The Franklin Utility Fund.

On Black Monday, October 19, 1987, I was enrolled in an investment class at the University of San Diego and I was able to witness the stock market correction from the safety of a classroom.  It was a tremendous learning experience to examine and review the correction in real time, especially since I didn’t have any money to invest.

A week after the crash I met with a broker from Dean Witter Reynolds to help me set up my first investment – The Franklin Utility Fund.  We discussed the correction, mutual funds, and long-term goals.  After an hour I handed him a check for $125 and established a monthly investment program of $25.  He made $5 in gross commissions ($1.40 net) for his efforts.

I was finally an investor and could hardly wait for my monthly contributions to credit my fund, so I could buy more shares.  I didn’t care if the market was up, down or sideways.  In fact, on most days I had no idea what the market was doing.

Two years later I entered the investment business and transferred the fund to my new firm.  I owned it for a few more years before I sold it to buy more growth-oriented funds and individual stocks. Owning the Franklin Utility fund taught me a lot about investing and it was the seed that sprouted my current portfolio. If I had held the Franklin Utility fund from 11/1/1987 to 2/28/18 my original investment would’ve grown to $41,233, a gain of 1,082%!

Here’s a few thoughts about my initial purchase.

  • I’m forever thankful for the broker at Dean Witter who educated me about my investment choices and treated me with respect. He was instrumental in my career choice.
  • My college professor and the broker were extremely calm during the correction. Their tranquil demeanor has been a reminder that markets rise, fall and recover.
  • The amount of money you save will have a larger impact on your net worth than will the daily gyrations in the stock market.
  • Small beginnings can have big endings. A small amount of money invested monthly will grow, especially if you start at a young age.
  • A boring investment can pay huge dividends. Utility stocks aren’t exciting, but they’ve performed well over the past 31 years and then some.

Successful investing requires patience, discipline, and courage. Establishing a dollar cost averaging program will help you put these traits to practice so you can take advantage of the long-term trend of the stock market.

Great things are done by a series of small things brought together. Vincent Van Gogh

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

3/29/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

The Bionic Advisor

The Six Million Dollar Man was a television series during the mid-seventies about an astronaut who was severely injured during a plane crash and was re-built to have super-human strength.  His new bionic body parts included both legs, an arm, and an eye making him part human, part machine.   The opening monologue for the show was: “Gentlemen, we can rebuild him. We have the technology. We have the capability to make the world’s first bionic man. Steve Austin will be that man. Better than he was before. Better…stronger…faster.”

Robo-Advisor programs are digital platforms with little, to no human interaction.[1]  They’re attracting billions of dollars as investors look for low-cost, efficient investment options.   Betterment, Wealthfront and Personal Capital are a few of the popular programs and together they manage more than $22 billion.   Individuals log-in to a website, complete a questionnaire and then a computer algorithm will build them a “personalized” portfolio.  The robo-advisor then manages the account based on the client’s profile.

These programs appear new, but they’re not.  In the early ‘90s most brokerage firms like Morgan Stanley offered managed account solutions based on a client’s goals and risk tolerance.  After a client completed a questionnaire a portfolio of mutual funds was invested for them and rebalanced because of market moves.  These programs were rules driven built on computer algorithms.  They worked well especially if a client committed to the program through rising and falling markets.

The difference between the old and new robo programs is the technology.  The advancement in technology has allowed these programs to thrive.

What do you get when you combine a human advisor with a robo?  A bionic advisor!  A Certified Financial Planner coupled with a robust technology platform may be better, stronger, faster than a standalone robo.  The human component will allow your advisor to meet with you in person and help verbalize your goals and direct you to the best investment solutions.  In addition to investment selection, he can give you guidance with your company retirement plan, insurance needs, educational accounts, philanthropic activity, and much more.

Today, most independent advisors have access to dynamic trading platforms.  Model driven, goal-oriented portfolios coupled with risk tolerance and rebalancing software allow advisors to create their own robo programs.  Access to this robust technology allows your advisor to produce rules-based investment programs founded on your goals.

To work with a bionic advisor, consider the following items.

  1. Make sure your advisor is a Certified Financial Planner practitioner who’s a fee-only, fiduciary, registered investment advisor.
  2. Complete a financial plan so your advisor can help you quantify your hopes, dreams and fears. You can link all your accounts (checking, saving, credit, investment, etc.) through aggregator websites to update your plan in real time.
  3. Stress test your portfolio to see how it may perform in up or down markets. Risk tolerance software will also help your advisor design a portfolio for you because of your risk level and financial goals.
  4. Invest in low cost mutual funds managed by Dimensional Fund Advisors or Vanguard. Controlling your cost will allow you to keep more of what you earn.
  5. Review your plan and investments by talking to your advisor on a regular basis.

Successful investing requires a combination of all the tools and resources available to you and rarely is it an either/or scenario.   A bionic advisor can’t run 60 miles-per-hour, but he can help you build a solid portfolio!

We are all now connected by the Internet, like neurons in a giant brain. Stephen Hawking

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

3/26/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

[1] https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp

 

Stress Test

A visit to your doctor to get a stress test can be stressful.  Running on a treadmill while hooked to an EKG monitor is designed to see how much stress your heart can take.  The best-case scenario is that your doctor tells you you’re fine and no other tests are needed.  The worst-case scenario is you’re rushed to a hospital to get a quadruple bypass.

It’s not possible for your doctor to look at you and tell you that you’re fine.  She needs to ask you a series of questions, run a few tests, review your vital signs, and then put you on the treadmill.  After all the tests are done she can give you the results.   Once your baseline is established, she can reference it for future visits.

This past week the stock market reacted negatively to news of a trade war, data breach and rate hike.  The Dow Jones fell 5.6% because of these unsettling stories and it has now moved into negative territory for the year.

A Certified Financial Planner practitioner, like your doctor, can’t look at you to determine your financial fitness.  He must review your financial vital signs to diagnose your situation.  A financial plan will assist him with the analysis. In addition, a stress test on your portfolio is recommended to find out how it performs during up and down markets.  A recommendation will be made based on the results of your review.

Over the years I’ve noticed clients who have a financial plan are calmer during market routs than those who don’t have a plan.  When volatility increases I’m able to review their plan to see how it’s performing and, more importantly, if the client is still on track to reach their goals.  Also, when a client moves money in and out of their account I will run a stress test on their portfolio to see how the flow of funds affects their situation. During these stress tests I’ve found the day to day movement of the markets has little, to no impact, on the outcome of their financial plan. The daily volatility is merely an irritation.

The daily average movement for the Dow Jones has been .04%, or $4 per $10,000 invested, for the past five years.  However, 45% of the time the market fell with several drops exceeding 2%.  The market has risen 58% over the past five years despite these down days.[1]

Expanding the data to cover 30 years, the market has averaged monthly volatility of .6%, or $60 per $10,000 invested.  It has risen 1,058% and closed higher 63% of the time. The best monthly close was October 2002 rising 9.6%.   During the past 30 years the market has never had a close where the index rose more than 10%.  This hasn’t been the case on the downside.  The market has lost more than 10% seven times during this run.  The worst close was August 1998 when it fell almost 18%.  The down days have been fewer but more violent.[2]

What should you do if the market volatility is stressing you out?  Here are my remedies.

  1. Sell your stock holdings to your comfort level. If you’re worried about losing money in the stock market, you own too many stocks.   Reducing your equity allocation may give you more peace and allow you to sleep better at night.
  2. Stress test your portfolio. A review of your holdings will give you a picture of how your portfolio performs in bull and bear markets.  Once tested, you can decide if you need to increase or decrease your equity exposure.
  3. Add bonds to your account. This past week bonds performed well because market driven interest rates fell, and the fear factor rose.  I know yields are low and the Fed is raising rates, but bonds can provide a level of safety not found in any other investment.   Bonds complete the asset allocation picture.
  4. Complete a financial plan. If you don’t know where you’re going, how will you know when you’ve arrived?  A plan will be your financial check-up and it will give you and your planner insight into your financial life.  Adjusting your plan and investments to your goals will give you confidence to withstand the market’s onslaught.
  5. Rebalance your portfolio. A quarterly, semi-annual or annual rebalance will keep your risk level and asset allocation intact.   Rebalancing will adjust your holdings because of the markets rise or fall.
  6. Think long-term. Over time, the stock market has always risen.  Don’t let short-term market moves derail you from achieving your long-term goals.

Stocks fluctuate.  The market has been rising and falling for hundreds of years and this trend will not cease any time soon.  However, the long-term pull of the market has always been higher.  If you’re comfortable with your financial plan and goals, then buy the dips.  The long-term trend is your friend, my friend.

Are you ready for your financial stress test?

Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. ~ Philippians 4:6

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

3/24/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

 

 

 

[1] Yahoo! Finance

[2] Ibid

16 Seed.

March Madness is in full swing.  Perennial blue-bloods like Arizona, UNC, Michigan State, and Virginia were expected to go deep in this year’s tournament.  These teams are laden with NBA caliber talent and it’s possible several of their players will be lottery picks in the upcoming draft.  It’s not surprising most people picked these schools to win their office bracket.  In fact, more than a quarter of the brackets picked Virginia to win it all this year.

Entering this year’s tournament, a 1 seed has never lost to a 16 seed.  The 1 seeds have compiled a first-round record of 135-0!  That was until this year when The University of Maryland Baltimore County destroyed Virginia 74-54.

The Retrievers put on quite the show, adding a punctuation mark to this year’s madness.  Led by 5’-8” point guard, K.J. Maura, the team kept Virginia at bay for most of the game.  They played as a unit and didn’t rely on a star player or a McDonald’s All-American.  They were just a bunch of determined young men playing extremely efficient basketball.

The mascot for the school is the Chesapeake Bay Retriever.  According to the American Kennel Club, “Chessies take to training, but they have a mind of their own and can tenaciously pursue their own path. They are protective of their humans and polite, but not overtly friendly, to strangers. Chessies make excellent watchdogs and are versatile athletes.”   This definition can also be applied to their men’s basketball team.

Investors are always on the hunt for one stock or fund they can buy to propel their portfolio to new heights.  In doing so, they ignore the efficiency and power of a diversified portfolio.  A balanced portfolio will deliver solid results without relying on a star stock or fund. In other words, you don’t need to be on the lookout for a 1 seed to win the investment game.

A balanced portfolio of five exchange traded funds (ETF’s) generated an average annual return of 7.7% for 10 years from February 2008 to February 2018.[1]  An initial investment of $50,000 is now worth $105,000.  This efficient portfolio doubled in value despite falling 24% during the Great Recession.

A low-cost, index portfolio shuns the star money manager model to provide market driven returns for shareholders.  A benchmark hugging portfolio is an excellent way to grow your wealth.  Active fund managers and high-flying stock pickers despise the index model because of their market producing returns.  However, 93% of large-cap active fund managers failed to beat their benchmark on a 15-year basis.  Most active money managers also failed to beat their benchmark on a 1, 3, 5, and 10-year period.[2]

It’s also wise to work with an advisor who will act as your coach. A fee-only, fiduciary financial planner can help guide you by developing a game plan based on your hopes and dreams.  In addition, a reputable planner will be with you during good times and bad.

As you build your winning team focus on a diversified portfolio of low cost investments and work with a fee-only, fiduciary advisor who’s a Certified Financial Planner practitioner.

Do you believe in miracles? Yes! ~ Al Michaels.

Truly I tell you, if you have faith as small as a mustard seed, you can say to this mountain, ‘Move from here to there,’ and it will move. Nothing will be impossible for you. ~ Matthew 17:20

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

March 20, 2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

[1] The five funds are IVV, IJR, EFA, BND & VNQ held from 2/29/2008 to 2/28/2018. Each fund started with $10,000 and the portfolio was rebalanced annually.

[2] https://www.spglobal.com/our-insights/SPIVA-US-Scorecard-Mid-Year-2017.html, Aye Soe and Ryan Poirier, 9/21/17.

The Silent Wealth Killer

If you drive a car or eat food you’ve noticed prices tend to rise more than fall.  Paying for childcare, healthcare, or college tuition has been a challenge as the rate of inflation for these items has soared.   College tuition, for example, has increased 197% since 1996![1]

Inflation is a metric not often tracked by investors. The stock market gets all the attention, but inflation may have more of an impact on your long-term wealth, especially if your assets aren’t invested properly. It can wipe out a generation of hard work without warning.

Inflation is defined as the rate at which prices increase.  The Consumer Price Index (CPI) is how the United States measures inflation. From 1926 to 2015 it averaged 2.9%.  However, there have been a few times when it spiked.  From 1917 to 1920 it averaged 16.4% per year and from 1970 to 1982 it averaged 7.7% annually.  Prices will double every 24 years at the historical rate.  Today, a Tesla Model X costs $80,700; in 50 years it will cost $353,781 if inflation averages 3%.Milk Inflation

Another way to look at inflation is the loss of purchasing power.  At a 3% inflation rate the value of the dollar will drop by 58% over 30 years, a dollar today will be worth 41 cents in the year 2048. In 1975 it was possible to purchase 10 stamps for a dollar; today it will only buy two!

Hyperinflation occurs when inflation spirals out of control.  The Weimer Republic of Germany experienced a bout of hyperinflation from 1918 to 1924.  It peaked in November of 1923 when inflation climbed 29,525%! Venezuela is currently ensnared by hyperinflation as prices have increased 4,000%.[2]    Hyperinflation has primarily been limited to developing countries like Venezuela, Vietnam, Iraq and Zimbabwe.  Countries can also experience hyperinflation during times of war like the United States did during the Civil War.

However, a low rate of inflation is healthy for our economy if it can be contained to 1% to 3%. Companies will benefit from rising prices as the increase can flow to their bottom line in the form of higher earnings.

Investors who rely on fixed income investments like bonds or certificates of deposit will see the value of their investments eroded by inflation as evident in the chart below.  A $1 investment in bonds was worth $21 after 90 years.  After inflation, it dropped to $7.  Stocks, on the other hand, have benefited from inflation.  A $1 investment in small stocks grew to $22,985! Stock Growth DFA

Your retirement may last 30 years or more so it’s imperative to allocate a healthy portion of your assets to stocks.  Resist the urge to retire your money as well.  A portfolio of “safe” investments may leave you in dire straights toward the end of your retirement.

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man. ~ Ronald Reagan

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

3/1/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

[1] https://www.financialsamurai.com/the-inflation-interest-rate-paradox/, Posted by Financial Samurai, website accessed 3/7/2018.

[2] https://www.bloomberg.com/view/articles/2017-12-19/venezuela-is-living-a-hyperinflation-nightmare, by Noah Smith, December 19, 2017.

Handbreadth.

A handbreadth is a unit of measure about the width of your palm, or 4 inches.  It’s also a measure of time as referenced in the Bible –  You have made my days a mere handbreadth; the span of my years is as nothing before you ~ Psalm 39:5. Meaning our time here on earth is short.

The Dash is an amazing poem written by Linda Ellis.[1]  She writes about how we live our lives between our birth and death dates which is represented by the dash.  Have you ever paid attention to tombstones? If you have, you’ve probably noticed that the dashes are all the same size – short.

My church recently held their annual men’s retreat and I asked my group if they could name their great-grandparents, most couldn’t.  So not only will we be gone but we’ll also be forgotten.

Knowing your time is limited, what can you do today to create a legacy?   Here are a few ideas:

  • A financial plan can help you define your legacy by aligning your investments to your goals.
  • Establishing a Donor Advised Fund (DAF) will allow you to contribute cash or assets to your account and then distribute your donations as you see fit. You’ll be able to deduct your contributions from your taxes.  The deposit is irrevocable, but you’ll be able to invest the assets inside the fund and you can control your distributions.
  • Create a private foundation to fund causes you support. You’ll need to establish a 501c3 organization which may be expensive and time consuming, but it may be worth the effort especially if you have the financial resources.   Some of the larger private foundations are the Bill & Melinda Gates Foundation, Ford Foundation and The Robert Wood Johnson Foundation.
  • Donate directly to your favorite organization such as your alma mater, museum, library, zoo or hospital. Your contribution, depending on the size, may also get your name on a building.
  • Legacies go beyond monetary gifts, of course, so donating your time might be a better option for you and your family. A good friend of mine has volunteered his time to read the Bible to a group of tenth grade boys. He’s been meeting with them ever since they were in the sixth grade.  He’s creating a legacy by giving these young men a solid foundation.
  • Using your professional talents to help others may pay dividends. Young people who are starting their career can benefit from a strong mentor. A good place to start is to take an inventory of your strengths to find out where you can serve best.
  • Procrastination is the enemy of wealth creation so start saving your money today. An investor who invests $1,000 monthly will see their money grow to $1.2 million after 30 years.  If he waited ten years to start, his account value would be worth $520,000, a difference of $680,000![2]  The sooner you start investing the more money you’ll have to fund your philanthropic efforts.

A popular Chinese proverb says that the best time to plant a tree was 20 years ago.  The second-best time is now.   If you’ve been waiting to start (fill in the blank) __________, I’d encourage you to do it today.  After all, were just a mere handbreadth.

“Goodbye Hobbes. Thanks…for everything…” ~ Calvin 

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

3/6/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

 

[1] https://www.linda-ellis.com/the-dash-the-dash-poem-by-linda-ellis-.html

[2] $1,000 per month at 7%, before taxes and fees.

No. How Can I Help You?

Are customers always right?   Employees who work in the retail sector are trained to say “yes” to client requests and that they’re always right.  They sell the client what they want, not what they need. It’s hard to find a salesperson who says “no” to client requests.

If I order a triple bacon cheeseburger with guacamole, chili-cheese fries, and a chocolate shake the clerk is going to take my order, deliver my food, and move on to the next customer.  He doesn’t question my order or the ramifications it will have on my health.

My role as an advisor, however, is to recommend what clients need, not what they want. This means I regularly say “no” to client requests especially when it’s not in their best interest.  My goal is to make sure they follow their financial plan.  I want to say “yes”; I want to be the good guy but not at the expense of their financial wellbeing.

In December of 1999 I met with a client who wanted to know why he didn’t have a larger exposure to high-flying technology and internet stocks.  He was questioning his allocation to international, real-estate and bond investments.  He wanted to sell these holdings to buy NASDAQ traded stocks.  I told him “no” because of their rich valuations and that they didn’t fit into his long-range plans.  He didn’t like my answer, so he asked the branch manager to transfer his account to another broker.  A few months later the NASDAQ peaked and proceeded to fall 70%.

Today, investors are once again questioning the wisdom of diversification as bonds, real-estate investment trusts and value stocks underperform growth stocks like Facebook, Amazon, Netflix and Google (Alphabet).  Investors are ready to abandon their asset allocation models to chase returns. Of course, the path of least resistance would be for me to cave into these requests and give them what they want, but is this prudent? Let’s look at a few examples.

  1. From October of 1989 to December of 2016 stocks averaged 9.38% per year. If an investor missed the 25 best days during this stretch his returned dropped to 3.98%.[1]
  2. In 2008 the S&P 500 fell 37% and long-term government bonds rose 25.9%.[2]
  3. From 1994 to 2016 stocks generated an average annual return of 7.3%. If an investor didn’t own the top 25% of performers each year, he lost an average of 5.2% per year.[3]
  4. In 2015, Denmark was the best performing stock market in the world and Canada was the worst. A year later they switched places.  Canada was first; Denmark was last.[4]
  5. International stocks returned a paltry 1.6% in 2016 but gained 25% in 2017.[5]
  6. In Barron’s 2017 Roundtable one prediction called for interest rates to rise and stocks to fall.[6] What happened?  Rates, stocks soared.

It would be nice to own investments that only went up, but this isn’t possible.  Markets rise and fall. Sectors move in and out of favor.  After all, if all your investments went up at the same time you wouldn’t be diversified!

A wise strategy is to follow your financial plan, diversify your investments and rebalance them annually.

“Never ask a barber if you need a haircut.” ~ Warren Buffett

But about that day or hour no one knows, not even the angels in heaven, nor the Son, but only the Father. ~ Matthew 24:36

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

3/1/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.  Photo credit = lisafx

 

 

[1] DFA –  Investor Discipline – Reacting Can Hurt Performance

[2] 2016 – Dimensional Fund Advisors Matrix Book

[3] DFA –  Diversification May Prevent You from Missing Opportunity

[4] 2016-Dimensional Fund Advisors Matrix Book

[5] http://awealthofcommonsense.com/2018/01/updating-my-favorite-performance-chart-for-2017/, Ben Carlson, 1/14/2018

[6] https://www.barrons.com/articles/stocks-could-post-limited-gains-in-2017-as-yields-rise-1484376687, Laurin R. Rublin, 1/14/17.