Predators

According to the African Wildlife Foundation, the lion population has declined 43% in the last two decades, and approximately 23,000 remain on the continent.[1] Other animals that face extinction are the Bengal Tiger, Northern White Rhino, Clouded Leopard, Scalloped Hammerhead Shark, and the Red Wolf.[2] Sadly there are over 41,000 species on the extinction list, and another 16,000 that are considered endangered.[3] From bees to zebras, animals are disappearing at an alarming rate.

Six of the eight species of bears are on the endangered list. Polar and panda bears are considered vulnerable.[4]

Predators are needed to maintain order in the ecosystem. A world without predators sounds nice, but it causes other problems. New Zealand wants to eradicate their predators by 2050. Stoats and ferrets aren’t native to the island, and they’ve been eating the Kiwi – the bird, not the fruit – at an alarming rate.[5] The Stoat and ferret don’t have any predators.

Bulls and bears dominate the stock market. Bulls represent a rising market, bears a declining one. Bullish traders expect the market to rise while bearish traders expect it to fall. Bulls are usually more optimistic than bears.

Can the stock market survive without bears? Wouldn’t the market be better off if everybody was bullish or optimistic? I don’t think so. Bears are needed to maintain order and balance in the marketplace. I believe their job is to identify problems, poke holes in rosy forecasts and look for accounting issues in financial statements.

Citigroup publishes the Panic/Euphoria index weekly. The chart ranges from positive .6 – euphoria to negative .9 – panic, but most of the time, the readings fall between .3 and -.3. When the indicator approaches .3, the market has risen substantially, bulls are winning, and investors are feeling euphoric, so it’s due for a sell-off. Conversely, when it drops to negative .3, investors are panicking, bears are winning, and the market is due for a rebound. Last December the indicator traded below -.3 as stocks were falling and then the market went on a terror, rising more than 27% during the next seven months. When Citigroup’s index trades to extremes, the market’s ecosystem is out of balance.

Jim Chanos is a famous short seller and one of the early bears to attack Enron. The accounting didn’t add up, so he shorted the stock in late 2000.  Enron declared bankruptcy in December 2001 – a good call by Mr. Chanos.

John Hussman, Ph.D., manager of the Hussman Funds, is expecting a market loss “on the order of 60-65%” based on his analysis of current market conditions.[6] The Hussman Strategic Growth Fund (HSGFX) has a 10-year average annual return of -7.46%. A $10,000 investment in 2009 is now worth $4,599. The S&P 500 Index returned 14.3% per year over the same time frame. A $10,000 investment in the index is now worth $30,870.

Harry S. Dent, Jr. is calling for the “biggest crash ever” coming by 2020. Mr. Dent is the author of The Roaring 2000s published in 1998 and The Great Depression Ahead published in 2009. The exact opposite happened for both books. If he had reversed the order of his books, he’d be an investing legend.

I’m habitually bullish on stocks because, on average, they’ve risen three out of every four years, and they’ve generated an average annual return of 10% for the past 93 years. However, I do read bearish reports to give me a perspective on what others are thinking. Negative outlooks and forecasts keep me in check. The bearish reports force me to ask, “What am I missing?”

If there are no predators, the ecosystem will get out of balance – in nature and the markets.

Life, uh, finds a way. ~ Ian Malcolm, Jurassic Park

July 29, 2019

Bill Parrott, CFP®, CKA® 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. Our firm does not have any asset or fee minimums, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

[1] https://www.awf.org/blog/recovering-africas-lost-lion-populations, March 2, 2018 by Jimmiel Mandima

[2] https://awionline.org/content/list-endangered-species#mammals, website accessed July 29, 2019

[3] http://www.endangeredearth.com/, website accessed July 29, 2019

[4] https://seethewild.org/bear-threats/ website accessed July 30, 2019

[5] https://www.kiwisforkiwi.org/about-kiwi/threats/predators-pests/mustelids/ website accessed July 30, 2019

[6] https://www.hussmanfunds.com/comment/observations/obs190714/, John P. Hussman, Ph.D., July 14, 2019

Does Age Matter?

Bloomberg recently published an article titled: The Old Rules for Building Wealth Are Obsolete. It highlights a few prominent financial advisors who target millennials. My take on the article is that older planners don’t understand younger clients. One advisor said, “Do you think someone’s going to tell some 65-year-old white dude, ‘Hey, we’re having trouble getting pregnant, can we take $20,000 out of savings?’’ She said, “They Won’t.”[1] Listening to the client, assessing their situation, and implementing their plan is universal – regardless of the age of the client or the advisor.

I was 24 when I started in the investment business. My friends and I didn’t have any money. We were concerned about paying down debt, getting married, raising kids, buying homes, and advancing our careers. We were struggling to save $50 a month, and we never talked about retirement. We had millennial-type issues.

Clients feel more comfortable working with advisors who think and act as they do, so it’s not surprising that younger clients want to work with younger advisors. My first branch manager told me clients gravitate towards advisors in whom they have much in common. My initial clients were in their 60s, 70s, and 80s primarily because I prospected with tax-free municipal bonds, a popular investment among people with assets. After obtaining a new client in his mid-80s, an “older” broker of 50+ approached me to see if I needed help. He was concerned I wouldn’t be able to handle the account because I didn’t understand the individual’s needs. I didn’t take him up on his offer.

If age is the key component for a client-advisor relationship, then boomers will work with boomers and millennials will work with millennials, and so on. Thankfully, this is not the case. Advisors most likely work with a slice of each cohort.

Unfortunately, the financial planning industry does have an age and diversity problem. It’s an industry dominated by older white males. 77% of Certified Financial Planners® are male[2] , and the average age is 50, while 11.7% of advisors are under the age of 35.[3] According to the Bureau of Labor Statistics, 86% of individuals working as a personal financial planner are white.[4]

I welcome the youth movement for the profession, maybe because I started in the business at a young age. When I talk to students, young professionals, or youth groups, I encourage them to explore the industry as a career choice. Colleges and universities have been offering degrees in financial planning for a few years. Schools like Texas Tech and Texas A&M are producing extraordinary financial planner graduates – a boon for the profession.

Next year I’ll be the president of my local financial planning association, and my mission is to expand our Women’s Initiative program and NexGen platform. Our women’s initiative is strong and robust; NextGen needs some help. I’m hopeful these two groups will flourish in our chapter for years to come. Our chapter does have a growing presence among women, minorities, and millennials. Two of our past five presidents have been African American women.

Financial planning and investment advice have always focused on relationships and trust. A good advisor will listen to a person’s needs, assess their situation, and give guidance. More importantly, they put the interest of their clients first and act in a fiduciary capacity. These old rules will never be obsolete.

Financial planning is life planning, and life is constantly changing. The young will grow old. Their wealth will increase. Their needs will change. My friends and I are much older now, and we’re concerned about retirement, helping our children launch their careers, worried about our aging parents, and giving back to our communities. The circle of life marches on; I doubt it will change soon.

Maybe I’m an old curmudgeon, but I still believe the planning and wealth management rules of yore still work today. Financial planning should be agnostic to income, age, race, gender, etc. It should be available to those who want or need help – based on trust and understanding.

Don’t let anyone look down on you because you are young, but set an example for the believers in speech, in conduct, in love, in faith, and in purity. ~ 1 Timothy 4:12

Wisdom is with the aged and understanding in length of days. ~ Job 12:12

July 25, 2019

Bill Parrott, CFP®, CKA® 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. Our firm does not have any asset or fee minimums and we work with anybody who needs financial help regardless of age, income or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] https://www.bloomberg.com/news/articles/2019-07-24/how-to-build-wealth-prepare-for-retirement-when-you-re-young, Suzanne Woolley, July 24, 2019

[2] https://www.cfp.net/news-events/research-facts-figures/cfp-professional-demographics

[3] https://retirementincomejournal.com/article/babybust-only-11-7-of-financial-advisors-are-under-35-cerulli/, Editorial Staff, March 8, 2018.

[4] https://www.carsongroup.com/insights/blog/advisors-face-a-diversity-problem/, Cameron Carlow, February 21, 2019

Working Forever

I’m going to work forever, never retire. I love my job, I like my clients, my commute is less than four minutes, and my office is air-conditioned with high-speed internet. What could be better? When I tell people I’m going to work forever, they think I’m crazy. Likewise, when I meet someone who’s going to retire early, I think they’re crazy. There’s probably a happy medium in there somewhere.

My movement is going to be called FINR (Finer): Financial Independent Never Retire, the opposite of the FIRE movement, Financially Independent Retire Early. Individuals who adhere to the FIRE movement save an excessive amount of their income so they can retire early.

Of course, if you’ve saved up enough money to retire early, go for it. If you want to work forever, knock yourself out. It’s your money. Someone once told me: “It’s my money; I can do whatever the hell I want with it.” If you have enough resources to cover your expenses for the rest of your life, then you can do whatever you want.

Several high-profile people are still working, or they never retired. Warren Buffett is 88 and his partner, Charlie Munger, is 95. Mother Teresa worked until the end. I’ve searched the Bible for the word retirement, and it doesn’t exist.

What are some advantages to working forever? Here are a few:

  • Live Longer. According to a Harvard Medical School study, they found that individuals who work longer also live longer and are in better health than those who retire early. They site physical activity, mental stimulation, and social engagements as key reasons.[1]
  • Delayed Social Security. Working longer will allow you to defer your Social Security benefits to age 70. You’re eligible to receive your benefits at age 62. For every year you defer your benefit, you’ll get an 8% raise. For example, at age 62, you may receive $21,475 per year, but if you wait until age 70, you’ll get $39,750.
  • No RMD’s. Working past age 70 will allow you to defer your required minimum distributions for the money in your 401(k). You’re still must take your RMD from your IRA if you work beyond age 70, however.
  • Save less. The longer you plan to work, the less money you need to save monthly. If your goal is to save $1 million in 10 years, you need to save $6,440 per month. Expanding your time horizon to 50 years means you only need to save $375 per month. Of course, you’ll never know when, where, or why you’ll need money, so save as much as possible today.
  • Give more. Working longer will allow you to give more money away through employee and employer contributions without dipping into your principal or savings.
  • Healthcare benefits. One obstacle to early retirement is paying for healthcare. Retiring before age 65 will force you to purchase private healthcare insurance — an expensive expense. Working beyond age 65 will allow you to use your employer’s health benefits.

Working longer doesn’t mean you have to forego living. I’ve seen most states and visited several countries. My family and I take vacations every year, and we enjoy hobbies. I still hike, bike, fish, run, read, and so on. Working hasn’t hindered our ability to enjoy life.

The end is inevitable Maverick; your kind is heading towards extension. Maybe so, sir, but not today. ~ Top Gun Maverick 2020 Movie Trailer.

July 20, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] https://www.health.harvard.edu/staying-healthy/working-later-in-life-can-pay-off-in-more-than-just-income, Published June 2018, website accessed July 20, 2019.

All Time Highs!

A record number of climbers reached the peak of Everest this year. In fact, it was so crowded that climbers had to wait in a long line to reach the summit and the approach to the peak was described as a “traffic jam.”[1] A climber spends about two months getting acclimated to the elevation before they start their ascent to the highest point on earth.[2] After a few minutes at the top snapping a few selfies to capture the view they’ll start descending to base camp. A slow climb to the top, a faster descent home.

This past week the S&P 500 hit an all-time high of 3,013. It’s been a long, slow ascent for the index to reach its current peak. In 1998 it crossed 1,000 for the first time. It broke through 2,000 in 2014. Fifty years ago, it was at 92. When I started in the business it was 330 and the Dow Jones was trading below 3,000!

The rise from 92 to 3,000 hasn’t been straight up, of course. During the Great Depression the index produced a return of .6% per year (1929 – 1943). In the decade of the ‘70s it rose 15 points, or 1.5% per year. It fell 42% from August 2000 to September 2002. It cratered 46% from October 2007 to March 2009. Despite these rough patches, the index managed to generate an average annual return of 10% dating back to 1926.

What now? Will the S&P 500 fall back to earth? Will it dip or dive soon? Who knows? I’m sure it will be as volatile as it has been in the past. When it does drop, use it as an opportunity to buy a few quality stocks or funds. Buy the dip, historically, has been good advice.

If you’re concerned about a descent from the ascent, here are a few strategies you can incorporate today to protect your assets.

  • Take some gains and sell your stocks. Locking in a profit never hurts. You can sell your winners or losers to raise cash. Ideally, you’ll want to sell your winners in a tax deferred account like an IRA and sell your losers in a taxable account for the tax write off. Regardless, selling stocks to raise cash makes sense if you’re concerned about a drop.
  • Buy bonds. Buying bonds yielding 1% to 2% sounds boring. It is. Bonds reduce risk and volatility in your account. During times of duress, however, you’ll be glad you own bonds. In the drops I mentioned above, bonds performed well. During the Great Depression, long-term government bonds averaged an annual return of 4.3% (1929 – 1943). During the ‘70’s they averaged 5.5%. In 2000 bonds rose 21.5% and they climbed 25.9% in 2008.
  • Buy puts. Use put options to hedge your portfolio for short term moves. Options are used to protect individual positions like Amazon or indices like the S&P 500. This strategy is expensive, so use it sparingly. Let’s look at a put option for Amazon. Amazon is currently trading at $2,012. Buying the August 16, 2019 $2,010 put option will cost $6,155 for every 100 shares you own. If Amazon falls below $2,010 on, or before, August 16 you may profit on your trade. If Amazon stays above $2,010, you’ll lose 100% of your investment. If a short-term option strategy is too risky, you can extend the maturity date. For example, the January 17, 2020 $2,010 put option will cost $13,410. Still expensive and risky. To employ this strategy only work with an advisor who is well versed in trading options.
  • Do nothing. Be still and let your stocks run. Trying to time the market may cost you more than a market correction. Over time, a buy and hold strategy performs well. A recent study by Dimensional Fund Advisors highlights this point. From 1926 to 2018, they found the market is significantly higher after a market reaches a new high. According to their study, the market is 14.1% higher one-year after reaching a new high. The three-year average is 10.4% and the five-year average is 9.9%.[3] Don’t sell your stocks If your only reason to sell is because the market has reached a new high.

Everest will always be there and so will the stock market. Unlike Everest, the S&P 500 can continue to soar to new heights – without limit. I’m not sure what the market will do in the next few months, but I’m convinced it will be significantly higher 50 years from now. My recommendation is to stay the course and enjoy the view.

I lift up my eyes to the mountains – where does my help come from? ~ Psalm 121:1

July 13, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

[1] https://www.washingtonpost.com/world/2019/05/24/mount-everest-has-gotten-so-crowded-that-climbers-are-perishing-traffic-jams/?utm_term=.6d6dd10799e9, May 25, 2019 by Siobhan O’Grady

[2] https://www.nepalsanctuarytreks.com/how-long-does-it-take-to-climb-mount-everest/

[3] file:///C:/Users/parro/Downloads/Timing%20Isn%E2%80%99t%20Everything.pdf, July 2019

Call an Expert!

It was time to upgrade my laptop because my old computer was starting to show its age. I did my homework by comparing models, prices, warranties, etc. I had a working knowledge of computers and knew what I was looking for, so I didn’t consult anyone about my purchase.

After my due diligence was done, I purchased a brand name computer from a big box retailer. I spent one Saturday afternoon transferring the data to my new laptop. The transfer was easy and seamless. I was ready to go. However, my computer wasn’t. It was extremely slow. I was frustrated and upset at the lack of response from my new system, but I was going to give it a couple of days to see if it improved. No luck. The speed never increased, and the performance lagged my old computer. Most of my software systems were running at less than optimal performance.

I vented to my wife. She listened, for a while, and then told me to call an expert.

A few days later I contacted an IT expert to help me trouble shoot my system. The first thing he did was check the speed of the CPU. He showed me my CPU’s speed relative to others, and it was close to last, if not dead last. My computer would never be fast. Thankfully my purchase was still under warranty, so I returned it.

With the help of my IT consultant, we picked a new computer based on my needs. My new computer is smaller, lighter, and faster than my previous one. It works like a charm. Had I hired him prior to my first purchase I would have saved a lot of time, hassle and money.

Individual investors should hire an expert as well. Regardless if you’re a do-it-yourself investor or someone who has no interest in managing money, a professional can potentially help you improve your financial situation.  We can all use a little help.

Here are a few ways a Certified Financial Planner® can help you with your finances.

  • Budgeting
  • Financial Planning
  • Retirement Planning
  • Estate Planning
  • Education Planning
  • Special Needs Planning
  • Investment Advice
  • Investment Selection
  • Asset Allocation Models
  • Asset Management
  • Business Valuations
  • 401(k) Guidance
  • Cash Flow Planning
  • Charitable and Philanthropic Planning
  • Income Distribution
  • Required Minimum Distributions
  • Social Security Optimization
  • Beneficiary Updates and Reviews
  • Debt Management
  • Equity Compensation Analysis
  • IRA Rollovers
  • Life Insurance Analysis
  • Long-Term Care Insurance Analysis
  • Asset Protection
  • Risk Management
  • Fee Analysis
  • Second Opinions

This list gives you a good idea of the services provided by a Certified Financial Planner.® In addition, most planners have access to CPA’s, attorneys, mortgage brokers, bankers, and other professionals who can help you with most of your planning needs. Give us a call. Don’t go it alone!

for by wise guidance you can wage your war, and in abundance of counselors there is victory. ~ Proverbs 24:6

July 11, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

Can I Get A New Toy?

On a recent trip to Target I heard several kids asking their parents if they could buy a toy, a shirt, a game, and so on. The kids were relentless in their pursuit of acquiring something, anything. Their parents were equally relentless in the denial of their children’s wants. This is a battle that will be waged for years to come.

My daughter wasn’t immune to acquiring new toys. She had a strong desire to own as many My Little Ponies and Breyer Horses as she could. Her mom and I had to tell her no quite often. When she’d get upset, we called it the Green-Eyed Monster from the Bernstein Bears Book: The Bernstein Bears and the Green-Eyed Monster.

When she was five years old, we gave her a weekly allowance of $1. When she received her first dollar, she wanted to visit the toy store to buy a very large Breyer Horse. I knew how this was going to turn out as her dollar was going to fall about $45 short of her goal. She was not going to be happy. When we arrived at the toy store, she pointed to the horse she wanted to buy and together we looked at the price tag – instant tears. She was upset because she couldn’t buy the horse, and, worse, it would take her months to save enough money to buy it. It was a great learning experience.

Her allowance taught her how to save money for buying things she wanted. More importantly, she stopped asking us if she could get a new toy every time we went shopping. If she had the money, she could buy what ever she wanted. In addition to saving her money, she started to give some of it away to her Church. She was learning the gifts of saving money, living within her means, and giving money away to help others. As a young adult, she has kept these important habits.

Here are a few suggestions to help you turn your child into a super-saver and smart spender.

  • Give them an allowance. A few dollars a week will allow them to start saving money and give them a sense of ownership.
  • Establish a savings account. It’s easy to open a savings account. Since they’re young, you’ll need to be listed on the account as well. They will, or should, get excited to see their account balance grow. I still remember my first savings account at a local bank, I was thrilled to see it climb above $60.
  • Let them spend their money. If they have $50 in their wallet, let them spend $50 at the store. At some point, they’ll get tired of spending their own money on things that won’t last. It will also be painful for them to see their bank account get depleted.
  • Encourage them to give money away. Let them decide on how best to donate their money. They can decide when and where it makes sense to help others. The joy of giving brings happiness to all.
  • Teach them to invest. After they have saved a few dollars, teach them how to buy a stock or mutual fund. Let them identify a few companies they have an interest in owning like Apple, Facebook, Coke, Pepsi, McDonald’s, etc. They’ll take pride in their ownership. They’ll also learn about the stock market, the economy, and investor behavior.
  • Invest for growth. Young investors should invest 100% of their funds in stocks or growth-oriented investments.
  • Open a Roth IRA. Once your children start working and earning income, open a Roth IRA. A summer job might pay them a few thousand dollars, so contribute a portion of their salary to a Roth. Kids can invest 100% of their income or $6,000, whichever is less, per year to an IRA. Contributing to an IRA at age 18 will pay huge dividends when they get older. In fact, your kids can let their money grow tax-free for more than 50 years! Investing $1,000 per year in the Investment Company of America Mutual Fund (AIVSX) for 50 years is now worth $2.14 million![1] Not bad for a summer job.

It’s unlikely your five-year-old will ask you to open a Roth IRA or set up a dollar cost averaging program. However, giving your child money to spend, save and give away will establish lifelong benefits. It will change their narrative and make your trips to the store more enjoyable.

Don’t let anyone look down on you because you are young, but set an example for the believers in speech, in conduct, in love, in faith and in purity. ~  1 Timothy 4:12

July 9, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

[1] Morningstar Office Hypothetical: June 30, 1969 to June 30, 2019.

Stocks or Funds?

Is it better to buy individual stocks or mutual funds? It depends, of course, on several factors like how much to invest or how much risk you’re willing to take. If you have a high tolerance for risk and millions of dollars to invest, you may be a good candidate to own individual stocks. If you only have $1,000 to invest, a mutual fund is a better option.

When building a portfolio for your future focusing on your goals will help you determine the best strategy. How much to invest? What is your tolerance for risk? How involved will you be in managing your assets? How much time will you commit to researching new investment ideas?

A portfolio of 30 individual stocks or more is recommended for a diversified portfolio.[1] A report on Morningstar’s website suggests 18 to 20 names.[2] When individuals pick their own stocks, they focus primarily on large companies with brand name recognition like Apple, McDonald’s, or Pfizer. Few investors add small or international stocks to their portfolio.

RiskAlyze® helps investors and advisors quantify risk. The risk score for the S&P 500 is 74 on a scale of 1 to 99. A T-Bill, by comparison, has a risk score of 1. I sent a list of 20 large-cap companies to a client for review. The risk profile for the portfolio was 73, or 1 point lower than the S&P 500 Index. If the risk levels are similar, why not buy the index? The Vanguard S&P 500 fund owns 500 companies with exposure to every sector; it’s also cheaper than buying 20 individual stocks.

What about the FAANGs – Facebook, Amazon, Apple, Netflix and Google? Yes, if you owned these 5 stocks you destroyed the S&P 500 over the past 5 years. The FAANG portfolio soared 272%, bettering the S&P 500 by 205%!  How do you identify these companies in advance? The best performing stock in the S&P 500 index this year is Xerox, a stock that has underperformed the market by more than 100% for the past 10 years. Last year it dropped 30%. Xerox was probably not on your radar screen. The other stocks rounding out the top ten are Cadence Design, Advanced Micro Devices, Chipotle, MSCI, Anadarko Petroleum, Total System Services, Synopsys, Global Payments, and DISH Network. These 10 stocks have outperformed the FAANGs by 33% this year! Finding consistent winners to beat the market each year is tough – if not impossible.

Investing in large companies with brand name recognition makes sense on the surface, but it ignores a fair chunk of the global market. Vanguard’s Total World Stock fund invests 73% of its assets in large-cap stocks with 57% allocated to the United States. An all large-cap U.S. portfolio ignores bonds, small companies, real estate, gold, and international investments.

Picking individual stocks also takes time. An hour per stock, per week has been suggested. If you own 20 stocks, you’ll need to set aside 20 hours per week for research. Can you commit 20 hours per week to review your portfolio?

For most investors a globally diversified portfolio of low-cost mutual funds based on your financial goals is the best path to take.

Diversification is your buddy. ~ Merton Miller

July 5, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

[1] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, Jason Whitby, June 25, 2019.

[2] https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

The 4th of July

Today is July 4th, Independence Day. Our great country is 243 years old. I have fond memories of block parties, barbeques, beach trips, and firework shows all celebrating the 4th.

The Declaration of Independence is an incredible document crafted and signed by our founding fathers. Written to stand for generations, it’s still going strong. The authors represented the original thirteen colonies who were ready to declare their freedom from British rule and join the Union. John Hancock said, “We must be unanimous; there must be no pulling different ways; we must hang together. Matthew 12:25 states, “Every kingdom divided against itself will be ruined, and every city or household divided against itself will not stand.”

The Constitution sets the foundation for our country and guides our steps, a great basis for democracy. E.B. White said, “Democracy is the recur­rent suspicion that more than half of the people are right more than half of the time.”

The Bill of Rights include the first ten amendments like the right to free speech, the right to bear arms, and the right to trial by jury. Amendments to the constitution have made it a stronger document. Abolishing slavery and giving women the right to vote are two that stand out. Thomas Jefferson said, “A Bill of Rights is what the people are entitled to against every government, and what no just government should refuse, or rest on inference.”

These three documents are the ultimate in planning documents. The original architects had the foresight and wisdom to think generationally. Were they thinking about you and me when they wrote it? Could they have envisioned Twitter, Facebook, Instagram and Snapchat when they wrote the first amendment?

The best, and hardest, part of the constitution is that we do have the right to free speech. Regardless of your religious or political beliefs, you’ll probably upset 50% of the people you know with your comments or posts. If you need proof, read comments on any Twitter thread. I don’t agree with all the people I follow online, but it does give me a perspective on what others are thinking. A healthy debate about issues is encouraged. Noam Chomsky added, “If we don’t believe in freedom of expression for people we despise, we don’t believe in it at all.” The Bible also has a view, “Love your neighbor as yourself.”

I do get upset when people complain about America. It frustrates me when they won’t stand for our National Anthem or attack (physically and verbally) our military personnel or first responders. My take on people who are disgusted with America have never lived in North Korea, Iraq, Venezuela or Sierra Leone. They probably have never set foot in Nicaragua, Haiti or Uganda. Our country isn’t perfect, nothing on Earth is, but it’s better than most.

These documents have survived dark times in our country like the Civil War and Civil Rights, but it has been there for the good times as well like creating our National Parks and giving us the right to vote.

If you’re looking for documents to follow for producing your financial plan, look no further than the Declaration of Independence, Constitution, and Bill of Rights. They were created to last forever, cross generations, and withstand multiple attacks.

Your financial plan should be designed to last generations as well. Is it written to protect your family members 243 years from now? Are you investing for future generations? The Constitution has been amended several times. It started with 10, it now has 27. Amendments are needed to accommodate for changing times. Your plan should be amended as needed. A rigid plan will not stand. Flexibility is a key ingredient for survival.

Anyways, that’s all I’m going to say about that. Happy 4th of July!

You will never know how much it has cost my generation to preserve YOUR freedom. I hope you will make a good use of it.” ~ John Adams

July 4, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

The Trailhead

I just returned from Colorado where I spent a week riding horses and hiking in the Rocky Mountain National Park. One of my hikes was to the summit of Estes Cone. It’s considered a strenuous hike with an elevation gain of 1,800 feet or 551 feet per mile.[1]

Most trails are well marked from the beginning including the trail for Estes Cone. The trailhead for our hike was the Longs Peak trailhead. Longs Peak is the ultimate hike in the park and someday I’ll hike it, maybe. Our group was initially stuck at a fork in the road before we referenced our trail map. After a brief detour, we were back on the trail.

The trailhead is often the best place to start when you go hiking.  It would be helpful if there were financial trailheads for individuals who want to save money, create a budget or pay off debt, but there isn’t, at least not one for everybody. Even though there isn’t a single map for financial success, others have left clues and markers to help you reach your financial goals. Here are a few suggestions.

Start. Hikers start at the trailhead because it’s usually the lowest point on the trail. Start by setting a few short-term goals like opening a savings account, paying off a credit card, or creating a budget. It’s okay to start small. A little nudge might be all you need to get moving.

Orient. When hikers reach the trailhead, they orient their compass to the summit and trail map. The map and compass will guide them to their goal. Likewise, your financial goals will help you orient your path. Well defined goals are needed for financial success.

Gear. Hikers love gear – shoes, packs, knives, poles, etc. These items are essential for a successful hike. Investors need quality gear as well. Financial software can make your life easier. Today you can find software for any scenario like financing college, paying off your mortgage, buying life insurance, or leasing a car.  These tools will help you get your financial house in order.

Guide. Our hike was led by one of the ranch hands where we were staying. He knew the trail and led us to a successful hike. We could have hiked without a guide, but it may have taken us longer to reach the top. To increase your chance of obtaining your goals consider hiring a Certified Financial Planner® who can help you guide your financial steps. A CFP® professional is trained to handle a multitude of investment and planning scenarios.

Valleys. Some trails will take you through a valley before you reach the summit. When you enter a valley, it might not feel like you’re going to reach your goal, but if you stay on the trail and follow your map, you’ll reach the summit. Markets will take you deep in the valley at times in the form of corrections or pullbacks. During these down days stay true to your financial path and don’t panic. Market corrections are normal and short-term in nature.

Obstacles. Trails can be besieged with rocks, trees, shrubs or water. If you’re not paying attention to your steps, you can trip and tumble. A hiker in our group referred to this as the “tuck and roll.” Staying focused on your financial goals is paramount so don’t get distracted by taking your eyes off your goal.

Rest. It’s okay to stop on the trail to catch your breath, drink some water, grab a snack and check your bearings. In fact, it’s recommended. It’s also recommended to review your accounts often to make sure they’re performing to your satisfaction. Reviewing your asset allocation, risk level, and performance will help you stay invested for the long haul.  Adjust your portfolio as needed so you can stay focused on your financial goals.

Peaks. The summit is the goal for hikers. The summit for Estes Cone is 11,006 feet. Your summit may be a financial goal you’ve reached. Your peak, or financial goal, will keep you moving forward. If you’ve reached your summit, celebrate.

Hiking is a great activity, particularly in a national park. The challenges of a mountain make for great adventure.

Investing is challenging, but with the right tools and resources you will have an opportunity to reach your financial summit. Climb on!

The mountains are calling, and I must go. ~ John Muir

July 2, 2019

Bill Parrott, CFP®, CKA® 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

[1] http://www.rockymountainhikingtrails.com/estes-cone.htm