Month: April 2024

Mission Accomplished?

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What happens when you achieve your goals? I’ve pondered this question lately as a few clients have retired. Do you set new goals or rest on your laurels?

I believe in setting actionable goals. As a kid, I wanted to be a collegiate athlete because my dad played baseball at the University of Arizona and Occidental College. I wanted to start a company because my grandparents owned a business. While running 5Ks, I set a lofty goal to run the Boston Marathon. I achieved all three goals.

What can you do if you reach your life goals? Here are a few ideas.

  • Set new goals. If you’ve checked all your life boxes, set new goals, start a new challenge.
  • Mentor. Can a student or your professional benefit from your life experiences? The next generation needs your help setting goals and defining their mission.
  • Start a hobby. During Covid-19, I learned the basics of playing the guitar. My guitar skills are low, but I enjoy strumming.
  • Travel. Can you take your show on the road? Learn another language and travel the world to meet new people.
  • Join a nonprofit. Nonprofits need your expertise. Can you volunteer with your favorite charity or organization?
  • Face your fears. Is it time to dive with sharks, scale a mountain, or run with the bulls? If you’ve played it safe your entire life, now is the time to push the envelope.
  • Exercise. If you’ve achieved your goals, use your free time to improve your health. Can you find thirty minutes daily to hike, bike, or walk?
  • Adopt a pet. A dog or cat can bring much joy and companionship.
  • Build a bigger table and break bread with your neighbor. Open your home to your neighbors to share a meal.
  • Forgive. Life is too short; mend a fence today.

Cooking is all about people. Food is maybe the only universal thing that really has the power to bring everyone together. No matter what culture, everywhere around the world, people eat together. ~ Guy Fieri

April 23, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

Today or Tomorrow?

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One of my favorite Aesop Fables is The Ant & The Grasshopper. The ants worked diligently to store food for the autumn while the grasshopper was busy making music. The grasshopper did not have time to work the fields and save for the future, a costly mistake.

Here is the fable.

One bright day in late autumn, a family of Ants was bustling about in the warm sunshine, drying out the grain they had stored up during the summer, when a starving Grasshopper, his fiddle under his arm, came up and humbly begged for a bite to eat.

“What!” cried the Ants in surprise, “haven’t you stored anything away for the winter? What in the world were you doing all last summer?”

“I didn’t have time to store any food,” whined the Grasshopper; “I was so busy making music that before I knew it, the summer was gone.”

The Ants shrugged their shoulders in disgust.

“Making music, were you?” they cried. “Very well; now dance!” And they turned their backs on the Grasshopper and continued their work.

There’s a time for work and a time for play.

A challenge I’ve seen during my career is to live for today or save for tomorrow, and, unfortunately, there is not an easy answer. It’s essential to save for tomorrow so you can afford to retire on your terms. On the other hand, you can’t ignore today’s demands.

I recently talked with a young client planning a trip to Europe but canceled her plans because her insurance premiums and property taxes increased significantly. She’s postponing her trip until her finances improve. An older client was contemplating returning to work to make ends meet.

Here are a few suggestions to help you live for today while saving for tomorrow.

  • Develop a spending plan. A spending plan will help you allocate your dollars so you can live for today while planning for tomorrow. A well-constructed spending plan will free you from the burden of battling the needs of today or tomorrow. Here is a link to EveryDollar: https://www.ramseysolutions.com/ramseyplus/everydollar
  • Start an emergency fund. An emergency fund of three to six months of expenses can help weather a storm if you need short-term assistance. If your job is safe and secure, three months of savings is sufficient. Six months to a year if your job is risky or unstable.
  • Invest in a taxable brokerage account. A taxable brokerage account allows you to access your funds without penalty, a valuable feature if you want to retire before age 59.5. You can also use the account to fund a car purchase, a trip, education, or retirement. Since COVID-19, we’ve seen a spike in individuals wanting to retire early, highlighting the importance of investing in taxable accounts.
  • Fund your retirement accounts. Contributing the maximum amount to your company retirement plan is the best way to save for your future and achieve financial independence because it is an automated process that removes procrastination and market timing. The maximum amount is $23,000, and the catch-up provision is $7,500. If you can’t contribute the maximum amount, aim for 10% of your income. If that’s too much, do what you can, especially if you’re young.
  • Don’t delay. Time is friend and foe to the investor. A twenty-five-year-old can save $158 monthly to become a millionaire at age 65, whereas a fifty-five-year-old must save $4,882.
  • Invest in good habits. Automate your savings and expenses to ensure financial peace. Automation removes the guesswork from investing and eliminates late fees on your obligations.

The Franklin Utility Fund (FKUQX) was my first investment. I started investing shortly after October 19, 1987, when the Dow Jones fell 22%. I invested $150 to start and $25 monthly. I used the funds for several items, like taking a trip or buying a car. It wouldn’t make me rich, but it started the flywheel for a successful investing career and pending retirement (someday).

It’s important to invest for today and tomorrow, but the bottom line is that you must prioritize retirement because you can get a loan for every other endeavor– car, home, school, etc.- but you can’t get one for retirement.

Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty. ~ Proverbs 21:5

April 20, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

My Struggle with Alternative Investments          

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My struggle with alternative investments, private placements, and commodities dates back over three decades while working for one of Wall Street’s largest firms. I sat near a couple of commodity brokers touting the virtues of silver. They sounded smart and opined about the price of silver, but their predictions rarely materialized. Since 1990, Vanguard’s Long-Term Bond fund has outperformed silver.

The Wall Street firm where I worked was a major player in the commodity arena, and it packaged managed futures funds for brokers to sell as a hedge against a stock market correction or inflation. Brokers were paid 4% to 5% to sell the funds and got an ongoing commission of 5%. I don’t recall whether these funds performed as advertised during my tenure with the firm, but they seemed to fall when stocks fell, which is not a good hedge.

Limited partnerships and tax credits were popular “investments” for brokers to sell in the late 1980s, selling the offerings because they received a large commission of 8.5% or more, and some funds didn’t generate any returns but produced tax losses or credits clients could use to lower their taxes. The general partners sponsored lavish trips and showered brokers with gifts, golf outings, and steak dinners to market the funds. Like silver, the promise of these funds fell short of expectations.

Alternatives, commodities, and limited partnerships were attractive in the eighties and nineties because most investors remembered sky-high interest rates and inflation from the 1970s and the elevated tax rates in the early 1980s, which made these investments easy for brokers to sell. Also, the stock market barely budged from 1970 to 1982, and investors were hungry for something different.

Private placements were also attractive to the brokers because of the commission structure, but few advisors I talked to could adequately value the holdings. A lack of liquidity is also common with private placements. During COVID-19, some companies froze their funds so clients could not access their money. If general partners can’t liquidate their fixed assets, investors can’t make money or recoup their investment.

We’re in another era of firms marketing alternatives to a legion of investors. Today, firms position their offerings as a hedge against another virus, a stock market correction, a rising deficit, stubborn inflation, and higher interest rates, which brings me to Bitcoin and cryptocurrencies, a fashionable category for many. Bitcoin will offer 21 million tokens, the bull case for crypto enthusiasts. However, Yahoo Finance currently has 9,780 cryptocurrencies quoted! How do you choose the right one? How do you value cryptocurrencies? The price target for Bitcoin seems outlandish, with some calling for a price of $180,000 or more, a gain of 195% from the current level.[1] I struggle to find a use case.

I feel old-fashioned and sound like a curmudgeon, but I’ve seen this movie before. Will it be different this time? Maybe.

If you want to invest in alternatives, pay attention to fees, read the small print, and limit your allocation to 3% to 5% of your taxable portfolio.

I am no longer a curmudgeon. I am a curmudgeon emeritus. ~ James Gibbons

April 19, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

[1] https://cointelegraph.com/news/how-high-can-bitcoin-go-180k-btc-price-prediction

Where Are My Returns?

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The Nasdaq has risen 31% over the past year, and the S&P 500 is up  22%. Are you pondering your returns after reviewing your first-quarter statements? Likely, your accounts underperformed if you invested in bonds, international stocks, or small-cap holdings. Why not allocate 100% of your assets to large-cap United States stocks if this is the case?

Let’s explore some history.

  • International stocks outperformed the S&P 500 from 1970 to 2011. The MSCI EAFE Index averaged 10.17% annually, while the S&P 500 generated 10.03% yearly.
  • International small-cap stocks have outperformed the S&P 500 index from January 1970 to March 2024 by an annual margin of 2.6%. It might not sound like a big difference, but if you invested $10,000 into each index, you’d have $6.7 million more in the international small-cap index.
  • Since 1927, US small-cap value stocks have trounced the S&P 500 by 2.88%. A $1 investment in the small-cap index is now worth $163,289, whereas a dollar invested in the S&P 500 is worth $12,386.
  • During the lost decade from 2000 to 2010, the Nasdaq fell 74%, the S&P 500 lost 9.10%, while small-cap stocks, international investments, and bonds produced positive returns. (See chart)
  • During the Great Financial Crisis (GFC) from 2007 to 2009, the S&P 500 and Nasdaq fell by more than 50%. Long-term bonds jumped 24%.
  • Stocks and bonds crashed in 2022, but US T-Bills generated a positive return.

It’s normal to focus on recent returns and consider moving all your assets to the most popular investments like gold, Bitcoin, the Nasdaq, Nvidia, etc. However, diversification is still the best choice for most investors because you never know when, why, or how stocks will move. Also, trying to predict the best-performing investment is impossible.

Stay diversified, my friends.

Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window. ~ Peter Drucker

April 17, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

The data for interest rates, returns, prices, and yields are from Ycharts and Dimensional Funds Webtool.

I Like Long-Term Bonds

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I like long-term bonds, and I’m in the minority and have been for some time. Most people roll their eyes, raise a hand, or shut me off when discussing bonds. Who wants to own bonds when you get better returns from Nvidia, Bitcoin, or Hippo Holdings? Bonds are boring, and lately, they have produced questionable returns.

Rising interest rates decimated bonds in 2022. Vanguard’s Long-term bond fund fell 27.22%, and the Bloomberg US Aggregate Bond Index declined 13%. It was a drubbing, and you lost money if you allocated assets to bonds. I feel your pain. However, Vanguard’s Bond Fund returned 7.52% last year, 16.22% in 2020, 19.10% in 2019, and 10.86% in 2017. Since 1994, it’s up 431%, averaging 5.77% annually. A $100,000 investment is now worth $531,160, despite the correction in 2022.

Of course, you can’t eat past returns, so here are five reasons I like long-term bonds.

  1. Income. The current yield for Vanguard’s Long Term Bond fund is 4.80%, and the yield-to-maturity for the existing portfolio is 5.05%. The current yield for the 30-year US Treasury Bond is paying 4.74%.
  2. The Fed. If the Federal Reserve lowers interest rates, the yields and income stream will evaporate on money markets, savings accounts, CDs, and T-Bills, while the prices of long-term bonds will appreciate. When the Fed lowered rates in 2020, long-term bonds jumped 16.22%. The Fed lowered rates during the Great Recession, and from 2007 to 2012, Vanguard’s fund soared 58.4%.
  3. History. Long-term rates have averaged 4.49% since 1871. Current rates are in line with their 153-year average.
  4. War. The Ukraine war shows no signs of abetting, while the Middle East is boiling over. If these wars intensify, investors will rush to buy US Treasuries as a safety trade, and the Fed may act sooner rather than later if the global economy slows down.
  5. The Election. Half the country will be happy in November, while the other half will be upset. Historically, our great country has enjoyed a peaceful transfer of power, but this fall, the equity markets may experience abnormal volatility, which drives investors to bonds.

Bonds and bond funds cause the most angst for clients during our quarterly reviews; the vitriol is real. I’ve fielded many colorful comments from clients about the performance of their bond portfolios over the years, but I’m standing my ground. It’s time to buy bonds.

For the record, my asset allocation has remained 75% stocks and 25% bonds for over three decades, and I’ve owned Vangaurd’s Long-Term Bond fund for several years.

Bye-bye, and buy bonds.

Gentelman prefer bonds. ~ Andrew Mellon

April 15, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

The data for interest rates, returns, prices, and yields are from Ycharts.

Recalibrate?

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Have you driven a car with poor alignment? It’s not fun. A trip to your mechanic can balance, calibrate, and align your wheels to ensure a smooth ride. Of course, ignoring the issue can lead to several problems, like flat tires or difficulty steering.

As the second quarter begins, is it time to recalibrate your thinking about interest rates and inflation? Entering 2024, financial experts speculated that the Federal Reserve would lower interest rates six or seven times. They might not lower interest rates until next year because of the persistent inflation data. The current inflation rate is 3.48%, above the ten-year average of 2.79%. Though it dropped significantly since 2022, it has remained steady since last May.

In addition to the inflation rate, other metrics remained stable. Traditional indicators like the Consumer Price Index, Producer Price Index, Personal Consumption Expectations Survey, and wages continue to climb. Our Gross Domestic Product (GDP) has also been rising. It’s up 3.30% over the past year, and consumer debt has increased by 5.16%.

The wealth effect is another factor. What is the wealth effect? When assets like investment accounts, 401(k) balances, and real estate rise, individuals feel wealthy; when people feel rich, they spend money. Low unemployment and rising wages ensure consumers will continue to shop for the foreseeable future.

What does this mean for your investment portfolio? Interest rates could remain elevated, which is not bad because your fixed-income portfolio can generate above-average income. It’s possible to earn a consistent 5% or more from bonds. Long-term interest rates currently sit at their 153-year average rate.

If you entered this year expecting interest rates to decline, it’s time to recalibrate your thinking and focus on a globally diversified portfolio of stocks and bonds. Investors are still nervous about buying bonds after the rout they incurred in 2022, but it’s unlikely rates will spike as they did from 2020 to 2022. The interest rate composite index soared 6,400% when rates jumped from .08% to 5.2%. Can you imagine interest rates at 332%? I can’t, but rates will be higher for longer.

As always, focus on your financial plan, diversify your investments, rebalance your portfolio, and think long-term.

I know a lot about cars, man. I can look at a car’s headlights and tell you exactly which way it’s coming. ~ Mitch Hedberg

April 10, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

Market Top. Now What?

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The S&P 500 traded to an all-time high to close out the first quarter. What should you do now that the stocks are at all-time highs? Will stocks fall now that they have peaked, or will they continue to climb? Time will tell. After all, if you summit a mountain and reach the peak, your next move is to turn around and come down. Sir Edmund Hillary and Tenzing Norgay spent about fifteen minutes atop Mount Everest before descending.[1]

Should you buy stocks when they touch all-time highs? Let’s see. Suppose you purchased stocks at previous market peaks and held them through the end of the first quarter, March 31, 2024.

  • October 1928. The average annual return from this peak was 9.93% despite Black Tuesday, the stock market correction in October 1929, the Great Depression, and WWII.
  • August 1987. The S&P 500 was up 32% in 1987 before stocks fell 22% on Black Monday, October 19, 1987. However, if you bought stocks in August, your average annual return was 10.29%.
  • December 1999. The internet fueled the S&P 500 returns from 1995 to 1999 as the index soared 220% before it fell 49% from 2000 to 20003. If you purchased stocks at this peak, your average annual return was 7.63%.
  • October 2007. Stocks peaked in October 2007, before the worst recession since the Great Depression. During the Great Recession, stocks fell 56%. If you purchased stocks at this peak, your average annual return was 9.95%.
  • February 2020. If you purchased stocks in February 2020, your average annual return was 14.26% despite the COVID correction and the stock market crash in 2022.

The average return from these previous peaks was 10.41%, which is impressive considering you bought stocks at the “worst” time in history.

I started my career on May 9, 1989, when the S&P 500 index stood at 295; it’s now trading at 5,205, an increase of 1,600%! In 1991, Jack Vander Vliet of Dean Witter predicted that the Dow Jones would climb to 10,000 by the year 2,000. It was a crazy prediction, considering the index was trading at 2,619. However, he was right. The Dow crossed 10,000 in June 1999. Today, it’s approaching 40,000.

If you want to sell stocks when they near new highs, think again because you can miss out on significant gains. Stay invested, my friends.

Dow 100,000 by 2035?

Our peace shall stand as firm as rocky mountains. ~ Shakespeare

April 2, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

[1] http://www.history.com/news/7-things-you-should-know-about-mount-everest, Jesse Greenspan, May 29, 2013, accessed August 12, 2016.