Day: August 16, 2017

Financial Planning is a (Boston) marathon and not a sprint.

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In 2009 I decided to run the Boston Marathon.   Unlike most marathons, the Boston Marathon requires runners to qualify for their esteemed race so the earliest that I could run this marathon would be in April of 2011.   I launched a plan to make this happen and set out on a two year journey to realize my dream.   

In my early days of running marathons I just ran.  I ran without any plan.   My first marathon was the Los Angeles marathon in 1991.   I was in shape but did not have any type of strategy for training or race day management.   I was going to run as fast as I could for as far as I could.   I wore cotton and did not stop at any aid stations to drink water.   This “strategy” worked well until mile 20.   At mile 20 the wheels came off.   I was dehydrated and started to cramp.  The last 6.2 miles of this race were some of the worst of my life.  My lack of planning did me in on this marathon.

Can this running analogy help you as an investor?   I believe it can.  I have noticed over my career that most investors do not have a financial plan or investment strategy.    Most investors show up on race day and hope for the best.  This strategy of hope for the best usually does not end well.   A solid financial plan can help you create generational wealth.   A well-constructed financial plan can assist you with income generation, portfolio construction, risk management, tax benefits and estate protection.   The numbers also back up the many reasons why you should have a financial plan.  In an October of 2006 study done by Annamaria Lusardi and Olivia S. Mitchell in a paper titled, “Financial Literacy and Planning: Implications for Retirement Well Being,” [October 2006, page 26] they found that successful planners had 3 times the net worth of non-planners.   This is a significant number and it should not be ignored.  As Eleanor Roosevelt once said, “it takes as much energy to hope as it does to plan.”  

So how did I do with my Boston Marathon plan?  I qualified for Boston by running the 2010 Austin Marathon.   I ran the Boston Marathon in April of 2011 on a gorgeous Monday morning.  It was my perfect race.   The weather, the crowd, the course and my time all exceeded my goals.  I was able to PR in this race due to my two year plan.

Bill Parrott is President and CEO of Parrott Wealth Management, LLC.

10/19/2015

 

Can you pick the winner in the crowd?

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The world’s largest marathons may attract 30, 40 or 50 thousand runners.   The Los Angeles, Chicago, New York, Boston, Berlin and London marathons attract tens of thousands of runners each and every year.   The runners have different abilities and backgrounds but all have a similar goal of finishing the race.   If you had to pick a winner for an upcoming marathon where would you begin?  Would you ask a friend?   Would you get your advice from a cable TV commentator?   Would you throw a dart?  Would you subscribe to a service that specializes in picking the best marathon runners?  How about looking at the entrants to identify the one that looked like the best runner?   Can you review past race results to isolate the winner?  It is not so easy to pinpoint the one winner.

In reality, only five or six runners in the field of thousands will have a legitimate chance of winning.   Does this make your job of picking the winner any easier?   The elite runners will leave the field behind after the first mile and the pack will never see them again.    The elite runners will finish the marathon in a little over two hours.   The field may average about four hours with the back of pack finishing in six, seven or eight hours and, as always, some runners will not finish.

The top five runners in the 2015 Boston Marathon finished the race in under two hours and eleven minutes.   There were 26,598 finishers in this marathon and the average finish time was 3:46:28.   15,327 runners finished better than this time, 11,271 runners fared worse and 3,653 runners did not finish.   Of the initial race entrants, about 50% finished better than average and 50% finished worse than average.  With this data how is it possible to pick the top finishers each and every year?

According to the Morningstar data base, there are 21,015 stocks.  Is it possible to pick the best five or six stocks every year from the tens of thousands that trade?   Would you be able to pick the five best?  Five worst?  What if you happened to pick a stock that did not finish?   In 2015, there were 1,074 companies that were up more than 95% and 626 companies that were down more than 95%.

What is the best way to stay in the race so that you finish your financial marathon?   I say take the field.   Again, the average time from last year’s Boston Marathon was 3:46.  Ask any marathon runner if they would like to finish a marathon in 3:46, most would say yes.    The ideal way to take the field when you invest is to own an index fund.   An index fund will give you the greatest opportunity to make money for the long haul.   An index will give the investor the best chance to win the financial race.    The Vanguard S&P 500 Index fund has averaged 10.64% since August of 1976.    A $100,000 investment in this fund in August of 1976 is now worth $5,440,000!  I would guess that most investors would be happy with these results.

As a runner in a marathon, you are competing against professional athletes, finely tuned runners, weekend warriors and first time marathoners.   A runner dedicated to training for a marathon will have an enjoyable experience.   An individual that did little training, not so much.

Like a marathon runner, an individual that enters the investing arena will be competing against professionals, seasoned traders, hobbyists and first time investors.   If you are not ready for the competition, it would be wise to hire a financial coach or advisor to help you reach your goals.

Is it worth your time to try and find the best five companies year in and year out?  A better allocation of your time might be to identity your top five financial goals and make those dreams become reality.

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.

Sources: Marathonguide.com, Boston Athletic Association, baa.org, Morningstar.com

A Runner’s Guide to Retirement Planning.

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My first marathon was a disaster.   After a years of running short races, I decided to graduate to a marathon.   The 1991 Los Angeles Marathon was going to be my first.   On race day I thought I was ready for the 26.2-mile journey through LA.

I was young, naïve and in shape so the only strategy I employed was to run as fast as I could for as long as I could.  In short, I had no strategy.  I was running without a plan.

My first miscalculation was my attire.  I wore cotton.  Cotton is a major no-no for marathon runners.  After a couple of miles, the shirt had to go.   I took it off and ditched it on the side of the road and this brought up another issue.  I was now shirtless and running without sunscreen.  As the Southern California Sun bore down on me I started to burn.

During the race I avoided all the aid stations until mile twenty.  At this point I was done.  I was dehydrated and sunburned.  I looked like a big red salt lick.  I started to walk but was saved by a young boy who gave me a giant bottle of Gatorade.  His gift gave me enough fuel to get to the next aid station.   The aid stations for the last 6.2 miles were of little use because I couldn’t drink enough Gatorade to cure my thirst.

I finally finished the race and made it home where I was able to lick my wounds and reflect on the events of the day.

If I was going to continue to run marathons, I needed a game plan.  As the years went on I read books on running and applied what I learned.  As a result, my race experiences went up and my race times went down.  I was fortunate enough to run in the 2011 Boston Marathon and in 2015 I set a PR in San Diego.

What does this have to do with retirement planning?

If you’re a runner, you’re most likely patient, disciplined and goal oriented.   Are you the same when it comes to planning your retirement?  Do you spend as much time planning your retirement route as you do your running route?

Here are a few strategies to help get you to the retirement finish line with a smile on your face.

  1. A plan is needed. A sound retirement and financial plan will help guide your steps.  It will help align your investment holdings to your goals so they’re both working for your benefit.  The plan will give you a baseline of your current financial situation.
  2. Think long term. A marathon, as you know, is 26.2 miles so don’t worry about what is happening at mile 3 or 4.  If you’re retiring in 10, 20 or 30 years let your investments run and pay little attention to short term moves in the markets.
  3. Find the right shoes. Running a marathon in high quality, light weight shoes makes all the difference in the world.  So, too, when it comes to your investments.  The “lighter” your fees the better your investment results.  You have the ability to control your costs.  When you’re working on your financial plan you should also do a thorough review of your investment holdings.  It’s imperative to focus on low cost index funds and investments so you can drive your expenses lower.
  4. Set your own pace. A large marathon may have twenty, thirty or forty thousand runners.  It’s likely you will pass, and get passed, by another runner during the race.    Each runner in a race has their own goal so don’t get caught up trying to match them step for step.  You’ll be better served to focus on your own goal and pace.   Your retirement goals are yours only so don’t try to keep up with the Joneses.   Your financial plan will help set your retirement pace.
  5. Re-fuel and check in. Take advantage of all the aid stations on the race route.  Taking a few seconds to hydrate and re-fuel will treat you well for the back half of the marathon.   Once your retirement plan is up and running you’d be wise to check it every year to make sure your still on pace to achieve your goals.
  6. Run with a coach or a team. Your running results may improve if you run with a coach or a team.  Who doesn’t want a running partner or two when it’s 5:00 in the morning and raining?  Running with a team will help you stay focused and motivated.  A financial coach or a team of trusted advisors can do the same.  Your team will support you on your retirement journey.   A financial coach can assist you with all decisions financials.
  7. Go fast. Stocks will be your best friend during your retirement expedition.   Stocks purchased for the long haul will allow your assets to grow faster than “safe” investments like bonds or cash.
  8. When you cross the finish line stop running. The pain of the last few hours pales in comparison to the feeling you get when you see the finish line.   Your retirement plan will give you a finish line.  If you’ve achieved the assets needed for your retirement, you can now afford to stop running and lock in your gains.   A move to more conservative assets likes bonds or cash can help preserve your assets.

A plan for running and retirement can keep you going for a long time.   I would encourage you to get out there and start planning!

We all know that if you run, you are pretty much choosing a life of success because of it. Deena Kastor.

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

July 26, 2016

My fee will be less than $2,000,000.

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In the mid-90’s I received a call from a client asking me how I would invest a lot of money.   I asked him how much money.   He was reluctant to give me an answer at first because of the large sum of money.  He had to eventually tell me the amount so that I could give him my advice.  The money he received was life altering for him and his entire family.

As the story goes, my client received an inheritance from his uncle who lived in the mid-west.   My client was the sole beneficiary to his uncle’s estate.    He was both delighted and nervous to be in a position to receive this substantial inheritance.   When the money arrived we decided to invest it in a 6 month U.S. Treasury Bill so we could buy some time to develop a plan while taking advantage of the government guarantee.

Here is the rub.  His uncle did not have any type of estate plan.  As a result, my client had to write a check to the IRS for over $2,000,000 to cover the estate tax!   This was a tough pill to swallow.   My client had just written the largest check of his life and it went to pay taxes!

After the money had been sent to the IRS, we started to build a game plan so that his beneficiaries would not be burdened with sending one red cent to the government when he and his wife passed away.  I referred him to an attorney who helped him establish a number of trusts so that the assets would be protected for the generations to follow.  I assembled a portfolio that consisted mostly of California tax free municipal bonds and high quality dividend paying stocks.

What is behind the $2,000,000 fee?  Not long after he wrote his colossal check to the IRS he asked me what the fee would be to set up the investment accounts and family trusts.   I told him my fee will be less than $2,000,000.   He got a nice chuckle from my comment.

He and his wife passed away a few years ago and the trusts and investments that we set up are still going strong today and his beneficiaries did not send any money to the IRS for estate taxes!

A little planning can go a long way potentially spanning generations.

For I know the plans I have for you,” declares the Lord, “plans to prosper you and not to harm you, plans to give you hope and a future.  Jeremiah 29:11 

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

12/14/2015

 

 

 

 

We Can’t Win!

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When my daughter was in the first grade I had the honor of coaching her soccer team.   Our team name was the Mustangs.   These little Mustangs consisted of a band of young ladies, most of whom were playing an organized sport for the first time in their lives.  Our league did not keep score as the main goal was to introduce the girls to the world of soccer.   Before our first game one of the girls on the team said to me, “if we don’t keep score, we can’t win.”  She was right.  If we don’t keep score, we can’t win.

Most investors don’t keep score.   An investor who doesn’t keep score does not know if they are winning or losing the investment game.   In addition to not keeping score, most investors don’t know what game they are playing or what road they are travelling on.   As the Cheshire cat said to Alice in Alice in Wonderland, if you don’t know where you are going, then it doesn’t matter what road you take. 

How can you win?  How do you know if you are winning or losing the investment game?  How do you know if you are on the right road?   Here are a few ways that can help you keep score –

1.       Financial Plan.  A well designed financial plan can help you keep score and guide you towards your financial goals.   

2.       Investment Policy Statement.   The IPS will put a spotlight on your investment holdings and how they will be managed.  In addition, your IPS should also highlight your fee schedule and how often your account will be reviewed.

3.       Quarterly Reviews.   The quarterly review is a quick check in to review the activity in the previous quarter. 

4.       Annual Review.  The annual review is a deep dive into your financial plan and investment policy statement.   When should you schedule your annual review?  I would recommend scheduling these meetings around your birthday.

As a note, the girls kept score at each game.

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

11/9/2015

 

Jacob’s (Bond) Ladder.

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Jacob’s Ladder is an American horror movie starring Tim Robbins who plays a postal working trying to work his way back into society after a tour of duty in Vietnam and the death of his son.   Jacob was dealing with both perception and reality.

Another horror story for investors is the thought of rising interest rates.   When interest rates rise the price of a bond will drop.   The price of a bond has an inverse relationship to interest rates.   The relationship is like a see-saw in a park when one side goes up the other side goes down.   The price of a 30 year bond today would fall 17.6% with a 1% rise in interest rates.    To add to this horror story the 30 year U.S. Treasury bond is currently yielding about 2.85% so the thought of getting single digit interest while losing over 17% of your principal is not too compelling.  

How can you avoid this horror show?   A bond ladder.   A bond ladder will help protect you against rising and falling interest rates.  A bond ladder can be constructed with any type of bond or fixed income vehicle.   You can create a bond ladder with CD’s, corporate bonds, tax-free municipal bonds or U.S. Treasury investments.    You band ladder can have multiple rungs with multiple investments.   The ladder can be manufactured with a short term or long term view.   The choice is all yours.

What constitutes a bond ladder?   A ladder is assembled by buying bonds that come due at different times.  For example, a five year bond ladder can have investments maturing at one year intervals – 1 year, 2 year, 3 year, 4 year and 5 year.   When the 1 year bond matures you will re-invest the proceeds into a new 5 year bond.   The other bonds have now moved up by one year so your 2 year bond is now a 1 year bond and so on.   By employing this strategy you will always have money coming due for you to take advantage of the current interest rate environment.   This strategy can continue indefinitely.

What if interest rates fall?   In this case your longer term bonds will get more expensive and trade at a premium because when rates fall your principal will rise.   A 1% drop in rates will make our 30 year bond appreciate by 22.8%!   This is the advantage of a ladder.  You will have the ability take advantage of any type of interest rate move.

The bond ladder can be customized to your unique situation.   A short term bond ladder can be nothing more than rolling 3 month CD’s for a year.   This ladder would have CD’s maturing every 3, 6, 9 and 12 months.  You can also take a long term view and buy nothing but 30 year bonds. 

Bond ladders are not scary and can help you avoid your own horror show.

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

10/29/15

 

 

 

 

 

Do you invest and plan like Captain Ahab or Captain Phillips?

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Herman Melville’s book Moby Dick is a great read.  It is a book with colorful characters and a ton of suspense.    Captain Ahab is the main character who is in endless pursuit of the white whale that bit off part of his leg.   Captain Ahab wanted revenge on Moby Dick.   When I finished reading Moby Dick I thought what an amazing story.  My other thought was that Captain Ahab did not have any plan to capture the white whale.   His only plan was to kill Moby Dick and at any cost.   In the end the entire crew of the Pequod is killed as a result of Captain Ahab’s endless pursuit of the white whale.   If he had a plan his results may have been different.

Captain Phillips on the other hand was a man with a plan.   You may have seen the movie Captain Phillips starring Tom Hanks about the hijacking of the Maersk Alabama.   The movie was great and like Moby Dick full of vibrant characters and an ocean of suspense.   Captain Phillips, according to the movie, ran numerous drills to make sure his crew was always prepared.     He drilled his crew and then drilled them some more.  As a result, when trouble arrived he and his crew were prepared to act.    Captain Phillips was in a position to save his ship, his crew and ultimately himself as result of having a plan and being prepared.

Do you identify more with Captain Ahab or Captain Phillips when it comes to your financial planning and investment readiness?   Are you the type to hop in a boat and set sale chasing after white whales or do you set a course that will deliver you to your financial destination?  I would say that most investors are like Captain Ahab in that they do not have a plan and they are always chasing something – a rumor, stock tip, return or yield.    If you plan and invest like Captain Phillips, your chances of success will rise.  An investor with a plan is more likely to achieve their goals than an investor who does not have any plan.   Nonetheless, once your plan is in place you need to review it often so that you are ready for whatever the markets toss your way.   A well prepared investor is more likely to stick to the plan through all types of market conditions.

I would encourage you to spend some time planning your financial future so that you end up more like Captain Phillips and less like Captain Ahab.

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

10/27/15

 

Are You Diversified?

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Diversification is a blessing and a curse.  Diversification is a great way to manage risk in your portfolio without trying to time the market.  It will also keep you invested during good times and bad.  In a truly diversified portfolio you’ll own a mixture of investments with some up and some down.  If all your investments are up or down, your portfolio isn’t diversified.

It’s human nature to want to own a portfolio of investment winners.  Investors are quick to sell losing positions to chase the winners, a classic strategy of buying high and selling low.  The Denmark stock market rose 23% in 2015 leading all developed markets.  The Canadian stock market fell 24% in 2015 and was the worst performing global stock market.   What do you think happened in 2016?  In 2016, Canada was the best market by gaining 24% and Denmark was the worst by losing 15%.  These two global markets exchanged places from 2015 to 2016.

This year emerging markets are leading the way while small cap stocks are turning in a sub-par performance and international stocks are outperforming U.S. stocks.  Last year, the opposite occurred with U.S. stocks and small caps outperforming international investments.

Trying to identify the best investment from year to year is challenging, like trying to pick the best horse in a field of race horses.  Sham was a great race horse in the 1970s finishing in the money 85% of the time but had the unfortunate event of being born in the same year as Secretariat.[1]   In thirteen starts, Sham finished first, second or third eleven times.   Secretariat beat Sham in each of the Triple Crown races and won the Belmont Stakes by 31 lengths.    To win in the long term, bet on more than one horse.

Here a few hot tips for your diversified portfolio.

  • Own large and small U.S. companies. Since 1926, large stocks have generated an average annual return of 10% and small stocks have averaged over 12%.
  • Own growth and value companies. Growth companies typically have stronger earnings and higher valuations than value companies.  Growth and value companies will zig and zag depending on economic conditions.  In the early stages of an economic recovery, value stocks will outperform but will lose momentum to growth stocks as the economy matures.[2]
  • Invest internationally.  International markets make up 46% of the global market and often outperform the U.S. market.
  • Invest in developed and emerging markets. Develop markets include the United States, Canada, Great Britain, Germany, Australia and Japan.   Emerging markets include countries like Brazil, Russia, India and China.
  • Buy Bonds. Bonds will generate income and provide a blanket of safety for your account.  For example, when the stock market fell 37% in 2008, long-term government bonds rose 25%.  The gain from bonds helped cushion the blow from falling stocks.
  • Add alternatives. Adding a pinch of alternative investments will help diversify your portfolio.  Alternative investments can include real estate, gold or oil.
  • Hold cash. A cash holding will allow you to take advantage of emergencies and opportunities.
  • Rebalance. Rebalancing your portfolio annually will reduce your risk and retain your asset allocation.

Here is a sample asset allocation for a portfolio consisting of 60% stocks and 40% bonds.  Your 60/40 portfolio can have the following asset allocation.

  • Large U.S. Companies = 25%.
  • Small U.S. Companies = 10%.
  • International Developed Markets = 15%.
  • Emerging Markets = 5%.
  • Alternative Investments = 5%.
  • Bonds = 35%.
  • Cash = 5%.

A diversified portfolio will keep you in the winner’s circle by giving you exposure to thousands of investments from around the globe so stay diversified my friends.

Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it.  If it don’t go up, don’t buy it.  ~  Will Rogers.

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

August 16, 2017

 

[1] http://www.pedigreequery.com/sham

[2] https://www.merrilledge.com/article/growth-vs-value-investing-two-approaches-to-stocks