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Control and Influence

As the father to four young men, one of my goals is to successfully make the transition from a relationship of control to one of influence. Control is easy, right?  Do this, don’t do that. For example, don’t take off your clothes and turn the garden hose on the sweet little Japanese family that your mom tutors.  In my defense, I didn’t think I would have to provide such counsel to my 4-year-old, but I guess I should have. First-time parent rookie mistake, I guess.  Or please do take off your clothes before using the restroom. Thought I covered that in the first several years or so, but I guess not. (Sophomore slump with #2 – child #2, that is.)  And one of my personal favorites of #2, please don’t tell the hairy man at the pool that you thought cavemen were extinct. On second thought, maybe control isn’t that easy. But in the world of personal finance, believe it or not, control is a bit more obtainable.

Today and every day, and in every facet of our lives, we should be focusing more on things we can control and worrying less about the things we can’t. In the world of finance, for example, none of us has any control over the markets, taxes, interest rates, inflation or the headlines of tomorrow’s news outlets. Yet, such things can affect our outlook on our financial situation and lead us down the path of worry and anxiety. And left unchecked, that worry can lead to paralyzing fear, or possibly worse, emotionally charged decisions. Both of which can be detrimental to our financial wellbeing. So, what should we focus on?  There are essentially four primary factors within your control when it comes to your finances. I’ll present these in a “self-fulfilling prophesy” kind of way.

I can control how much I spend.  Unless you have an unlimited supply of resources, your spending will need to be controlled. Similar to exercise, it can be difficult and painful, but it can be done. And you’ll be better off because of it. Let’s define spending as how much you’re choosing to live on every day and how much you’re choosing to spend to enjoy your life today and in the years to come.

I can control how much I save.  I will save X amount now, so that I’ll have Y amount to spend later. If you’re still in the wealth accumulation stage, you or your spouse likely have access to a 401(k) retirement savings plan. And in some cases, your employer may incentivize you to save for retirement by offering an employer “match.” That is, your employer will match a certain percentage of your contribution (to your plan) up to a certain percentage of your salary. In such a case, your decision to save not only provides for your contribution to be spent later, but your employer matching contribution as well.  The industry term there is “free money”. And yet another contributor to your retirement account will be the law of compounding returns – what Einstein called the 8th wonder of the world – whereby you’re earning returns on both your original investment and on returns you received previously. Picture a snowball rolling down a mountain, picking up more snow as it goes. Before long, your snowball is a heaping mound of cash. You catch my drift.  See what I did there? (Bonus Track:  Look up the Rule of 72 and thank me later.)

I control how much risk I take. Indeed, you do. Not every person that invests in the stock market is 100% invested in stocks.  In fact, an August of 2024 survey from Empower Retirement has the average stock allocation for those in their 20s, 30s and 40s to be approximately 50% of their total portfolio. Can you guess which age group from that same survey is credited with holding the 2nd highest percentage of cash at a whopping 30.8%?  Wrong – those in their 20s. Bested only by retirees 70 and older.1 A post for another day, maybe, but such a conservative and seemingly “risk-averse” strategy may be anything but.

I control the timing of my financial decisions. Yes, you do. Like when you pull the trigger on a large purchase, or decide to retire, change jobs or (these days) even take on a second job. Also within your control is the timing of when to save more, spend less, invest more aggressively. They say, Timing is everything. I don’t know about everything, but it’s a fairly big lever to pull with respect to your financial security.

As I’m sure you’ve recognized by now, these four areas of control are inextricably linked.   You’d be hard pressed to change one without affecting the other. Again, assuming resources are finite, if you choose to spend more, then you’ve also chosen to save less. If you’re spending less, you very well could be saving more. And saving more (or saving less) will certainly subject your goals to more (or less) risk, right? If, for example, you’re spending a great deal of money now on Alabama season tickets, you’ll presumably have less money saved to put your daughter through Auburn. (We’ll do anything for our kids, won’t we?) And anytime you’ve chosen to make any changes in savings, spending or risk taken – or not – you’ve made a decision in timing.

So where does influence come in? Great question. Influence certainly has its role in your finances. As we’ve stated, none of us will likely ever move the stock market, nor will we affect the tax structure or control interest rates.

Each of those, however, will influence what we can control.

Let’s say inflation rises – a lot. And you find yourself barely having the money for the things you need – much less the things you want. Now what? Well, that means you’ll need to prioritize and spend less on the things you could do without and save more for the things you really want. Or possibly change the amount of risk you’re taking to increase the chance you’ll make more money for the things you want. Maybe you’ll choose to work longer? Or maybe you’ll have to find a new job or possibly a second one?  Or it could easily be some combination of these. It’s important that we understand when it’s time to adjust the factors that are within our control – our spending, our saving, the risk we take, and the timing of our decisions. Many factors can and will influence our decision-making process. Which begs the question,

Do you know what matters most to you in your financial life?

A quick answer can be found in your check register. Or for those of you under the age of 50, your online bank statements.  Your answer to that question will guide you as you create a plan to help you live your one best financial life. And through that financial plan, you’ll be able to manipulate those areas within your control in anticipation of those influencing forces outside of it.

As for my boys, #1 is married and finishing up med school, #2 is a junior at Auburn and literally creating his own path toward a career of film/sharks/ecotourism, #3 is a senior in high school and likely to change the world through music, and #4 is a sophomore in high school and winning the hearts of college basketball and soccer coaches alike. All accomplished young men in their own rights, but all benefiting from the influence of those who’ve gone before them. I’m honored to be a part of that counsel.  Whether serving as a father or a financial advisor, having influence for the betterment of one’s life is a legacy I’m proud to be a part of.

Article by:  Billy McCarthy, Investment Advisor

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or www.capsouthwm.com/what-we-do/ Call 800.929.1001 to schedule an appointment to speak with an advisor.

1  What is the average allocation by age? (Empower Retirement, The Currency, 08.07.24)

 

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. Any performance data quoted represents past performance; past performance is no guarantee of future results.

 

 

 

401k Participant Update: Q & A with a 401k Advisor

By: ANTHONY MCCALLISTER, AIF®, J.D., Senior VP, Wealth Advisor

We have held many 401(k) group meetings, one-on-one meetings, and phone calls with 401k participants this year. Understandably, participants are concerned with the markets and their 401(k) accounts. What follows are a couple of the common questions we’ve been asked and our general responses. 

Question:

I am tired of contributing to my 401k and seeing it decline in value.  Should I stop funding my 401k until the market stabilizes?

Answer:

We generally believe it best to continue contributing to your 401k to take advantage of dollar cost averaging.  Contributing consistently is an important step in preparing for your retirement.  You control your payroll deductions directly from your paycheck, helping to make this a simple and effortless process.  Coupled with the principle of dollar cost averaging, this consistent payroll deducted contribution into your 401k throughout your working career can help you reach your retirement goals.  Dollar cost averaging is the investment of equal amounts of money at standardized points over time, regardless of the price of the underlying securities.  This can lower the impact of price volatility, as we are experiencing currently, and can lower the average cost of the investments being held.

Question:

My account has declined in value this year.  Should I move my account into something safe (i.e., the money market, stable value, guaranteed account, or other cash equivalent) until I see the market rebound and I feel better about it? 

Answer:

While everyone’s situation is different, we do not recommend trying to time the market; we believe it is better to focus instead on long-term investing.  Timing the market includes when an investor moves some or all of their stock investments to cash in an attempt to avoid a market decline and with the hope of later reinvesting into a market rebound.  While this sounds like a good strategy, this requires a participant to make two correct decisions: when to sell and when to buy.  In the previous 12 bear markets of the S&P 500 Index, the index had positive returns a year following entering the bear market in all instances but three.  The average one-year return was 23.9%.  But reviewing each of these 12 bear markets individually on a one-month, three-month, six-month, and one-year basis, the returns they experienced differ significantly, making timing when to enter back into the market very difficult.   (https://www.wsj.com/livecoverage/stock-market-today-dow-jones-bitcoin-fed-rates-06-14-2022/card/how-the-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB).

It is very difficult to time when to leave the market to avoid market declines.  It is equally as difficult to determine when to reinvest an account at the opportune time in order to experience any market rebound.  We believe the best course of action is to maintain an appropriate, diversified mix of stocks and bonds, investing for the long-term in light of a dynamic plan for reaching your retirement goals.

In these difficult markets, we recommend holding fast to investment principles of resisting the urge to sell equities into declining markets, not attempting to time the market, focusing on investing with a long-term financial plan in mind, and continuing saving through dollar cost averaging.   Do not hesitate to contact your CapSouth Financial Advisor to schedule a time to discuss your individual situation and to review your accounts.

(See: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/is-market-timing-worth-it-during-periods-of-intense-volatility/).

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Any opinions expressed in the material are those of the author and are not presented as facts. 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. The S&P 500 Index is an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. This article contains links to third party content (content hosted on sites unaffiliated with CapSouth Partners). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. 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.

Three Things to Consider in a Bear Market

I’d like to address the elephant in the room. This year has been incredibly volatile for the stock market, and we’ve experienced some steep declines.  It can be frustrating, confusing, and even frightening. Currently, we are in a bear market. Perhaps you have heard the term before and understand the feeling associated with a bear market but aren’t exactly sure what it is (besides scary). A bear market is when a market experiences a prolonged drop in investment prices. This is typically referenced when a broad market index falls by 20% or more from its recent high. There is tremendous noise in the media.  Many investors are anxiously looking at account balances more frequently, particularly after experiencing a long run for the bull market. Experiences with past down-market events may be triggering strong feelings of concern. One of my greatest strengths is being able to stay calm in difficult situations and it serves me well as an Advisor. To help you tackle a difficult situation head on in hopes of instilling some calm in the chaos, I’ll discuss three things to consider in a bear market

Communication with your Advisor is Critical

I love talking to my clients.  They share their dreams and lives with me. They trust me enough to delegate a large amount of their financial life to me.  It’s very difficult to do my job well without clear and consistent communication from clients. It’s also difficult to plan for clients without truly understanding how they feel about risk, how they view money and even some of the personal biases they may have in their approach due to previous experiences.  Some of my clients have never worked with an Advisor before working with me while others have unfortunately had very negative experiences working with an Advisor which is why they sought a change. For some, I serve as a sounding board and for others I offer trusted advice and guidance.  The one unofficial role I never knew I would take on is counselor.

We often think of money as transactional. Most of our money exchanges are even labeled as transactions. We use labels such as “good” and “bad” to describe debt, investments, and even Advisors.  We spend a great deal of time thinking about what we want to do with our money as well as thinking about what our money is doing in the markets.  We don’t often talk about how we feel about money or our life experiences with money.  This is ironic as the field of Behavioral Finance is growing. Research consistently indicates that client behavior is also a key indicator of financial success.  One of the leading organizations in the financial planning industry, FPA, recently announced a new partnership to offer its members a Psychology of Financial Planning Specialist program.  Covered in the program are topics such as Behavior Finance for Financial Planners, Counseling in Financial Planning Practice, and Implementing Financial Psychology into Practice. The industry has recognized what we as individuals may not be able to see right in front of us – dealing with money comes with a lot of emotion.  It’s time we start talking about it.

While I believe communication is always important, communicating with your Advisor during a bear market about how you are feeling is crucial.  A client recently shared that this was the first time they have ever felt uneasy.  We had a long conversation about why they felt uneasy.  We had reviewed the financial plan and were well in the confidence zone.  There was plenty of cash to fund their needs for an extended period. We began to peel back the layers and have the hard conversations around emotions.  Throughout the conversation I learned that when I said “everything is fine” the client perceived that as being dismissive. While that was never my intent, their honesty and vulnerability allowed me to clear the air and lean into even deeper conversation. I decided to ask the client a very tough question – are you uneasy because you have lost trust in me? Thankfully, they had not.  After a while, they shared that they felt uneasy because it was the first time that they were experiencing a bear market while in retirement.  It was scary to see the losses while on a fixed income.  The client’s vulnerability in sharing those feelings took courage. We walked back through their financial plan, discussed “what ifs” and discussed how we might address them in the future.  We didn’t abandon the plan and we didn’t make any sudden investment changes that were out of scope of the plan.

During this bear market, if you find yourself dealing with emotions that are new or ones you haven’t experienced in a while about your money, please tell your CapSouth Advisor.  We truly care about you and we are here to listen.  It is our responsibility to coach and guide you through the emotions so that we can limit behavioral influences. There is an adage that says, “the only people that get hurt on a roller coaster are the ones who jump off”.  Advisors often use this to explain how behavioral changes impact money such as selling when the market is declining. We understand the emotions and we will spend the time needed to address concerns.  Let us serve as the safety bar to keep you locked into the seat while we ride this roller coaster together.

Your Financial Plan Has a Long-Term Outlook

One of the things I love most about CapSouth is our dedication to Financial Planning.  For most of my life, I only thought of a Financial Advisor as someone who manages money.  My experience with them had been limited to those that work in the Broker world as an investment manager.  Unfortunately, our industry has limited regulation on how the title Financial Advisor is used.  I have had many new clients come to CapSouth with the same limited viewpoint.  When I explain that we view investment management as a commodity and that our real value comes in planning, it can be a true mindset shift.  Perhaps you had a similar experience when starting to work with us. We ask a lot of questions! We ask for a lot of information.  For those that are just starting to work with us, it can be overwhelming although we do our best to make the onboarding process enjoyable. With all the information provided we then craft a financial plan and begin working with you to implement it. We review the financial plan every year in meetings and are consistently adjusting it because life happens. We start to focus more on the Confidence Score to answer the question “am I going to be, okay?”

Like the Wizard of Oz, I’m going to give you a peek behind the Advisor curtain.  The Confidence Score is generated through a process called Monte Carlo simulation.  So, what is it and why does it matter? Surprisingly, it’s not unique to the financial industry. It’s also used in physics and engineering.   In our financial plans, we don’t have the certainty of knowing what the future holds. That includes knowing what the average rate of return will be for your plan. Therefore, the Monte Carlo simulation runs 1,000 trials of your plan using 1,000 different return possibilities to calculate the probability your plan will be successful. While you may not have considered worst case scenarios or bad returns, your financial plan already has. 

When we dig into these simulations and look at the 1,000 Trials detail, we can get an even better understanding of the numbers.  We can see year data in 5 year increments (Year 5, Year 10, etc.). We can also see End of Plan Dollars and The Year Your Money Goes to $0.  These time frames are charted out by Trial Percentile. They include 1%, 25%, 50%, 75% and 99%. My personal plan has a Confidence Score at 88% (at time of writing this).  When I look at these trials, I can see that in the very best scenario my plan would end with more money than my husband and I would know what to do with and would need a fantastic estate plan.  I can also see that in the very worst scenario, we would run out of money in the year 2049.  Does that scare me? Not at all.  The reason? It’s an extremely unlikely scenario just like the one that looks amazing. The most realistic scenario is somewhere in between, and it’s why my Confidence Score is reassuring.  (Friendly reminder here: This is not like school where the highest score is the best score.  If my score is in the blue zone, it is considered an overfunded plan, and I need to ensure my estate plan is in order because I will likely be leaving money to heirs). 

We don’t often get into these types of details in meetings because it can be data overload.  The key takeaway right now during a bear market is that your financial plan is not surprised by a down market with negative returns.  Neither is your Advisor.  We take a long-range approach and understand that markets go down just like they go up.  Historical charts show that the markets have always recovered.  While history is not a predictor of the future, it does give us data to consider.  While it can be difficult to zoom out when emotions are high it is important to remember the decisions made together with your Advisor when times were not as tumultuous.

It’s Not All Doom and Gloom

When we set the fear and frustration of a bear market aside for a moment, we can turn our focus to the bright spots in this market.  No, I’m not talking about a “sweet deal” a friend is telling you about or even buying treasuries at 4%.  I’m talking about the planning opportunities that present themselves during a bear market.

If you are still working or have cash on the sidelines, it’s an excellent opportunity to dollar-cost average new money into the market.  If you are participating in a company retirement plan, it’s likely that you are already using this approach. Each time you contribute to your 401(k) you are investing new money. This may be weekly, bi-weekly, or twice a month depending on how your payroll is processed.  It’s a great buying opportunity. I like to say we’re buying on sale and it’s an opportunity we haven’t had in a long time due to high market prices. We may only know that the bottom of the market has occurred when we are able to look back, so trying to time cash into the market isn’t a great approach.  By leveraging dollar-cost averaging, you smooth out your investment purchases and remove market timing.

Now is also a great time to consider a Roth IRA conversion.  Roth conversions are a part of our normal consideration process for clients with IRAs, but they are particularly appealing when markets are in decline and your portfolio value may be lower. Conversions now may increase the likelihood of tax free growth as the market recovers.  You may even be able to save on the tax bill you are paying now for that conversion due to the lower portfolio value. Less taxes and increased potential of tax free growth? That sounds like a great opportunity to be considering in a bear market.

A bear market also presents you with the opportunity to revisit your market risk tolerance. Are you feeling different now than how you felt when you originally discussed your risk tolerance with your Advisor? Perhaps you overestimated how much risk you could tolerate and need to evaluate dialing back market risk long term.  The opposite could also be true.  You may have always feared the worst and now, faced with a bear market, you aren’t as bothered as you thought you would be.  These are valuable, real-time insights that can help you and your Advisor plan for the long term.

Above all else, remember that you are not alone. You are a part of the CapSouth family, and we value our long-term relationships with clients. We are here in the good times and in the bad. Do not hesitate to reach out to your Advisor at any time.

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 to schedule an appointment to speak with an advisor.

by: Jennifer Fensley, CFP®️,CRPS®️

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.

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