What is the S&P 500?

What did the market do today? Was it up? Down? When people refer to the “the market” it’s usually the S&P 500® Index. But what is it? It’s a key benchmark money managers, mutual funds, and other professionals use to measure performance.

The S&P 500® Index is a collection of the 500 largest publicly traded U.S. corporations. It’s a market weighted index meaning the largest companies have the greatest impact on performance – good and bad.  The largest company in the index is Microsoft; the smallest is News Corp. When Microsoft moves, so will the index. The 10 largest companies in the index are Microsoft, Apple, Amazon, Berkshire Hathaway, Facebook, Johnson & Johnson, JP Morgan Chase, Alphabet, Exxon Mobil, and Bank of America. The largest sectors are Information Technology, Healthcare and Financials.

Standard & Poor’s launched the now famous index on March 4, 1957. It’s a better gauge of the market because of the breadth of its holdings especially when compared to the Dow Jones Industrial Average which only holds 30 companies.[1] The Dow Jones index was founded in May 1896.

Because of the breadth and consistency over time there are currently $9.9 trillion in assets linked to this index. The most popular one is the Vanguard S&P 500 Index Fund founded by Mr. John Bogle. Mr. Bogle recently passed away and this put a spotlight on this popular category. Mr. Bogle started the fund in 1976 to a less than stellar opening. His goal was to raise $150 million but he only received $11.4 million – a rounding error on Wall Street.[2] The fund currently has assets of $400 billion! If you had invested $10,000 in this fund when it opened, your account balance would be worth $744,951 today. It has generated an average annual return of 10.71% since its feeble beginning.

Wall Street was not a fan of Mr. Bogle’s fund because of its low fee structure and average returns. What investor would want to own a fund generating average returns when active fund managers and stock pickers could do so much better? Makes sense. However, active stock pickers rarely outperform the S&P 500® Index. In fact, 91% of active fund managers failed to outperform the S&P 500® over a 10-year period and 95% of funds with high fees lagged this key benchmark. The active managers were below average, well below.[3]

Rather than average returns consider market returns. If you can generate market returns over time, your wealth should grow despite the occasional drop in value or spike in volatility. A low cost, diversified investment like the Vanguard S&P 500® Index Fund is a great candidate for most investors.

As a side note, the S&P 500 owns 505 companies!

Happy Investing.

“The two greatest enemies of the equity fund investor are expenses and emotions.” ~ John C. Bogle

February 1, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] file:///C:/Users/Bill%20Parrott/Downloads/fs-sp-500.pdf

[2] https://www.inc.com/magazine/201210/eric-schurenberg/how-i-did-it-john-bogle-the-vanguard-group.html, B Eric Schurenberg, 9/25/2012

[3] https://office.morningstar.com/research/doc/Aug%2023%202018_Active_vs_Passively_Managed_Funds_Takeaways_from_Our_Mid-Year_Report__880196, Ben Johnson, August 23, 2018

The Shutdown

As you watch the Super Bowl you may hear the term “shutdown corner.” A shutdown corner is the best defensive back on the team and they’re usually left on their own to cover the other team’s best receiver.  Some of the best shutdown corners have been Deion Sanders, Lester Hayes and Charles Woodson. A shutdown corner is a good thing, a government shutdown is not.

The shutdown lasted 35 days, removed $11 billion from the Gross Domestic Product, and impacted 800,000 federal workers.[1] The government reopened to a temporary deal, but it could grind to a halt again on February 15th. At the end of the day, it appears not much has changed.

Since 1980 there have been 10 government shutdowns, most lasting 1 to 5 days, so the financial impact on federal employees was minimal. However, this shutdown lasted 35 days forcing some employees to rely on food stamps, handouts, and other stopgap measures to keep their households afloat.

It was heartbreaking to read stories about workers struggling to make ends meet. The circus in Washington exposed a dark side to our economy in that numerous families live paycheck to paycheck with little, to no savings, in the bank.  When the tide goes out, rocks are exposed, or as Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

What can you do to fortify your resources so you’re not dependent on the government to bail you out of an unfortunate situation?

Stop spending. If you’re spending money on nonessential items – stop. Rather than spending money on items you don’t need, redirect your money to your savings account.  “Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also. ~ Matthew 6:19-21

Reduce your debt. Paying down your debt will pay big dividends in the future. Credit cards, auto loans, and student loans will divert good assets to pay for bad ones.  Start with your lowest balance and work your way to the largest. Dave Ramsey refers to this as the debt snowball. As you payoff one debt, apply the previous payment to your next obligation.  The rich rule over the poor, and the borrower is slave to the lender. ~ Proverbs 22:7

Sell your stuff. Do you have items in the attic or stuff in a storage unit? If so, sell them on EBay, Etsy, or Craig’s List.  If you have things in your house that you haven’t touched in years, sell them so you can raise cash or payoff debt.

Raise cash. During hard economic times cash is king.  According to a Forbes article “63% of Americans don’t have enough savings to cover a $500 emergency.”[2] One way to increase your savings is to set up an automatic draft between your checking account and savings account. Eating out less often or drinking coffee at home will also help you save a few dollars.

Create a spending plan. A budget will keep your spending inline. There are several online services to help you get a handle on your money. Services like Mint, NerdWallet or Every Dollar can help you track your income and expenses. Knowing where your money is going is half the battle.

Give. Giving money away seems counterintuitive to saving money but it will help you free your dependence on hoarding assets. Also, there’s never a bad time to do some good. “Love your neighbor as yourself” ~ Mark 12:31

You can control your spending and your savings. If you reduce spending and increase savings, then you can free yourself from financial stress and worry. Keep your lives free from the love of money and be content with what you have, because God has said, “Never will I leave you; never will I forsake you.” ~ Hebrews 13:5

Life is hard and things happen, so while things are good, store up savings so you can survive the next storm. Little actions today will have big consequences tomorrow – good and bad.

“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.” ~ Will Rogers

January 30, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] https://www.nolabels.org/blog/five-facts-on-the-economic-consequences-of-the-government-shutdown/, 1/29/2019

[2] https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-cover-a-500-emergency/#340aeead4e0d, Maggie McGrath 1/6/2016

What if I’m Wrong?

Being wrong is no fun just ask the referees from the recent NFC playoff game between the Los Angeles Rams and New Orleans Saints.

Timing is everything and sometimes the difference between right and wrong is a split-second decision. Of course, no one wants to be wrong, but it’s a part of life.

I believe stocks will generate wealth for years to come, but what if I’m wrong? What if you invest at the wrong time and lose money? Can you recover from a sharp sell off? Since 1926 stocks have risen about three quarters of the time and generated an average annual return of 10%. They’ve created wealth for legions of investors but what if it’s different this time?

Let’s look back at four difficult times for investors: 1929, 1973, 2000 and 2008.

1929

On January 1, 1929 an investor who started with $1,000,000 and allocated their holdings to 60% stocks, 40% bonds lost money for six straight years before recovering in 1935 with a value of $1,018,082. The stock component of $600,000 fell 65% to $207,961 by the end of 1932. The bond portfolio never dipped below $400,000. The returns weren’t great, but over 20 years the portfolio generated an average annual return of 3.8%.  From 1929 to 1949 stocks rose 50% of the time, bonds 85%.  At the end of 1949 the portfolio was worth $2,188,086, a gain of $1,188,086.

1973

An investor with a $1,000,000 portfolio and an allocation of 60% stocks, 40% bonds in 1973 had to wait until 1976 before their account was profitable. The combined portfolio generated an average annual return of 7.05% from 1973 to 1983. Stocks fell 37% in the first two years, but they made money 63% of the time, bonds made money 54%. The $1,000,000 portfolio was worth $2,114,774 at the end of 1983, a gain of $1,114,774.

2000

An investor with $1,000,000 and an allocation of 60% stocks, 40% bonds had to wait until 2003 before their portfolio recovered. Stocks fell 37% from 2000 to 2002 and their bonds never lost money. In fact, from 2000 to 2018 bonds outperformed stocks by a wide margin. Stocks averaged 4.65% annually while bonds returned 6.87%. The combined portfolio turned $1,000,000 into $2,834,987 at the end of 2018, a gain of $1,834,987. Stocks rose 74% of the time, bonds 79%.  The combined portfolio generated an average annual return of 5.64%.

2008

An investor with $1,000,000 and an allocation of 60% stocks, 40% bonds had to wait two years before their portfolio recovered. In 2008 stocks fell 37% and bonds rose 26%. Stocks rose 81% of the time, bonds 63%. The combined portfolio returned 6.44% per year and the portfolio grew to $1,987,575 at the end of 2018, a gain of $987,575.

Despite investing during some of the worst times in history, these portfolios still generated positive returns over time. A courageous investor made money by staying the course. Trying to time the market and panicking during downturns will do more harm than good. If you’re a long-term investor, ignore the short-term ripples in the market.

Now faith is confidence in what we hope for and assurance about what we do not see. ~ Hebrews 11:1

January 23, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.  The returns were calculated based on the data from the 2015 Ibbotson® SBBI® Classic Year Book.

 

Happy Anniversary to Me!

This year marks my 30th year in the investment business and what a long strange trip it’s been.

My last semester at the University of San Diego I took an investment course with a young, energetic, and entertaining investment professor. His knowledge about investing was second to none and he taught our class how to apply our learning to the real world of investing. His course changed my career trajectory.

I was living the good life as a college student. I lived in Mission Beach with the beach on one side and the bay on the other. My roommate at the time was in the same investment class.

After graduation I was working for Bank of America in downtown San Diego processing loans for residents of Orange County. My roommate took a job as a stockbroker with a penny stock firm. The stock market closed at 1:00 and on most days he’d call my office to let me know he was going to the beach.  He was going to the beach at 1:30 and I wasn’t getting home until 7:30. I asked, “Jim, did you make any money today?” His response, “Bill, I’m always making money!”

The thought of making money and going to the beach at 1:30 was too much to pass up so I called a former roommate whose dad was managing a small office for Spelman & Company in Rancho Bernardo. His dad told me if I passed the series 7, he’d hire me as a stockbroker. I borrowed some old series 7 training manuals and studied for a couple of months. I passed the exam with a score of 70.3! I was later told that the lower your score on the series 7, the better your odds of succeeding in the business.

Once I received my results, I resigned from Bank of America. My first official day on the job was May 8, 1989. My friend’s dad was an incredible mentor and it was an honor to work at his side. To get clients I spent most of my day cold calling with municipal bonds.

A few months later I moved back to Los Angeles to start working with Dean Witter in Pasadena. I went through their training program in April 1990. Like my job in San Diego I spent most of my day cold calling for new business. In addition to municipal bonds I added preferred stocks to the mix, and I’d dial the phone morning, noon and night – about 300 to 400 times a day, including Saturdays. My source of leads was the Criss Cross Directory. The early 90s was a great time to cold call because there was no caller ID, cell phones, or internet to interfere with my mission. To increase my odds of success I’d find a local bond paying 7% or more – tax free! My standard script went something like this: “Hello Mrs. Jones, My name is Bill Parrott and I’m calling from Dean Witter in Pasadena. The reason for my call today is that the City of Arcadia has just issued a new tax-free bond paying 7%. Would you like to hear more about it?” I repeated this process throughout the day. For a moment in time, I was the number one trainee in my class.

At Dean Witter I was blessed to work with another incredible mentor, a gentleman who’s been on the Barron’s 100 list of top advisors each year it’s been published. After hours we were often the only two left in the office and we’d go to lunch on several occasions.  I’d pick his brain about the business at every opportunity.

My mentors taught me more than investments, however. They taught me how to treat clients with respect and to put their interests above mine. I learned much by watching and listening to how they conducted themselves daily. Their wisdom, teachings and examples are still with me today.

On May 8, 1989 the Dow Jones Industrial Average closed at 2,376. It has since risen 933% to 24,553, averaging 8.17% per year – before dividends for the past 30 years! Despite the long-term success of stocks, each year, including this one, forecasters have called for the market to drop because it’s overvalued. In fact, the first year I started in the business one large producer told me to sell stocks and buy silver. I didn’t take his advice, thankfully.

During my career I worked in California, Connecticut and Texas. After Morgan Stanley and Dean Witter merged, I joined the management pool; managing offices in New Haven, CT and Austin, TX.  A few years after leaving Morgan Stanley I joined a large discount brokerage firm to work with executives, attorneys, pilots and doctors across the country. I spent a good deal of time in hotels and airports.

When I turned 50, I started my own company. My daughter was leaving for college and I thought if I don’t start my company now, I never will. It was a leap of faith. We live by faith, not by sight ~ 2 Corinthians 5:7.    

My firm is doing well and growing. I’ve had the benefit of working as an independent advisor, a wire-house broker, and an order taker. The independent channel is, by far, the best of them all. The relationships I have with clients are much deeper and more authentic than the other channels.

It’s been a great run and I’ve been blessed beyond measure.  Here are a few tips I’ve learned over the past three decades.

  1. Family and friends come first. I’ve been blessed with an amazing wife, a beautiful daughter, loving parents, and incredible sisters.
  2. Time in the market trumps timing the market. The long-term trend in the market will give you an opportunity to create wealth for you and those you love. Don’t try to trade the market daily because you’ll lose more often than you’ll win.
  3. Turn out the noise. As I mentioned, every year, for the past 30 years, “experts” have been telling me the stock market is overvalued. If I listened to any of these individuals, I’d have missed the historic rise in stocks.
  4. Diversify your portfolio. Diversification is the only free lunch on Wall Street. Stocks, bonds and cash will help you grow and protect your assets over time. All three will play a part in your wealth journey at some point.
  5. Invest internationally. About half of the global stock market capitalization is found in companies outside of our borders.
  6. Have a plan. Financial planning will help you create wealth. Your plan will quantify and prioritize your financial goals.
  7. Rebalance your accounts. At the beginning of each calendar year, review your asset allocation. If it’s out of whack with your risk level, adjust your portfolio.
  8. Eliminate your debt. Debt is a four-letter word and it’s a killer. Too much debt will keep you from reaching your financial dreams.
  9. Giving money away to help others has multiple benefits. It will make you happier, reduce your taxes, and assist those who receive your gift. It’s a win-win-win.
  10. We live on a beautiful planet with amazing things to see and do. Get outside and enjoy your life.

Thirty years have gone by in a blink of an eye. Between classes and jobs, my friends and I would sit on the beach and ponder our future. I’m happy to report we’ve all done well, and, more importantly we’re still friends. Life is good.

May He give you the desires of your heart and make all your plans succeed. ~ Psalm 20:4

January 22, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

Is 300 A Perfect FICO Score?

The FICO score ranges from 850 to 300 – exceptional to very poor. Of course, if you tried to get a loan from a bank with a credit score of 300, you’d be laughed out of the lobby. So why is 300 a perfect credit score? Let’s look at some data to answer this question.

First, this is how your credit score is calculated.[1]

  • 35% = Your debt history.
  • 30% = Your debt level.
  • 15% = The numbers of years you’ve been in debt.
  • 10% = Your new debt.
  • 10% = Your debt type.

Do you notice a theme? A key word? Debt! Your debt drives your credit score. It has nothing to do with your income, savings rate, asset level, or net worth.

Consumer debt is staggering and growing.[2] Banks, credit card companies, and other lenders have little incentive for you to pay off your debt because the more you owe, the more they make. According to Credit Karma the average credit card rate is 15.96%![3] With an interest nearing 16%, why would they want you to stop borrowing money?

  • Total Household Debt = $13.5 Trillion.
  • Mortgage Debt = $9.14 Trillion.
  • Auto Debt = $1.65 Trillion.
  • Student Loan Debt = $1.44 Trillion.
  • Credit Card Debt = $844 Billion.

Debt is a four-letter word and it will hold you back from reaching your dreams. The Bible taught us this centuries ago: The borrow is slave to the lender. ~ Proverbs 22:7.

Rather than trying to increase your credit score by going into debt, why not use your resources to eliminate it? Reducing or eliminating your debt will be freeing. A monthly payment for a $30,000 auto loan with a rate of 4.5% is $684. If you invested this same amount at 5%, your balance would be worth $46,516 after five years.

Here are a few suggestions to help you reduce your debt:

  • Use your debit card instead of a credit card. Your payment will be deducted directly from your checking account. If your checking account balance is $500, then your spending limit is $500.
  • Buy a used car, with cash. The moment you drive your new car off the dealer’s lot it starts depreciating. A new Land Rover Range Rover Sport costs about $67,000. A 2015 model costs about $40,000 – a difference of 40%!
  • Attend a community college for two years and then transfer to a state school. The annual tuition to attend SMU is $52,500, so two years of study will cost you, before room and board, $105,000.[4] Attending Austin Community College costs $5,100 – a difference of 95%!
  • Buying a home with 100% cash is challenging. If you buy a home with debt, limit your mortgage payment to 28% of your income. For example, if your monthly pay is $10,000, then your payment should be $2,800, or less. Of course, if you have resources to pay cash, then pay cash. Who’s going to lend you money if you don’t have a credit score? Dave Ramsey says you can request a manual underwriting from your bank.[5]

Once you stop using credit cards and other debt tools your credit score will start to disappear. It will take about six months for this process to occur. No debt. No FICO.

If you can’t afford it, don’t buy it. However, we, as a nation, no longer adhere to this philosophy. If we want it, we buy it – regardless of the cost. Before you decide to buy, calculate the cost. If you have the money, then buy it. If you fall short, save until you have the resources to do so.

Good luck and happy saving!

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? ~ Luke 14:28

January 11, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.daveramsey.com/blog/the-truth-about-your-credit-score, website accessed 1/11/19.

[2] YCharts

[3] https://www.creditkarma.com/credit-cards/i/average-apr-on-credit-card/, Janet Berry- Johnson, 1/2/2019

[4] Money Guide Pro

[5] https://www.daveramsey.com/blog/the-truth-about-your-credit-score

Optimists Rule

Optimists and visionaries have built our great country. Railroads, autos, airlines, rockets, and computers were created by individuals who focused on changing the world. They didn’t let “experts” tell them their ideas were a waste of time or their inventions wouldn’t work. The Wright Brothers, Henry Ford, Amelia Earhart, Andrew Carnegie, John D. Rockefeller, Katharine Graham, Thomas Edison, Steve Jobs, and other luminaries obsessed about success. They were tenacious and resolute as they pursued their goals. They were bold. Thomas Edison said, “I have not failed, I’ve just found 10,000 ways that won’t work.” Amelia Earhart added, “Courage is the price that life exacts for granting peace.”

One study of self-made millionaires found that “67% said their optimism was critical to their success.” The same study reported that “78% of the poor admitted to being pessimists.”[1]

The fourth quarter of 2018 was a difficult time to own stocks as the Dow Jones Industrial Average fell 12.5%. Pessimists and naysayers are coming out of the woodwork saying this is the beginning of the end. Several market pontificators are calling for stocks to fall further because of our country’s debt level, the bubble in junk bonds, the inverted yield curve, the Federal Reserve, Bitcoin, the trade war, the wall, etc. More than a few analysts believe the stock market could crater 50% or more and one analyst believes it “could fall by 70%.”[2] Will their predictions come true? Who knows? Maybe.

During the Great Recession (10/15/2007 – 3/2/2009) the S&P 500 fell 53.1%. If you invested all your assets in the Vanguard S&P 500 Index Fund (VFINX) on the day the downturn started, you would’ve made 109%, or 6.8% per year if you still owned the fund today despite the 53% drop. By comparison, if you owned the Vanguard Short-Term Bond Fund you would’ve made 5.29%, or .45% per year. Stocks significantly outperformed bonds despite one of the worst market corrections in history.[3]

Warren Buffett is worth $84 billion. His company, Berkshire Hathaway, has treated him, and his shareholders, well. From 1965 to 2017 it generated an average annual return of 20.9%. During this historic run the stock suffered a few significant setbacks. From March 1973 to January 1975 it dropped 59.1%; 10/2/1987 to 10/27/1987, 37.1%; 6/19/1998 to 3/10/2000, 48.9%; 9/19/08 to 3/5/2009, 50.7%.[4] If Mr. Buffett panicked and sold his holdings during these down drafts, he wouldn’t have the net worth he has today.

Bill Gates is worth $90 billion. From 1986 to 2018 Microsoft stock generated an average annual return of 25.2%. It dropped 62.9% in 2000, 22% in 2002, and 44.4% in 2008. For 16 years the stock didn’t move; it traded flat from January 2000 to April 2016.[5] If Mr. Gates sold his stock and parked it in cash until conditions were better, his wealth would be less than it is today.

Amazon stock has made Jeff Bezos the richest man in the world (before his divorce) with a net worth of $112 billion. Amazon stock has been a rocket ship averaging 35.9% from 1997 to 2018. It, too, has suffered significant corrections. In 2000 it dropped 79.6%, 30.5% in 2001, 15.8% in 2004, 16.3% in 2006, 44.7% in 2008, and 22.2% in 2014[6]. If he sold his stock in these down years, he wouldn’t be the richest person in the world. He’d be another book peddler.

In addition to creating great wealth for their families, these modern-day optimists have donated billions of dollars to philanthropic causes. Like Rockefeller, Carnegie, Ford, Vanderbilt, and Morgan these billionaires are using their resources for good.

When I peruse the Forbes 400 list of the richest people in the world, I’m reminded that the optimists win in the end. To my knowledge there are no analyst, reporters or pessimist on the list.

I will continue to follow the lead of those who have produced great wealth through owning stocks by holding them forever. Stay invested my friends.

Where there is no vision, the people perish. ~ Proverbs 29:18

January 10, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.businessinsider.com/studying-millionaires-showed-me-the-importance-of-optimism-2016-2, Thomas C. Corley, 4/21/2016

[2] https://admiralmarkets.com/analytics/traders-blog/2019-market-crash. January 4, 2019

[3] YCharts

[4] Berkshire Hathaway Inc. 2017 Annual Report.

[5] YCharts

[6] Morningstar Office Hypothetical.

A New Year

2018 was less than kind to investors as all major asset classes finished in negative territory. Cash was the best performing asset for the first time since 1994 and only the 10th time since 1926.

Diversification is still vital for investors to obtain and maintain wealth. A mix of stocks, bonds and cash based on your goals and risk tolerance is recommended. In a “normal” market stocks outperform bonds and cash. Stocks have risen about 75% of the time over the past 100 years, but, on occasion, they drop in value like they did last year.

Investors question the wisdom of owning bonds and cash during a rising market. From March 9, 2009 to October 1, 2018, the market rose 307% or 15.7% per year! It was a great bull run. When stocks are rising 15% per year who wants to own bonds paying 2%? But when stocks fall, bonds don’t look so bad. During the 4th quarter the Dow Jones fell 12.4% while long-term bonds rose 4.6%.

Rather than trying to time the market and move in and out of stocks with precision, focus on your goals and asset allocation. Here are a few suggestions to get you started.

  • Write down your goals. What do you want to achieve in 2019 – financially, personally, professionally? If you write down your dreams, they become goals.
  • Do you have any immediate financial needs? If so, attack these items first. Don’t let them fester. It’s not possible to pursue your financial dreams if something is holding you back. A boat can’t leave the harbor if it’s tied to a dock.
  • Create a financial plan. Your plan will help you quantify and prioritize your goals. It will also determine your asset allocation and risk tolerance.
  • Develop a spending plan. Do you know where your money is going? A budget will help you create wealth over time by redirecting your spending to savings.
  • Diversify your assets. As I mentioned, stocks, bonds and cash are essential to your long-term investment success. Adding international and alternative investments to your portfolio will also help your results.
  • Rebalance your accounts. January is a great time to rebalance your accounts and return them to your original asset allocation. If you didn’t make any changes to your accounts last year, it’s possible your equity exposure is below your target allocation because of the market drop.
  • Payoff debt. Do you have car loans, credit card debt, student loans or a mortgage? If you have assets to pay off these debts, do it today! Reducing your debt level is freeing financially and emotionally. In addition, you’ll save thousands of dollars in interest payments over the life of your loan. Let’s say you owe $30,000 on a car loan with a 4% interest rate. If you paid it off, you’d eliminate your $552 monthly payment and save over $3,100 in interest payments. Can you find a better way to spend $552 per month?
  • Establish an emergency fund. The goal is to reach three to six months of expenses in short-term savings like CD’s or T-Bills. For example, if your monthly expenses are $10,000, then try to save $30,000 to $60,000. I’ve run several marathons and the hardest part has always been the first day of training. Once I started, however, the training became easier.
  • Give money to groups or organizations you support. Giving will loosen your grip on your money, help others, and make you happier.
  • Health is wealth. January is a great time to start working out. Invest some time in walking, hiking, biking, running, climbing, skiing, swimming, lifting, or anything that gets you moving.

Focus on the future. Don’t let last year’s lousy market hold you back. The Baylor Bears won 1 football game in 2017 finishing with a dismal record of 1-11. However, they didn’t let the disappointment of their horrible season ruin their plans for 2018. Rather, they trained with a process and a purpose, concentrating on those items they could control. How did they do in 2018? They won 7 games and beat Vanderbilt in the Texas Bowl – quite a turnaround.

A new year gives you 365 new opportunities – so get going!

Let your eyes look straight ahead; fix your gaze directly before you. ~ Proverbs 4:25

January 2, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.