Are You Too Frugal?

The person who dies with the most toys – loses!

John Bogle, the founder of Vanguard, recently passed away with a net worth of $80 million. By Wall Street standards $80 million is pocket change, especially for someone who founded one of the largest investment and asset management firms in the world.  Vanguard has about $5.3 Trillion in assets under management.[1]  By comparison, Stephen A. Schwarzman, the CEO of The Blackstone Group, has a net worth of $12.4 billion. Blackstone’s assets under management are $427 billion, or 8.5% of Vanguard’s total.

Mr. Bogle is known for being frugal, probably to a fault. He once said, “I don’t like going into stores, I don’t like the whole process of buying things.” He didn’t like spending money on himself, but he did donate to charities and schools including The John C. Bogle Center for Financial Literacy, Blair Academy and Princeton.

Mr. Bogle could have sprinkled his assets to individuals or groups he supported, including himself, without risk of running out of money.

It’s good to be frugal and watch your budget, but is it possible to be too frugal? I think it is. For example, if you drop your daily Starbucks habit, you could save $152,000 over the next 30 years, but would you be happy? I’ve seen individuals who look to save a dollar or two on small ticket items but hold 100% of their assets in cash, CDs or T-Bills. Rather than trying to save a few nickels by kicking your coffee habit, move your assets to stocks so you have an opportunity to make more money. Since 1945 stocks have averaged 11.3% per year while T-Bills have returned 3.9%, a difference of 7.4% per year! With the money you make from stocks you can now afford multiple lattes!

Mr. Bogle followed an asset allocation of 60% stocks, 40% bonds in his retirement accounts. His taxable allocation was more aggressive with 80% stocks, 20% bonds.[2]

Here are a few suggestions for you to spend more money and be less frugal.

Spend. The goal is not to die with the most assets but to use your net worth to live and enjoy life. Cash is a use asset, so use it accordingly. If you’re concerned about spending money on things, spend it on experiences. A family trip to a national park is not only a great experience, it’s also economical.

Give. If your assets are burning a hole in your pocket, give them away. Donate your resources to charities or organizations you support. Your gift will bless the organization and you’ll benefit from a tax write off.

Retire. Retiring early will give you an opportunity to travel to distant lands, spend more time with your loved ones, or volunteer your time. If you retire early, you’ll spend your money sooner rather than later. In addition, you can use your resources while you’re young and mobile. A former client saved his money to travel with his wife, but she died one month after his retirement. Don’t wait to enjoy your resources because you don’t know when you’ll leave God’s green earth.

What if you’re not blessed with a net worth of $80 million? How do you know how much money you can spend before you run out of money? A financial plan will help you create a spending plan based on your current assets. It will also recommend an appropriate asset allocation and risk tolerance level in hopes of maximizing your return.

So, go ahead, buy the latte and enjoy your life!

A nickel ain’t worth a dime anymore. –Yogi Berra

February 14, 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. Happy Valentine’s Day!

 

 

 

[1] http://fortune.com/2019/01/16/john-bogle-vanguard-founder-created-index-funds-dies-89/, by Kevin Kelleher, 1/17/2019

[2] https://www.investopedia.com/articles/financial-advisors/012716/where-does-john-c-bogle-keep-his-money.asp, Richard Best, 4/26/2018

Better Off Dead?

Dr. Daniel Crosby is the author of The Behavioral Investor. In his book he highlights a story about Fidelity Investments and their attempt to identify their best performing retail accounts. They found that the individuals who owned these accounts had forgotten they existed, or the original account owner had passed away.[1] Fidelity was probably looking for an investment theme to duplicate. However, they discovered that these accounts weren’t being traded or tainted by human hands – living or deceased.

He tells of another story from the book Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory written by Greg B. Davies and Arnaud de Servigny. The authors discuss a study about how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[2]

Stocks have never lost money during a rolling 20-year period according to multiple studies. From 1926 to 2018 there have been 74 rolling 20-year periods and stocks have made money 100% of the time.[3] The most recent period, 1998-2018, finished with a positive return. An investment in the SPDR S&P 500 ETF (SPY) on 1/1/1998 generated an average annual return of 7.10% through 1/1/2018. However, during this 20-year period you would’ve experienced significant losses on several occasions. From 2000 to 2002 the market fell 43.07% and in 2008 it dropped 36.81%. As I mentioned, if you checked your balances daily, your chance of a realized loss was high.[4]

It’s hard to ignore your accounts especially if you’re connected to Twitter, Facebook, and other social media sites. Custodians and brokerage firms also have apps allowing you to check your accounts 24/7. Investment firms offer trading alerts and other notices to keep you in the know. It’s a fast-paced world and reacting to headline news stories may wreak havoc to your long-term wealth.

To protect your wealth from irrational reactions turnoff your account alerts and notices. Rather than reviewing your balances daily, try extending it to a month, then three months, and so on. Extending the time frame for reviewing your accounts will reduce your anxiety and potentially increase your returns.

You don’t have to die to generate solid returns. Rather, incorporate a buy and hold investment strategy with a balanced portfolio of low-cost investments. A diversified portfolio of low-cost mutual funds will reduce your dependence to constantly check your accounts. In doing so you’ll be able to enjoy your life while you’re living.

And lead us not into temptation, but deliver us from the evil one. ~ Matthew 6:13

February 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] The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 2673, accessed 2/10/19.

[2] Greg B. Davies, Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory (McGraw-Hill, 2012), p. 53. The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 1423, accessed 2/10/19.

[3] Ibbotson® SBBI® 2015 Classic Yearbook

[4] Morningstar Office Hypothetical – SPY, 1/01/1198 to 1/1/2018.

The Hallmark Channel

The Hallmark Channel has hit the motherlode with their romantic holiday themed movies.  Women of all ages are attracted to their shows, especially women between the ages of 25 to 54. My wife is a huge fan of their movies, especially during the Christmas season. She says, “I love a good love story, they make me laugh and feel good.” She adds, “The women are often portrayed as positive female role models in the workplace and the men are nice guys who respect women.”

Their movies follow a predictable pattern. A snowstorm or some other event brings a man and woman together in a bucolic setting straight from a Norman Rockwell painting.  At first, there’s no connection between the two, but through a series of events the couple gets together and fall in love at the end of the movie – usually in the last 5 minutes.  In addition to being predictable, the movies are safe to watch with the entire family without any hidden surprises. It’s wholesome entertainment and they have no desire to lower the bar by adding R-rated material or foul language. They know their target audience well.

One of their more popular shows was Christmas Under Wraps starring Candace Cameron Bure. She was about to receive a prestigious fellowship before taking a job as a doctor in a small Alaskan village. Ms. Bure has appeared in several Hallmark movies, as have many of their cast members including Meghan Markle, the Duchess of Sussex.

But does their model work? In 2017 they generated $390 million in ad revenue from the Hallmark Channel. The movies and mysteries added another $146 million – that’s a lot of love! The HBO channel spends about $10 million to $15 million to produce one of their shows; Hallmark spends about $2 million. In 2017 they were expected to draw 85 million viewers and since 2008 they have made 136 original movies.[1] The shows are economical to produce, and they generate a lot of revenue

Investors would be wise to follow Hallmark’s blueprint for success. They focus on predictable content, steady actors, minimal locations, and sensible budgets.

How can you write an investment script to stand the test of time? Here are few thoughts.

  • Develop a financial plan. Your financial plan will direct your investments, asset allocation, risk tolerance, goals, timeline, etc. It will be your guide.
  • Diversify your portfolio with a basket of low-cost mutual funds or exchange traded funds. Funds managed by Blackrock, Dimensional or Vanguard are solid candidates for your portfolio. A portfolio of large, small and international stocks will give you global exposure. Adding bonds to your account will reduce your risk.
  • Stay invested. The less you trade, the better. If you trade often, you’ll end up paying excess fees and missing key market moves. For example, traders who moved to cash in December because of the drop in the stock market, missed the surge in January. A buy and hold strategy will allow you to create wealth over time.
  • Rebalance your accounts once or twice per year. Keeping your asset allocation and risk tolerance intact is key to your long-term success as an investor. If you start the year with 60% stocks, 40% bonds and by the end of the year your allocation is 70% stocks, 30% bonds, then sell 10% of your stock holdings and buy bonds.
  • Work with an advisor. A registered investment advisor (RIA) who holds the Certified Financial Planners designation can work with you to develop your financial plan, implement your investment strategy, and keep you focused on your financial goals.

A buy and hold strategy with low cost investment funds based on your financial plan and asset allocation is safe and predictable. It’s a G-Rated strategy that’s appropriate for investors. And, who knows, you may fall in love with your long-term results!

Do everything in love. ~ 1 Corinthians 16:14

February 4, 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. I like the Hallmark Channel too – but don’t tell anybody.

 

[1] https://www.marketplace.org/2017/12/27/life/christmas-movies-netflix-hallmark-channel-prince-numbers, by  Jana Kasperkevic, 12/27/2017

Capitalism Wins

Henry Ford is credited with revolutionizing the auto industry and was on the forefront of innovation by creating the assembly line. He paid his employees $5 per day so they could purchase the cars they were manufacturing. He once said, “If I had asked people what they wanted, they would have said faster horses.” Mr. Ford’s net worth was about $200 billion. Capitalism allowed him to create great wealth.

Billionaires and the uber-wealthy are under attack by Elizabeth Warren, Bernie Sanders, and Alexandria Ocasio-Cortez.  Ms. Warren is calling for a tax of 2% on wealth from $50 million to $1 billion and 1% above $1 billion.  Ms. Ocasio-Cortez is suggesting a top tax rate of 70%.  Mr. Sanders wants an estate tax of 77% for estates north of $1 billion. He’s also proposing a 45% tax for estates with assets more than $3.5 million. When fisherman cast a wide net, they catch big and small fish.

Apple, Amazon, Ford, Facebook, Google, McDonalds, Microsoft, Nike, Starbucks, and Walmart were all founded by one or two people. These ten companies started with an idea from their founding fathers who weren’t billionaires at the time. Today these ten companies employ 3.7 million people.

Let’s do a deeper dive into these 3.7 million people. I’m assuming 75% of them are married and half the couples have two children. I arrive at 10.1 million people with my math. I’m also going to assume half of this population works and earns $100,000 per year. So, as a group, they’ll earn $506 billion per year. The average tax rate for this cohort is 22%. At 22%, they’ll pay $111 billion in taxes! Over the course of a decade they’ll pay more than $1 trillion in taxes. I’m not sure how many people Ms. Warren employs, but I’m positive they don’t pay $111 billion in taxes.

Furthermore, these 10.1 million people need services. They need teachers, doctors, real estate agents, insurance agents, bankers, grocers, plumbers, gardeners, bus drivers, electricians, painters, roofers, veterinarians, nurses, dentists, lawyers, accountants, dry cleaners, mechanics, architects, builders, engineers, librarians, florists, morticians, police officers, fire fighters, ambulance drivers, paramedics, military personnel, pilots, travel agents, butchers, bakers, and candlestick makers.

These billionaire’s employ thousandaire’s. On a recent Mad Money episode with Jim Cramer, Ms. Warren called for billionaires to “Stop being freeloaders.” Bill Gates doesn’t fit the description of a freeloader to me, but I could be wrong.

I’m not opposed to paying taxes and I believe everybody should pay their fair share. In fact, so does Jesus. Mark 12:17 says, “Give to Caesar what is Caesar’s and to God what is God’s.”

The individuals who founded these ten companies are also philanthropically oriented and they’ve established the following organizations: Bill and Melinda Gates Foundation, Bezos Family Foundation, The Brin Wojcicki Foundation, Carl Victor Page Memorial Foundation, Chan Zuckerberg Initiative, Emerson Collective, Ford Foundation, The Joan B. Kroc Foundation, Knight Foundation, Schultz Family Foundation and the Walton Family Foundation. These charitable organizations are armed with billions of dollars to make our world better by focusing on education, healthcare, the environment, and several more causes. They also employ thousands of people.

Our capitalist structure gives everybody an opportunity to succeed. People living in Afghanistan, Haiti, and Venezuela will never have this experience.  Socialists suck resources out of their citizen’s pockets. Margaret Thatcher said, “The trouble with Socialism is that eventually you run out of other people’s money.”

Animals are hypersensitive to danger and activate their fight or flight response often. The gazelle knows when the cheetah is lurking.  Billionaires and other wealthy individuals will defend their wealth by moving money overseas, changing residences, or creating trusts. On paper, they’ll look like paupers. They won’t wait around to be eaten by the government if the attack on their wealth begins. When the wealthy move and take their business with them what will be left? Venezuela? Ayn Rand captures this sentiment in her best-selling novel Atlas Shrugged.

If you want to protect your wealth or help others, here are a few strategies you can employ.

  • Charitable Remainder Trust (CRT)
  • Annual Gift Exclusion
  • Charitable Lead Trust
  • Donor Advised Fund
  • Family Limited Partnership
  • Grantor Retained Annuity Trust (GRAT)
  • Life Insurance Trust (ILIT)
  • Private Annuity
  • Revocable Family Trust

My great-grandparents migrated to Los Angeles from Mexico in the early 1900s. My grandfather told me repeatedly they didn’t have a pot to piss in, they were poorer than poor. He came of age during the Great Depression. He was a good student and wanted to attend Stanford, but his family couldn’t afford it, so he went to work instead. When he was 50 years old, he started his own business and was financially successful. If you’ve ever eaten at a fast food restaurant or enjoyed a bag of chips, you’ve benefited from his handywork. At his death, he gave his wealth to two colleges in Southern California for perpetual scholarships. His gift allows students without resources to obtain a college degree, one of the few things missing from his resume.  Capitalism allowed my grandfather to create great wealth.

Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler. ~ Proverbs 6:5

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.