My Dog’s Life.

On most mornings, I embark on a five-mile run with my dog Cricket.  Cricket is a five-year-old yellow lab who loves running.  Our morning ritual starts when I finish reading my daily dose of financial publications like the Wall Street Journal, Barron’s and Morningstar.   When I remove my glasses, and shut my iPad case Cricket knows it’s time to hit the streets. With her leash in my hand she starts to get excessively excited and run around in circles.  Once the front door is ajar she shoots into the yard like a bottle rocket.  I let her run off leash for a while to burn off some excess energy.

A short while later we’re reunited and I attach her leash to settle into our run.  Cricket knows where all the dogs live on our route and occasionally will try to veer off course and say hello.  In addition to the neighborhood dogs, there are a multitude of distractions like squirrels, birds or cats.  Cricket will give them a slight nod and then continue on her way.  She’s never too concerned about what’s behind her and typically focuses on the road ahead.

When we arrive at the park I’ll let her off leash so she can cut loose.   Back on the leash we head towards main drag and run with the flow of traffic.   When we’re outbound Cricket will run slightly behind me and then when we turn for home she’ll lead the way.   Once home, she is treated with a snack.   After her snack, she’ll drink her water and then head for bed where she’ll sleep for the next eight hours.   A good life for sure!

What can Miss. Cricket teach us about investing?   Here are few ideas we can learn from my favorite running partner.

  1. Rituals are important. An automated investment plan mixed in with an annual rebalance will treat you well over the long term.   Cricket’s morning ritual rarely changes and she’s a happy, healthy dog.   For example, investing $10,000 into the Dimensional Core Equity I fund (DFEOX) ten years ago, and investing $100 per month is now worth over $42,000 generating an average annual return of 8.86%.[1]
  2. Avoid distractions. Squirrels, birds and other dogs try to derail Cricket from her objective but she stays focused and runs on.   Investors today are bombarded with distractions from tweets, posts, chats and snaps.  The individual investor today is under attack 24/7.   Give your distraction a quick look and then move on to your goal.   If you let your distractions get the better of you, you’ll lose in the end.  The Fidelity Magellan fund is a solid long-term performer.  During the last ten years, the fund averaged an annual return of 5.29%.  However, investors in this same fund averaged one-half percent (.57%)![2]  Investors who were distracted by outside noise moved in and out of this fund.  If they had stayed invested, they’d have improved their returns dramatically.
  3. Enjoy the treats. Cricket knows when she returns home she gets a dog-treat.  As an investor, it’s suitable to take some money off the table and enjoy life.  If you’ve accumulated a nice nest egg, crack it open and spend some money.   Is it time to take your dream vacation?  Have you always wanted to own a second home?  Do you feel called to donate to your favorite charity?  After all, you can’t take it with you when you pass away.
  4. Sleep tight. Cricket sleeps like a rock without a care in the world.   If your investment portfolio is keeping you up at night and you can’t sleep, sell some stocks to reduce the risk in your portfolio.  You need to reduce your risk exposure to your sleeping level.

It’s time to follow Cricket’s lead.   To be a better investor focus on your investments, avoid the distractions and align your portfolio with your financial goals.

Happiness is a warm puppy. ~ Charles M. Schulz

God made the wild animals according to their kinds, the livestock according to their kinds, and all the creatures that move along the ground according to their kinds. And God saw that it was good. ~ Genesis 1:25

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  For more information on financial planning and investment management please visit www.parrottwealth.com.

Note: Past returns are not an indication of future performance.  Your returns may be more or less than those posted in this blog.

February 27, 2017

 

[1] Morningstar Office Hypothetical Tool, DFA Core Equity I, January 1, 2007 to January 31, 2017.

[2] Morningstar Office Fidelity Magellan Mutual Fund report dated 1/31/2017.

Active vs. Passive vs. You.

The battle between active versus passive investment management rages on.   The passive investment model is winning as billions of dollars pour into firms like Vanguard.   It makes sense as the passive model outperforms the active model most of the time.  In one study, 71% of active large cap money managers failed to beat the Standard & Poor 500 Index.[1]   In another study by Morningstar, only 4.5% of mid-cap money managers beat their corresponding benchmark.[2]   It appears the choice is obvious.

However, the real battle isn’t between active and passive.  The real battle is active AND passive against you!  The real enemy to long term financial success is the individual investor.   Let’s look at some famous investors and firms to make this point.   Vanguard recently crossed $4 trillion in assets by focusing on low cost index funds.  Warren Buffet has made billions by purchasing undervalued companies and holding them forever.  Jim Chanos has made billions shorting stocks of overvalued companies.  John Tudor Jones made billions actively trading currencies and commodities while Bill Gross made his billions investing in bonds.   These billionaires made their money with different investment models.  Through the years these great investors honed their skills by focusing on what they do best.  They kept their investment strategy and didn’t abandon their belief system.

The same is true in sports.  Bill Belichick, Geno Auriemma and Nick Saban are geniuses at coaching their respective sports.   These coaching legends didn’t try to succeed at other sports or abandon their coaching philosophy when times were tough.

When markets are at extremes individuals lose focus and abandon their investment strategy.  When the market is rising sharply investors want to chase the hot sector and sell investments not performing as well as others.   In a rising market, bonds become less attractive.  Who wants to own a bond with the stock market hitting all-time highs?  This strategy works well until it doesn’t.   As markets fall, investors sell stocks and buy bonds.   This popular pattern is known as buy high and sell low.

How can you invest like a billionaire?

  1. Find an investment style that fits your personality.
  2. Invest your time in creating a financial plan.
  3. Invest in simple models. If you understand what you own, you’re more likely to stay invested through rising and falling markets.
  4. Do not chase returns.
  5. Do not panic when the market is falling.
  6. Diversify your holdings.
  7. Rebalance and review your strategy annually.
  8. Save your money and keep your expenses low.
  9. Think generationally.

As the market continues to march on, focus on your financial goals and don’t get caught chasing returns.  A well-constructed investment plan and portfolio will treat you well for a long time.

All who are prudent act with knowledge, but fools expose their folly. ~ Proverbs 13:16

Bill Parrott is the President and CEO of Parrott Wealth Management.  www.parrottwealth.com

February 20, 2017

[1] http://www.investopedia.com/articles/investing/091015/statistical-look-passive-vs-active-management.asp, By Sean Ross, 9/10/2015

[2] http://corporate.morningstar.com/US/documents/ResearchPapers/MorningstarActive-PassiveBarometerJune2015.pdf, Morningstar Active/Passive Barometer, June 2015, accesses 2/20/17.

A Restless Soul.

A restless soul I be,

Traveling continents sea by sea.

Not much for drink or gin,

For it’s your spirit who moves within.

 

Open doors to face your fears,

Run through the valley amongst the tears.

March on and never stop,

Drop your pride, your rage and ascend to the top.

 

Riding dusty roads across the plains,

I trudge on through heavy rains.

Saddled with courage and fortitude,

As the path ahead gains altitude.

 

Trails I trek high and low,

Storms may break but I never slow.

Leaping from stone to stone toward the peak,

Exploring distant shores is not for the faint or weak.

 

Miles upon miles I’m weary and worn,

My clothes are tattered and torn.

Moving forward through trials and tests,

The light ahead draws me towards peace and rest.

 

I open the Book and there you are,

Guiding my steps near and far.

You tell me not to worry and show no fear.

I call you by name and you hear.

 

BP

2/18/17

The Watchman.

$4 trillion is a massive number.  Vanguard recently surpassed $4 trillion in client assets.  By comparison, the market cap of Apple is $710 billion.   Vanguard was founded in 1975 during the oil embargo recession and grew by putting the interest of their clients first, a novel concept on Wall Street in the mid-seventies.

Vanguard is named after the 18th century battleship the HMS Vanguard which means “in the forefront.”  The firm was led by the legendary investor John Bogle who was in the forefront of the index revolution having started one of the industry’s first index fund.  His idea wasn’t well received and the fund got off to a slow start.   Today it’s one of the largest mutual funds in the industry.[1]

A watchman is one who stands guard and is hired to protect others.   A watchman should be faithful, trustworthy and put the interest of others first.  Vanguard is a watchman for the financial services industry.

How can you find your own watchman to help you with your finances?  Here are few suggestions.

  1. Look for an advisor who is a fiduciary. By law a fiduciary must put your interest first.  A fiduciary must act in your best interest and disclose any conflicts of interest.
  2. Find an advisor who holds the Certified Financial Planner designation. An advisor who holds the CFP designation must go through years of study and pass a rigorous two-day exam.  They must also undergo continuing education.
  3. Work with an advisor who has an easy to understand fee schedule. The fee schedule should be easy to comprehend and one that does not break your bank.
  4. Identify an advisor who has a servant’s heart and returns your phone calls and emails in a timely fashion.
  5. Seek an advisor who owns investments he recommends to others.
  6. Discover an advisor who shares similar values to your own.
  7. Hunt for an advisor you can trust.

He heard the sound of the trumpet but did not take warning; his blood will be on himself. But had he taken warning, he would have delivered his life.  But if the watchman sees the sword coming and does not blow the trumpet and the people are not warned, and a sword comes and takes a person from them, he is taken away in his iniquity; but his blood I will require from the watchman’s hand.” ~ Ezekiel 33:5-7.

Bill Parrott is the President and CEO of Parrott Wealth Management.  www.parrottwealth.com.

February 15, 2017

 

 

[1] https://about.vanguard.com/who-we-are/a-remarkable-history/, Vanguard Website accessed 2/15/2017.

Dump the Trump Bump?      

The stock markets (all of them) continue to soar to new heights.   Since the presidential election, the Dow Jones Industrial Average is up 14.5%.   Several experts are a calling for the market to give back these gains and then some.   One advisor has called for the stock market to fall as far as 11,500 a drop of 44% from the current level.[1]  Another has called for a “$68 trillion biblical collapse.”[2]  Finally, one economist has said the stock market is currently 80% overvalued.[3]  Scary.

Is it wise to sell your investments and ride out the coming stock market decline?

Let’s look at some history.

The Standard & Poor’s 500 Index is up 20% on a year over year basis.  For the past five years, it’s up 93.3%.  During the last fifteen years, it has gained 173.2%.  Over the past twenty years it has risen 321%.  For the record, the stock market has never fallen 321%!

Looking back to 1987, a portfolio owning the Vanguard S&P 500 Index Fund and the Vanguard Total Bond Fund generated a total return of 977%.   A $100,000 investment is now worth $1,075,000.  During the past thirty years, this portfolio’s best year was in 1995 gaining 27.80%.  2008 was the worst year as it dropped 16.57%.  In this simple portfolio, you own some of the markets best performers including Apple, Microsoft, Amazon, Berkshire Hathaway and Facebook.

What should you do as the market continues to climb to new heights?   Here are few suggestions.

  1. Nothing. You don’t have to do anything.  History tells us that time in the stock market is the best way to create a mountain of money and produce generational wealth.
  2. Diversify. If 100% of your money is invested in the Dow Jones or S&P 500, move some of it to other investments like small companies, international companies or bonds.
  3. Plan. What does your financial plan say?  Have you arrived at your financial destination because of the markets rise?  If so, sell some of your equity holdings to reduce your risk exposure.
  4. Buy. If the market does drop 20% or 30%, then buy the dip.  Adding to your equity holdings when the market drops has proven to be a prudent financial strategy.
  5. Give.  If you have benefited from the rise in the market, take some gains and donate the money to your favorite cause.

Of course, no one knows what the stock market will do or when.   The best strategy is to focus on your goals, save your money and think long term.

Predicting rain doesn’t count. Building arks does. ~ Warren Buffett.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com.

February 14, 2017

 

Note:  Your investment returns may be more or less than those posted in this blog.  Past performance is no guarantee of future results.  The financial data has been generated from the Morningstar Office Hypothetical Tool as of 2/14/17.
 

[1] http://www.cnbc.com/2016/06/22/dow-11500-is-a-matter-of-when-not-if-advisor.html, Michelle Fox, June 22, 2016,.

[2] http://thesovereigninvestor.com/exclusives/80-stock-market-crash-to-strike-in-2016/, JL Yastine, January 30, 2017.

[3] Ibid.

Windsocks.

An airport is a sophisticated operation relying on the latest and best technology. An airplane is an engineering marvel designed to travel among the stars and heavens. The technology used in the airline industry is advancing at the speed of a Boeing 787 with radar and instrument panels beyond recognition by the early pioneers of flight.

During my investment career, I’ve had the opportunity to work with several commercial airline pilots. These pilots have circled the globe flying all types of aircraft from the 747 to the Dreamliner.   A former (favorite) client was one of the original pilots to fly the 747. He passed away last year and I miss talking to him about his love of flying.   We often talked about the technological advances to the airplane over the years.

This past Sunday I was on a flight from San Diego to Houston and as I was waiting for the plane to take off the bright orange windsock caught my attention.   I thought it was ironic we still rely on the windsock for wind direction and wind speed.   Despite all the advances in technology we still can’t see the wind. The windsock is an invaluable tool to help us with wind direction and wind speed. A quality windsock cost about $50.

The windsock is a simple, but needed, instrument for pilots and airports.   The windsock can help air traffic controllers guide pilots to the best and safest runway.

Investors depend on technology to help with investment decisions. Investment technology is increasing at a rapid rate and is used by all types from robo-advisors to high frequency traders.   The level of sophistication available to investment firms, advisors and clients is unparalleled. The advances continue to propel the industry to great heights.

Do investors have a windsock? I believe they do. Individual investors actually have a few windsocks.

Windsock One. Planning. A pilot must file a flight plan to fly from San Diego to New York and all points in between.   A pilot also uses a checklist before they taxi down the runway. The flight plan and the checklist are essential for a successful flight. A financial plan will help you navigate a path to financial freedom.   Your plan is unique to you and can deliver you to your desired destination.

Windsock Two. Index Funds. The index fund may be the ultimate windsock. A simple structure that has helped investors generate market returns. The index revolution continues to gain loft as investors pour billions into index and exchange traded funds.

Windsock Three: Diversification. An investor who diversifies their investment holdings will avoid long term turbulence in their portfolio.   Owning several investments will keep your portfolio aloft for a long time.

Windsock Four: Asset Allocation. Asset allocation and diversification often fly in the same formation and may even share a hanger or two. Asset allocation spreads your assets across stocks, bonds and cash.   Allocating your assets to different types of stocks and bonds will help your account avoid a hard landing. By investing your assets in large, small, and international holdings your account will benefit from domestic and global growth.

Windsock Five. Fees. The lower your investment fees, the less drag on your portfolio.   Do you like to pay high fees? I don’t. By controlling your costs, you’ll be able to keep more money in your pocket.

As we continue to depend on technology, do yourself a favor and keep your eye on the windsock. It will be beneficial to your investment success. As a note, I’m not a pilot but I’m a great passenger!

Happy flying!

They shall mount up with wings as eagles. ~ Isaiah 40:31.

Bill Parrott is the President and CEO of Parrott Wealth Management. www.parrottwealth.com

February 6, 2017