All That Jazz

Jerry Sloan, the legendary coach of the Utah Jazz, recently passed away. Mr. Sloan had a stellar career as a player and a coach. As a player, he was twice an all-star, and his number was retired by the Chicago Bulls.  In 2009, he was enshrined in the NBA hall of fame for his coaching ability. He coached the Utah Jazz for more than 20 years, “the longest coaching tenure with the same team in professional sports,” and retired as the 4th winningest coach in NBA history.[1] Mr. Sloan was consistent and respected.

Coach Sloan led the Utah Jazz to their first NBA finals in 1997 with players Karl Malone and John Stockton. The Utah Jazz teams under Sloan weren’t flashy like the Lakers, nor did they have the pedigree of the Celtics, and they weren’t as coarse as the Pistons, but they were fundamentally sound, and nice – like most people in Utah.

If Coach Sloan were an investment professional, he probably would have been a fan of dollar-cost averaging, a consistent strategy that relies on fundamentals and patience. The dollar-cost averaging strategy lacks the flair of private equity, liquid alts, futures trading, IPOs, or option collars. Still, it is stable and reliable, and for most investors, it delivers results.

How does dollar-cost averaging work? This strategy requires you to invest a fixed dollar amount each month into a mutual fund or several funds. Let’s look at an example. You decide to invest $500 per month in Vanguard’s 500 Index Fund (VFINX) over several years.

  • One Year: After one year, your investment is worth $5,950, and it generated a loss of 1.83%.
  • Five Years: After five years, your investment is worth $37,298. It generated an average annual return of 8.92% and produced a gain of $7,298.
  • Ten Years: After ten years, your investment is worth $105,927. It generated an average annual return of 11.11% and produced a gain of $45,927.
  • Twenty Years: After twenty years, your account is worth $310,255. The 20-year average annual return was 8.74%, and it produced a gain of $190,255.
  • Thirty Years: After thirty years, your account is worth $818,929. The 30-year average annual return was 8.79%, and it produced a gain of $638,929.
  • Forty Years: After forty years, your account is worth $2.97 million. The 40-year average annual return was 10.24%, and it produced a gain of $2.73 million.

For the dollar-cost averaging strategy to reward shareholders over time a down market is needed, and the lower, the better. If you’re investing for the long haul, a down market will allow you to accumulate shares at lower prices. Your share accumulation will pay dividends when the stock market recovers because you will own more shares at higher prices. If you participate in a 401(k) plan, you likely witnessed this happening in your account.

If you’re looking for an easy way to accumulate wealth, look no further than the dollar-cost averaging strategy. A calculated, consistent investment strategy over time is a winning formula. This strategy is easy to institute, and you can do it with an IRA, 401(k), 403(b), 529 Plan, or taxable brokerage account, and you can start it with any dollar amount.

Courage is the most important of all the virtues because, without courage, you can’t practice any other virtue consistently.” ~ Maya Angelou

May 30, 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 are not suitable for every investor.

 

[1] https://www.hoophall.com/hall-of-famers/jerry-sloan, website accessed May 29, 2020.

 

Planning with Uncertainty

Zero Dark Thirty is a thriller about the global pursuit of Osama Bin Laden. A CIA operative determines he is living in a compound in Pakistan, but few believe her analysis, until the meeting scene. During this scene, the power players assess the likelihood that Bin Laden is living at the compound. One associate tells the group, “We don’t deal in certainty, we deal in probability.”[1] The members are approximately 60% positive that he is living at the site until they ask Maya what she thinks. She says, “A 100% he’s there. Okay, fine, 95% because I know certainty freaks you guys out, but it’s a hundred.”[2]

Financial planning is clothed in uncertainty – a combination of math, assumptions, predictions, and guesses. Most financial planning models rely on intuitions about the future, and financial planners are aiming at moving targets. A change to one metric will reverberate through the plan. If I modify the rate of return by 1%, it can have life-altering consequences for a client. Despite the uncertainty, a written plan is still recommended for all investors, because as John Maynard Keynes said, “It is better to be roughly right than precisely wrong.”

Regardless of the environment, uncertainty is ever-present even in the best of times. Last year the stock market and economy were humming. The future was bright, investors were confident, but then the Coronavirus arrived, and uncertainty escalated quickly.

To learn more about planning with uncertainty, I contacted Captain Lawrence G. Getz III, Commander of the University of Michigan’s Navy ROTC program. Captain Getz is a Navy helicopter pilot who has flown more than 2,500 hours, including 500 combat hours in the SH-60 Seahawk helicopter. He was also the Executive and Commanding Officer of the USS Kearsarge. For his service, Captain Getz has earned the Defense Superior Service Medal, Legion of Merit, and two Meritorious Service Medals, to name a few. Captain Getz knows plenty about planning with uncertainty, and he has learned a thing or two during his twenty-nine years in the Navy.

Before each mission, he and his team would script out their pre-planned responses (PPR). Captain Getz said, “It‘s like Tom Brady throwing to different receivers. If one is covered, he looks for the next receiver, and so on until he finds an open one.” He added, “Tom Brady and his teammates practice the routes, they are pre-planned.” Part of his planning is to make smart decisions every day and take precautions. “The smart decisions you make today will make you better years, and decades from now,” he added.

“No plan survives the first contact, but the training and trust will get you through the bad days,” said Captain Getz. I asked him how he dealt with his emotions while flying. He said, “Compartmentalize your emotions, put them in a box, and execute your plan. Being afraid is normal, but do not make emotional decisions in highly volatile times. Do not make decisions in fear.” He added, “We are always dealing with VUCA – volatile, uncertain, complex, and ambiguous situations.”

Emotions play a significant role for investors. If you let them manipulate you, it can have negative consequences on your financial future. I asked Captain Getz how individuals should deal with fear, and he said, “Look to historical spikes. Individuals had the same concerns and fears ten or twenty years ago as people do today, but we (Americans) made it through. We are resilient. We put our head down and make it out.” He talked about people’s reaction to New Orleans after Katrina ripped through The Big Easy. He said, “People did not want to rebuild the city; they wanted to tear it down. But that’s not what we do; we make it better.”

In a recent report from Morningstar: A Behavioral Guide to Market Volatility, they note that “volatile times can also make us more prone to behavioral mistakes.” They added, “When we predict what’s going to happen in the future, our minds naturally reach for what happened most recently.”[3] We believe current events will last forever.

Captain Getz relies on his team through pre-planned responses and constant communication. How does he know when it is time to waive off a mission? When is it time to get out of a bad situation? He said, “His team talks before each mission.” For example, he tells them, “If he is on final approach, and he is taking enemy fire they should remind him to waive off.” Communication and planning are paramount.

Reviewing each mission is critical to his team’s success, and they will evaluate each one when they return to base. He said, “You have to check your ego at the door and have the conversation about the mission. Was it clear? What did you think? We must communicate to work better.”

Captain Getz flew with a Smart Pack strapped to his knee – a 5×7 card, a checklist for each mission. The card included details about the mission, navigation, code words, etc. He said, “If I forgot my name, I could look down at the card and follow the plan.”

Building and developing a team to deal with uncertainty is also important to Captain Getz. He relied on his team frequently, and he spent considerable time hanging out with his crew. His team would work out, walk, eat, read, and drink together. The camaraderie “made them better teammates.”

I asked Captain Getz how he celebrated his victories. He said, “Celebrate humbly, take pride in your work, take pride in working well together.” He added, “I look to provide meaning, and I know we are serving something bigger than ourselves.”

As an investor, how can you incorporate Captain Getz’s wisdom? Here are a few suggestions.

  • Develop a written plan for your pre-planned responses (PPR). Your written plan will help you navigate your financial future. Decide beforehand how you will react to a falling market, a shifting economic environment, or a change to your employment status.
  • Build a team. In addition to your financial planner, incorporate your CPA, attorney, insurance agent, mortgage banker, and other professionals to assist you with your planning needs. Your team can guide you through challenging times; they are your financial support group.
  • Communicate with your team and loved ones. Let those most important to you know about your financial intentions. Inform them of your plans and show them where you keep your relevant documents like wills and trusts. If your situation changes, let them know as soon as possible.
  • Make smart, short-term decisions every day. Your daily decisions will have generational consequences.
  • Control your emotions. Avoid all financial decisions if you’re afraid or fearful. Talk to your team or reference your plan before you proceed. If you’re emotionally paralyzed, wait 24 hours before making any adjustments. As an investor, you can only control how much you save and how much you spend; everything else is beyond your grasp, so let it go.
  • Do not wait for perfection. If you’re waiting for 100% certainty before proceeding, you’ll never execute your plan. By the time the all-clear signal is given, it’s too late to act. Make the best decision you can with the information you have and advance accordingly.
  • Review your plan. Review your plan regularly to ensure your goals are still intact. Do not revise it if you are on target to achieve your goals. If your plan has been dislocated due to the recent market turmoil or some other factor, adjust it as needed. I recommend reviewing your plan quarterly.
  • Celebrate your victories. It’s okay to enjoy the fruits of your labor and celebrate your wins. If you have reached your goals, rejoice in your success.
  • Serve others. Serving others with your time, talent or treasure is humbling, especially if you’re helping those who can’t pay you back. It’s hard to worry about yourself or feel discouraged when you’re lending a hand to someone in need. During this economic downturn, look for opportunities to do some good.

We are in uncertain times, but we will prevail. Our country has faced many challenges, but we’re still standing. We are still fighting.

Fair winds and following seas.

“A good Navy is not a provocation to war. It is the surest guaranty of peace.” ~ Theodore Roosevelt

May 18, 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 are not suitable for every investor.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1] https://www.youtube.com/watch?v=irG0wGzw7Ok, Website accessed May 17, 2020

[2] Ibid

[3] A Behavioral Guide to Market Volatility: How Behavioral Science Can Help Advisors During Market Turmoil. Morningstar Research by Samantha Lamas, Behavioral Researcher and Steve Wendel, Head of Behavioral Science

PWM Weekly Stock Market Update

Happy Saturday,

Investors sold stocks this past week as they reacted to economic data and assorted reports on Covid-19. The economic data was bad but expected. Retail sales fell 16.4%. The previous low was negative 3.67% during the Great Recession. Manufacturing output fell by 13.7%, the most significant decline since 1919.[1] Industrial production dropped 11.2%.

The market was also startled by Federal Reserve Chairman Jerome Powell’s comments when he said the economic outlook is still “highly uncertain and subject to significant downside risks.”[2] And one billionaire hedge fund manager said, “this is the second-most overvalued market, behind only ’99.”[3] But he also purchased shares of Twitter, Microsoft, Wells Fargo, Micron, Netflix, and Energy Transfer LP.[4] Do as I say, not as I do?

Bankruptcies continue to pile up, including J.C. Penney’s, Frontier Communications, Gold’s Gym, True Religion, Ultra Petroleum, and Diamond Offshore.

The House passed a $3 trillion Coronavirus Relief Bill.

Tesla will build its next factory in Austin, Texas – Hook ‘em!

Consumer confidence rose this week.

The number of air travelers has increased by 160% since the April lows, according to the TSA website. As one client mentioned to me, “He can’t wait to drink a beer in a crowded airport.”

OpenTable® restaurant reservation data continues to improve.

Here is how stocks, bonds, and alternative asset classes performed this past week.

  • The S&P 500 fell 2.33%%
  • The NASDAQ fell 1.05%
  • Small-Cap Stocks fell 7.56%
  • Real Estate Stocks fell 7.76%
  • International Stocks fell 3.15%
  • Emerging Markets fell 2.03%
  • Bonds rose .47%
  • Gold rose 2.19%
  • Energy Stocks fell 6.79%

Captain Lawrence G. Getz III is the Commanding Officer of the University of Michigan’s Navy ROTC program and a Navy helicopter pilot. He flew more than 2,500 hours, including 500 combat hours. For his service, he earned the Defense Superior Service Medal, Legion of Merit, and two Meritorious Service Medals, to name a few. I recently asked him how he dealt with his emotions while flying. He said, “Compartmentalize your emotions, put them in a box, and execute your plan. Being afraid is normal, but do not make emotional decisions in highly volatile times. Do not make decisions in fear.”

We should follow Captain Getz’s advice. Reacting to fear and emotion can have long-term consequences for your family’s wealth. It’s imperative to follow your plan and focus on your goals. Difficult times will fade, and the stock market has always recovered. I sound like a broken record, but the poor stock market performance has not harmed our client’s financial plans. Be strong and keep the faith.

“Great things never came from comfort zones.” ~ Anonymous

Have a great weekend!

May 16, 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 are not suitable for every investor.

 

[1] https://www.wsj.com/articles/coronavirus-lockdowns-trigger-record-spending-drops-on-shopping-eating-out-11589535000?mod=hp_lead_pos1, Harriet Torry, May 15, 2020

[2] https://markets.businessinsider.com/news/stocks/negative-interest-rates-not-considered-federal-reserve-policy-jerome-powell-2020-5-1029198208, Ben Wick, May 13, 2020

[3] https://www.cnbc.com/video/2020/05/13/david-tepper-this-is-second-most-overvalued-market-behind-only-99.html website accessed May 15, 2020

[4] https://whalewisdom.com/filer/appaloosa-management-lp#tabholdings_tab_link, website accessed May 16, 2020

My Fitbit

My wife and daughter own Fitbits. I didn’t want to be left out, so I bought one too. The main reason for getting our Fitbits is our healthcare plan will give us points we can use to purchase gift cards. Of course, we want to get fit, but our real motivation is to rack up the points.

My Fitbit tracks my sleep, steps, heart rate, weight, water intake, calories, and so on. My goals are to walk 10,000 steps per day and exercise at least five days per week. So far, it’s going well. My Fitbit buzzes when I reach my goal, and if I have been sitting for extended periods, it will remind me to get up and walk around. My daily record, so far, has been 26,000 steps, which included walking, mowing my lawn, and cycling around my neighborhood. For my efforts, I earned the following badges: skydiver, skyscraper, penguin march, and classics. I guess these are good badges.

My Fitbit is like an electronic coach I wear on my wrist, a constant reminder to keep moving, keep pursuing my goals despite the obstacles.

A financial plan is like a Fitbit. A plan records and tracks your essential financial data to make sure you’re on pace to achieve your goals. Unlike your Fitbit, your plan comes with a financial planner. Your planner will be your coach and confidant, encouraging you to keep moving despite the headwinds.

As the stock market falls and the economy crumbles, a financial plan may bring you peace. Despite the destruction in the market this year, our client’s financial plans and goals remain intact. We monitor our client’s data regularly and adjust as needed. When a client inquires about their investments, I can review their financial plan to let them know they’re still on pace to achieve their goals.

A financial plan is mostly data-driven, a combination of assets, ages, goals, time-horizons, risk tolerance levels, etc. It’s a numbers game, and the data gives clients the confidence they need to keep moving forward.

Here are five reasons why it’s essential to complete a financial plan.

  • Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[1]
  • A plan will quantify and visualize your goals. Do you want to retire early? Buy a second home? Travel the world? Your plan can answer these questions and several more.
  • A plan can improve your budgeting and spending goals. A spending plan can give you control over your cash flow, allowing you to buy what you want – if it’s in the budget!
  • Your plan will be your financial guide, whether your saving money for college or retirement. It will be your GPS. It will keep you on the right path.
  • It will keep your emotions in check, especially when global markets are falling apart.

For our part, as a planner, we will do the following:

  • Understand your personal and financial circumstances.
  • Help you identify and select goals.
  • Analyze your current and potential course of action.
  • Develop financial planning recommendations.
  • Present your recommendations.
  • Implement your recommendations.
  • Monitor your progress.

Once your plan is in place, I recommend meeting with your planner quarterly. After you’re satisfied with the results, an annual review is all that is needed.

A Fitbit can’t make me work out, nor can a plan make me develop healthy financial habits. I must do the work and put in the time, but if I do, I know good things will happen.

Success is walking from failure to failure with no loss of enthusiasm.” ~ Sir Winston Churchill

May 13, 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 are not suitable for every investor.

 

 

 

 

 

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

PWM Weekly Stock Market Update

The stock market and the economy are sending mixed messages. The Dow Jones Industrial Average is up 31% from the March lows while the economy is posting depression era numbers. 20.5 million people lost their job in April, and the unemployment rate spiked to 14.7%. Despite the terrible economic news, investors are optimistic about a potential vaccine and the possibility of returning to work. The market is a leading indicator, and it is looking past the recent data – hopefully, there is good news on the horizon.

Our investment models were quiet this week as volatility continues to drop. The volatility index (VIX) is down 66% from its peak, and the lower it goes, the better it is for investors.

The American Association of Individual Investors (AAII) tracks several indicators. The percentage of individual investors who are bullish, or expect stocks to rise, fell to 23.67% – a low rating. This AAII indicator is a contrarian indicator. When individual investors are pessimistic about the future direction of the stock market, the market usually rises and vice versa. For example, the index reading on January 23, 2020, was 45.6%, before the Dow Jones fell 36%. The thirty-three-year average AAII indicator is 38.23%.[1]

The NASDAQ is now positive, and it’s up 14.5% for the past year as Microsoft, Amazon, and Apple lead the way. The S&P 500 is also trading in positive territory for the past year.

Shanghai Disneyland is reopening on Monday, and tickets sold out within minutes. Starbuck’s is planning to open 85% of its stores here in the U.S., and Walgreen’s is returning to regular operating hours.

Retailers continue to struggle as Neiman Marcus and J.Crew file for bankruptcy protection. Nordstrom’s is permanently closing 16 stores (sorry Mom).

Several pharmaceutical companies, including Gilead, Pfizer, Amgen, Johnson & Johnson, and Regeneron, are racing to produce a vaccine for the Coronavirus.

The Thunderbirds will fly in formation above San Antonio and Austin on Wednesday to show their support for healthcare workers, first responders, and essential personnel.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 3.74%
  • The NASDAQ rose 5.77%
  • International Stocks rose 2.82%
  • Emerging Markets rose 4.46%
  • Long-Term Bonds fell 2.36%
  • Gold fell .18%
  • Energy Stocks rose 7.85%
  • Chinese Stocks rose 5.79%

Despite the recent performance of the market, we do remain cautious on stocks in the near term, so diversify your portfolio, follow your plan, think long-term, and be patient.

Here is the story of The Tortoise and The Hare, a great reminder about being patient and following your plan – enjoy: http://read.gov/aesop/025.html

Patience and perseverance have a magical effect before which difficulties disappear, and obstacles vanish. ~ John Quincy Adams

Have a great weekend, and keep the faith!

May 9, 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. http://www.parrottwealth.com

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 are not suitable for every investor.

[1] YCharts

It Still Works

After the Great Recession, a friend asked me if diversification still made sense. He followed up with another question before I could answer. He asked, “If my assets are diversified, how come I’m losing money?” I said diversification still works, but it doesn’t protect you against a loss. Diversification helps reduce your risk allowing you to create generational wealth.

During the Great Recession, bonds outperformed stocks, but stocks have topped bonds for the past ten years as the market rebounded from the recession lows. This year, so far, bonds are winning. Investing is not a binary event. Few investors allocate 100% of their assets to bonds or stocks and flip between the two depending on their temperament

Stocks can decline, especially after a 10-year bull market. Stocks enter correction territory about every three to five years. Over the past two decades, the market has realized drops of 30%, 40%, and 50%. The average decline for the past twenty years has been 9.3%.[1] The market is always correcting, always adjusting, so it should not surprise you when it falls.

Microsoft, Apple, Amazon, Facebook, Alphabet, and Netflix account for 21% of the S&P 500 Index and 48% of the NASDAQ 100. These super six companies generated an average total return of 280% for the past five years compared to a 39% return for the S&P 500. However, they have experienced periods of underperformance relative to diversified portfolios. Microsoft fell 71% from January 2000 to March 2009, and it took 17 years for it to reclaim its previous high. Apple fell 75% in 1985, 74% in 1998, and 80% in 2003. Amazon fell 93% during the Tech Wreck. And risk arrives quickly – like lightning. Last year Hilton, Hertz, and Southwest Airlines were up, on average, 33%. This year, as a group, they’re down 56%, and Hertz is contemplating bankruptcy.[2]

Stocks, bonds, and cash are components we use to build diversified portfolios. Stocks for growth, bonds for income, and cash for safety. Stocks are subdivided into large, small, and international companies. Bond maturities vary between a few months to several years.

A diversified portfolio has many moving parts, and depending on the market cycle; some are up while others are down. One goal of a balanced account is to keep people invested for the long-term, despite the roller coaster ride of the market. Dimensional Fund’s 60% stock and 40% bond portfolio is down 10.5% for the year. It has averaged 7.5% for the past twenty years, and it has risen 75% of the time. Since 1926 it has been profitable 78% of the time and generated an average annual return of 8.9%.[3]

How do you develop a diversified portfolio? It starts with your financial plan. Your plan will incorporate your hopes, dreams, and fears. It will integrate essential financial components to determine your risk tolerance and asset allocation. If your investments are aligned to your goals, you’re more likely to remain invested so you can capture the long-term trends from the market. A balanced account is designed to withstand several market conditions and endure for generations. Diversification still works because we don’t know in advance which investments will perform well. Therefore, a globally diversified portfolio of mutual funds is the best way for most people to invest. If you want to invest in individual stocks or concentrate your investments, do so in a taxable account so you can take advantage of the tax code.

As we continue to deal with uncertainty from the virus and rumble through a volatile market, focus on your goals, create a plan, think long-term, and good things will happen.

But divide your investments among many places, for you do not know what risks might lie ahead. ~ Ecclesiastes 11:2

May 7, 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 are not suitable for every investor.

 

 

[1] YCharts

[2] Ibid

[3] Dimensional Fund Advisors – January 1, 1926 to April 30,2020

The Beauty of Cash

Cash is wonderful. Simple. Humble. It never boasts when times are good, nor complains when times are tough. Cash is an asset like stocks or bonds or real estate, but it doesn’t get any respect – like Rodney Dangerfield, but it should, particularly when the stock market and economy are struggling.

CEOs who hold large amounts of cash get ridiculed for not deploying it to acquire other companies, buy back their stock, or pay a dividend to shareholders as if holding cash was a sign of weakness.

Warren Buffett, CEO of Berkshire Hathaway, holds $128 billion in cash, and it has been suggested he “buy blue-chip stocks, invest in Boeing, or provide rescue financing to companies in the travel industry.”[1] Instead, Mr. Buffett recently sold all his airline stocks to raise more cash. Mr. Buffett has made his billions by investing for the long haul, being patient, and utilizing cash.

Tim Cook, CEO of Apple, has also been criticized for carrying too much cash on the balance sheet. Apple currently has more than $100 billion in cash and short-term investments, and he has been urged to buy other technology companies. Fortune thought Mr. Cook should have purchased Netflix last year, calling it “his biggest blunder so far.”[2] A money management firm posted an open letter on its website to Apple and Tesla, suggesting they merge, saying, “Apple lost its innovative soul when Steve Jobs passed away in 2011.”[3]

Berkshire Hathaway and Apple have pristine balance sheets that must be praised, not mocked. Companies and CEOs who pay attention to the bottom line can survive recessions and depressions.  If two iconic investors are holding billions of dollars in cash, shouldn’t we pay attention? Is it time to give cash some respect?

What is cash? Cash can be dollars you carry in your wallet or keep in your bank. It can also include short-term certificates of deposit or US Treasury Bills.  Any liquid, guaranteed investment maturing in one year or less is considered cash, at least for investment purposes. A money market will invest in short-term obligations, so you can park your money in a money market fund as well.

As interest rates approach zero, does allocating a portion of your assets to cash still make sense? It does. Despite low rates, cash is liquid and safe like few other investments.

Cash does have a downside. As a long-term investment, it does not hold up, and it will barely keep pace with inflation. Investing in stocks is still the best way to create generational wealth, but if you need to preserve your wealth in the near term, invest in cash. If your time horizon is five years or more, allocate most of your assets to stocks.

What can you do with your cash? Here are a few ideas.

  • Emergency Fund. Your emergency fund should have enough money to cover three to six months of expenses. If your household expenses are $10,000 per month, your emergency fund balance should be $30,000 to $60,000. During challenging economic times, you might want to increase your fund balance to cover nine to twelve months of expenses.
  • Opportunity Fund. Setting aside money for opportunities is also recommended. How much money is appropriate for this fund? It depends on what you want to buy or where you want to go.
  • If you are within five years of retirement, my recommendation is to keep three to five years of expenses in cash. If your annual household expenses are $100,000, your cash balance should be $300,000 to $500,000. A large cash balance allows your stocks to recover if you were to retire during a down market like we are experiencing today.
  • Purchases. If you need to buy a car or pay for college tuition, keep your money in cash regardless of the time frame. Also, allocate your money to cash if you need it in one year or less.
  • Borrowing. It’s common for people to rely on debt to finance cars, homes, education, etc. But what do you do if your bank freezes your credit? Wells Fargo has stopped issuing home equity loans, and they will only refinance jumbo mortgages for clients who hold at least $250,000 in liquid assets with their bank.[4] A cash balance gives you access to your capital regardless of your bank’s internal policies.
  • Risk Reduction. Allocating a portion of your assets to cash will reduce your risk. Your risk will fall by 23% when you allocate 30% of your portfolio to cash or short-term investments. Stocks outperform cash significantly over time; however, for the past two years, this has not been the case as stocks have fallen 4.5% from January 1, 2018.[5]

Calvin Coolidge said, “Use it up, wear it out, make it do, or do without.” Mr. Coolidge was a fan of cash, and we ought to follow his advice today. If you have the money to buy something, go for it. If not, save your money until you do.

Cash has always been king, and it should be given the respect it is due. Treat it as a valued asset, and it will bring you peace, and it may even enhance your portfolios overall performance.

I don’t get no respect – Rodney Dangerfield

May 4, 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 are not suitable for every investor.

[1] https://www.nasdaq.com/articles/its-time-for-warren-buffett-to-get-greedy-2020-03-13, Barrons, Andcrew Bary, March 13, 2020

[2] https://fortune.com/2019/02/15/apple-tim-cook-netflix/, Fortune, Don Reisinger, February 15, 2019

[3] https://gerberkawasaki.com/article/open-letter-to-tim-cook-and-elon-musk-on-why-apple-and-tesla-need-to-merge, Danilo Kawasaki, website and article accessed May 3, 2020

[4] https://www.wsj.com/articles/wells-fargo-curtails-jumbo-loans-amid-market-turmoil-11586037701, WSJ, Ben Eisen, April 4,2020

[5] YCharts