My Gym

I work out at my local gym twice per week, mostly to lift weights. The amount I lift today is a fraction of what I used to lift while playing football in college, but it keeps me in shape.

My gym is a cross-section of men, women, young, old, fit, and almost fit. During the football offseason, members of the local high school team use our gym to supplement their school workouts. These young men are full of energy and bravado, and they have no coordinated plan for their workout regime. They lift, look in the mirror, look at their phone, talk to their friends, and repeat this process until they leave. They also say “bro” – a lot! I was probably that way in high school, too, except I didn’t have a cell phone. I know if they followed a routine, they’d see better results.

While playing football at the University of San Diego, we had two weightlifting coaches, one a former Navy Seal. They joined our program after my sophomore year and put our team on a weightlifting schedule for the entire year, including football season. I noticed a substantial improvement in my strength and endurance while following their plan.

Now that I’m older and, hopefully, wiser, I still follow their plan because it works. The formula is simple and easy to follow. It was because of their strategy and coaching that allowed me to experience better results.

A plan makes all the difference in the world for almost everything, notably investing. A financial plan can help investors improve their results by giving them a guide on how to achieve their goals. It addresses several issues, including investments, insurance, education, retirement, budgets, debt management, Social Security analysis, to name a few.

Like weightlifting, you won’t see results in a day from your financial plan. It may take months or years before your plan starts to bear fruit. And, like exercise, there will be up days followed by down days requiring you to be patient. During the down days or setbacks, it’s imperative to keep moving forward, regardless of your short-term results. If you completed your plan in October 2007, you were met with a wicked bear market where stocks fell more than 50%. I’m sure you didn’t expect to lose half your investment value within a few months, but if you followed your plan and stayed committed to it, you were able to enjoy a substantial rebound in the stock market from the lows of the Great Recession.

Exercising and investing require regular check-ups to measure your progress. Weightlifters constantly adjust their workouts depending on several factors, investors should do the same. Reviewing your strategy often is recommended based on your circumstances. At our firm, we offer quarterly reviews for our clients to make sure their plan and investments are meeting their needs. I also encourage clients to contact us during a life change – marriage, death, the birth of a child, a job promotion, retirement, etc. It’s easier to tweak your portfolio periodically than it is to do a significant restructuring.

Your plan desires action. If I have a written program for lifting weights, but I don’t follow it, I’m never going to get in shape. After you finish your written financial plan, you need to follow through with the recommendations of your advisor, don’t put it on your shelf to collect dust. Several years ago, I was working with a client who finished setting up a living trust for his family, but he didn’t transfer any assets into the trust. I told him he needed to follow through on his attorney’s recommendations to re-title his assets. He assumed, incorrectly, that since he finished the trust document, he did not need to do anything else. He needed to act on the plan.

Exercising is a lifelong pursuit, as is investing. A consistent, well thought out plan will deliver reliable results over time. Write down your goals, follow your dreams, work with a professional, and good things can happen.

What makes a weightlifting program successful? Your hard work and dedication. ~ Greg Everett

January 28, 2020

Bill Parrott, CFP® 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.

 

 

 

 

My College Tuition Experience

The student loan debt crisis is getting worse, not better. The current debt level is $1.5 trillion, and since 2003 it has increased 522% while inflation has risen 42%.  A child born today can expect to pay $655,000 in tuition to attend a private college or $323,000 for a public school.[1]

My daughter recently graduated from a private college in Texas, and, thankfully, we did not use student loans. Shortly after she was born, I opened a Uniform Transfers to Minors Accounts (UTMA) and transferred shares of Philip Morris to seed her account.

When my wife and I started saving for her college, we didn’t have the financial resources to contribute significant amounts of money, so we did what we could with what we had. We added $25 here and there, and when we were able to add more, we did. Her great-grandfather purchased a bond for her account, and her grandparents helped with supplies and books while attending college.

We started investing in her account during the late ‘90s, before one of the worst decades on record for common stocks. During the tech-wreck from 2000 to 2003, stocks fell 47%, so I sold the bond and added more stock. The asset allocation in her account for most of her pre-college years was 100% stocks. We owned JP Morgan, Disney, Pepsi, Apple, Amazon, and Google, to name a few.

When the market fell, I used it as an opportunity to buy great companies at discounted prices. A few years later, during the Great Recession, when stocks fell 53%, I added more companies. I bought the dip at every opportunity. During the first ten years of her life, the S&P 500 had a negative return; however, the next ten were much better, and the S&P 500 returned 338% from when we first started investing for her college career.

After I opened her investment account, I created a spreadsheet to track various colleges from around the country. The original list included fifty different schools, some private, some public. I updated the list annually to get an idea of what it was going to cost me to send my daughter to college. The figures were overwhelming and alarming, but we continued to save and invest.

As she got older, I culled the list. During her junior year of high school, it was cut to five, before she settled on her final choice. In my research, I noticed the smaller the school, the more beautiful the landscaping, the more expensive the tuition. I attended the University of San Diego, and my friends and I joked there were more gardeners than professors on campus.

When she was ready to attend college, I sold enough stocks to cover tuition, room, and board for one year. As we paid her expenses, I would sell more stock to replenish her cash balance. Thankfully, through the power of compounding and a rising stock market, her account kept a steady level, despite the withdrawals.

As I mentioned, when we started saving for college, we weren’t in a great financial position, but we were determined to pay for her tuition. We knew most of the inputs needed to figure out how much to save. For example, when she was born, we knew we were going to need a pile of money when she turned 18, and my spreadsheet allowed us to track the cost of fifty different colleges. As a result, we knew when and how much she would need, so it was an easy calculation.

Here are a few suggestions to help you and your family save for college.

  1. Take an inventory of your financial assets. How much money do you have in checking or savings accounts? Do you own any stocks, bonds, or mutual funds? Does your company offer an employee stock purchase plan (ESSP)? These are assets you can use to fund your child’s account.
  2. Open a 529 education account. The 529 account allows your money to grow tax-free. If you use the money for tuition and other college expenses, the distributions are also tax-free. The funds in a 529 account are invested in various mutual funds.
  3. If you want to purchase individual stocks or bonds, open a Uniform Transfer to Minor’s Account. The money you deposit into this account is considered an irrevocable gift to your child, so if they decide not to go to college and buy a Corvette instead, there’s not much you can do to stop them.
  4. Identify a few colleges and start tracking their expenses. Several websites will help you find the cost of most colleges, and some college websites will also have a tuition calculator.
  5. After identifying the school and cost, start investing. Set up an automatic draft so you can invest monthly to take advantage of the long-term compounding of the stock market.
  6. If the cost of attending a four-year university is too expensive, consider a community college. The tuition for a community college is about a third less than a public college.[2] After a year or two, you can transfer to a university.
  7. Work with a Certified Financial Planner® to help you formulate a plan for paying for college.

Unfortunately, the rate of inflation for tuition is growing at more than 7% annually.[3] At 7%, the cost of college will double every ten years – a sobering thought, so you must own stocks to help you keep up with the sharp rise in the price of tuition.

Regardless of your financial situation, saving any amount toward college will allow you to borrow less.

An investment in knowledge pays the best interest. ~ Ben Franklin.

January 26, 2020

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] Money Guide Pro College Cost Calculator

[2] https://www.affordablecolleges.com/rankings/community-colleges/, website accessed January 25, 2020.

[3] https://www.edvisors.com/plan-for-college/saving-for-college/tuition-inflation/, website accessed January 25, 2020.

Rivers and Tributaries

The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.

The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can’t survive.

Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.

In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.

As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.

The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]

Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.

How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.

Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.

If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.

A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes

January 21, 2020

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.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba

[2] YCharts

[3] Morningstar Office Hypothetical

Know Your Risks!

During college, my friends and I would often go skiing in Lake Tahoe. I wasn’t a good skier, but I could fight my way down a mountain. Most of the time, I didn’t realize the risk I was taking because my friends were much better skiers, and I went where they went. One afternoon we were skiing at Squaw Valley, when my former roommate, who grew up ski racing and spent one winter working with the ski patrol, decided to ski Chute 75, considered the fifth steepest run in Tahoe.[1] Not only was it steep, but it was about as wide as a hallway. I skied the run under duress and against my will, but I survived.

My family and I recently returned from a ski trip, and my risk level is much lower. I mostly ski groomed blue runs, occasionally mixing in a black diamond run or two. Now that I’m older and wiser, I’m aware of the risks I’m taking while skiing.

This past decade stocks soared 185%, outpacing bonds by 143%![2] It was also the first decade on record without a recession. As the market rises higher, investors want more risk assets, and they are willing to chase returns while abandoning safe assets like bonds.

If you owned a portfolio consisting of 60% stocks, 40% bonds ten years ago, and left it alone, your current allocation is now 80% stocks and 20% bonds.[3] Your original portfolio is now 25% riskier. During the Great Recession, a 60%/40% portfolio fell 35%, and the 80%/20% portfolio dropped 47%.[4] An unbalanced, unmanaged portfolio returned 10.5% for the decade. If you rebalanced your account annually to your original asset allocation of 60%/40%, you earned 9.6% – a good return, with less risk.

January is an ideal time to check the risk level for your investments, especially after last year’s excellent stock market performance. If your risk level is high, lower it by rebalancing your portfolio to its original allocation.

Here are a few ideas to help you make sure your risk level is in line with your goals.

  • Start with the end in mind and work backward. What is your asset target? How much money do you need to meet your financial goals? How much is enough? If you have the assets to retire, sell stocks and buy bonds. Lock in profits, take gains, reduce your risk profile.
  • Review your asset allocation. What is your current allocation to stocks and bonds? A glance at your account statements should give you all the data you need to determine your asset allocation.
  • Examine your stock positions. Do you own any stocks that account for more than 15% of your portfolio? If so, sell half and distribute the proceeds across several asset classes. Diversify your investments.
  • Stress-test your portfolio. What would happen to your investments if the market fell 20%? Are you comfortable with the results? You might be content with a 20% drop in percentage terms, but what about dollars? A $5 million portfolio will lose $1 million if stocks fall 20%. Can you manage a million-dollar loss?
  • Rebalance your accounts. Rebalancing your accounts every year will keep your risk level in check and aligned to your goals. If you participate in your company’s 401(k), you probably have a rebalancing tab that will automate this process for you, so you don’t have to think about it every year. It’s counterintuitive to sell investments doing well to buy ones that aren’t, but this strategy will allow you to maintain a consistent risk profile. And, if you’re comfortable with your investments, you’re more likely to hold them for the long haul.

A Certified Financial Planner® can assist you in reviewing your investments, determining your asset allocation, and analyzing your risk level. They can also help you create a financial plan to make sure you’re on the right trail to achieving your goals. Here’s a link to the CFP’s website to help you find an advisor in your area: https://www.letsmakeaplan.org/. Check it out and give us a call!

Cross country skiing is great if you live in a small country. ~ Steven Wright

January 7, 2020

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] http://theliftiereport.rentskis.com/tlr/the-10-steepest-ski-runs-in-california/, Website accessed January 12, 2020

[2] Ycharts – S&P 500 Index and Vanguard’s Total Bond Fund.

[3] Morningstar Office Hypothetical – Vanguard S&P 500 Index Fund & Vanguard Total Bond Fund

[4] RiskAlyze

Ice Cream and Investing

My friends and I would ride our bikes (Schwinn’s) to Thrifty’s Store to get ice cream. Thrifty’s ice cream was the best, and it was economically priced for young kids – 5 cents for a single, 10 cents for a double, 15 cents for a triple. Thrifty’s used an ice cream gun to produce near-perfect cylinders, ideal for stacking a triple scoop in a sugar cone. My three go-to flavors were mint chip, chocolate chip, and rocky road – in that order. I had no desire for peach, strawberry, or vanilla. Thrifty’s, at the time, only had about ten flavors, so if my friends wanted more variety, we’d ride to Baskin-Robbins. I would still order my three favorites, however.

Ice cream and investing have much in common because it has something for everyone — some like vanilla, others chocolate. Individual stock pickers might spend hours doing research, reading reports, talking to companies, or listening to analysts hoping to find a unique flavor at a bargain. Or worse, they may watch an expert on TV talking about ice cream, and without any knowledge, they buy gallons of the flavor before tasting it because some guy told him it was going to be good.

Mutual fund investors rely on others to choose the ice cream for them, regardless of flavor. The investors give up the right to select peach or mocha because the flavors are handpicked by the money manager. A mutual fund ice cream owner will get the best flavors, and the worst. In addition to my three favorite flavors, I will also get ones I don’t like. However, the tasty flavors will outnumber the bad ones, and over time, the bad ones will go away.

Trying to pick individual stocks is challenging because you’re continually searching for the next big winner on a limited budget. Today if you decide to buy several ice cream cones with a dollar, you’re not going to get many, or any. And, if you’re fully invested, you must sell one stock to buy another. Do you sell vanilla to buy chocolate? Trading stocks can be expensive, and it’s not tax efficient.

Owning a globally diversified portfolio of low-cost mutual funds is a better solution for most investors because you can own several thousand stocks and, gasp, bonds. I prefer not to eat strawberry ice cream, but millions do. If my mutual fund owns strawberry ice cream, I win even if I don’t eat it. My globally diversified portfolio gives me exposure to stocks on the other side of the world that I would not have chosen myself. Chinese people like black sesame ice cream, Indians want jackfruit, and Swedes prefer ice cream with lingonberries[1]. If I didn’t own a global portfolio, I would miss out on these distinctive flavors.

Here are a few reasons to own a globally diversified portfolio of low-cost mutual funds.

  • Your investment portfolio is a function of your goals, whether you’re aggressive, conservative, or somewhere in between. If your investments match your goals, you’re more likely to hold on to them regardless of market conditions allowing you to capture the upward trend in the stock market.
  • Your costs will go down because you won’t need to trade because your account is being managed for the long haul by your fund managers.
  • Mutual fund companies are in a trade war as they compete against each other to lower their fees. Their pain is your gain. Schwab, Fidelity, Vanguard, and T.D. Ameritrade each have waived their trading commissions. Dimensional Fund Advisors is lowering fees on 77 of their funds. The cost of their U.S. Large Company Portfolio is dropping 40%![2]
  • A balanced portfolio will remove your investment bias and tendencies. I prefer buying large companies with growing dividends, but I also need to own small international growth companies that don’t pay any dividends. A global portfolio allows me to hold a variety of stocks, especially ones I would never buy on my own.

I own a globally diversified portfolio of low-cost mutual funds because it allows me to enjoy my life and focus on things I want to do, like eat ice cream.

I scream, you scream, we all scream for ice cream! ~ Howard Johnson

January 7, 2020

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.zagat.com/b/crazy-ice-cream-flavors-around-the-world, by Linnea Covington, June 1, 2016.

[2] https://www.barrons.com/articles/dimensional-fund-advisors-enters-the-asset-management-fee-war-51577137749, by Evie Liu, December 23, 2019