Hurricane Harvey & Hardship Withdrawals.

The IRS recently announced individuals effected by Hurricane Harvey will be allowed to remove money from their 401(k) plan under the hardship provision to help pay for any damages suffered.   The distribution must occur before January 31, 2018.[1]

The IRS allows for several safe Harbor distributions including the following expenses:[2]

  • Medical expenses.
  • Purchase of your principal home, not including mortgage payments.
  • Tuition, fees, room and board.
  • Payments to avoid eviction from your home.
  • Funeral expenses.
  • Damage to your home.

Your distribution will be limited to the amount of money you need to satisfy the expense.  For example, if your 401(k) balance is $250,000 and the cost of the repair is $100,000, you’ll be allowed to remove $100,000.  Your distribution will also be limited to your elective deferrals so to remove $100,000 from your plan your personal contributions must exceed $100,000.  If you qualify for a hardship withdrawal, you’re not allowed to put the money back into your 401(k) or roll the money into your IRA.   In addition, you may be restricted from contributing to your 401(k) for six months following the distribution.[3]

This distribution will be a taxable event and you may incur a 10% penalty if you’re under the age of 59 1/2. You’ll receive a 1099-R for your hardship distribution which is reported to the IRS.

If you need a hardship withdrawal, please discuss it with your plan administrator and refer to your summary plan description.  I’d also recommend getting tax advice from your CPA.

Rather than a hardship withdrawal, you may be better served with a loan from your 401(k) if your repair is $50,000 or less.  The loan will allow you to contribute to your plan and the distribution isn’t considered a taxable event if it’s paid back within five years.  The amount of your loan will be capped at $50,000 or one half of your vested balance.  If your vested balance is $40,000, you’ll be allowed to receive a loan for $20,000.

As always, please seek help and guidance when you remove money from your company sponsored retirement plan.

 I will say of the Lord, “He is my refuge and my fortress, my God, in whom I trust.” ~ Psalm 91:2.

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.

August 31, 2017

 

 

[1] https://www.cnbc.com/2017/08/31/irs-makes-it-easier-for-harvey-victims-to-tap-401k-money-for-rebuilding.html, Sarah O’Brian, CNBC, 8/31/2017.

[2] https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans, accessed 8/31/2017.

[3] Ibid.

The Seventies.

The decade of the seventies was unique.   The ‘70s brought us great music like Stairway to Heaven, Joy to the World and Hotel California.   The Beatles parted ways and Elvis left us too soon.  The Sting, Rocky and The Deerhunter each won an Oscar for best picture while Jaws kept most people out of the water.

The Oakland A’s, New York Yankees and Cincinnati Reds dominated baseball.   The Miami Dolphins, Dallas Cowboys and the Pittsburgh Steelers ruled the NFL.  The NBA introduced us to Magic v. Bird.

Hank Aaron hit his 715th home run and Muhammad Ali was the reigning heavyweight champion of the world.   Billie Jean King beat Bobby Riggs in the Battle of the Sexes and Secretariat won the Triple Crown by thirty-one lengths in the Belmont Stakes.

Disco music, vibrant colors and shag carpet were everywhere.

We watched the horrific acts from the Munich Olympic Games as the Israeli athletes were murdered.  Jim McKay told us, “They’re all gone.”

Politically, the decade of the seventies was a hard time for our country because of the resignation of Richard Milhous Nixon, the Iran Hostage Crisis and the fall of Saigon.

The oil embargos of 1973 and 1979 brought the country to its knees with unforgiving gas lines.

We celebrated the 200th anniversary of our great country on July 4, 1976 and watched the return of Apollo 13.   Saturday Night Live debuted in 1975 and Star Wars took over the universe a year later.   The Sony Walkman was a must have item.

The Sears Tower and Twin Towers opened their doors to the world.  The Iron Lady rose to power in the UK and Mother Teresa won the Nobel Peace Prize.

For investors, the ‘70s was a challenging environment because of stagflation, high interest rates and even higher inflation.   The S&P 500 eked out a gain of 5.9% underperforming T-Bills which returned 6.3%.[1]  Inflation averaged 7.9%[2] during the seventies so after taxes and inflation an investor was left with a negative return.   The ‘70s was truly a lost decade.  In fact, it wasn’t until 1982 when Business Week declared the death of equites before stocks started climbing again.

However, if an investor ignored the headlines, rhetoric and expert opinions, they were rewarded handsomely by investing in the stock market for the long haul.

An investor who invested $100 per month in the Fidelity Magellan Fund (FMAGX) on January 1, 1970 through July 31, 2017 now has a nest egg of $4.45 million!   During the past forty-seven years, the Magellan Fund dropped meaningfully numerous times.  In 1973 and 1974 it fell 69%. In 2001 and 2002 it dropped 35%.  In 2008, it was cut in half, falling 49%.  Despite these declines the fund managed to produce an average annual return of 13.8%[3].   A buy and hold investor enjoyed these outsized returns if they stayed the course.

Since 1970, the S&P 500 has averaged 10.3%, T-Bills have averaged 4.8% and inflation has averaged 4%.[4]

The outlook for stocks and bonds is once again dire according to a few market professionals and some experts are predicting low stock returns with rising interest rates.[5]   Should you pay attention?  If your time horizon is three to five years or more, my suggestion is for you to focus on your financial plan and keep investing.   If (when) the stock market corrects, use it as an opportunity to add quality stocks to your account because the long-term trend for the stock market will reward you in the future just like it did for our investor in 1970.

“Therefore, keep watch, because you do not know the day or the hour.” ~ Matthew 25:13

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

August 30, 2017

Note: Your returns may be more or less than those posted in this blog.  Past performance is not a guarantee of future performance.

[1] Dimensional Fund Advisors 2017 Matrix Book.

[2] Ibid.

[3] Morningstar Office Hypothetical Tool, Fidelity Magellan Fund, 1/1/1970 to 7/31/2017, returns do not include taxes, your returns may be more or less than those posted in this report.

[4] Dimensional Fund Advisors 2017 Matrix Book.

[5] http://marcfabersblog.blogspot.ca/2017/02/marc-faber-warns-higher-yields-may.html

How to Generate More Income.

Interest rates remain stubbornly low and this is an issue for individuals looking for income.   How can you generate more income in this low interest rate environment?

Here are three simple strategies you can employ today to help you generate more income.

Systematic Withdrawal Plan:   If you own mutual funds, a systematic withdrawal plan (SWP) will allow you to generate monthly, quarterly or annual income from your existing mutual funds.   For example, in 1976 you decide to invest $100,000 in the Vanguard S&P 500 Index Fund (VFINX) and withdraw 4% of the account balance each year.   At the end of July, you would have received over $930,000 in total income and the fund balance grew to $1.34 million!   In 1976, your annual income was $4,000 and this year it will be $53,600, an increase of 1,240%.[1]

Option Writing.  Writing options or selling calls on stocks you own is a great way to pick up more income.  Let’s say you own 1,000 shares of ABC company trading for $37 per share.  If you decide to sell your shares at $40, you can employ a covered call strategy.   A hypothetical option expiring in October may be priced at .50 cents.  You can write ten call contracts on your ABC holdings because one contract equals 100 shares of stock.   1,000 shares, or ten contracts, at .50 cents will generate $500 before fees and commissions.  If ABC stock trades above $40 per share on the October expiration, you must sell your stock at $40 regardless of how high it trades above $40.  If ABC stock settles below $40 on expiration, you get to keep your shares and you can write another ten contracts for November or December.[2]

Charitable Remainder Trust.  If you own appreciated stock, land or some other asset, you can transfer the investment to a Charitable Remainder Trust to generate income.  Once your investment has been transferred to the trust, you can sell it and avoid all capital gains.  In addition to avoiding capital gains, you’ll get a tax deduction for your contribution.   After the asset has been sold, you can reinvest the proceeds into investments of your choice and withdraw 5% to 8% of the account balance each year.  At your death, the assets in the trust will transfer to your charitable beneficiary.   The CRT is a great way to avoid a capital gains tax, diversify your portfolio and benefit your favorite charity.

These strategies are easy to incorporate and may benefit your family.  If you want to learn more about income producing ideas, please give me a call.

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.

August 24, 2017

 

[1] Morningstar Office Hypothetical Tool, 8/31/1976 to 7/31/2017.  Your rate of return may vary and your results may differ.  They hypothetical does not include fees or taxes which will adjust the results.

[2] Options involve risk and are not suitable for every investor.

An Interview with Myself.

Good afternoon and welcome to my interview with Bill Parrott, President and CEO of Parrott Wealth Management in Austin, Texas.

Bill, thank you for taking time out of your day to sit down with me and answer a few questions about your business.

My pleasure Bill.   I appreciate you reaching out to me and I look forward to our interview.

Great.  Let’s get down to it.  Why did you start your own firm?

I started my own firm to offer more services like financial planning and investment management to individuals free of any conflicts.  I also wanted to be a true fiduciary and put the interests of my clients first.

You’ve been in the investment business a long time.  Why start your business now?

Well, that’s a good question.  I’ve been in the investment business for twenty-eight years and I’ve worn many hats from financial advisor to branch manager.   In 2015, I turned fifty and my daughter was applying to college and I thought to myself if I don’t start my own business now I never well.  In addition, my previous employer was flying me all over the country to present investment workshops and meet with clients.  The travel was becoming a bit much and I wanted to spend more time with my family and work with clients in my neighborhood.  After you’ve seen one airport terminal, you’ve seen them all.

Excellent.  Tell me about your process when working with a new client.

When I meet with a new client I try to get a good understanding of their financial situation by offering a financial plan and risk tolerance profile.  In addition, to the questionnaire, I spend a fair amount of time talking to them about their financial goals and dreams.  The time I spend discussing their financial situation gives me a good idea of how to structure their investment accounts.  I may meet with them five or six times before we decide to open a new account.

Once you set up a client account how often do they hear from you?

I offer to meet with clients quarterly so we can discuss their accounts and the market.   The quarterly meetings are a great way to check in to see if anything has changed with my clients.  In addition to the quarterly meetings, I email a monthly newsletter to clients and potential clients.  I’m willing to meet with anybody at any time especially if they need help.  I also make house calls!

I looked at your fee schedule and it seems awfully low.  Can you tell me about your fee structure?

Ha Ha!  I’m often told my fee schedule is too low but it works for me and more importantly it works for my clients.  My fee structure is simple and clear.  The fee is .5% (one half of one percent) on the first $10 million in assets.  My fee is about half of the industry average.  In addition, I charge a flat $525 for a financial plan.   I don’t charge any other fees and I don’t have any fee minimums.

Your fee is low!  What type of investments do you offer?

In addition to my low fee, I offer low cost investments like index funds and exchange traded funds from Dimensional Fund Advisors, Vanguard and Blackrock.  These three fund families are excellent financial partners because they don’t charge a sales commission and their internal fees are extremely low.   I like working with these firms because they also have a client first mentality.  I also offer individual stocks and bonds which don’t have any internal fees.

How do your clients keep up with their accounts?

T.D. Ameritrade is my custodian and clients can view their accounts 24/7 on their phone, iPad or computer.   T.D. Ameritrade will send a monthly statement to the client listing all their positions.  On a quarterly basis, I send a detailed report from Morningstar highlighting their performance, fees, gains, losses, income and much more.

Do you have any employees?

I do.  I have an assistant who works with me and her name is Janet Jackson.

Janet Jackson?

Yes.  Janet has a great name and we’ve been friends for a long time.  We started working together on the same day when we were hired by Dean Witter in Pasadena in 1990!  She is a tremendous resource and helps with onboarding new clients and helping me with the firm paperwork.

I love your logo.  Can you tell me more about it?

I’ve been blessed with a colorful last name and so I wanted to incorporate it in my business.  I’ve been told you shouldn’t name your business after yourself but not everybody has a cool last name like mine!  Ha!  Ha!  I wanted a bright and colorful logo that would make people smile as well.  My daughter added the pie chart to the letter “O” which is a nice touch.

Bill, thank you for your time.  It sounds like you love the business and have a genuine concern for your clients.   How can people get in touch with you?

You know me well!  I can be reached at bill@parrottwealth.com and my website is www.parrottwealth.com.

I notice you end your blogs with a Bible verse or quote.  What do you have for us today?

Here is a good one, or two, from Matthew: Jesus replied: “‘Love the Lord your God with all your heart and with all your soul and with all your mind.’ This is the first and greatest commandment.  And the second is like it: ‘Love your neighbor as yourself.’ ~ Matthew 22:36-39

A good one.  Thank you!

My pleasure.

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.

August 22, 2017

Stock Picking v. Indexing.

Individual stock picking is exciting and the thrill of selecting a winning stock is exhilarating.  Investors are constantly searching for the next big winner hoping to find another Amazon.  Stock pickers try to outperform the market, usually the S&P 500, by buying winners and ignoring losers.  The top ten stocks in the S&P 500 this year are up 67% while the bottom ten are down 41%.  How do you find the best stocks?

I’ve found most investors primarily focus on large companies with brand name appeal like Apple, McDonalds and Boeing and ignore other sectors such as small companies or international investments.  Investors also tend to overload on stocks in their own backyard so individuals who live in Houston are likely to own shares in Exxon.

Trying to pick stocks to outperform the S&P 500 Index is futile because in a diversified portfolio you may only have 25% exposure to companies in the S&P 500.  In a million-dollar account with 60% invested in stocks and 40% in bonds, the large cap holdings will account for 25% of the entire portfolio.  With $250,000 to invest you can allocate $25,000 to ten stocks.   Morningstar currently tracks over 20,000 companies so how do you pick the ten best?  If you limit your search to the S&P 500, you’d have to identify the top 2% of this index to find your ten stocks.

To create more diversification in your portfolio, you need to add more stocks.  As you add more stocks, your account starts to resemble an index fund.  A study by Dimensional Fund Advisors found that if you own 50 stocks, your probability of outperforming the stock market on a one-year basis is 56%.   Over a ten-year period, the probability of outperforming the market is 69%.   How many stocks do you need to own to get close to outperforming the market?  The answer is 1,000![1]

Most investors don’t have the financial resources to own 1,000 stocks nor do they have the time to follow and research each individual company.   Jim Cramer says you need to dedicate an hour each week to each position to fully grasp the stocks you own.[2]   If you own 1,000 companies, you need to allocate 1,000 hours to study your holdings and a week only has 168 hours so you can do the math.

A better alternative for your investment portfolio, is to purchase a basket of index funds based on your financial goals.  Your financial goals will help determine your asset allocation and investment selection.   Instead of spending thousands of hours on stock research, devote your time and effort to refining your goals.

Teach us to number our days, that we may gain a heart of wisdom. ~ Psalm 90:12.

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

August 19, 2017

 

[1] Dimensional Fund Advisors, The Importance of Diversification, June 1979 to June 2016.

[2] https://www.thestreet.com/static/rules6.html

Look for Silver Linings.

In fifty years, I will be dead and the stock market will be higher.   Fifty years ago, our country was embroiled in the Civil Rights Movement, the Vietnam War and a space race with Russia.  The late sixties were a difficult time for our county but we survived.

Today, I’m deeply disturbed with the division in our country and I’ve never understood racism, bigotry or hatred.   The acts of white supremacist, neo-Nazi groups or the KKK are deplorable and have no place in our great nation.  Our country is in dark place but let’s try to find the good in our fellow man and look for silver linings.    

Everyone who does evil hates the light, and will not come into the light for fear that their deeds will be exposed. ~ John 3:20.

The stock market has had an average annual return of 10.2% since 1967 despite numerous issues and headwinds including the 1970s and 2000s. In 1973 and 1974 the stock market dropped over 41%.   The S&P 500 averaged .4% from 2000 to 2010, a lost decade for investors.   A $10,000 investment in the S&P 500 fifty years ago is worth $1.2 million today.   If this investment could run for another fifty years, it would be worth $165 million in the year 2067!

I’m confident our country and stock market will thrive over the next fifty years so what can you do today to make our world a better place for our children and grandchildren?  I’ve found it’s hard to hate while serving others.

The point is this: whoever sows sparingly will also reap sparingly, and whoever sows bountifully will also reap bountifully. ~ 2 Corinthians 9:6.

Here are few suggestions to help you help others.

Serve.  Can you be a greeter, reader or youth leader at your Church, Synagogue, or Mosque?

Volunteer.  Can you volunteer at your local school or library?

Give.  Can you use your financial resources to help those in need?

Mentor.  Can you mentor a young high school or college student who will benefit from your wisdom?

Teach.  Colleges, junior colleges, and high schools need educators with real world experience.  Can you use your knowledge to help the next generation succeed?

Join.  Civic organizations like Rotary, Kiwanis or the Lions Club are always looking for new members.  These groups do wonderful and amazing things in the communities they serve.

Travel.  Travel the world to meet new people and learn about their cultures.  Mark Twain said, “Travel is fatal to prejudice, bigotry, and narrow-mindedness.”

Love.  Love and hate can’t exist at the same time.  Introduce yourself to your neighbors and love on them!

…You shall love your neighbor as yourself. ~ Matthew 22:39

In fifty years, the world will be a better place so don’t worry about the current gyrations in the stock market or the political turmoil in Washington.  Instead, get out there and do some good!

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own.  ~ Matthew 6:34.

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

August 18, 2017

Note: Your returns may differ than those posted in this blog.

 

 

 

Market Timing or Rebalancing?

Market timers allegedly have models allowing them to move money flawlessly between global markets while avoiding all stock market corrections.  Market timers use a bevy of indicators like the CAPE ratio, Bollinger bands, and candlestick patterns to determine if their client should go long, short or neutral the stock market.

Tactical asset allocation is a fancy term for market timing but the process is the same.  Tactical asset allocation sounds more professional than market timing but the results are the same; trying to time the market is a waste of time.

Market timing is challenging because you must be right all the time and it must be repeated, correctly, for the rest of your life for you to outperform the more traditional buy and hold model.  Your tactical trading model might flash a sell signal today, but will it flash a buy signal tomorrow?

In a 2014 Dalbar study, the S&P 500 generated a 30-year average annual return of 11.1% while the individual investor made 3.7%.[1]   The market timer was left with less money when compared to the buy and hold investor.   A buy and hold investor who invested $100,000 in the S&P 500 made $2.35 million while the market timer made $297,000.   The buy and hold investor accumulated $2 million more than the market timer.

Dimensional Fund Advisors found a similar result amongst mutual funds.  In a fifteen-year study of equity mutual funds, only 17% of the funds they studied survived and outperformed their corresponding benchmark.[2]

Rather than trying to time the market, rebalance your account instead.   Rebalancing your account will align it with your financial goals.  Your financial plan will determine your asset allocation and investment selection.   For example, after completing your financial plan, you set your asset allocation to 60% stocks and 40% bonds.

In 2007, you invest 60% of your assets in the iShares S&P 500 (IVV) exchange traded fund and 40% in the iShares Core Aggregate Bond Fund (AGG) exchange traded fund.   If you didn’t rebalance your account, your asset allocation at the end of ten years was 67% stocks and 32% bonds and generated an average annual return of 6.43%.  Your current asset allocation is too aggressive based on your financial plan.  If you rebalanced your account annually, your 60% stocks and 40% profile remained intact and your portfolio generated an average annual return of 6.62%.[3]

You can rebalance your portfolio as often as you wish but annually is sufficient for most investors.  A January rebalance is recommended because it will incorporate the prior year’s capital gains and dividend income.

If you want to test your own market timing model, try darting in and out of traffic on a heavily congested highway and see how it goes.

Be very careful, then, how you live—not as unwise but as wise… ~ Ephesians 5:15.

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:  Your results may differ from those posted in this blog.

August 17, 2017

 

[1] https://www.fool.com/investing/general/2014/05/28/3-reasons-why-market-timing-doesnt-work.aspx,  Jay Yao, May 28, 2014.

[2] Dimensional Fund Advisors, Pursuing A Better Investment Experience, July 2017.

[3] Morningstar Office Hypothetical Tool.

It is time to sell. Everything!

Is it time to sell everything?  You should not sell everything but you may want to sell something.  The stock market continues to underwhelm in 2016 and this trend looks like it may remain in the near term.   The fear of the downside is real and growing among investors especially if you pay attention to the posts, papers and pundits.   The general consensus among the masses is for the doom and gloom to linger. 

Should you be a seller?   Here is a list of individuals who should sell their stock holdings.

1.       You should sell if you need your money in one year or less.   According to Morningstar and Ibbotson the stock market has made money 73% of the time on a one-year basis between the years of 1926 and 2014.   However, the range is wide.  The best year was 1933 with a gain of 53.99% and the worst year was 1931 with a loss of 43.34% (Ibbotson®SBBI® 2015 Classis Yearbook).

2.       You should sell if you are going to buy something with the money invested in the stock market.  If you are going to buy a home, car, boat or plane then this money should be in cash.

3.       You should sell if you have to pay for an event like a wedding or a college education.   My daughter will be leaving the nest soon and heading off to college in the fall.   As a result, I sold half of her investment account two years ago and invested the proceeds in U.S. Treasuries knowing that a tuition payment is imminent.   I did not want to have 100% exposure to stocks before she left for college.

4.       You should sell if you are retiring in 3 to 5 years.   You don’t need to sell all of your stock holdings just enough to cover 3 years’ worth of household expenses.  For example, if your annual household expenses are $100,000, then you should have at least $300,000 in cash in your retirement or investment accounts.

5.       You should sell if you are up to your eyeballs in debt.  This can be mortgage, credit card, consumer, auto or margin debt.  Debt is debt and the less you have the better.  A rule of thumb is that your total monthly debt payments should be less than 38% of your gross income.  For example, if your gross income is $10,000 per month, then your total debt payments should be no more than $3,800.

6.       You should sell if you don’t have a financial plan.  If you don’t have a financial plan, this is analogous to driving a car without a steering wheel or sailing a ship without a rudder.   How can you invest your assets if you have no idea where you are going?  A financial plan will help guide your investments and make you a better investor.   A well-constructed financial plan will be your life guide.

7.       You should sell if your account is 100% invested in stocks.   A portfolio that is invested in 100% stocks has had an average annual return of 10.1% with a standard deviation of 20.1.   A portfolio that is 70% in stocks and 30% in bonds has had an annual return of 9.2% and a standard deviation of 14.3.  The bonds reduced your risk by 29% and your returns by .9% per year.   The time frame for these returns is from 1926 to 2014. (Ibbotson®SBBI® 2015 Classis Yearbook).

8.       You should sell if you can find a superior long term investment that outperforms great American and International companies.

9.       If you do not fall into one of the above categories, then you should be a buyer of stocks!

Happy Investing.

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

1/30/16

 

 

 

Planes, Trains and Indices.

Planes, Trains and Automobiles is a great movie starring Steve Martin and John Candy.   This 1987 comedy was all about Steve Martin’s character trying to get home for Thanksgiving.    He and his new BFF, John Candy, were using all means necessary to get home for the holidays.   Steve Martin’s character did not care how he got home so long as he got home.

As we launch another trading year should you be more concerned with outperforming and index or arriving at your financial destination?  It is common for investors to focus on an index, usually the Standard & Poor’s 500, as their primary benchmark.   An investor will consider their investment year a success if they outperformed this index even if it was down for the year.   A relative outperformance is considered a victory for most.

There are a few issues with trying to outperform a standard benchmark.   Standard & Poor’s website references that they track over 700,000 indices in real time.   700,000!  If you were going to benchmark to an index, which one of the 700,000 indices would you choose?   If you are an investor with a diversified portfolio, you may only have 15% or 20% exposure to the companies in the S&P 500.  The majority of your portfolio will be linked to some other asset class like small companies, international companies, bonds, real estate, commodities or cash.   These asset classes will have little, if any, connection to the S&P 500 index.    It is recommended to broaden your market benchmark to combine all of your asset classes.  A blended benchmark will give you a better picture of your overall portfolio performance.

To follow up on Planes, Trains and Automobiles, if I am scheduled to fly from Los Angeles to New York should I be concerned that there are other planes flying to Bend, Austin or Denver?   Should I be concerned that there is more than one flight to New York and some of the planes will arrive before mine does?  The answer is no!  My only concern should be for me to arrive in New York on my scheduled flight.

As you travel through 2016 it is recommended to focus on your own goals and not worry about which one of the 700,000 indices is up, down or sideways.   Your investment and financial plan should be collaborated to your hopes and dreams and no one else’s.  If you arrive at your financial destination on your terms, then I would consider that a huge success!

Do you not know that in a race all the runners run, but only one gets the prize? Run in such a way as to get the prize. 1 Corinthians 9:24

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

1/4/16

 

Are Forest Fires Good?

The Yellowstone National Park fire of 1988 was one of the largest in U.S. history.   It burned over 1 million acres.  On “Black Saturday”, the worst day of the fire, it consumed over 150,000 acres.[1]

This fire was devastating in terms of acreage burned and animals lost, but it also was a re-birth for the park.   The fire allowed new life to rise from the ashes.  A forest fire is needed to clear out brush, dead trees and other items so new life can begin to grow.   Birds and bears returned to the burned area to nest and feed.[2]

My family and I visited Yellowstone in 2004 and were awed by the park’s beauty.   We spent some time exploring the area burned by the fire.   The once scorched earth was now covered with millions of trees.  The park ranger told us not one tree was planted by human hands.  All the trees were allowed to grow as a result of the fire.  He mentioned for the seeds to open they need heat similar to a popcorn kernel.  If not for the fire, these trees wouldn’t have been allowed to take root and grow.

A forest fire brings new life so, too, will a stock market correction.  Like a forest fire, a stock market correction, is not fun to experience but needed.  For a recovery to take hold there has to be some destruction.  When the stock market is falling it feels like the correction will never end.  During a down draft is when people abandoned their investment strategy not realizing better times are ahead.

According to the Reformed Broker the average stock market correction results in a drop of 13.3% and lasts 71 days while a recovery lasts 221 days and has an average annual return of 32%[3]

Let’s look at some recent history.   The Dow Jones rose 83% from the lows of the Tech Wreck in the early 2000’s and climbed 6,339 points.  Since the lows of the Great Recession in 2009 the Dow Jones Industrial average is up 148% and has climbed over 10,000 points.   An investor who sold their stock holdings during the last two corrections missed these epic rebounds.   It should be noted the stock market has never lost 148% of its value.

According to a study by Dimensional Fund Advisors of stock market performance from 1970 to 2015 found investors who missed the 25 best days saw a huge drop in their investment returns.  A buy and hold strategy during this 45-year stretch turned a $10,000 investment into $89,678.  If you missed the 25 best days during this run, your $10,000 grew to $21,224.  By timing the market, you “lost” a lot of money.  A $10,000 investment in U.S. T-Bills during this same period is now worth $9,195.[4]

What happened to Yellowstone a year after the fire?  The visitors returned in droves to Yellowstone National Park.  In 1989 the attendance for the park reached a record for the decade with over 2.6 million visitors![5]

Remember a recovery always follows a correction.  Don’t get burned by trying to time the market!

for our “God is a consuming fire.” ~ Hebrews 12:29.

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

5/19/2016

 

 

[1] http://www.yellowstonepark.com/1988-fires-yellowstone/

[2] https://www.nps.gov/yell/learn/nature/upload/firesupplement.pdf

[3] http://thereformedbroker.com/2013/08/20/a-field-guide-to-stock-market-corrections/

[4] Dimensional Fund Advisors – Performance of the S&P 500 Index, 1970 – 2015.

[5] http://www.ksl.com/?sid=26482639