back to us. Your noble steed balks…does he run through it, jump it, go around it? As he fast approaches the puddle, he decides to jump around it in a quick maneuver fashion that you were not prepared for…and off you go into the mud. Yes, I’m writing that one from experience. My horse, Apache, actually loves water and would’ve done just fine. However, that day I decided to ride a different horse with a bit more “spunk”. I can say, though, that I did get back on.

In our financial lives, some endeavors will not play out in the manner we intended. That business venture, that career position, or even that stock purchase – not every idea is a winner. However, the important thing is to dust off your boots, learn from your mistakes, and go again…in maybe a more prudent fashion the next time.

Don’t squat with spurs on

Sometimes we can be our own worst enemy. We know our vices and weaknesses, and yet we put ourselves in the same positions. It could be as simple as going to the grocery store while hungry and ending up with loads of junk food and nothing of substance. Or maybe we think we will just go test drive that new truck to see the new features, but not buy one. Or maybe we have had a bad day, and it’s too easy to escape to the shopping mall or Amazon for some retail therapy. In either case, we know better; we just get careless and set ourselves up for failure.

A little self-discipline can go a long way. Take time to know yourself and to create a budget and calendar to help set some guardrails. You will be glad you did.

Big hat and no cattle

Ever seen that “cowboy” that is dressed to impressed…he has the Stetson hat, the pearl snap shirt, the boots, the Wranglers…he is styling. But have you ever seen him even ride a horse? Or is it all just show?

I would liken this to the family with the designer clothes, the newest of luxury cars, that new house on the corner…are they really doing well? Or are their banks and credit card companies doing well off them and their debt? Don’t be so quick to judge the book by its cover and be too easily impressed. That neighbor down the street with the classic chevy may be debt free, have substantial savings for retirement, and fewer concerns. Don’t get me wrong, I appreciate nice things. We just need to make sure we aren’t sacrificing our long-term success for short-term luxuries.

Always drink upstream from the herd

Everyone seems to have ideas about everything. Turn on any news channel, ask any friend, and they likely have at least a few suggestions for you on any given topic. Change the topic, and all the sudden they go from an engineer to a chef to an investment expert to an estate planner. And of course, they have all taken time to consider your values, your goals, your particular assets, and how they all fit into your financial plan, right?

Seek wise, qualified, and appropriate guidance. I wouldn’t want my financial advisor diagnosing my medical needs, and I wouldn’t look to my physician for financial lessons and direction on my investments.

Most of us don’t wear spurs on a daily basis, or maybe ever. However, these are timeless financial lessons that apply to everyone. If these premises generate any thoughts for you about your personal situation and you would like to discuss further, please reach out to a CapSouth advisor.

By: Scott McDowall, CFP®/Wealth Advisor

To learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or https://capsouthwm.com/what-we-do/financial-planning/ or call 800.929.1001 Click to Schedule a Discovery Call.

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice.

Women and Money: Taking Control of Finances

August 11, 2022
Finances, Financial Planning, Wealth Management, Wisdom

As a woman, you have financial needs that are unique to your situation in life. Perhaps you would like to buy your first home. Maybe you need to start saving for your child’s college education. Or you might be concerned about planning for retirement. Whatever your circumstances may be, it’s important to have a clear understanding of your overall financial position.

That means constructing and implementing a plan. With a financial plan in place, you’ll be better able to focus on your financial goals and understand what it will take to reach them. The three main steps in creating and implementing an effective financial plan involve:

Developing a clear picture of your current financial situation
Setting and prioritizing financial goals and time frames
Implementing appropriate saving and investment strategies

Developing a clear picture of your current financial situation

The first step to creating and implementing a financial plan is to develop a clear picture of your current financial situation. If you don’t already have one, consider establishing a budget or a spending plan. Creating a budget requires you to:

Identify your current monthly income and expenses
Evaluate your spending habits
Monitor your overall spending

To develop a budget, you’ll need to identify your current monthly income and expenses. Start out by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support.

Next, add up all of your expenses. If it makes it easier, you can divide your expenses into two categories: fixed and discretionary. Fixed expenses include things that are necessities, such as housing, food, transportation, and clothing. Discretionary expenses include things like entertainment, vacations, and hobbies. You’ll want to be sure to include out-of-pattern expenses (e.g., holiday gifts, car maintenance) in your budget as well.

To help you stay on track with your budget:

Get in the habit of saving–try to make budgeting a part of your daily routine
Build occasional rewards into your budget
Examine your budget regularly and adjust/make changes as needed

Setting and prioritizing financial goals

The second step to creating and implementing a financial plan is to set and prioritize financial goals. Start out by making a list of things that you would like to achieve. It may help to separate the list into two parts: short-term financial goals and long-term financial goals.

Short-term goals may include making sure that your cash reserve is adequately funded or paying off outstanding credit card debt. As for long-term goals, you can ask yourself: Would you like to purchase a new home? Do you want to retire early? Would you like to start saving for your child’s college education?

Once you have established your financial goals, you’ll want to prioritize them. Setting priorities is important, since it may not be possible for you to pursue all of your goals at once. You will have to decide which of your financial goals are most important to you (e.g., sending your child to college) and which goals you may have to place on the back burner (e.g., the beachfront vacation home you’ve always wanted).

Implementing saving and investment strategies

After you have determined your financial goals, you’ll want to know how much it will take to fund each goal. And if you’ve already started saving towards a goal, you’ll want to know how much further you’ll need to go.

Next, you can focus on implementing appropriate investment strategies. To help determine which investments are suitable for your financial goals, you should ask yourself the following questions:

What is my time horizon?
What is my emotional and financial tolerance for investment risk?
What are my liquidity needs?

Once you’ve answered these questions, you’ll be able to tailor your investments to help you target specific financial goals, such as retirement, education, a large purchase (e.g., home or car), starting a business, or increasing your net worth.

Managing your debt and credit

Whether it is debt from student loans, a mortgage, or credit cards, it is important to avoid the financial pitfalls that can sometimes go hand in hand with borrowing. Any sound financial plan should effectively manage both debt and credit. The following are some tips to help you manage your debt/credit:

Make sure that you know exactly how much you owe by keeping track of balances and interest rates
Develop a short-term plan to manage your payments and avoid late fees
Optimize your repayments by paying off high-interest debt first or take advantage of debt consolidation/refinancing

Understanding what’s on your credit report

An important part of managing debt and credit is to understand the information contained in your credit report. Not only does a credit report contain information about past and present credit transactions, but it is also used by potential lenders to evaluate your creditworthiness.

What information are lenders typically looking for in a credit report? For the most part, a lender will assume that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. As a result, a history of late payments or bad debts will hurt your credit. Based on your track record, if your credit report indicates that you are a poor risk, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate. In addition, too many inquiries on your credit report in a short time period can make lenders suspicious.

Today, good credit is even sometimes viewed by potential employers as a prerequisite for employment–something to think about if you’re in the market for a new job or plan on changing jobs in the near future.

Because a credit report affects so many different aspects of one’s financial situation, it’s important to establish and maintain a good credit history in your own name. You should review your credit report regularly and be sure to correct any errors on it. You’re entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months. You can go to www.annualcreditreport.com for more information.

Working with a financial professional

Although you can certainly do it alone, you may find it helpful to work with a financial professional to assist you in creating and implementing a financial plan.

A financial professional can help you accomplish the following:

Determine the state of your current affairs by reviewing income, assets, and liabilities
Develop a plan and help you identify your financial goals
Make recommendations about specific products/services
Monitor your plan
Adjust your plan as needed

Keep in mind that unless you authorize a financial professional to make investment choices for you, a financial professional is solely there to make financial recommendations to you. Ultimately, you have responsibility for your finances and the decisions surrounding them. There is no assurance that working with a financial professional will improve investment results.

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or call 800.929.1001 or click to Schedule a Discovery Call

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

A Shallow Dive Into Alternative Investments

July 19, 2022
Investing, Investment Updates

In what has been a limited but quite eventful career in finance, I frequently get asked by people how they should invest their money. As in most cases, there is no “one size fits all” answer to that question. The phrase “It depends” is used quite often in our company as many factors must be considered before making an investment decision. Warren Buffett might tell you to invest in a low-cost index fund and leave it alone for 30 years. Others may say that cash is king and to stick it under your mattress. Still, others may say to buy the newest Crypto-Token-NFT-Chain (I know that is not a real thing). The answer is rarely as simple as any of these options I mentioned, and I spend the majority of the day trying to answer what seems like a simple question, “How do I invest this money?” If you have paid attention to just about any type of media lately, you know that the stock market is not having its best run this year. With inflation at the highest level in 40 years and the Fed hiking interest rates three times already, and likely another next month, there does not seem to be a good answer to how to invest in these tumultuous times. Not since 1994 have we seen negative returns in both the stock and bond market, and cash is losing purchasing power due to the high inflation. So where do you hide? One such possibility is becoming more and more relevant and, fortunately, more available to investors. This is what the investment world calls Alternative Investments.

What are Alternative Investments

Alternative Investments are considered financial assets that do not fall into one of the conventional investment categories, such as common stocks, bonds, and cash. Sometimes called the private market, alternative investments cover many different categories such as private equity, private debt or credit, real estate or real assets, hedge funds, venture capital, futures, derivatives, and so forth. Alternative Investments (Alts) attempt to have the same outcome as public markets as they seek to generate return, provide growth, and protect assets while diversifying investments from the public market. Often, these investments have a low correlation to the public market allowing; many have less volatility than public markets and a lower risk profile in a portfolio. Until recently, Alternative Investments were only available to institutional investors and not the retail market. Regulatory changes and innovations in products and services have opened the world of Alts to a much broader market. In the past, retail and even high net worth investors had limited access to Alts due to high investment minimums, liquidity limitations, and accreditation requirements, however, a shift in focus has allowed a much larger number of investors to qualify and benefit from private investments. In many cases, investment minimums have declined, subscription processes have become more streamlined, and funds have even begun trading on the open market, albeit they are usually less liquid than your normal stocks or ETFs and may still have a hold period for liquidation. Investors are now able to differentiate their portfolios even further by using Alternative Investments as a standard in their investment process.

Why Invest in Private Markets

In current market conditions, it is now more important than ever to consider investing in private markets as valuations are fundamentally driven and not as impacted by market sentiment. In other words, news cycles, social media, and CEO popularity have much less impact on the companies’ valuations than those available in public markets. Through the use of private equity investments, companies are able to stay private much longer, without needing the investment from joining the public markets, and investors are able to benefit from a longer duration in the private market – kind of a chicken and egg situation. Much economic growth is now taking place in private markets as IPO’s are reaching the market at increasingly higher valuations, often leaving less potential for investment return once a company does go public.

Source: National Venture Capital Association. Data as of 12/31/19.
Source: Journal of Applied Corporate Finance. Private Equity and Public Companies. “The Growing Blessing of Unicorns: The Changing Nature of the Market for Privately Funded Companies.” Keith C. Brown and Kenneth W. Wiles, University of Texas at Austin. Sample set was determined as follows: The demographic and financial characteristics for sets of active unicorns at two different points in time: August 31, 2015 (the sample from our original study) and March 1, 2020. As before, to be included in either sample, a company must satisfy the following conditions: (1) have always been private; (2) have received at least one funding round of institutional capital; (3) not be a divisional buyout of a public company; and (4) have an estimated market valuation of $1 billion or more. Throughout the entirety of the surveying process, the identity of and data for these samples were gathered from several sources, including CB Insights, Capital IQ, CrunchBase, PitchBook, Preqin, and Wells Fargo, as well as their own research.
Sources: Stripe; “Stripe has raised a new round of funding to accelerate momentum in Europe and reinforce enterprise leadership.” Stripe data as of 3/14/21. Amazon: https://techcrunch.com/2017/06/28/a-look-back-at-amazons-1997-ipo/.

Large Private Equity funds generally hold a portfolio of companies, and successful fund managers purchase companies that have the potential to add value to the overall portfolio. In other words, they look to have the portfolio companies feed off each other, and, by extending their holding period, they are allowed adequate time to create value by implementing crossover initiatives. Investments in private debt and private credit focus more on providing a greater yield and overall return, than the public fixed income market while also maintaining and possibly increasing the value of their holdings. This is especially important at this point in time, as rising interest rates have historically caused a loss of value due to duration risk – something constantly discussed in investor meetings. Private real estate funds also focus on providing a yield, but with further potential advantages: growth opportunity due to property appreciation, tax advantages due to property depreciation, and the ability for real assets to hedge inflationary risks.

How Do Alternatives Deliver

When most people speak of investing, they are most familiar with one market, stocks listed on U.S. stock exchanges, which are public, liquid, and provide timely information to anyone who is interested. People rarely think about another, much larger market, the private market, where information is not as transparent and investments are generally not as liquid. For those unfamiliar with the investing term “liquid” (or liquidity), surprisingly, we are not discussing a favorite drink. Liquidity is referred to as how easily an asset can be converted to cash. Assets like stocks and bonds that trade on the public market can be converted to cash in a day or two. Alternative Investments are generally not as liquid, meaning you cannot just sell them over the counter and see your money quickly. There can be lock-up periods, partnership votes, property sales, long-term contracts, and many other protocols to convert an investment back into cash. Because of this lower liquidity, investors in private markets can demand a greater return on their investment, called a liquidity premium. Keep in mind that just because an investment is illiquid does not mean it guarantees positive returns or any return level; however, companies are generally willing to pay more for extended use of funds.

Going back to the overall size of the private market, we often think the public stock market composes the vast majority of the market. However, the private company universe is magnitudes larger than the public market. According to the US Census, there are approximately 6 million companies with employees in the U.S., only about 5,700 of which are listed on the New York Stock Exchange and the NASDAQ combined.¹

1. Source: U.S. Census Bureau – Statistics of U.S. Businesses; Droidge, Karolyi and Stulz (1988-2017). Represents the latest data available as of 2/5/21.

2. Source: www.wilshire.com. As of 2/5/21.

3. Source: Kaiser Family Foundation, 2019 data; www.kff.org. Data updated as of 2/5/21.

Information, or lack thereof, is another driver of return for private investments. The SEC, or Securities and Exchange Commission, requires publicly listed companies to provide potential investors with annual reports and other disclosures containing information regarding their finances, strategies, and operating procedures. These rules theoretically allow all investors to be on the same playing field when evaluating an investment. Private companies are not required to provide investors with the same level of information and disclosures and, therefore, are more difficult to value, which in turn leads to the need for more educated investment decisions.

Are Private Investments Risky

Just like any other investment, or for that matter, any other decision we make in life, Alternative Investments pose certain risks. Interestingly enough, the same traits that make private investments valuable are also what make them risky. As discussed before, the lack of transparency in private markets, as opposed to public markets, leads to both risk and, hopefully, reward. Similarly, the liquidity premium you expect to be paid could also be detrimental if you were to have a need to redeem your investment in a timely manner. It is imperative to look at private investments over a long-term horizon and only invest funds that would not be needed in the near future. Some alternative investments also require investors to become partners in the fund, venture, property, etc., so it is essential for investors to understand the structure of the deal and confirm they are limited to loss of investment only and are not on the hook for further investment. Finally, alternatives can be highly concentrated, adding to a level of risk not generally found in ETFs, Mutual Funds, or market indexes.

In closing, Alternative Investments can be an impressive source of return, growth, and protection for many investors. Still, they should normally be considered a part of the overall portfolio, not the entire investment strategy. Anyone wanting to invest or learn more should read, research, and then speak to their tax, legal, and financial professionals about Alternative Investments before diving in head-first.

To discuss this article further contact Peter Ramsey at pramsey@capsouthparters.com or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or https://capsouthwm.com/what-we-do/investment-management/. Call 800.929.1001 to schedule an appointment to speak with an advisor.