Our Newest Asset and Alternative Investments

With the uncertainty brought on by rising inflation and interest rates in 2022, many investors are looking for investment opportunities beyond standard stocks and bonds. At Correct Capital Wealth Management, as independent and fiduciary advisors it’s our obligation to seek out and consider alternative investment options for those clients who want greater diversification or are seeking a greater return outside traditional assets.

Financial advisor and CERTIFIED FINANCIAL PLANNER™ professional Colin Day continues his series of videos and podcasts getting to know the people who help Correct Capital Wealth Management and our clients thrive. He recently sat down with the newest member of our advisor team, Ryan Potts, to discuss alternative investments and when they may be appropriate.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our Capital Conversations podcast or view our recent blog posts.

Below is the transcript of our most recent Capital Conversation podcast episode, “Our Newest Asset and Alternative Investments.”

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Colin Day: Welcome to another edition of Capital Conversations. I am Colin Day, CERTIFIED FINANCIAL PLANNER™ professional. With me today, Ryan Potts. He's our new assistant portfolio manager. Ryan, thank you for joining me.

Ryan Potts: Thank you for having me. I'm excited.

Colin Day: I’m happy that you're here too. We try to get through all of the employees of the firm so people can become familiar with the faces, the different players that you might interact with in our firm.

Of course, being the new guy, Ryan's been here for about two months now. We wanted to chat a little bit about a recent adventure that Ryan went on with our portfolio manager Joe Anderson, who's been on several editions of Capital Conversations in the past. But I figured we would start here and then we'll get to the meat and potatoes in a moment.

So, Ryan, what brought you to our firm? Tell us a little bit about your background.

Ryan Potts: We've talked about this a little bit in the past already, but, I'll keep it high level because this could be a 20 minute conversation. When I was in college, I kind of recognized that I really enjoyed speaking with people and working with them side by side, and kind of having the same motives to work with other people. I've always enjoyed math, I’ve always enjoyed the markets. So, I kind of fell in love with the investment industry and financial services in particular. That allowed me to keep my relationships available while also using my analytical mindset.

I really fell in love with the industry. I got an internship in college; I worked at an independent Registered Investment Advisor (RIA) while I was a student at the University of Missouri in Columbia. While I was there, I got my hands on all different realms of the industry and the business, and what it looks like to work with clients, work with advisors, do back office – really the whole gamut.

With that, I graduated college, moved back to Kansas City, worked for another RIA, and while there I actually got to focus a little bit more on the investment side of the business. I was still client facing and still helping with all kinds of operational things along the way, but really my focus day-to-day was a lot more on the investment side. And I actually helped restructure the model portfolios that the firm was using. I wasn't the final decision maker, but I played a big part in it and I did a lot of research for the investment committee there. Did that, and then I actually have a relationship with my girlfriend in college. She's from the St. Louis area.

Colin Day: I hope you had a relationship with your girlfriend.

Ryan Potts: Right, kind of implied it, no? But she's half the reason I'm here. I saw the opportunity and I obviously had met John in the past through work. I saw [the job posting] online, reached out and had a great conversation. I realized it was gonna be an awesome fit, and now I'm here to really help out the firm. Grow and expand and do new things.

Colin Day: We were blessed, of course, with having interviews with many qualified candidates for the open role. But after your particular interview, it was like, “Ooh, that one, I want that one.” It was clear that – based on your experiences and what you've done and what you bring to the firm – it was clear as to where you can bring value. I've only seen good things so far in the first two months, so keep up the good work, of course.

Ryan Potts: You don't have to lie to me just cause we're on camera.

Colin Day: Well, like we said before the camera turned on, you're not supposed to butter me up just because I'm the tenured associate or anything.

But in any case, Ryan and Joe went to North Carolina recently on a kind of a fact-finding trip. I'm gonna let Ryan say more about it. But when it comes to the kinds of research studies that we do and how we involve ourselves in the process of deciding on the kinds of appropriate investments for our clients, we wanna make sure that if we can be in person, if we can see somebody face to face, and if we can see the literal product, we're gonna take advantage of that opportunity.

So why don't you tell me a little bit about this trip that you two were recently on?

Ryan Potts: Joe and I took a trip down to Charlotte. That trip was really just geared around private placement, alternative investments. I'll backtrack before we get into alternative investments necessarily, but traditionally speaking, you know, everyone understands the stocks and bond portfolio. They understand kind of weighting allocations differently based on risk metrics, etc…

This trip was kind of the third leg of all of that, which has really come to be predominant in the industry in the last two years. And, that's alternative investing. For those that don't know what alternatives are: Basically, stocks and bonds trade on a daily basis, they're click to buy, click to sell. It's very liquid. You have access to it really instantaneously now, especially with online trading platforms.

With alternatives, we're really looking at a longer time horizon. And these are definitely investments for, I would say, the higher net worth individual. People who don't have liquidity constraints, people who aren't worried about getting to a hundred percent of their assets on a daily basis.

Colin Day: Right.

Ryan Potts: So our trip down to North Carolina, we were actually checking out a single family rental portfolio. There's different asset classes within alternatives. So you've got your private real estate, private equity, and then a subclass of private real estate is private real estate lending. So you can kind of play both sides of the gamut. The specifics of what we were looking at was an actual private equity or private real estate equity play. This is a national group that is going around building and acquiring single family rentals for your class A renter. Higher income levels, homes are typically a little bit higher quality depending on the markets – you know, the price range is gonna fluctuate. But for St. Louis, MO listeners we're looking at probably the $250,000 to $325,000 home price. And these are typically newer built homes. We're not looking at what they would call “classic,” which is, you know, your $50,000s, $60,000s, and $70,000s where people are going in and flipping. These are actually true build-to-rents. So that's what we were doing down there. And I can go into that as much as you would like me to.

Colin Day: I think that's interesting because as you started off, this isn't for everybody. This kind of investment isn't designed for most retail investors. With the vast majority of the folks that we work with, you have millionaires next door, you've done a really great job saving in your 401k plan. Maybe you have an IRA, maybe you inherited something from Aunt Sally when she passed. Those types of individuals, this probably isn't an appropriate thing for them to even consider. Is that fair to say?

Ryan Potts: I would absolutely agree with you there. It's hard to put a dollar amount on a one size fits all for investors. Obviously everyone has a different appetite for risk, and liquidity is unfortunately is a portion of risk, right? For a lot of retail clients, they wanna make sure that their assets are easily accessible, and we totally understand that.

Again, this goes back to one off scenarios and based on appetite. But as a good rule of thumb, if you're leaning over like that $3 million, $4 million, $5 million liquid net worth asset base, you've done your planning. We always talk about financial planning and the importance of that when it comes to investing. If you run your planning you realize that you can cover your liquidity. You have your 4% rule and, and you can do that with 60-70% of your asset base leaning towards the alts and where you should expose a $5 million client. Let's say they could put 20-30% in alternatives and not necessarily need the daily liquidity of that entire $5 million.

Colin Day: Sure. And, this is a very unique play of course. And so you should always consult your financial advisor to see whether or not this is appropriate for you. This, of course, is not a solicitation for any particular investment. But what I do find interesting is that this group that was sponsoring this event, they had you out to see the homes. It wasn't just some pictures and a brochure. It’s “Hey, no, here's the literal property that could be a part of the portfolio.”

So we're always interested in finding different kinds of avenues for investments as opposed to just being reliant on the traditional mutual fund stock bond portfolios that many investors might be used to.

Ryan Potts: I would add to that and say that it's really just another level of service that we can provide to clients. Obviously, anyone can go online right now and go on CNBC and look up “Top Five Dividend Growing Stocks” or “Best Bonds to Buy in 2023.” I’m not saying that's how you should invest, but anyone can go and do that and feel like they have a grasp on what investing is. With these private placements and with these alternative assets, it's really important that a company like NexPoint invites us down to Charlotte and we actually get to see the product, see the business, meet the operators, meet the management team.

You said it was kind of a fact finding trip. I always call it a due diligence trip because I wanna make sure that I'm going and doing due diligence on these investments on behalf of our investors and making sure that if we're recommending these kinds of things that our clients have access to them. But we're confident in it and our investors are confident in us to make sure that we're doing this due diligence.

Colin Day: Right. And as a larger part of it – if we think about it in the context of why alternatives are becoming a stronger part of portfolios in general, not just for us, but likely for advisors across the nation – is because of this kind of pressure. Ryan mentioned the 4% rule, which is an interesting industry standard to consider: How much money can I deplete out of my portfolio every single year to be able to replace that if I'm thinking about a 30 year retirement? So, if I've got a million dollars, I could take 4%, $40,000, out of the portfolio and with some reasonable confidence feel like I can have this money last for retirement.

Well, with the pressures of 2022, we see both the stock market and the bond market falling at the same time. It makes for this kind of uncomfortable area where there is no place to hide. Now alternatives provide an additional sleeve of investments that maybe don't always 100% correlate to stocks or bonds. So that's another avenue that more advisors are considering. So I think that's fair to say. Our firm, we started to really approach this – we would have loved to approach it earlier – in earnest last year. Do we think that that's probably the appropriate play for, maybe not in this particular fact-finding mission, the due diligence trip that you're on, but do we think that this is something that we should be considering with our clients going forward?

Ryan Potts: Yeah, and I think alternatives are gonna be a long-term fit in a lot of investors' portfolios. In the industry and on the analytical side, a lot of large institutions and universities invest a certain way. The way that they invest is called the endowment model; essentially it's these endowments, pensions, and private sovereign funds. They call it the endowment model because endowments inherently have a perpetual lifetime. They don't have a 5, 10, or 20 year window of investing. Their pensions and endowments are supposed to last into perpetuity. So they should hopefully never run out of money. The reason that I kind of throw out like the $5 million number in terms of like an asset base – again, it's not one size fits all, you really need to have a plan in place to figure this out – but the reason I say that is because typically you can, when you start to hit that net worth, a lot of clients realize that they're probably not gonna spend their last dollar on their last day.

So a lot of the investing that happens for those dollars that are gonna be there after the fact, you really should kind of have that perpetual mindset in place. And you get a lot of access and exposure to great investments that aren't on the public markets going through alternatives.

I think it truly will be a long term play for a lot of higher net worth individuals. And hopefully, one day, they really democratize it to allow the next door millionaire, or even lesser than that, an opportunity to invest in these vehicles. Because right now that’s kind of a barrier of entry.

Colin Day: Absolutely. Well I could talk with you all day about it, I'll be honest with you, but we should probably cut this one here. Any last words? Anything that you want to share in regards to what you're looking at as a portfolio manager on the firm? Anything that you're looking forward to over the next 3-6 months that you want to mention?

Ryan Potts: I don't ever look that short in time frame, just because I know I'm gonna be wrong 90% of the time. I will say, long term, I think alternatives are very, very attractive. I think the reason is over the last 2-3 decades, there's been a really high correlation between stocks and bonds just as a whole. What's worked for everybody the last 20 years with a declining interest rate environment, etc... It's been really easy to make money long term if you've just bought and held and really not done anything different. I just don't see that being true for the next 10 years. I'm not saying you won't make money, but I'm just saying that I think it's gonna be a lot harder and it's gonna take a lot more expertise to have success going forward. Especially with what's going on with inflation and interest rates. The feds have a whole different policy than they did in 2010.

It's really interesting and I just think people need to be aware that what has worked in the past is probably not going to continue to work going forward. I know that's hard to swallow sometimes, but –

Colin Day: It’s a little scary.

Ryan Potts: Yeah, but it's not supposed to be scary. It's just opening your eyes to new ideas and trying to figure out different ways to have success going forward. It is going to be important.

Colin Day: Alright. Well, Ryan, we're going to leave it there. Thanks so much for joining me again. We will certainly have you on more videos. If you have not already, you can subscribe to our YouTube channel if you're watching us on YouTube. You can also subscribe to this podcast. And until next time, take care.

The opinions expressed in this program are for general informational purposes only, and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember, investing involves risk and possible loss of Principal capital. Please seek advice from a licensed professional, correct. Capital Wealth Management is a registered investment advisor. Advisory services are only offered to clients or perspective. Clients where correct Capital Wealth Management and its representatives are properly licensed or exempt from licensure.

No advice may be rendered by correct Capital Wealth Management unless a client service agreement is in place.

Capital Conversation by Correct Capital Wealth Management

Worried about what might happen to your portfolio in uncertain times? Afraid you’re missing out on potentially lucrative investment opportunities? Schedule an appointment with one of Correct Capital’s financial advisors to see if real estate and other alternative investments may be right for you. As an independent advisory firm, all our advice is objective, unbiased, and based on what we truly believe is best for you. Call us today at 314-930-4015 or contact us online to learn more.