Month: October 2019

Are You Emotionally Attached to Your Stocks?

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It’s easy to fall in love with a stock, especially if you handpicked it yourself. Over the years, I’ve talked to scores of investors about their favorite stocks, and most prefer to hold on to them forever regardless of allocation or performance. If you’re emotionally attached to a company, try not to overlook several risk factors.

It’s easy to get anchored to your original purchase price. If your stock falls below your purchase price, you might be reluctant to sell it for a loss for fear of admitting you were wrong. Another challenge for investors is when a stock drops below the all-time high. If it hit the high price once, it must do it again. Of course, it doesn’t have to do anything.

Enron traded at an all-time high on August 23, 2000, closing at $90.75 per share. At its peak, Enron’s market-cap was more than $70 billion, and, at the time, it was the 7th largest publicly traded company.[1] Two years later, it would be worthless. As a comparison, Berkshire Hathaway is currently the 7th largest publicly traded company.

Here are a few companies that are currently trading off their all-time highs: IBM peaked at $215 on March 14, 2013. It’s now trading at $135, down 37%. Boeing peaked at $440 on March 1, 2019. It’s currently trading at $339, down 23%. Tesla traded to an all-time high of $385 on September 18, 2017. It’s currently trading at $328, down 15%. Exxon traded at $104.37 on June 28, 2014, and it is now $69.25, down 34%. 3M sold at $258 on January 26, 2018. It’s currently selling for $166, down 36%. These companies may return to their peaks, but in the meantime, they’re a drag on portfolios.

During my career, I’ve found investors fall in love with three types of stocks. The first is a company located in their backyard, the second is a story stock highlighted on TV, and the third is a mega-cap stock.

Locals in California, pick Apple. Oregonians run with Nike, Washingtonians click on Amazon or Microsoft. Texans ooze over Exxon and Tennesseans like the way FedEx delivers. Investors who own homegrown stocks like to hold them forever.

Story stocks get big headlines. Tesla gets a lot of screen time, as do recent IPOs like Uber, Peloton or Beyond Meat. If it’s new, it must be a winner, but not always.

Mega-cap stocks like Apple, Microsoft, Alphabet (Google), Amazon, Facebook, Berkshire Hathaway, Visa, JP Morgan, Walmart, and Procter & Gamble are popular holdings, and, rightfully so. These battleship stocks have stood the test of time and have rewarded shareholders handsomely. Mega-cap stocks also have another benefit to shareholders in that consumers use their products daily.

By investing in homegrown stocks, you might miss opportunities in companies scattered around the globe.  Advantest Corporation is a Japanese company, which is up 148% year-to-date. Fortescue Metals Group in Australia is up 137%. Li Ning Company in China is up 213%, and Hotai Motor in Hong Kong is also turning in a stellar performance, up 108%.

A basket of globally diversified index funds will remove the emotional attachment of investing and give you exposure to thousands of companies. It’s easy to fall in love with Tesla, not so much with a small-cap international index fund. Also, your diversified portfolio will allocate a portion of your assets to bonds, and no one falls in love with a bond fund. However, when the market corrects, you’ll be glad you own a bond fund or two.

A financial plan will also help you with your emotional attachment. A good plan will quantify and prioritize your financial goals. Your plan will also direct your advisor on how best to construct your investment portfolio. Your plan and portfolio will synch to your goals.

Despite the numerous benefits of financial planning, a recent study by Vanguard found, “many advisors are not preparing financial plans for their clients.” Their study found that only 47% of advisors created a formal plan for clients with $100,000 to $1,000,000.[2]

To achieve long-term financial success, create a financial plan, invest in a globally diversified portfolio of mutual funds, and keep your fees low.  If you follow this plan, you might fall in love with your results!

Love is patient and kind; love does not envy or boast; it is not arrogant or rude. It does not insist on its own way; it is not irritable or resentful; it does not rejoice at wrongdoing but rejoices with the truth. Love bears all things, believes all things, hopes all things, endures all things. ~ 1 Corinthians 13:4-7

 

October 28, 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 an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from 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.begintoinvest.com/enron-stock-chart/, Website accessed on October 23, 2019

[2] The Vanguard Advisor’s Alpha® Guide to Proactive Behavioral Coaching, Donald G. Bennyhoff, November 2018.

The Washington Nationals

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The Washington Nationals are going to the World Series for the first time in their history. The Nationals moved to Washington DC in 2005 from Montreal where they were the first major league baseball team in Canada. The Expos played in Montreal from 1969 to 2004. The combined franchise has had some phenomenal players like Vladimir Guerrero, Stephen Strasburg, Andre Dawson, Tim Raines, Pedro Martinez, Gary Carter, Jayson Werth, and Bryce Harper.

Mr. Harper was the first pick for the Washington Nationals in the 2010 Major League Baseball draft, and he made his major league debut on April 28, 2012.[1] He was the face of their franchise. He was their marquee player, that is, until this season when he decided to leave the Nationals and take his talents to Philadelphia, signing a 13-year contract for $330 million.

Despite losing their best player, the Nationals entered the postseason as a wild card and proceeded to beat the Dodgers and Cardinals. They’ll now play the Houston Astros in the fall classic.

There is no “I” in team, and sometimes losing a high-profile player may be a blessing and not a curse. I grew up in Los Angeles, and I was a huge Dodgers fan. From 1974 to 1988, they won the World Series twice and the National League pennant five times. These great Dodger teams played as a unit and rarely relied on the talents of one superstar player.

The Oakland A’s are probably the best team to rely on a group effort as detailed in Michael Lewis’s excellent book, Moneyball. The payroll for the A’s this season was $92 million while The New York Yankees, who rely on star power, had a payroll of $216 million.[2] The Yankees spent $2 billion on marquee talent this decade and failed to reach the world series once. It’s the first time they missed playing in the World Series in a decade since 1910.[3]

As an investor, you’d be wise to follow the team approach and give up trying to find the one great stock. Who wouldn’t want to find the next Microsoft, Apple, or Google and get in on the ground floor? It’s easy to get attracted to star-studded stocks that are hyped up on cable news shows while ignoring the basics of investing. Even if you found a diamond in the rough, star stocks do fall on hard times. Microsoft traded flat for 16 years from 2000 to 2016. Facebook fell 53% during it’s first few months as a publicly traded company while Google dropped 61% during the Great Recession.

Identifying stars before they become stars is difficult. This year a few high-profile stocks have come public with much fanfare, but their performance has been weak. A few of the superstars are Lyft, Slack, Uber, and Peloton. Despite the pre-IPO hype, they’re down 48%, 42%, 24%, and 14%, respectively. By comparison, a globally diversified portfolio of low-cost mutual funds with an allocation of 60% stocks and 40% bonds is up 15.4%.

For most investors, investing in a diversified portfolio of low-cost funds based on your financial goals is the best strategy. However, if you want to swing for the fence and try to hit a home run with a stock or two, limit your purchase to 3% to 5% of your investment capital.

My prediction for this year’s World Series? The Astros will win it all in six games!

Play Ball!

The best possible thing in baseball is winning the World Series. The second-best thing is losing the World Series. ~ Tommy Lasorda

October 22, 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 an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from 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://en.wikipedia.org/wiki/Bryce_Harper, Website accessed October 22, 2019

[2] https://www.spotrac.com/mlb/payroll/, Website accessed October 22, 2019

[3] https://www.wsj.com/articles/the-yankees-decade-of-almost-2-billion-spent-zero-titles-won-11571579532?mod=trending_now_pos2, Brian Costa and Jared Diamond, October 20, 2019

To 403(b) or not to 403(b)?

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Teachers and non-profit professionals do remarkable work. They prefer to work for a cause rather than a paycheck. The hours are long, but the impact they have on others is significant. I still remember the influence my 4th-grade teacher had on my life.

My mom, grandmother, aunts, sister, and wife have all been teachers and my wife currently works for our church, a non-profit organization. I’ve been surrounded by educators and non-profit professionals my entire life.

A significant benefit for teachers is the defined benefit program. In Texas, teachers participate in the Texas Retirement System, or TRS. At retirement, they can enjoy a lifetime of guaranteed income. If you’re a teacher, you can access your benefit information at mytrs.com.

However, a benefit often overlooked is the 403(b). The official title for a 403(b) is the tax-sheltered annuity plan, and it’s available to employees of public schools, non-profit organizations, and certain ministries. If you work for a 501(c)3 organization, then your employer qualifies for a 403(b) plan.

The tax-sheltered annuity name causes confusion because it includes “annuity” in the title. I’ve talked to several teachers about their retirement options, and most aren’t aware they can also invest in low-cost mutual funds. You can contribute to an annuity or a mutual fund.

I recently helped a friend convert his 403(b) from a high-cost annuity sold through a broker to a low-cost mutual fund at Vanguard. His previous annuity was charging him more than 2.5%.  We were able to lower his expenses by 94% because we moved his plan to a mutual fund with internal fees below .14%.

Insurance companies sell 403(b) annuities to teachers at benefit fairs, and you may have attended one in the past. The atmosphere is a financial carnival.  I would get calls from teachers telling me they need to open a new 403(b) annuity for the coming school year after attending one of these events. Most weren’t told they can contribute to their existing plan or invest in a low-cost mutual fund. As a result, some teachers now own four or five different retirement accounts, which is expensive and inefficient. How many 403(b) accounts do you need? One!

How can you improve your 403(b)? Here are a few suggestions.

You can contribute to your retirement plan through a salary reduction agreement with your employer. For example, if your salary is $75,000 per year and you contribute 10% of your pay to your plan, then your take-home pay will be reduced by $7,500. The $7,500 is now in your retirement account and hopefully growing. Your distributions will eventually be taxed as ordinary income.

You can also contribute to your retirement account through a Roth 403(b). A Roth allows you to add to your plan with after-tax money.  Your funds will grow tax-free, and when you start receiving distributions, they’ll be tax-free as well. Don’t confuse after-tax contributions with Roth contributions. After-tax is also known as voluntary, and they’re above and beyond your elective deferrals.

You’re allowed to contribute $19,000 to your 403(b). If you’re 50 or older, you can add another $6,000. The maximum allowable contribution (MAC) to your plan is $56,000. The amount is a combination of elective deferrals, non-elective contributions (from your employer), and after-tax contributions. If your income is less than $56,000, you’re allowed to contribute 100% of your compensation to your account.

Another bonus of the 403(b) plan is the 15-year rule. The rule allows an employee who has worked for their employer for 15 years or more to contribute an extra $3,000 for up to five years, or an additional $15,000.

After contributing to your 403(b) plan for years, when can you take the money out? The earliest you can withdraw your money without penalties is age 59 ½.  Distribution options can also apply to hardships like medical expenses or tuition payments, to name a couple.

Once you retire or leave your employer, you have the option to roll over your plan assets to an IRA or another employer’s retirement plan if it allows for incoming transfers.

How do you know if your 403(b) is doing well? If you’re not sure what you own, how much risk you’re taking, or the fees you’re paying, we can help. If you have multiple plans, you can consolidate them into one plan. If you have an expensive plan, we can help you locate a low-cost provider like Vanguard.

Those who are happiest are those who do the most for others.” ~ Booker T. Washington

October 21, 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 an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from 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 Five Best Mutual Funds!

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Stocks are soaring and nearing all-time highs. As they continue to climb a wall of worry, they’re leaving nervous investors stranded on the sidelines. I started thinking about the historical performance of the stock market and wondered why investors don’t buy the best performing funds?

After a quick screen of Morningstar’s database[1], I found the five best mutual funds over the past 15 years, and here they are:

Berkshire Focus Fund (BFOCX) has generated an average annual return of 15.25% for the past 15 years. A $10,000 investment in 2004 is now worth $81,300.

Fidelity Select IT Services Fund (FBSOX) has generated an average annual return of 15.34% for the past 15 years. A $10,000 investment in 2004 is now worth $82,790.

ProFunds Internet UltraSector Fund (INPIX) has generated an average annual return of 18.40% for the past 15 years. A $10,000 investment in 2004 is now worth $126,620.

Rydex NASDAQ 100 – 2X Strategy Fund (RYVLX) has generated an average annual return of 17.95% for the past 15 years. A $10,000 investment in 2004 is now worth $115,220.

T. Rowe Price Communication and Technology Investor Fund (PRMTX) has generated an average annual return of 15.37% for the past 15 years. A $10,000 investment in 2004 is now worth $84,950.

If you invested $10,000 in each of these five funds in 2004, your nest egg is now worth $491,611, a gain of 883%. By comparison, the S&P 500 generated a total return of 264%.

Why not put all your eggs in this high-octane basket? Good question. These high-flying funds have $10.8 billion in combined assets, which sounds like a lot, but that’s less than 3% of Vanguard’s S&P 500 fund, which currently manages $487 billion.

If these funds are so good, why don’t they have more assets?

The short answer is risk. The portfolio turnover for these funds averages 162% per year while the S&P 500 turnover is 4%. A fund with high turnover will generate short-term capital gains.

The beta for the portfolio is 1.36, or 36% more volatile than the S&P 500. If the stock market drops 10%, the portfolio will fall by 13.6%.

During the Great Recession, the best five fund portfolio fell 74%. Last December it dropped by 29%. In May if fell 11.5% and since August it’s down 8%. To harvest the gains, you must endure the rainy seasons.

Of course, hindsight is 20/20. It’s unlikely you would have picked these five funds in 2004 and held them for the past 15 years. It’s easy to pick winners while looking in the rear-view mirror.

And there are two sides to a coin. What if, instead, you picked the five worst funds for the past 15 years?

The five worst funds:

ProFunds Ultra Short NASDAQ 100 Fund (USPSX) has a 15-year average annual return of -29.96%

Rydex Inverse NASDAQ 100 2X Strategy Fund (RYCDX) has a 15 -year average annual return of -29.42%.

ProFunds Ultrashort Small Cap Fund (UCPSX) has a 15-year average annual return of -27.82%.

Direxion Monthly Small Cap Bear 2X Fund (DXRSX) has a 15-year average annual return of -27.48%.

ProFunds UltraShort Mid Cap Fund (UIPSX) has a 15-year average annual return of -26.54%.

An equally weighted portfolio of these funds generated an average annual loss of 28.24% per year. A $10,000 investment in 2004 is now worth $68.90, enough to buy dinner for two at a decent restaurant. Despite their atrocious performance, these funds still manage about $60 million.

The moral of the story. You won’t choose the best fund, nor will you pick the worst. Avoid leverage. Don’t short the market. Buy a diversified portfolio of low-cost mutual funds based on your goals and stay the course.

The benefit of hindsight is we only really talk about those things that did work out. ~ Jonathan Ive

 

October 15, 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 an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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] Morningstar Office Hypothetical, 2004 – 2019. YCharts data 2004 – 2019.

Full Stop

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Full stop. The end. Period. No more. No Mas. I’ve noticed lately that politicians, commentators, and other public figures have been using the term “full stop.” I guess they want to punctuate their point, so the viewer or reader knows they’ve stated their position, and there will be no more discussing the issue. They’re moving on to the next item.

On November 25, 1980, Roberto Duran was fighting Sugar Ray Leonard. During the fight, Mr. Duran raised his arms and said, “No Mas.” He had enough and didn’t want to finish the fight.[1] He was done – a stunner for the boxing world.

According to Webster’s Dictionary, full stop means period, and it was first used in 1643, and the origin is “chiefly British.”

The financial planning and investment management industry has their version of full stop items where no more explanation is needed. Here’s a shortlist.

  • Individuals who complete a financial plan have three times (3X) the assets of those individuals who do little or no planning.[2]
  • Stocks outperform bonds. The 92-year average annual return for common stocks has been 10%, while long-term government bonds returned 5.5%. A $1 investment in large-company stocks is now worth $7,0257, while $1 invested in bonds is worth $142.[3]
  • Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.1% from 1928 to 2018. A $1 investment is now worth $72,335. The Dimensional Large-Cap Value Index averaged 11%. A $1 investment in this large-cap index is now worth $13,442.[4]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[5]
  • Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over a 15-year period, 95% of active fund managers fail to outperform their benchmark. The data is similar for 1, 3, 5, and 10 years.[6]
  • Lower fees are better than higher fees. Less is more.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[7] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more.

Full Stop.

The grass withers, the flower fades, but the word of our God will stand forever. ~ Isaiah 40:8

October 10, 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 an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from 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://en.wikipedia.org/wiki/Sugar_Ray_Leonard_vs._Roberto_Dur%C3%A1n_II, Website accessed October 10, 2019

[2] http://www.nber.org/papers/w17078

[3] Dimensional Funds 2019 Matrix Book.

[4] Ibid.

[5] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] https://www.vanguard.com/pdf/ISGQVAA.pdf

Yard Sales and Investing

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Twice a year, my neighborhood holds a yard sale. It’s well advertised, so people come from all over town to hunt for trinkets and treasures. The buyers arrive with a plan and a purpose.

The people who visit our neighborhood are seasoned yard sale shoppers. Arriving in trucks with trailers, they scour our streets looking for bargains. Most were looking for clothes or small household items. I had several drive buys, but nothing the shoppers wanted. I guess they didn’t need tennis rackets or baseball mitts.

One shopper had a trailer full of used equipment like bikes and lawnmowers. The items he found needed repair, and I’m sure he’ll fix them up to resale them at a higher price. His specialty appeared to be items that were broken or needed a little TLC. One man’s trash is another man’s treasure.

In addition to being value shoppers, the buyers haggled for lower prices. If it cost $10, they’d offer $5. If the seller didn’t budge, the buyer moved on to another house. They’re patient and shrewd buyers.

Now and then, a buyer finds a rare gem. One man found an original signed copy of Ernest’s Hemingway’s The Old Man and The Sea. He purchased the book for $2, and it’s probably worth more than $30,000. A buyer in Fresno, California bought a box of photo negatives for $45 and later found out they belonged to Ansel Adams. The images are worth more than $1.8 million. An Arizona buyer found a Jackson Pollack painting worth more than $5 million.[1] It pays to hunt for a bargain.

Investors can learn much from weekend yard sale shoppers like focusing on value, being patient, and having a plan. Patient investors can take advantage of market drops to find companies in the bargain bin. When stock prices drop, most investors tend to look the other way. Not so with value investors. If a company has issues, value hunters know they’re going to get a reasonable price. Sellers, on the other hand, are liquidating because of fear. For example, Kraft Heinz, Nordstrom, Walgreen’s, 3M, Pfizer, and Schwab are all down more than 10% this year, and investors don’t appear interested in these blue chips. It’s unlikely these companies will stay down forever, so at some point value investors will swoop in and start buying.

As we approach the end of the year, look for investments that are down and out that may rebound in a year or two. If you currently own poor-performing investments, be patient.

To improve your investment results, consider a financial plan. A well-constructed financial plan will help you identify and quantify your financial goals. A Certified Financial Planner® will use your financial plan to assist you with managing your debt, taxes, investments, retirement, education, philanthropic and estate planning needs.

“I am sending you out like sheep among wolves. Therefore, be as shrewd as snakes and as innocent as doves.” ~ Matthew 10:6.

October 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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://bestlifeonline.com/garage-sale-finds/, Alex Daniel, February 22, 2019

Are Zero Commission Rates Good?

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Schwab dropped a bombshell on Tuesday when they announced they’ll reduce commission rates on stocks, ETFs, and options to zero! Not to be outdone, TD Ameritrade and E*Trade quickly followed suit. As a result of the announcement, Schwab’s stock fell 14%, TD Ameritrade slumped 28%, and E*Trade plunged 19%. The loss of trading commissions will result in a significant drop in revenue for these firms. Their pain is your gain.

Trading with zero commission reminds me of a visit to an all-you-can-eat buffet. Walking into a buffet is exciting when you see the endless sea of culinary delights. On your first pass through the buffet line, you pile your plate high with a wide variety of food items. You know it’s not a good idea to make a fifth trip through the buffet line, but you need to try several desserts before you leave. Eating at all-you-can-eat buffets will have harmful consequences on your health as will excessive trading on your wealth.

Now that commission-free trading has gone mainstream, this may entice individuals to trade more often, and more trading is not good. During the internet boom, Morgan Stanley introduced a commission-free trading account called Choice. Clients paid a fee based on the level of their assets. As a branch manager, I reviewed accounts and trades. One of our clients was trading more than 200 times a month, and it wasn’t going well. She was not a good trader, incurring significant losses. The losses didn’t detour her because she felt empowered to trade by not paying commissions on each trade.

An unfortunate byproduct of excessive trading is short-term capital gains. Short-term capital gain rates are much higher than long-term capital gain rates because they’re taxed as ordinary income. Another potential issue is the wash rule. The wash rule disallows a loss if you buy or sell the same security within 31 days before or after your trade.

Warren Buffett, Bill Gates, Jeff Bezos, Mark Zuckerberg are billionaires because of their stellar business skills and the excellent performance of their company stock. A significant portion of their wealth has come from sitting, not trading. Most of the time, they’re doing nothing with their shares. Do you think Bill Gates and Warren Buffett day trade their accounts? LOL.

Commission rates were deregulated on May 1, 1975. With commission rates no longer fixed, Wall Street firms were now able to set their own rates. Charles Schwab (the person) launched his firm as a result of the new rule, and a revolution was born.[1] Commission rates have been low for years, and some firms already offer free trades through zero-fee trading on ETFs.

Long-term wealth is created by being patient, and one of the best ways to increase your wealth is to buy and hold a globally diversified portfolio of low-cost mutual funds.

As commissions drop, how can you take advantage of lower rates and fees? Here are a few ideas.

  • Move your account to a custodian currently offering zero-rates for trading like TD Ameritrade, Schwab, or E*Trade.
  • Most registered investment advisors work with a custodian to handle client accounts. Make sure your advisor uses one of the custodians from above.
  • Hire a Certified Financial Planner® with low fees, ideally well below the industry standard of 1% of your assets.
  • Conduct a fee audit on your accounts. Brokers post their charges, and advisors list theirs in their ADV. A Certified Financial Planner® can help you review your statements to make sure your costs are low.
  • Hire a firm that offers financial planning in addition to investment management. The financial plan should be included in the fee you’re being assessed to manage your assets
  • Avoid manufactured products like annuities or permanent life insurance. These insurance products have substantial fees and deferred sales charges, meaning if you sell your investment early, you’ll incur heavy penalties.

Are zero commission rates good? Lower rates are a boon to investors. The less you pay, the more you keep. However, there’s no free lunch, so read the small print to find out how your firm makes money.

 “I have the right to do anything,” you say—but not everything is beneficial. “I have the right to do anything”—but not everything is constructive.  No one should seek their own good, but the good of others. ~ 1 Corinthians 10:23-24

October 3, 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 an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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.wsj.com/articles/charles-schwab-ending-online-trading-commissions-on-u-s-listed-products-11569935983, By Alexander Osipovich and Lisa Beilfuss, October 1, 2019