A Biden Victory?

According to the recent Quinnipiac poll, Joe Biden is leading Donald Trump by 15 points – 52% to 37%.[1] Of course, much can happen between now and the election on November 3, but if the trend continues, Mr. Biden will likely become the 46th President of the United States.

Investors are primarily concerned about Mr. Biden’s tax policy. A few of his proposals include raising the top individual tax rate to 39.6% for incomes exceeding $1 million. The long-term capital gains rate would jump to 39.6% from 20% for this cohort. He wants to eliminate the step-up cost basis on estate transfers. For example, let’s say you purchased Amazon for $1, and on the day of your death, it closes at $3,500. Currently, your beneficiaries will inherit Amazon at $3,500, and they will not have to pay any taxes upon receipt. Their stepped-up cost basis is $3,500. Under Biden’s proposal, your beneficiaries would inherit your cost basis of $1, so if they sell it, they’ll have a capital gain of $3,499 per share, and they could be taxed at a rate of 39.6%.[2]

Biden’s proposal will also impact the Social Security Tax.  The Social Security tax of 12.4% is capped on incomes up to $137,000. Mr. Biden would extend the tax to those individuals making more than $400,000.[3] He would limit itemized deductions to 28% on high-income earners and raise the corporate income tax rate to 28% from 21%.[4]

Here are a few steps you can take if Mr. Biden wins, and you’re concerned about your taxes increasing.

  1. Sell your stocks and realize your gains. The top capital gains tax rate is 20%, and for most individuals, it’s 15%.
  2. Sell your stocks and realize your losses. If you have securities trading in negative territory, realize your losses so you can offset gains at a later date. The current tax code allows you to offset losses and gains dollar for dollar. If you don’t have any capital gains, you can carry your losses forward and write off $3,000 per year until your losses are absorbed.
  3. Invest in tax-free municipal bonds. If you live in a state with high taxes like California or New York, the tax-free rate can be substantial. For example, a California tax-free bond paying 3%, would be the equivalent of a taxable bond paying 6.3% for an individual in the highest brackets. If you live in a state with an income tax, you must purchase bonds from your state to receive tax-free income. If you live in Texas or Florida, you can buy bonds from any state in the country.
  4. Limit your stock purchases to your IRA or 401(k). Investing in stocks or stock funds in your IRA will allow you to realize gains without paying taxes. Your dividend income will be free of current taxes as well. However, you will not be able to recognize losses, and when you withdraw money from your IRA, it will be taxed as ordinary income unless it’s a Roth IRA.
  5. Convert your traditional IRA to a Roth. You’ll experience a bump in taxes this year, but your distributions will eventually be free of taxation. And, if you convert to a Roth, you never have to take out your money unless you need it for living expenses or some other purpose.
  6. Invest in a Roth 401(k). The Roth 401(k) does not have any income limits, so it is available to all employees. The maximum contribution is $19,500, and if you’re 50 or older, you can add another $6,500. When you leave your employer, you can roll it over to a Roth IRA.
  7. Invest in collectibles like art, jewelry, watches, cars, or antiques. These items do not generate income, and they may increase in value. Furthermore, they’re easy to transfer from one generation to the next.
  8. Buy physical gold, silver, or other metals. Like collectibles, precious metals will not produce income, but they can surge higher.
  9. Buy raw land. Raw land may give you tax breaks like an agricultural or wildlife exemption. Your land will not generate income, but it can grow over time. Unlike collectibles or precious metals, your land will pass by title to your beneficiaries, so it could trigger a tax on the transfer.
  10. If your estate is large, you can lower it through your annual gift tax exclusion. The IRS allows you to give away $15,000 per person per year. The current lifetime exemption is $11.4 million.
  11. Donate to charities you support or cherish through a direct gift of cash or stock.
  12. Use a charitable vehicle like a donor-advised fund or charitable remainder trust to front-load your donations. You will receive a tax deduction based on your gift, and you can defer your distributions to a later date, including your death.
  13. You do not need to make any changes today. I was talking to a client yesterday about some of these strategies, and she said she could wait until November 4 to make any changes.

The election will occur in 67 days, so you’ll know if you need to make any adjustments to your portfolio before the year is over. I would caution you, however, to make significant changes to your investments regardless of who wins. As you know, politicians have big ideas while on the campaign trail, but most of them rarely make it to the policy stage. And, if Biden wins, it may take months or years before he implements his suggestions.

Lastly, regardless of who you’re voting for, register to vote. Here is a link to Vote.org: https://www.vote.org/

George Washington is the only president who didn’t blame the previous administration for his troubles. ~ Author Unknown

August 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.

[1] https://poll.qu.edu/national/release-detail?ReleaseID=3666, website accessed August 28, 2020

[2] https://www.cnbc.com/2020/07/21/heres-what-a-biden-presidency-might-mean-for-your-taxes.html, Darla Mercado, CFP®, August 28, 2020

[3] Ibid

[4] https://taxfoundation.org/reviewing-joe-bidens-tax-vision/, Garrett Wilson and Erica York, August 20, 2020

Forever?

Exxon Mobil is leaving the Dow Jones Industrial Average after 92 years. They joined the Dow in 1928, and it’s considered one of the bluest of blue chips – a stock to own forever. Salesforce will take its spot. It’s not the first perennial holding to be substituted by a newer, swankier company. Walgreen’s replaced General Electric in 2018 after a 112-year run and Apple supplanted AT&T in 2015 after 99 years. The three former Dow Jones members spent a combined 303 years in the popular index. Procter & Gamble is now the longest-tenured company in the Dow at 88 years.

For decades, shareholders of Exxon, GE, and AT&T considered themselves set for life. A portfolio consisting of these three companies turned $30,000 into $1.2 million from 1983 to 2016, generating an average annual return of 11.8% – far outpacing the S&P 500. Yet, from 2016 through 2020, this three-stock portfolio has fallen 45% while the S&P 500 is up 68%, a difference of 113%![1]

XOM_GE_T_chart (1)

From 1930 to 1960, Exxon, GE, and AT&T were a few of the largest companies in the world, and AT&T held the top spot for four decades. Exxon was the largest company in the world in 2011.[2] It’s now the 34th largest company in the US.

Big Board

In addition to the long-term investment success of this blue-chip triad, they generated significant dividend income over the past three decades. Exxon’s dividend yield averaged 3.15%, GE’s average payout was 2.95%, and AT&T paid 4.54%. These former juggernauts raised their dividends by an average of 495% during this stretch.

However, time’s change and Exxon’s revenue has declined 31% over the past decade, and its dividend payout ratio is 207% – an extremely high metric. Exxon’s stock price has risen 68 cents over the past twenty years, and GE’s stock hasn’t budged a dime in twenty-eight years. AT&T has followed a similar path. Its share price is down more than 40% from its 1999 peak.[3]

Cisco Systems is an excellent example of not getting married to a stock. Its share price soared 3,500% from 1995 to 2000. By 2002, it had fallen 85%. Over the past twenty years, it’s down 42%, and it has never returned to its all-time high of $72.19 set in April 2000.[4]

CSCO_chart

Today, Facebook, Amazon, Apple, Netflix, Google, Microsoft, and Tesla are the largest companies, and investors plan to own them forever. And rightfully so. If you owned a basket of these high-flyers, you’d be up 97% this year! It’s hard to imagine that one of these companies could follow the fate of Exxon, GE, or AT&T, but it’s possible.

What should you do if you own a stock that you want to hold forever? Here are a few suggestions.

  • If your company is performing well, and it’s meeting your needs, do nothing. Let it run.
  • If the stock becomes a significant percentage of your wealth, consider reducing it, and redeploying your capital into another company or two. What is a large percentage? When your stock approaches 10% or more of your portfolio, start paying extra attention to it. When it breaches 25%, sell some shares to drop your weighing to 10% of your account balance or lower.
  • Trust, but verify. Review earnings reports and company announcements. Is the trend intact? Are they generating positive revenue, earnings, and cash flow? Is the company innovating and producing products and services people will use? If so, hold on to the stock.
  • Keep an eye on management. Steve Jobs, Bill Gates, Jeff Bezos, and Elon Musk are legendary leaders and visionaries. A strong management team is a crucial component to the success of a company, so keep an eye on their lieutenants as well. You can track critical employees on Morningstar or Yahoo! Finance.
  • Take profits. It’s okay to take profits after a strong run. Apple and Tesla announced stock splits a few weeks ago, and their stock prices have risen 31% and 47%, respectively. After a substantial gain, it’s okay to trim your holdings to lock in a profit.
  • Average up. Most people are comfortable averaging down, but few like to average up. What is averaging up? Let’s say you purchased 100 shares of Apple at $150 in 2019, and you bought more at $250 and $350 and $450. Your average cost is $300. Apple is currently trading for $500 per share, so your gain is $200, or 67%, despite buying the stock at higher prices.
  • Sell it. If your company’s fortunes change, sell it, and move on to a new company. There are thousands of companies and investment opportunities, so don’t get wedded to a stock.

Owning great companies is one of the best ways to create wealth and concentrating your holdings into a few stocks can magnify your returns. But, it’s essential to review your investments regularly to make sure they’re meeting your goals and objectives. Do not ignore fundamentals and pay attention to popular trends. Times change and being flexible to pivot to new ideas will allow your account to grow over time.

The bigger they are, the harder they fall. ~ Anonymous

August 26, 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.

 

[1] Morningstar Office Hypotheticals – April 1983 to July 2020

[2] Dimensiional Funds

[3] YCharts

[4] Ibid

The Indianapolis 500

Drivers start your engines!

Today marks the 104th running of the Indianapolis 500 – “The Greatest Spectacle in Racing.” Drivers will travel at speeds of 225 miles per hour or more in pursuit of auto racing’s most iconic trophy. The 1911 winner, Ray Harroun, averaged 75 miles per hour, slower than some currently posted highway speed signs.

Race day is exciting, and the spectacle is legendary. Crowds of people usually pour into the brickyard to be part of the scene, and millions more will watch it on TV.  The singing of our National Anthem, the singing of “Back Home Again in Indiana,” and the stealth bomber flyover add to the enthusiasm of the day.

Most of the attention will be on the 33 drivers, and rightly so, as they’ll be the ones responsible for executing the plan. However, behind them is an army of support staff like strategists, spotters, spouses, and owners. Teams work as one to make sure the driver can win the race by strategizing and planning for a successful outcome. The plan is their road map for the race.  As the race continues, they must adjust their strategy based on new data like car performance, track conditions, and weather.

In addition to a fast car and the driver’s skill, they’ll need a little luck to win. In 2011 Dan Wheldon was trailing the winner until the last lap when J.R. Hildebrand’s car hit the wall on the final turn. Hildebrand’s accident allowed Wheldon to win.  Wheldon would’ve finished second, at best, had Hildebrand not crashed.

Regardless of how fast these cars travel, drivers will pass each other often and spend a majority of the 500 miles jockeying for a position to win. Drivers need to focus on their team goals, trust the process, and not worry about the competition.

Unfortunately, drivers may experience a crash. When this happens, the yellow caution flag will fly, and drivers must slow down for the cleanup crew to clear the track before racing can resume. Accidents and crashes are unexpected, of course, so it’s best to try and minimize the damage. Drivers do not live in fear of a crash, and nor should you.

What can an investor learn from the Indianapolis 500? Here are a few thoughts.

  • Drive your race. People travel at different speeds to reach their goals. If you’re on the right track, don’t worry about others. Your plan only applies to you and your current situation.
  • Create a financial plan. Your plan will help guide you through the race of your life. It will be your roadmap to success.
  • Adjust and review your plan. Drivers adjust their plans based on new data. As you review your plan and goals, you should adapt to new data as well. Flexibility is paramount.
  • Work with your team. A driver relies on their team to win, and your trusted advisors can help you reach your goals. A CPA, attorney, real estate agent, mortgage broker, insurance agent, financial planner, and an investment manager should be in your pit crew.
  • Diversify your investments. In the market, like racing, crashes happen. It’s not possible to predict when they will occur, so your best defense is a diversified portfolio of stocks, bonds, and cash.
  • Celebrate your wins. It’s essential to enjoy the fruits of your labor. If you’ve reached a goal, celebrate it with gusto – and milk!

After 500 miles, the winner will capture the checkered flag, drink their milk, and kiss the bricks at the finish line. The team will celebrate the victory for a few days and then start planning for the next race. You might not pass under a checkered flag when you’ve achieved your goals, but you’ll know when you’ve won your race.

Nothing compares to the Indianapolis 500.  ~ Mario Andretti

August 21, 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 T.D. 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 Generation

I love The Who and “My Generation is one of my favorite songs. Rolling Stone magazine considers it one of the greatest songs ever – number 11 out of 500.[1] The song was released fifty-five years ago, and it has been going strong ever since—a classic. Despite being an oldie, it’s still relevant today.

My investment career has spanned more than three decades. A benefit of longevity is that I get to work with generations of investors. During this recent downturn, I had several clients contact me about establishing investment accounts for their children. These kids are in their teens and early twenties. In one case, we created accounts for the fourth generation of family members by opening 529 college education accounts. I love it when young people begin investing.

One benefit of starting your investment strategy when you’re young is time. The longer you allow your investments to grow, the better. A majority of Warren Buffett’s wealth came after the age of 65. He started investing at age 11. According to Dave Ramsey’s Financial Peace University, if Jack invests $2,400 every year from age 21 to 30 and stops, he will accumulate $2.5 million by age 67. If Blake waits until age 30, and he invests $2,400 every year for 38 years, his account will grow to $1.48 million. Despite investing more money for longer, Blake fell about $1 million short of Jack.[2]

Here are a few ideas if you want to help your children or grandchildren build an investment portfolio.

Start small. Small companies historically outpace large companies. And, small companies eventually grow into large ones. According to Dimensional Fund Advisors, small companies produced an average annual return of 13.8% for the past 40 years, while large companies averaged 11.8%.[3] Apple is the largest company in the world measured by its market capitalization, but it once was a small company.

Buy individual stocks. A popular theme on Wall Street is to buy what you know. If you own an iPhone, buy Apple. If you wear Nike shoes, buy Nike. You can buy shares in any company you want. The advantage of this strategy is you can control what you own. The disadvantage is the lack of diversification and potential cost. For example, Amazon sells for more than $3,250 per share!

Buy mutual funds. A mutual fund will allow you to invest a small dollar amount into a fund of your choice – $25, $50, etc. The mutual fund manager will invest your dollars alongside other shareholders to buy several different companies. A mutual fund is also a great way to establish a monthly investment program. A disadvantage of a mutual fund is you won’t have any control over what you own. A mutual fund, for most, is the best choice for new investors, regardless of age.

Open a Roth. If you’re working, you can open a Roth IRA. A Roth allows your money to grow tax-free for decades. You can contribute $6,000 per year or 100% of your salary, whichever is less. If you buy and sell stocks inside a Roth, you do not have to pay capital gains taxes. When my daughter started working a few summers ago, we contributed 100% of her salary to her Roth.

Open a brokerage account. A taxable brokerage account will allow you to access your money at any time, for any reason – college, a new car, a trip, a house, and so on. The IRS will treat your trading activity as a capital gain or loss.

Slice and dice. Investment firms like T.D. Ameritrade, Schwab, and Robinhood allow you to buy and sell stocks and Exchange-Traded Funds (ETFs) without commissions. These companies may offer partial share trading, or slices, as well. For example, I mentioned Amazon trades for $3,250. If a firm allows for partial share trading, you can invest $100 in Amazon.

Keep your fees low. In addition to commission-free trading, keep your mutual fund fees low. All funds have operating expense ratios (OER), so read the small print. The lower the OER, the more money you get to keep. Index funds typically have low fees relative to other types of mutual funds.

Embrace volatility. Stocks fluctuate – daily. If your stock or fund drops, use it as an opportunity to buy more shares. Apple stock is up 1,300% over the past decade; however, it fell 40% in 2012, 25% in 2016, 32% in 2018, and 26% in 2020.[4] Don’t fear down days. Long-term wealth is created during the depths of a bear market.

Concentrate. Concentrate your investment holdings to a few companies or funds. Find a few great investment ideas and invest heavily in them.

Diversify. As your account grows, take some profits to buy more companies. For example, if you invest in a company and it doubles, sell half and purchase another stock.

Set goals. Why are you investing? How do you plan to use the money? Writing down your investment goals will make you a better investor. It can also help you to stay invested during market downturns.

Read. Your secret weapon to finding great investment ideas is reading. Here are a few of my favorite investment books.

  • One Up on Wall Street – Peter Lynch
  • The Only Investment Guide You’ll Ever Need – Andrew Tobias
  • The Wealthy Barber – David Chilton
  • How to Make Money in Stocks – William J. O’Neil
  • The Millionaire Next Door – Thomas Stanley
  • Everyday Millionaires – Chris Hogan

Review. Analyzing your investments will make you a better investor. Winners are great, but we can learn much by analyzing our losers.

Investing is a long-term journey, so be patient. My recommendation is to grow rich slowly. If you think generationally, it will allow you to ignore the daily fluctuations in the market and let your money grow over time. If you pursue risky, short-term gains, you may become frustrated and potentially give up on investing. Don’t be greedy.

Good habits formed at youth make all the difference. ~ Aristotle

August 21, 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 T.D. 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.rollingstone.com/music/music-lists/500-greatest-songs-of-all-time-151127/the-clash-london-calling-3-66001/, April 7, 2011

[2] Financial Peace University workbook, Jack & Blake, pages 62 & 63

[3] DFA 2020 Matrix Book

[4] YCharts

What Is a Stock Split?

Tesla and Apple are splitting their shares, sending their stock prices higher. Wall Street, Twitter, and CNBC spent the last week or so commenting on the benefits of a split. What does it mean when a company decides to split its stock? Nothing.

What is a stock split? Let’s say you own 100 shares of a $100 stock valued at $10,000. If the company issues a two for one stock split (2:1), you will own 200 shares at $50 with a value of $10,000 once the split is complete. In this case, your shares doubled, and the price cut in half.

Tesla is issuing a five for one split, so for every share you own, you’ll own five afterwords. Tesla closed at $1,650 per share on Friday. If the split occurred today, the price would be $330. Since the announcement on August 11, the shares have soared more than 19% – in four days!

TSLA_chart (1)

Apple announced a four for one  (4:1) split, so for every share you own, you will hold four when completed. It is up more than 8% since the announcement. Apple last split its stock seven for one in 2014. If you purchased 100 shares on June 1, 2014, you would own 2,800 shares once they complete the recently announced split. Apple has split its shares five times.

AAPL_chart

Stocks splits used to be the norm. When a company reached a specific price, it would split its shares. For most companies, the magic price was $100. McDonald’s has split their shares eight times since the 1970s, while Coca-Cola has issued six, and Pepsi has done it five times.

What if a company doesn’t split its shares? Berkshire Hathaway trades for $316,251 because they have never issued a split. If Berkshire split its stock as often as Apple, the share price would be $1,411 – less than the price of Tesla and Amazon. If Apple never split its stock, it would trade for approximately $103,000 per share.

BRK.A_chart

When I lived in Connecticut, I chopped wood in the summer for our winter fires. After I cut a large piece of wood in two, I still had the same amount but in two smaller chunks.  I worked at a deli while in college. If someone ordered a sandwich, I cut it in two – same sandwich, two halves. When my family orders a dessert, we cut it into thirds – the same amount, three pieces.

Stock splits are exciting, but they do not add or subtract from the value of the company. One of the best ways to benefit from a stock split is to buy a great company and hold it forever.

You better cut the pizza in four pieces because I’m not hungry enough to eat six. ~ Yogi Berra

August 15, 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.

101 Financial Plans

101 Dalmatians™ was a favorite movie for my daughter, and we often watched it together as the dogs battled their Villain – Cruella de Vil. If you owned 101 dalmatians, I would think you’d learn a thing or two about raising dogs.

Since I started my financial planning and investment management firm five years ago, we have completed more than one hundred financial plans. The numbers do not include stand-alone modules we offer like Social Security optimization, estate planning, education planning, budgeting, investment reviews, or student loan repayment strategies. Money Guide Pro, our planning software, recently added an analytics feature, and the data is noteworthy.

Financial planning is the cornerstone of what we do at our firm, and we offer it to all clients. During the pandemic crash in March, we were able to evaluate all our plans in real-time. The correction did not hurt our client’s goals, and, as a result, we remained fully invested through the decline, giving us a chance to make money as stocks recovered. Our goal is to have 90% of our clients complete a detailed financial plan. We’re currently at 79%. Why not 100%? Some clients have more money than they can ever spend, so we focus on other programs like asset protection or estate planning.

The Data

Here are some statistics from our financial plans.

Total completed financial plans = 106

Average client age = 56

The cohort with the most financial plans = Ages 51 to 64

The group with the most assets = Age 65+

Average plan assets for clients with incomes greater than $100,000 = $1.9 Million

Goal, Expectations, and Concerns

The top five retirement goals: travel, purchase a new car, home improvement, buy a new home, and celebration (wedding, anniversaries, etc.).

The number one concern for individuals who want to retire before age 65 is paying for healthcare. If you’re going to retire early, affordable healthcare should be a priority. It’s common for healthcare premiums to cost $1000 to $2,000 per month, so do your homework!

The number one concern for couples with young children is paying for college. The sooner you start saving, the better. The annual cost of college is rising by about 6% to 7% per year or twice the rate of inflation. According to Money Guide Pro, the current tuition for a public, in-state college is about $26,000 per year.

The most common expectations for retirees are pursuing an active lifestyle, spending time with friends and family, and living with less stress. A word of warning: do not wait until retirement to enjoy your life.

The two most common retirement concerns are running out of money and suffering investment losses. Running out of money in retirement is not good. One of our firm goals is to make sure clients can retire on their terms, and more importantly, stay retired. Running out of money and suffering investment losses are competing concerns, and you must choose between risk today or risk tomorrow. If your investments are too conservative early in your career, you may run the risk of running out of money. If your assets are too aggressive later in life, suffering a significant investment loss can have dire consequences. A financial plan will assist you in selecting the proper balance between risk and reward.

Assets and Income

The most significant asset for individuals is their home, 401(k) plan, or business. Lately, there’s a lot of discussion about renting or buying a home. My recommendation is to be a buyer, not a renter. Your home will provide shelter and memories, and it should appreciate over time – typically at the rate of inflation.

A company retirement plan offers a systematic way to create wealth. A constant contribution to your retirement account, compounded over decades, will yield substantial results. The people with the most significant retirement balances are typically teachers and individuals who work for their employers for many years. The maximum contribution to a 401(k) or 403(b) plan is $19,500. If you’re fifty or older, you can add $6,500.

If you’re a business owner, monetizing your company can be a significant portion of your retirement assets. I recommend getting a business valuation every few years. The assessment can help you plan for retirement, along with your estate and insurance needs.

However, your best asset is you and your ability to generate revenue. You may work for forty-five years or more. If your average annual salary is $100,000, you will make $4.5 million in income. Let’s assume you save 10% of your salary per year, or $10,000. At a conservative growth rate of 5%, your account balance would be worth about $1.6 million when you retire.

What’s Missing?

What is missing from the financial plans? Insurance. Life insurance, long-term care, and disability insurance are understated investment tools. Most people have life insurance through work, but the non-working spouse usually does not own any policies, a huge mistake. The primary breadwinner assumes they’ll be able to support the family financially. On the surface, this may be true, but how do you replace all the services a non-working spouse provides? And, if you’re the breadwinner, you may not have any desire to return to work after losing your spouse.

An assisted living facility, or nursing home, can wipe out a generation of savings if you don’t have the proper coverage. A long-term care insurance policy will provide you care when needed and preserve your assets for your children or grandchildren.

You can only die once, but you can be disabled multiple times. If you are your most valuable assets, shouldn’t you insure yourself against a loss of income? A disability policy will provide income to you if you can’t work, allowing you to pay your expenses and let your investment assets grow.

What’s Next?

A financial plan can bring you peace of mind. Will it be perfect? Hardly. But, a well-constructed plan can quantify your hopes and dreams. If you’re waiting for perfection, you will never act. Your plan will direct your retirement expectations, determine income streams, and establish your investment allocation. It can also address other issues, like insurance, real estate, and liabilities.

If you don’t know where to start, give us a call. We are here to help.

“You think dogs will not be in heaven? I tell you, they will be there long before any of us.” ~ Robert Louis Stevenson


August 6, 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.

 

 

 

 

 

 

A Kodak Moment

Shares of Kodak soared more than 2,700% from July 27 to July 30. If you had a crystal ball or insider information, you could have turned $100,000 into $2.7 million as the stock rose from $2.13 to $60. The average trading volume for Kodak (KODK) for the past five years has been 481,000 shares. Two days before shares of Kodak climbed sharply, 284 million shares changed hands.

KODK_chart

The price of Kodak soared because they received a $765 million loan under the Defense Production Act so it can begin producing pharmaceutical ingredients.[1] I had no idea they manufactured drugs. Oh, and on the day before Kodak announced its deal, the board of directors awarded its chairman 1.75 million shares of company stock.[2]

Eastman Kodak was founded in 1888, 132 years ago, primarily to produce film for cameras. Eastman Kodak was a powerhouse, a blue-chip. They were added to the Dow Jones Industrial Average in 1930, where it remained for seventy-four years. Eastman Kodak was part of the nifty-fifty, a group of high-flying growth stocks, during the 1960s and 1970s, along with Bristol-Myers, Coca-Cola, GE, IBM, Pepsi, Pfizer, Sears, and Xerox. In 2012, Kodak declared bankruptcy, and one year later, they emerged from bankruptcy protection, a different company to focus on five divisions: print systems, enterprise inkjet systems, micro 3D printing and packaging, software and solutions, and consumer and film.[3] Pharmaceutical manufacturing is not one of their stated divisions.

My first photography class was in 8th grade. I borrowed my aunt’s 35 millimeter Pentax camera for a school project. I went to Thrifty’s Drug Store to purchase a roll of black and white film. When I finished my project, I dropped off the film at the drive-up Kodak kiosk in the mall parking lot. I returned a few days later to pick up my pictures – a few I still have today. When I became a stockbroker in the early 90s, Kodak (EK) was one of the first companies I purchased. It was going to be a cornerstone of my portfolio because of their growth prospects and dividend yield.

The recent move in Kodak shares may tempt you to hunt for undeveloped stocks in hopes of quick riches. Before you take the plunge and start buying low-priced, speculative stocks, here are a few suggestions to help you avoid some common mistakes.

  • Greed. Since peaking at $60, Kodak stock has dropped 72% to $17.05. The stock remains volatile as speculators try to trade around the news and catch another shooting star. I believe most traders will eventually lose money on this stock as greed attracts speculators like a moth to a flame.
  • Diversify. If you plan to purchase companies trading below $5, buy hundreds of them because most of them will lose money. If you can find one Kodak, among 99 losers, you’ll make money. According to YCharts, 2,826 companies are trading between $1 and $5 per share, so choose wisely. Spread your bets around the table.
  • Limit your speculative capital investment to 3% to 5% of your taxable trading account assets If you plan to purchase stocks below $5. If your account balance is $100,000, then your speculative trading pool will be $3,000 to $5,000.
  • Margin. Day traders try to amplify their gains by purchasing stocks on margin. My recommendation is to avoid margin entirely, but if you must use it, limit your debit balance to 10% of your trading account value.
  • Using options to leverage your gains on low-priced stocks is not recommended because an option is a wasting asset. Professional options traders will increase the implied volatility on options contracts for speculative stocks like Kodak, making them very expensive. For example, the implied volatility for Kodak’s August 21 call option with a strike price of 15 is 300, meaning option traders expect the shares to move up, or down, by 18.8% daily. By comparison, McDonald’s implied volatility is 21, or 14 times less volatile than Kodak.
  • Nimble. If you’re one of the lucky ones to buy a low-priced stock before it takes off, enjoy the ride. If possible, sell enough shares to cover your original cost and let the remainder run so you can play with the house’s money. However, if the stock starts to fall, cut your losses and move to a new idea.

Kodak was a juggernaut, generating more than $10 billion in sales in 1981, employing more than 120,000 at its peak, and producing 50 million Instamatic cameras between 1963 and 1970.[4] However, it lost its way, and it’s now trying to rebrand itself – again. I don’t know how Kodak’s deal will develop, so tread lightly and be careful.

Nostalgia often leads to idle speculation. ~ J. Paul Getty

August 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 aren’t suitable for every investor.

 

[1] https://finance.yahoo.com/news/kodak-stock-skyrockets-deal-drug-200548406.html?.tsrc=rss, By Michelle Jones, July 29, 2020

[2] https://www.cnbc.com/2020/08/01/eastman-kodaks-top-executive-reportedly-got-trump-deal-windfall-on-an-understanding.html, Reuters, August 1, 2020.

[3] https://en.wikipedia.org/wiki/Kodak, Website accessed August 3, 2020

[4] https://theweek.com/articles/481308/rise-fall-kodak-by-numbers, The Week Staff, October 3, 2011. Website accessed August 3, 2020