Category: Wisdom

Investment Challenges of the Affluent Investor

May 22, 2019
Investing, Investment Updates, Wisdom

High net worth investors face investment challenges that some would consider unique to their financial status. The fundamental tenets of investing apply just as equally to them as any other investor, but these investors need to be mindful of issues that typically arise only from substantial wealth.

Let’s examine a few of these.

Being Too Conservative. When an individual has more assets than they think they may ever spend, there can be a tendency toward overly conservative investment. This may result in lower long-term returns, which may shortchange the impact of bequests to charities or the wealth that will transfer to the next generation.

The Value of Collectibles. The affluent have a tendency to invest in their passions, and many collectibles have performed well over the years. One common mistake, however, is not keeping up-to-date appraisals, which may have adverse consequences with regard to estate liquidity and taxes. An investor should also remember that the value of collectibles can be significantly affected by a variety of factors, including economic downturns or markets that have little or no liquidity. Therefore, there is no guarantee that collectibles will maintain their value (or effective purchasing power) in the future.

Concentrating Equity. Some senior executives accumulate large stock positions in the company that employs them. A general rule of thumb is that any position making up more than 10% of a portfolio should be reviewed for appropriateness. Not every concentrated position needs to be sold, however. Indeed, it may be possible for a client to continue to hold a sizable amount of one stock if their portfolio also has a solid foundation of well-diversified investments to help pursue their goals. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change and that shares could be worth more or less than their original cost when sold.[i]

DIY Mentality. Some wealthy investors have achieved great career or business success due to their intelligence, initiative, and self-confidence. This very success often promotes the belief that building or managing successful enterprises is not dissimilar to managing great wealth. In fact, it can be quite different, requiring a whole different body of knowledge and experience. An investor might be surprised how the company they have invested in actually makes money.

Too Many Advisors. Affluent investors often place their invested assets with multiple investment professionals, presuming this may lead to better performance. Many of the key needs of larger portfolios, such as risk and tax management, could suffer as a consequence. This may occur because an investment professional supervising only some of the assets would lack an overarching view into the larger picture of an individual’s entire portfolio. The independent actions by separate investment managers, all with the best of intentions, may actually encourage suboptimal outcomes.

With increasing wealth comes even more unique challenges, beyond those covered by this discussion. Consequently, affluent investors are encouraged to seek professional guidance that may be best suited for their particular needs and circumstances.

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. This material has been prepared for planning purposes only and is not intended as specific tax or legal advice. Tax and legal laws are often complex and frequently change. Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.ellevest.com/magazine/investing/concentrated-stock-position

To Catch an Identity Thief

March 26, 2019
Financial Planning, Life, Wisdom

Many Americans have taken steps in recent years to protect their personal information, but savvy cybercrooks have overcome some of those defenses. A 2018 Javelin Research report found identity theft hit an all-time high in 2017, affecting an estimated 16.7 million consumers. For the first time, Social Security numbers were compromised more frequently than credit card numbers.[i]

If you have not taken measures to protect yourself, it may be a good idea to consider your options.

Here are four basic steps you can take to help protect against identity theft. These steps are represented by the acronym SCAM.

Be Stingy when giving out your personal information. Make sure the person requesting the information is on a “need-to-know” basis. For example, someone who claims to be calling from your bank does not need to know your mother’s maiden name if it is already on file with the bank.

Check your financial information periodically. If you get hard-copy credit card or bank statements mailed to you, consider keeping these documents in a safe, secure location. Be skeptical if it appears the financial institution missed a month. Identity thieves may try to change the address on your accounts to keep their actions hidden from you for as long as possible.

From time to time, ask for a copy of your credit report. This report shows bank and financial accounts in your name and may help provide evidence if someone has used your name to open another account. To obtain a report, contact any of the three major credit bureaus: Equifax, Experian, or TransUnion.

Maintain good records of your financial accounts and obligations. Retain your monthly bank and credit card statements, either in hard-copy or digital form. Easy access to this information may make it easier to dispute a transaction, especially if your signature has been forged.

Additionally, consider these steps. Think about guarding the information on your phone the way you protect the data on your computer: with security software, data encryption, and a password necessary for basic access. You could also choose two-factor authentication at the websites of the retailers you frequent most; this potentially gives you the same degree of protection you would get with a brokerage or bank account. You could also elect to freeze your credit report at the major credit bureaus, for a small fee.¹

If your identity is stolen, you may face not only out-of-pocket financial loss, but the additional cost of trying to restore your good name. Help protect yourself by using caution when sharing your personal information and keeping an eye out for warning signs.

To learn more about CapSouth Wealth Management, visit www.capsouthwm.com.

[i] https://www.cbsnews.com/news/identity-theft-hits-record-high

The Investment Risk No One’s Ever Heard Of

March 26, 2019
Investing, Retirement Planning, Wisdom

Knowledgeable investors are aware that investing in the capital markets presents any number of risks – interest-rate risk, company risk, and market risk. Risk is an inseparable companion to the potential for long-term growth. Some of the investment risks we face can be mitigated through diversification.[i]

As an investor, you face another, less-known risk for which the market does not compensate you, nor can it be easily reduced through diversification. Yet, it may be the biggest challenge to the sustainability of your retirement income.

This risk is called the sequence-of-returns risk.

The sequence-of-returns risk refers to the uncertainty of the order of returns an investor will receive over an extended period of time. As Milton Friedman once observed, you should, “Never try to walk across a river just because it has an average depth of four feet.”[ii]

Sequence of Returns

Mr. Friedman’s point was that averages may hide dangerous possibilities. This is especially true with the stock market. You may be comfortable that the market will deliver its historical average return over the long term, but you can never know when you will be receiving the varying positive and negative returns that comprise the average. The order in which you receive these returns can make a big difference.

For instance, a hypothetical market decline of 30% is not to be unexpected. However, would you rather experience this decline when you have relatively small retirement savings or at the moment you are ready to retire – when your savings may never be more valuable? Without a doubt, the former scenario is preferable, but the timing of that large potential decline is out of your control.

Timing, Timing, Timing

The sequence-of-returns risk is especially problematic while you are in retirement. Down years, in combination with portfolio withdrawals taken to provide retirement income, have the potential to seriously damage the ability of your savings to recover sufficiently, even as the markets fully rebound.

If you are nearing retirement or already in retirement, it’s time to give serious consideration to the “sequence-of-returns risk” and ask questions about how you can better manage your portfolio.

Visit www.capsouthwm.com for more information about CapSouth Wealth Management.

[i] https://www.kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html

[ii] https://quotefancy.com/quote/868218/Milton-Friedman-Never-try-to-walk-across-a-river-just-because-it-has-an-average-depth-of