Time Is on Your Side, Yes It Is.

The Rolling Stones released Time Is on My Side in 1964 and this classic song has been entertaining fans ever since.  The Rolling Stones have defied time as they’ve been playing music together for 55 years. Time certainly has been on the side of the Rolling Stones.

For investors, time can be a blessing or a curse.  The sooner you start investing the more money you’ll have for retirement.  The opposite is also true: the longer you wait to start investing, the less money you’ll have for retirement.   If you start saving $1,000 per month at age 30, it will grow to $2.26 million at age 60.  If you wait until age 45 to start saving a $1,000 per month, it will grow to $415,000.  Waiting 15 years to start investing has reduced your nest egg by 82% or $1.845 million.[1]

Timing also will play a significant role in your financial success.  From 1970 to 2015 the S&P 500 generated an average annual return of 10.27% but if you missed the 25 best days during this stretch, your return dropped to 6.87% per year.[2]  Trying to time the stock market can have adverse consequences to your portfolio so focus on a more prudent strategy like buy and hold.

Knowing your time horizon is paramount when building your investment portfolio.  If your time horizon is 1 to 3 years, buy safe investments like CDs and U.S. Treasury Bills.  These safe investments will give you access to your money with little, if any, downside risk.  If your time horizon is 3 to 10 years, invest in corporate bonds, tax free bonds or common stocks.   A large allocation to common stocks is recommended if your time horizon is 10 years or more.

Longevity risk is a concern for many as people are living longer meaning they may outlive their financial resources.  Time may be a problem for retirees who try to find a balance between generating income today and preserving assets for tomorrow.  Owning a basket of common stocks may offset longevity risk.  Another option is to purchase a deferred income annuity, or longevity annuity, which provides income to individuals age 80 to 85 or older. Longevity risk isn’t going away as the number of people reaching age 100 has grown by 44% from 2000 to 2017![3]

Your Social Security payment can also benefit from the gift of time.  Individuals are eligible to receive their Social Security benefit at any time between the ages of 62 and 70.   Your largest benefit will come at age of 70 and your smallest benefit will be at age 62.  For example, a monthly benefit of $1,600 at age 62 may rise to $3,000 at age 70.  By waiting eight years to receive your benefit, you’ve put an extra $1,400 per month in your pocket.   A Social Security optimization analysis can help you determine the right time for you to initiate your benefit.

When it comes to investing you can’t always get what you want as investors must decide how much money to allocate between stocks, bonds and cash.  Investing for safety, income or growth has pros and cons but all three are needed for long term financial success.  When stocks rise, investors question the wisdom of owning bonds and when stocks fall, investors question the wisdom of owning stocks.  A diversified portfolio of stocks, bonds and cash based on your risk profile may assist you in staying invested for the long haul regardless of what markets are doing.

Time marches on so make sure it’s working for you and not against you.  Let the long-term trend of the stock market and father time help you create wealth.

You’ve got the sun, you’ve got the moon, and you’ve got the Rolling Stones. ~ Keith Richards

So teach us to number our days that we may get a heart of wisdom. ~ Psalm 90:12

Bill Parrott is the President and CEO of Parrott Wealth Management, a fee-only, fiduciary financial planning and investment management firm.  For more information, please visit www.parrottwealth.com.

October 30, 2017

Note: Your returns may differ than those posted in this blog and past returns aren’t a guarantee for future returns.

 

[1] FV calculation with a 10% return, no taxes or fees have been applied to the calculation.

[2] Dimensional Fund Advisors Investing Profiles

[3] http://www.cnn.com/2016/01/25/health/centenarians-increase/index.html, Carina Storrs, 1/25/2016.

October 19, 1987.

Today marks the 30-year anniversary of Black Monday when the Dow Jones Industrial Average fell over 22%!  It was a dark day as stocks fell to historic lows.  Despite the drop, the Dow finished the year with a gain of 2.26% and it climbed 11.85% in 1988 and 26.96% in 1989.

In 1937, during the Great Depression, Sir John Templeton purchased $100 worth of every stock trading below $1 per share.  A few years later he sold most of them for a substantial profit.[1]  The Standard & Poor 500 fell 35% in 1937.  It’s not easy, but when investors are in a panic selling mode it allows the patient investor to buy great companies at bargain prices.

Here are a few stocks you could’ve purchased on Black Monday.[2]

  • Coca-Cola: A $10,000 investment in KO is now worth $453,514.
  • Boeing: A $10,000 investment in BA is now worth $556,532
  • McDonald’s: A $10,000 investment in MCD is now worth $590,529.
  • Johnson & Johnson: A $10,000 investment in JNJ is now worth $634,413.
  • Apple: A $10,000 investment in AAPL is now worth $1.44 million.

Will we ever experience another Black Monday?  Forever is a long time so it’s likely we’ll witness another dramatic drop.  When the market does fall again, here are a few survival tips to help you navigate the correction.

  • Buy. Stocks sell for bargain prices when individuals sell out of fear.  I’d recommend creating a list of companies you want to purchase before the correction arrives so you’ll be ready to pounce on your ideas during the market turmoil.
  • Wait. If you’re not sure what to do during a market meltdown, don’t do anything.  Your best strategy may be to wait until the storm passes and then you can make changes to your portfolio.
  • Diversify. A diversified portfolio will help reduce the losses in your portfolio.  In 1987 the international index (MSCI-EAFE Index) was up 24.6% and the one-month T-Bill was up 5.5%.[3]
  • Rebalance. During a steep stock market drop your asset allocation will change significantly.  Rebalancing your portfolio will return your account to its original allocation.
  • Review. Reviewing your investment plan and financial goals is always recommended, especially when the stock market is falling.  Are your goals still intact or do you need to make changes?
  • Think. What’s the root cause of the correction?  Flash crash?  Political event? Failed merger?  Knowing the reason behind the crash may give you some time to think about selling your holdings.

From October 2007 to March 2009, the Great Recession, the Dow Jones Industrial Average fell 53.5%.  It bottomed on March 9, 2009 and since then it has climbed 257%.

Corrections are petrifying but markets have always recovered.  In fact, today, the Dow Jones closed at an all-time high of 23,157!

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” ~ Warren Buffett

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.

October 19, 2017

Note:  Your returns may differ than those posted.  Past performance isn’t a guarantee of future performance.

[1] http://www.investopedia.com/university/greatest/johntempleton.asp, By Nathan Reiff, website accessed 10/16/17.

[2] Morningstar Office Hypothetical Tool – 10/19/1987 to 9/30/2017.

[3] Dimensional Funds 2017 Matrix Book.

Who Knows?

This week marks the 30-year anniversary of Black Monday when the Dow Jones Industrial Average fell 508 points or 22.5% and experts are still searching for answers as to why the market crashed.  The culprit has been pinned on portfolio insurance which is ironic because portfolio insurance is designed to protect portfolios when stocks fall.  Professional investors needed a villain because they couldn’t tell their clients they didn’t have a reason for the stock market correction so portfolio insurance has been accused of the crime.  However, no one really knows why the market fell on that dark day in October.

Last week Richard Thaler was awarded the Nobel prize in economics for his study of behavioral economics and finance.   He studies the psychological side of economics and tries to understand why investors behave in certain ways.  In his book Misbehaving he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Confidence runs high on Wall Street because investors want answers, they want the truth.  CNBC commentators, money managers, traders, and pontificators give surefire forecasts.  These experts claim to know the direction of stock prices, interest rates and oil.   They’re not only certain in the direction of their trade but they also know when it will happen.   These individuals have big microphones and a wide audience so their word is accepted as Gospel like Adam Sandler in the Wedding Singer, “Funny, I have the microphone and you don’t so you will listen to every damn word I have to say!”

When their predictions don’t work or fall short, their explanation is usually blamed on some unforeseen event, an event no one could have foretold.   The unseen event is why no one will ever be able to predict market moves.  After all, if we knew an event was going to happen, we’d take steps to protect ourselves against the event.   For example, Warren Buffett sold 90% of his Walmart holdings during the fourth quarter of 2016.[1]  Walmart is up 15.25% for 2017.  Do you think the greatest investor of all time would have sold Walmart if he knew it would rise 15%?

Wall Street is not alone in their definite predictions.   College pre-season football analyst, political pundits and weatherman join the list of experts who must be right early and often.  The listening audience wants to know the experts are in control and all knowing.

I’m an advisor and financial planner so I’m supposed to know the unknown.  I’m supposed to be certain in a sea of uncertainty.   Predicting the direction of the stock market should be easy like trying to forecast the flight pattern of a butterfly on a windy day or the spending habits of teenagers.   I want to have all the answers but I don’t.  I don’t know what will happen tomorrow let alone ten years from now.

Despite the ambiguity of forecasts and predictions, I do know a few things that can give you a long-term advantage.

  1. Save more and spend less. You control how much money you spend and how much money you save.   If you save more than you spend, your assets will grow.
  2. Plan for success. A financial plan can give you a framework to help strengthen your financial foundation.   Your plan can help with things like retirement or education.
  3. Stocks outperform bonds. For the past 90 years stocks have outperformed bonds by a ratio of 45:1.   If bonds are worth $10,000, then stocks are worth $450,000.   If your time horizon is longer than 10 years, you’d be wise to own a large basket of stocks.[2]
  4. Diversification will reduce risk. A portfolio allocated across large, small and international stocks mixed in with bonds and cash will reduce the risk for your investments.  For example, a portfolio with 60% stocks and 40% bonds and cash will reduce your risk 35% when compared to an all stock portfolio.[3]
  5. Time wins. A long-term view will improve your investment results.  Trying to time the market or actively trade your account is a loser’s game.  Over 20-year rolling periods (1980 – 2000, 1981 – 2001, and so on) the stock market has made money 100% of the time.  Since 1926 there have been 72 rolling periods.[4]
  6. Rebalance your account.  Rebalancing your account will help reduce risk and keep your original asset allocation in check.   For example, if you start the year with a portfolio of 60% stocks and 40% bonds and by the end of the year it moved to 80% stocks and 20% bonds, it should be rebalanced back to your original 60%/40% split.

For the record, if you invested $100,000 in the Vanguard S&P 500 index fund on October 19, 1987, your investment is now worth $2,100,000 and generated an average annual return of 10.71%.[5]

Will the stock market crash soon? Who knows?

“The market can stay irrational longer than you can stay solvent.” ~ John Maynard Keynes.

“Therefore, keep watch, because you do not know on what day your Lord will come. ~ Matthew 24:42

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.

October 14, 2017

Note: Your returns may differ than those posted in this blog and past performance is not a guarantee of future performance.  Securities involve risk and are not insured or guaranteed.

 

[1] http://www.businessinsider.com/why-warren-buffett-sold-walmart-2017-3, John Szarmiak, March 13, 2017.

[2] Dimensional Fund 2017 Matrix Book.

[3] Riskalyze

[4] Ibbotson®SBBI® 2015 Classic Yearbook.

[5] Morningstar Office Hypothetical Tool, 10/19/1987 – 9/30/2017.

Match the Hatch.

Astute fly fishermen and women match their fly to the insect to catch more fish and this is referred to as “match the hatch.”  For example, if you’re fishing in area with grasshoppers, you want a fly that looks like a grasshopper.  Entomology is the study of insects so a basic understanding of it will help fly fishermen and women have a better experience when they’re on the water.

Investors should try to match their hatch as well.  An investor who wants to improve their odds for investment success should match their hopes, dreams and fears to their investment portfolio.

Completing a financial plan is one way to increase your odds of financial success.  Your plan will assist you in identifying and quantifying your financial goals.  The discovery period for your financial plan is just as important as the finished product.  The more detailed and specific your goals and financial information, the better your financial plan will be.  Of course, your plan will only be as good as the data you put into it so spend some time in complying your information.

Knowing your risk tolerance is another important factor for your investment success.  However, trying to understand how much risk you’re willing to take is challenging.  During a rising market investors are willing to take on a high degree of risk.   When markets fall, investors are risk averse and aren’t comfortable owning risk assets.   How much risk can you handle?  One benchmark is to review your trading habits during the Great Recession of 2008.  During the 2008 market meltdown, did you hold on to your investments or did you sell your holdings?  If you didn’t sell your investments, you’re probably a growth oriented investor willing to withstand a high level of risk.  If you sold your investments, you’re probably a conservative investor.   In addition to your actions, you can also complete a risk tolerance questionnaire or two.  Riskalyze and FinaMetrica are two services that can help you identify your risk tolerance level.

Once you’ve identified your financial goals and risk tolerance, the next step is to make sure your investments are aligned with these metrics.   If your investments are united with your financial goals and risk level, then you’re more likely to stay invested through multiple market cycles.

What should you do if your financial plan, risk tolerance and investments are out of whack?  If your plan isn’t in sync, then changes must be made.  Your investment portfolio will need to be rebalanced and aligned to your financial plan and investment goals.  The portfolio adjustment might be a minor tweak or a major overhaul.   If your plan calls for a major overhaul, pay attention to taxes, fees or penalties before you make any changes.

Catching a fish with the right fly is a thrilling experience.  However, if you’re fishing with the wrong fly, you need to change it as soon as possible to the correct fly so you can catch more fish.

There is no greater fan of fly fishing than the worm. ~ Patrick F. McManus

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

October 13, 2017

 

 

10 Ways to Improve Your 401(k) Plan!

Your 401(k) plan may be your largest asset, even larger than your home.  However, it appears most individuals pay little attention to this treasured asset.  In my experience working with 401(k) providers, companies and several employees sign up for their plan without giving much thought to their contribution amount or investment choices.   To increase your odds for a successful and confident retirement take time and get advice on setting up your plan.

According to the Employee Benefits Research Institute 18% of workers feel very confident about their ability to enjoy a comfortable retirement a number that hasn’t changed since 1993.[1]   What about the remaining 82%?  82% of the working population aren’t confident about the future of their retirement.

Here are few ideas to help you improve your 401(k) plan and your retirement.

Start.  Do not delay in signing up for your company retirement plan.  As soon as you’re eligible for your company 401(k), sign on the dotted line and start contributing to your plan.  The sooner you start contributing to your plan the larger your retirement nest egg will be.

Max Out.  You can contribute $18,000 to your plan each year.  If you’re 50 or older, you can contribute an extra $6,000 to your plan for a total of $24,000.  Contributing $18,000 for 45 years at 7% will grow to $5.1 million by the time you’re ready to retire.

Contribute.  If you can’t afford to max out your contribution, contribute 10% of your income to the plan.  If you can’t contribute 10%, then match your company match.  If your company matches 4%, your contribution level should be 4%.  If you earn $50,000 per year, your 10% contribution will be $5,000.  Contributing $5,000 to your plan for 45 years growing at 7%, will be worth $1.4 million at your retirement.

Escalate.  Your plan may include an auto-escalation button allowing you to increase your contribution percentage annually.  For example, if you start contributing 4% to your plan, you can sign up for an annual 1% increase forever or until it reaches a pre-determined percentage.  Your contribution this year will be 4% and next year it will increase to 5% and so on.

Diversify.  Your plan probably has six to seven investment categories like large companies, small companies, international companies, alternative investments, bonds and cash.  To be successful, you’ll need to own more growth investments than safe investments.  A 70%/30% allocation might look like this:  35% to large companies, 10% to small companies, 20% to international companies, 5% to alternative investments and 30% to bonds.  You don’t need to allocate any money to cash unless you’re retiring this year.

Be Aggressive.  Your working career may span 45 years or more so take advantage of the long-term trend of the stock market.  Also, you’ll be contributing to your 401(k) every two weeks giving you the opportunity to buy stocks when they’re up, down and sideways.  I once worked with a group of anesthesiologists in Austin and, not surprisingly, the doctors with the most aggressive investment profile had the largest account balances.  Some of the senior doctors I worked with had invested 100% of the 401(k)-balance invested in stocks when they were young and they never changed their asset allocation resulting in large nest eggs.

Rebalance.  Rebalancing your 401(k) once per year will keep your desired risk level in tack.  The best time to rebalance your plan is in January.  A January rebalance will allow the dividends, interest payments and capital gains to be contributed to your plan from the previous year.  Your plan might have an automatic rebalancing button you can turn on when you log in to your plan.

Align.  It’s important for your contributions, asset allocation and rebalancing targets to be aligned.  For example, if you’re contributing 35% to large companies, your asset allocation and rebalancing options should also be set to 35%.

Stay.  In the gig economy workers are changing jobs every two to three years and, as a result, they may be hurting their retirement plan.  By moving from one company to the next you’re leaving valuable dollars on the table by missing a company match or two.  In addition, when you join a new company you may miss an enrollment window keeping you out of your new company plan for six months to a year.  These small misses will have major implications on your retirement.  If you’re employed by a good company with a solid retirement plan, then stay the course and let your retirement benefits accrue for you and your family.

Review.  You should review your plan and investment choices once per year.  You don’t need to spend much more time on your plan beyond your annual review.  In fact, the less you touch your plan the better.

Treat your treasured asset with respect by contributing what you can afford, investing for growth and rebalancing annually.   Allocating time and resources to your plan will allow you to have a much more bountiful retirement.

You can be young without money but you can’t be old without it. ~ Tennessee Williams.

Bill Parrot is the President and CEO of Parrott Wealth Management.  If you need help with your retirement planning, please visit www.parrottwealth.com.

September 30, 2017

 

 

 

 

 

 

 

[1] http://www.marketwatch.com/story/what-ive-learned-over-14-years-of-covering-the-depressing-but-crucial-topic-of-retirement-2017-09-29, Robert Powell, 9/29/17.