Episode 14: The role of investments in your financial plan

Oscarlyn Elder:

If you know your main priorities in life, it’s time to work with your advisor to put numbers around those goals. For most of us, the funds we have today won’t be enough to achieve those aspirations. So, we’ll need to create a plan to build our assets, and investments typically provide an engine of growth.

I’m Oscarlyn Elder, co-chief investment officer for Truist Wealth, and this is I’ve Been Meaning To Do That, a podcast from Truist Wealth, a purpose-driven financial services company. We appreciate you listening.

In Episode 6, we discussed the need to create a financial roadmap for reaching your goals. In this episode, we’ll provide some key points you can talk about with your advisor about the investments you’ll need to follow that map to your destination. My guests are two Truist Wealth colleagues who have a lot of experience helping clients on their investment journeys.

If you want to take notes on today’s episode, we have a worksheet you can download and print. You can find it by selecting this episode at Truist.com/DoThat.

Before we get started, we’ll be talking about investments today. So, keep in mind that investing involves risk. The value of an investment will fluctuate over time, and you can gain or lose money.

My two guests today are Trey Smith and Niles Greene. Trey is a senior managing director and financial advisor with Truist Wealth. He is based in Nashville. Hello, Trey. Welcome to the podcast.

Trey Smith:

Hello! Thanks for inviting me.

Oscarlyn Elder:

Niles is a senior vice president and investment manager with Truist Wealth. He is based in Greensboro. Hi, Niles!

Niles Greene:

Hey, Oscarlyn. It’s great to be with you,

Oscarlyn Elder:

Thanks to you both for being here. Truist is a company that’s driven by purpose, so we like to start every episode by talking about it. Trey, could you share your purpose with us?

Trey Smith:

Certainly, I’d be happy to. Now, mine’s really simple. It’s just to add value. I try and add value at every engagement, whether that’s personally or professionally, whether I’m at home with the family or working with clients or just out in the community. If I know I’m adding value, then I think I’m doing what I meant to do and what I was brought up to do.

Oscarlyn Elder:

Thank you for sharing that. And Niles, how about you?

Niles Greene:

Sure, Oscarlyn. I have a personal mission statement to lead a life full of joy while recognizing the cost of fear and the benefit of gratitude. And the way you abate fear is with knowledge. So, the goal today is hopefully share some knowledge that’ll help people be a little less fearful while they’re investing.

Oscarlyn Elder:

Thank you both for sharing your purpose statements. They’re very meaningful, and I know that they’re going to help guide our conversation today.

Niles, before we jump in and start talking about investments, I’d like to first start the conversation with, what’s the difference between saving and investing?

Niles Greene:

Such an important question, Oscarlyn. Saving is the money that you keep in your checking account, your savings account, your short-term CD. It’s dollars that you can’t afford to put at risk, because they’re helping you live the lifestyle that you’re accustomed to living on a daily basis. Any monies that are above and beyond that amount are monies that we can put away for the long term and potentially grow at a greater return to meet those objectives like retirement, college, etc.

Trey Smith:

Yeah, and inflation normally erodes the value of money over time. And so one of the things that when we’re thinking of the difference between investing and savings, that to me is one of the big differences—is that we invest. One of our big concerns is inflation. And when we save, we’re saving for something that’s short term, that we’re not nearly as worried about inflation.

It’s more for that rainy day or for that use that’s coming up, just sleep at night money. So, for a lot of people, it really is that when you’re investing for long term, and inflation is something that we really have to take into consideration. And when we’re investing for a much shorter timeframe or for a risk or something that’s coming up that may be unforeseen.

Oscarlyn Elder:

So, we need that cash liquidity bucket, the savings bucket, to help get us through the shorter term. That’s how we look at it for items that may be coming up, that we know we’re going to need cash dollars for to buy. And we’ve got that in our savings bucket where we can get to it. The price stays stable. And also that cash liquidity bucket gives us extra flexibility for absorbing the unexpected things that come our way in life.

Whereas the investing bucket, typically we’re looking much longer term, and we’re looking to really fuel our ability to meet our financial planning goals. Typically, you would have a much longer term horizon for that investing bucket.

So, I think it’s great to start with that fundamental savings versus investing. And we’re here today to talk mostly about investing. And so Trey, let me go to you and have you explain, what do we mean by investments? How do you go about talking to clients about investments?

Trey Smith:

A lot of times it’s really starting with the basics. And the two most common ways to invest, or the two most common things, are the things that we’re looking at in the public markets. And that’s stocks that you’re seeing—again, you can find them when you turn on the TV or whenever you’re reading the newspaper, something that you can follow that trades on a day-to-day basis—and bonds.

And so common stocks, they represent an ownership in the company. And so what you’re doing is you’re buying a little piece, a share of that company. And by doing that, you get to participate in the company’s earnings, and if they have a dividend that’s paying out, you’re getting to participate in that. So, you’re really buying a piece of a company.

When you’re buying a bond, you’re really on the other side. Instead of buying ownership in the company, you’re actually lending money. You’re providing the company with a loan. It may be a government, it may be a municipality, but you’re providing a loan to some organization for a purpose.

And that’s what’s really different, because with a bond, with that loan, what you’re expecting is that kind of a fixed rate of return. They’re going to have a coupon payment that they’re going to pay out over time, and it’s going to be a fixed payment most of the time. You’ll know exactly what you’re going to get. There’s going to be a term that’s associated with it. You’re going to know how long you’re going to get it. And at the end of that, you are going to receive a set dollar amount or a fixed dollar amount back, as long as they have the ability to pay their bills.

And so one, you’re participating in the growth and all the opportunity of a company, and the other one, you’re really participating in a much more fixed environment of the ability for that company to pay their bills, so to speak.

Oscarlyn Elder:

Well, let’s take a moment and dig deeper into stocks. Clients often have questions and concerns about owning stocks, especially when they see news reports about stocks dropping in price. That’s typically when the concern comes up. Niles, what do you say to clients about that?

Niles Greene:

Oscarlyn, it’s absolutely normal to have anxiety about your money being invested in the stock market, because it does change in value. As financial advisors, as professional guides in investing, our job is to hold their hand, remind them that they do have that cash bucket for their short-term needs, and that any of these dollars that we’ve put toward investments, they’re to solve a long-term objective.

And we need to give it that timeline to achieve those goals. We never let people invest into stocks if these dollars are needed in the next three to five years. We want to extend that period, because over a long period of time, we know stocks really perform. In the short term, you can have volatility, and volatility could equal anxiety.

Oscarlyn Elder:

So, what does the word volatility mean?

Niles Greene:

Fair enough. So, if I buy a stock today for a dollar, we know that that stock is being bought and sold by lots of investors in the market all throughout the day. If there are more people wanting to own that company, the value of that stock is going to go up, just like an auction. Demand is going to drive it higher.

And in the same respect, maybe there’s breaking news that’s negative. Everybody’s trying to sell all at once. This drives the price down. So price volatility has a lot to do with what’s just happening today versus the value of a stock over a very long term, which has way more to do with deep-value-oriented thesis.

Oscarlyn Elder:

So, tell me more about kind of long term, both you and Trey. Speak to me, like, tell me more about what drives value in the long term within the stock market.

Niles Greene:

Sure. So, when Trey and I are looking at owning stocks, we want to be informed. There has to be information available on the company. How long have they been around? Do they have good management? How long have they been selling this product? Is this product in demand? Is there a reasonable margin on it, which creates earnings?

That’s value-oriented. We have a lot of information that we can delve in to figure out, is this stock selling at a price that is reasonable compared to those earnings? And we refer to that as a multiple.

Trey Smith:

And there’s always risk involved, not just with stocks, but with any type of investment. Again, we talked about bonds earlier, and normally—or most people associate bonds with low risk. But they’re absolutely not risk-free. There’s a risk that’s associated with those. Companies can default. Governments can default.

And, of course, just like with for stocks, there’s day-to-day valuation changes, depending on what the news cycle is and what interest rates are, or maybe what the underlying perception of how a company is going to do or perform. And all those things can adjust the prices. So, there’s volatility or there’s risk really within any sort of investment. And that’s key to know and key to plan for.

Oscarlyn Elder:

Before we wrap up this part of the conversation—Niles, in talking with you before, you have talked about a statistic about how the market trades kind of within the year. And when I say the market, I need to be more specific—the S&P 500. Just this thought of volatility and the fact that in any given time period, especially a shorter time period, like a year, the market can be under pressure.

We’re investing, so we’re thinking about the longer-term view, our expectations around the longer-term view and how that drives results. Ultimately, we’re looking for that longer-term investment to drive results for the financial plan. But in order to get those longer-term results, you have to be comfortable living through what can happen in the shorter term. And so I was just, I would love for you to bring that statistic up to share with our listeners.

Niles Greene:

Sure, Oscarlyn. We like to say that volatility is the admission price to the stock market. If you’re going to be investing, you’ve got to tolerate short-term volatility. We can even measure that in the single year.

For example, if we start with 1984—in 1984, if you began with a dollar in the S&P 500, which is an index of the 500 largest companies in our country, and that stock index dropped in value between January and December. And in 1984, that happened to be around 13%. That meant at some point, your dollar was worth 87 cents in the middle of the year. But if we look at where 1984 closed, it was actually up 6%.

We can measure that every single year going forward. And what’s fascinating to me is that 83 percent of the time, before the year ends, the stock market ends up positive. So, that 83 percent of the time yields a 12.8% average return over that 40-year period. So, we can have intrayear volatility, but over a long period of time is where we get the real bang for our dollar.

Oscarlyn Elder:

Thank you for sharing that information. And I know our co-chief investment officer, Keith Lerner, and his team have done a lot of work around that data, so that frankly, we have the flexibility to share it with our clients. It’s really important information.

And what I hear you saying really clearly is, when we looked over the last 40 years, there has been an upward trend. However, you have to be willing to be able to live with that down movement that often comes as the market kind of struggles with changing expectations, more news flow, the development within specific companies, as well as kind of the larger macroeconomic picture, if you will.

Niles Greene:

Absolutely.

Oscarlyn Elder:

Thank you both for laying the foundation for this discussion. I’d like to turn our discussion next around to how we can assess and manage risk for our investments.

So, Trey, we understand that really every investment has risk. Could you provide some background on how we try to understand how much risk is involved with an investment?

Trey Smith:

Yeah, I mean, risk is defined a variety of different ways, but what we try and do is mitigate as much of it as we can a lot of times, because we can never know what all of the business and financial risks are that are involved with the company. But we do have some guideposts that we can work through.

We try and have a thorough understanding of what the company’s services are, what their products are, what the strategic approach is of the company—kind of what their history is, get a good understanding of kind of what their management philosophy is, and do they have a product that can carry forward now. That’s something that is future looking in a lot of terms.

As part of that, you want to have a good understanding of the knowledge of the sector in the industry that they’re participating in. What are their competitors doing or what are they not? Again, do they have a product that has a competitive or a compelling story and something that they’re going to be able to carry forward in the long term, or is it something that was great five years ago and we’re at the tail end of it now?

And getting a good understanding of kind of how those interplay and how that either increases or decreases the risk for individual companies and even sectors as a whole. Then you have to look more broadly and say, OK, what are the general economic conditions? Are we looking at—are we going into a recession? Are we looking for a booming market? Is this a sector that’s going to be particularly affected by a downturn? Or is this something that actually does OK or thrives in a downturn?

And finally, we have some other agencies or organizations that help us. So, we use research from internal and external research, there are rating agencies for bonds, there are research reports that we get on a regular basis. And it really is all pulling all of that together to get a good understanding of, here’s what the company is, here’s how they’re managed, here’s what their product looks like, here’s what their sector that they’re in looks like and how they compete within that, here’s what the economic forces may do it.

And all that really plays into what the risk of an individual company is and how they operate. And it gives us no certainty, but it gives us some guideposts to try and pick things that we think are going to do well and are investable going forward.

Oscarlyn Elder:

And you brought up a key word—investable. And again, we’re focusing on investing. And I think it’s important, Niles, that folks understand the difference between investing and speculating. Niles, will you talk to us about that?

Niles Greene:

Sure, Oscarlyn. Trey did a great job explaining what it looks like when we’re educated and informed, when we know a company, when there’s a lot of information for us to focus on. With speculating, you don’t have that information, right? You don’t have that track record of maybe leadership. Maybe the company is new. Maybe the product line or technology is brand new.

And we just don’t know how it’s going to play out in the future. We don’t know if the company is going to be able to make money because of this product or service or technology. Though it’s exciting, there’s a lot of risk associated with it. That’s speculative investing.

Oscarlyn Elder:

And we’re really rooted in investing. So, what I would say is, speculating is not what our team does. And our view is that the ability to drive toward long-term financial goals is really rooted in investing, and speculating doesn’t really have a role in meeting those goals.

Niles Greene:

100%. Vegas is full of speculators. We’re not in that business.

Oscarlyn Elder:

That’s right. Trey, anything that you would add?

Trey Smith:

Again, I think it’s easy to get caught up in that environment. It’s easy to see something on the news or online, and it makes you want to jump on the bandwagon, so to speak. But the key is, is that, what’s the story? What’s the actual value? What’s the information? What are they doing? If you don’t understand it, if you can’t explain it, if there aren’t financials that actually go with it that makes sense, then you’re speculating. You’re not investing. That’s a different set of risks.

Oscarlyn Elder:

Absolutely. And risk that we would advise steering away from that type of risk. But as we’ve pointed out, there are always risks with investing. And so, Trey, what sorts of discussions do you have with your clients about investment risks?

Trey Smith:

Yeah, that’s probably one of the most important conversations we have with clients, because getting a good understanding of where their comfort level is and what we’re doing. And one of the first things that you really have to make sure that the client understands is that there’s some tradeoffs versus risk and reward.

For example—it’s not always the case—but often a more conservative investment will have less risk. That generally also means that it has a lower return. I keep bringing up bonds today, but bonds are a great example of this—you know, in exchange for that fixed rate of return for that coupon that you’re going to receive, really a more certain outcome, again, as long as you picked a company that has the ability to pay their bills. You’ll often receive less reward than you will in the common stock, or, again we’ve kind of used the S&P 500 index as an example of that.

And so there’s a risk and reward. So, can you take on more volatility for that greater potential? Or, no, you really need to be conservative. And as a part of that, you always should be asking if I am taking a risk, am I getting paid enough for that risk? Do I understand what I’m signing up for and is it appropriate for what I’m actually trying to achieve? And is the opportunity worth what I’m risking to take it?

Oscarlyn Elder:

Absolutely, Trey, that is the core question that every investment professional, every client with an investment portfolio should be asking—am I being compensated for this risk? Is the return that I expect enough to compensate me for the expected risk that I’m going to endure for that ride that I would expect over the long term?

And if the answer is no, you likely need to do something different. We know that every situation is unique. Every portfolio needs to be crafted for each client situation. But, if you go through the exercise and you arrive at a place where you don’t believe you’re being compensated, you don’t expect to be compensated enough for the risk that you’re expecting, then you should likely do something different.

Trey Smith:

And there’s two components about that, that need to be differentiated, in my mind, at least. And I think Niles will agree with me on this. There’s the economic opportunities that are available. So, sometimes, as Niles and I will look at an investment, we’ll say that the risk to that investment—the potential outcome isn’t what we want.

The other side of that compensation function, there’s that sleep at night function for a client. It’s how much risk are you willing to take? And even if we can say and project, look, we think this is going to do this well, is that well worth the volatility? Is that going to create a sleepless night for you? And is that worth it?

That’s where that risk conversation really does have two parts of it. It has a true just investment—is it worth it based on what the market’s saying? And then is it worth it based on where that client actually is—where they live, where they sleep, you know, how they interact? And our job’s really to find that line where we’re maximizing both wherever we can for the client, helping them to find the risk level they’re happy with and getting the risk versus reward that they really need on there from a personal side and related to how the market’s actually interacting and working today.

Oscarlyn Elder:

Niles, what would you add?

Niles Greene:

I think the only thing we’re leaving out is timeline. A lot of times when we talk about risk, we talk about when do we need this money? What goal are we trying to accomplish? If I’m 30 years old and my goal is to retire in 30 years, I’ve got a long time to digest that risk.

If I’m wanting to retire in three years, that’s a whole different conversation. And that’s where Trey and I are going to dial back the amount of risk in a portfolio to help those people not only be prepared for that event, but also to sleep good at night during.

Oscarlyn Elder:

So, you’ve brought in another element, Niles. It’s really time horizon, which feeds ultimately into how a client may assess their risk profile, how they may think about how much risk can they take on based upon their time to stay in the market. That’s a great point. Absolutely.

There are other elements to really thinking about risk or determining risk. And I’d like to take a couple seconds to talk about those. And one that ties to, as we think about the risk that a client can potentially engage with, in addition to the time horizon, you know, another element really centers around liquidity, which is a fancy sounding word for, in essence, how quickly can an investment be turned into cash that I can spend?

It goes back to an element of the conversation we’ve already touched on earlier, which is around that cash bucket, or cash reserves. It’s all tied to liquidity. And so liquidity risk is another element that we think about when we think about risk. And so I just wanted to bring that up and ask you Niles, do you talk to clients about liquidity needs, and also how do you work the concept of liquidity risk into your practice?

Niles Greene:

Absolutely. As I mentioned earlier, Oscarlyn, one of the questions we ask a family when we sit down to work with them is, how much cash do they need to live that lifestyle they’re accustomed to, right? If we can identify the cash needs they have, then we can satisfy the liquidity needs out over six months, 12 months.

When we’re investing, we’re trying to put those monies to work for a long period of time. Our objective is to not disturb them, to not go out and have to sell a stock to pay a light bill, to sell a stock to pay for a vacation. That should all be met in our cash bucket, in our liquidity bucket. When we have those conversations, we determine, what is the right amount of cash? What is the right amount of stocks? What is the right amount of bonds? So we don’t disrupt that balance while that person is leading the life they’re accustomed to leading.

Oscarlyn Elder:

That’s definitely the desire, to not disrupt that balance. And I’ll just also add that from an actual investment vehicle perspective, there are certain investment vehicles that aren’t liquid, which is again kind of another layer of this risk. And so there’s certain vehicles where it may be a private equity investment, a private credit investment, where an investor makes a commitment and it may be a 10- or 12- or 14-year commitment to a singular investment that doesn’t have the ability to be easily exchanged into cash.

And so when we’re crafting portfolios, that’s another level of risk that we’re evaluating for our clients around the client’s ability to withstand an investment liquidity risk, or illiquidity risk, if you will.

Trey, what would you add?

Trey Smith:

I think that really is something that’s when we’re going through the planning process—and, you know, planning isn’t the main point of that—but it’s so intertwined with investing. Every asset has a different liquidity profile. Some of them it’s same day, some of them are next day, and then you go out for, literally sometimes decades. And understanding what their goals are and what we’re planning for, that allows us to tie in and plan for those liquidity needs and again, be prepared for when there is a liquidity need to avoid that risk.

It’s important that clients understand that they don’t necessarily want to tie their hands to a certain degree with too little liquidity, because those rainy days do unfortunately come if you live long enough and making sure that there’s ample liquidity. It saves a lot of problems, because you never know what’s going to happen. There could be something that you think has some surety, but there could be a credit risk or a credit default. There can be interest rate risk, and so the fixed income isn’t working the way you want. So, liquidity is one of those driving things that we just have to make sure is completely covered within a client’s portfolio.

Oscarlyn Elder:

You brought up credit risk, and I think that’s another risk that we should draw out for our listeners. So, credit or default risk, that’s another risk that we talk about relative to bonds. And it really is the risk that, as you discussed earlier, it’s the risk that either that coupon payment stops at some point, because either the company or either the government entity that issues the bond to you doesn’t have the ability to pay the coupon, or something happens and they’re not able to pay you back that principal amount.

And that is a risk in the bond part of the portfolio we care very deeply about. We want to make sure that we understand the credit risk and that we’re taking appropriate credit risk for the client and the client’s profile and the investment objective.

And so it’s just a word I think we want folks to know about. What would you add?

Trey Smith:

Yeah, I think it really does go back to that difference between savings and investing. Any form of investing carries risk with it. And that variability of what that rate is, the default risk or that credit risk, that also adds liquidity risk to those investments.

So, sometimes even if you have a bond that has a value, finding a buyer for that bond might be difficult. And so even things that you think are on the public market and have excellent liquidity, on a certain day and in a certain week and under certain market conditions, there may be liquidity constraints within that, or at least within a price range that you want to do it.

And so understanding that and planning for it, Niles and I have to do that on a day-to-day basis. And that’s part of why we exist.

Oscarlyn Elder:

Well, this has been a very valuable conversation. Hopefully, folks will walk away from this part of the conversation with a deeper understanding of the risk associated with investing. We certainly believe in investing for the long term to achieve financial goals. We believe it’s a really important part of the financial plan, but with it comes risk. And we just wanted to make sure that we spent the appropriate amount of time to illuminate some of those specific risks so that our listeners hopefully have better grounding when they’re talking to their advisors in the future about their overall portfolio composition.

Niles, since we’ve been talking about investment risk and rewards, what are some of the tools you have for managing the risk for your clients?

Niles Greene:

Sure, Oscarlyn. One of the biggest tools that we have available to us when we’re managing risk is establishing an asset allocation. And this is the conversation we have with an investor, saying how much do we allocate toward cash for the short-term needs? How much do we allocate toward stocks for the long-term growth to offset inflation and how much to bonds to generate stability and income flow?

The second tool that I would have available to me is how quickly do I put those dollars to work in the market? And we refer to that as dollar-cost averaging. It’s the ability for an investor to set aside a specific amount of money over a specific period of time so that we draw out the various prices that we’re buying those positions.

So, if I’m trying to invest a dollar in the market, if I put it all in today, I’m subject to today’s volatility. But if I put 10 cents in today, 10 cents in next week, the following week, and so on until the dollar is invested, I’ve mitigated the risk of picking one point in time to put all of my money to work.

Oscarlyn Elder:

Niles, you just talked about dollar-cost averaging. And what we know is that really that consistent and regular investing also means that you’re not trying to time the market by jumping in and jumping out of investments.

Studies have shown that since 1950 through the end of 2022, the S&P 500, when we’re looking at five-year rolling returns, has been up, has had a positive return 93% of the time. When we broaden that out and we look at 10-year timeframes, rolling timeframes, 97% of the time, and then broaden it out even further, looking at 20-year timeframes, the S&P 500’s been up 100% of the time. So, again, that consistent and regular investing is really how we expect to generate the results to drive the financial plan.

Trey Smith:

Again, just kind of tying into what you guys have been talking around dollar-cost averaging and asset allocation—if we kind of tie it in or bring it in just a little closer to the individual portfolios and what we’re selecting inside those portfolios, we really want to look at broadening that out.

And one way I bring it live for a person, when I’m talking to a client, is using nutrition as an example. If you went to a client and you said, or you’re talking with somebody, and you said, look, you’re only going to eat one thing for the rest of your life. You can only eat, you know—even if that one thing you feel is healthy, that’s probably not the best nutritional balance that you’re ever going to have.

You know that eating a variety is going to provide a more healthy lifestyle for you going forward. Well, really the portfolios work the same way, is that you don’t just want to own one thing, you want to have that more broader feel. And whenever you think of asset allocation or really the diversification within that allocation, now we can look at stocks, for example. You know, small-caps can be higher risk versus higher return. Large-caps have a tendency to be a little lower risk for that same profile, but have also a little lower return. And you compare that with bonds, which again, you kind of step another level back and have a little less risk with even lower return.

And so there’s these scales of what you want to do and how they interact with each other and when one does well and when one doesn’t.

So, you can do that a variety of different ways. You can buy investments that track entire parts of the market, whether that’s the equity market or stock market or bond market, or you can do it on a more individual basis. But having broader parts, owning more than one piece, having that diversification to really make sure that your allocation is doing all that you expect it to be doing is really, again, kind of one of the keys to having a good, healthy portfolio, which again, provides an outcome that’s good and healthy for your goals going down the road.

Oscarlyn Elder:

Diversification works in part because investments such as stocks and bonds tend to over the long term behave differently to various market conditions. This helps to reduce the overall risk of the portfolio, because one investment may zig while another investment zags. A goal of diversification is to build a better portfolio of assets that are able to zig and zag, as we expect them to, so that they’re able to better weather the ups and the downs of markets.

Diversification doesn’t only mean common stocks and bonds, depending upon your level of wealth—and I know both Niles and Trey, you all have experienced this—it may be appropriate to invest in alternative investments, such as hedge funds or private capital. So let me share a little bit briefly about each.

Alternative investments offer a wide range of strategies and risk levels. Three main subcategories are hedge funds, private equity, and private credit. Hedge funds, for instance—there’s not a simple, all-encompassing definition of what a hedge fund is. Hedge funds invest in a range of global asset classes, including equities and fixed income, credit, currencies, and commodities.

Different hedge funds have significantly different performance objectives. Some are looking to deliver outsized returns along with some elevated risk, while others are much more conservative in an effort to deliver more modest returns with lower risk. We use hedge funds in client portfolios because they offer diversification benefits to our clients.

One of the things that makes hedge funds really special is their potential to make money, to earn returns, whether the value of assets goes up or down. Many hedge fund strategies exhibit low to moderate correlation—which we just talked about, the zigging and the zagging—to traditional investments, and therefore they can improve the risk-adjusted returns of a portfolio.

Private equity is a unique investment class that may offer higher returns relative to the public markets in exchange—and this is important—in exchange for taking on higher levels and different types of risk. The term private equity encompasses investments and businesses that are not listed on public stock exchanges. In order to invest in privately held companies, private equity firms create funds with a set duration—typically a term of 10 years—which pool money invested by institutional and high-net-worth investors.

The capital is invested or called in increments until the whole investment commitment is met. Now, we use private equity in client portfolios because we believe it provides an expanded investment opportunity set and growth potential as well as diversification benefits. Private equity provides really a compelling and meaningful opportunity set for investors who are qualified to participate, as there is a larger universe of private investable companies available compared to public companies.

Private equity investments are illiquid, and we’ve talked about liquidity a lot today. They cannot easily be sold for cash quickly. Private equity investors are willing to trade liquidity for the potential for higher returns. Private equity is often used in conjunction with public equities as part of a growth allocation, part of that growth engine within a portfolio. Including private equity and investment portfolios can provide diversification benefits, we believe, resulting in the potential for an improved risk-reward profile. Because of the unique characteristics of private equity investing, expert manager research and due diligence are essential to achieving the client’s desired outcomes.

And lastly, Trey, why don’t you tell us about private credit?

Trey Smith:

Yeah, I’ve talked a lot about public credit, bonds, today. And so the other side of that really is the private credit market—or, as it’s often known, it’s the private debt market. And this refers to borrowing and lending that’s outside of normal bank lending or normal bond lending that you’re seeing in the public markets per se.

And we use private credit in client portfolios for a variety of reasons. A lot of times, it’s because it has an expanded investment opportunity set, it has a different income potential, and it really provides some diversification from what’s available within the public market space.

And there are different liquidity components that obviously come with that. So, that diversification, that often a change of correlation with what the public equity market and the public fixed-income market, it’s a really important component to me as to why we take a look at the private credit market at this stage.

Oscarlyn Elder:

And Niles, what considerations do you think about for your clients when recommending or using alternative investments for their portfolios?

Niles Greene:

No matter whether we’re talking about stocks, bonds, cash, hedge funds, private equity, we’re really talking about what’s appropriate for each investor. And when we’re talking about alternatives, we want to focus on clients of higher net worth, because sometimes there’s higher minimums to get involved in these investments. So that can affect their liquidity.

We also want to take into effect of the illiquidity that’s associated with these investments. So, we don’t want to put dollars to work in one of these strategies that we’re going to need before that 10-year period that they might mature.

And then the last thing I would always want to take into consideration is tax reporting. When you invest in stocks and bonds, you get a 1099 at the end of the year that you give to your accountant. When you’re investing in private strategies, you’re going to be issued a K-1, and that may not even come to you before the end of the year, so it could cause a delay in your tax reporting. So again, it always comes down to what’s appropriate for the individual investors that are sitting in front of us.

Oscarlyn Elder:

I think we’ve really created a sound foundation for our listeners and understanding the need for investing so that they can achieve their goals.

I really appreciate you taking the time to help create a foundation of investing knowledge for our listeners. And so we’ve come to the end of this episode. But before we go, I’d like to ask you each this question: What’s the one thing you’ve been meaning to do but haven’t done and will commit to do in the future? Niles, you go first.

Niles Greene:

Sure, Oscarlyn. It’s embarrassing to have to confess your own personal pitfalls, right? The cobbler’s children have holes in their shoes. I spend a lot of time working with my client’s children. I love educating, and I love bringing knowledge to the next generation. My commitment going forward is I want to do the same with my own children. And it’s time for me to make sure that they have a strong foundation and better understand how I manage my own personal money.

Oscarlyn Elder:

That’s a great to-do, Niles. I’m going to check in with you to see how that progresses as we move throughout this year. Trey, how about you?

Trey Smith:

Well, I took a different tack, as I have a tendency to do. And part of what we’re talking about is investing, which means I need to stay mentally sharp. And I’ve been reading a lot that learning a foreign language is a way to do that. And so my goal, and what I’ve been meaning to do and have committed to my wife to do—which is more important than anything—that I’m going to try and learn Italian. And so my “I’ve been meaning to do that” is I’m going to pick up a foreign language, and hopefully that’ll help the gears continue to run as they have been for the last few years.

Oscarlyn Elder:

Trey, that’s amazing. And I’m going to point you to Episode 12 of “I’ve Been Meaning To Do That,” where I talk with Dr. Ayelet Fishbach from the University of Chicago’s Booth School of Business. She’s written a great book about goal setting, and you might find some nuggets in that book.

But I think you’ve got to set some very specific weekly goals around how often you’re going to engage and make it happen. I’m just saying, it’s just a tidbit. That’s what I learned—set some weekly goals.

Trey Smith:

It’s 15 minutes a day.

Oscarlyn Elder:

There we go.

Trey Smith:

I’ve got a structure as to how I’m going to accomplish this. I don’t plan on learning it quickly. This is truly a long-term goal for me to do it.

Niles Greene:

Just like investing, Trey—time allocation.

Trey Smith:

Just like investing. That’s exactly right. Trying to diversify my mind a little bit with a little different knowledge.

Oscarlyn Elder:

That was fantastic, Niles and Trey. Thanks so much for joining me today.

Niles Greene:

It’s been an absolute pleasure, Oscarlyn. Thanks so much for having me.

Trey Smith:

Yeah, thanks. We really appreciate it. And this has been a lot of fun for both of us.

Oscarlyn Elder:

And for you listening, thank you for joining me today. If you liked this episode, please be sure to subscribe, rate and review the podcast, and tell friends and family about it. If you have a question for me or suggestion for this podcast, email me at dothat@Truist.com.

I’ll be back soon for another episode of I’ve Been Meaning To Do That, the podcast that gets you moving toward fulfilling your purpose and achieving your financial goals.

Talk to you soon.

Trey Smith is a registered representative of Truist Investment Services, Inc., and investment advisor representative of Truist Advisory Services, Inc. Niles Greene is an investment advisor representative of Truist Advisory Services, Inc.

Asset allocation does not ensure a profit or guarantee against loss. Diversification does not ensure against loss and does not assure a profit. Dividend stock investing involves risks, including potential market loss, and companies can trim or slash dividend payments at any time. Regular investing does not assure a profit or protect against a loss in declining markets.

Past performance does not guarantee future results. The risk profile of private equity investment is higher than that of other asset classes, and it’s not suitable for all investors. Alternative strategies are not suitable for all investors.