Month: October 2020

My Pilot

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My last flight before COVID shut us down was an uneventful one from Denver to Austin. The flight lasted just under two hours, arriving as scheduled. My pilot brought me home safely. She probably examined a thousand items before we left Denver, like checking the aircraft, reviewing her flight plan, strategizing with her first officer, and so on. Once she felt confident with her plan, we were ready to take to the skies.

When I fly commercially, I trust my pilot to fly me to my destination safely. I don’t want to go to another city, do barrel rolls, go vertical, break the sound barrier, or land on a highway. The flight should be boring, mundane, and lack excitement.

 In 1987 I was flying home from Europe on board a TWA 747. While on our final approach to JFK, the pilot lowered the flaps and put the landing gear down. When we got near the runway, he hit the afterburners, raised the flaps, and retracted the landing gear; we were on our way to Canada. The air traffic controller closed the runway seconds before our scheduled landing because of a significant snowstorm. It was a white knuckle moment as we banked right and headed north. After a few hours in Canada, we returned to New York. Scary, eh?

If a pilot does her job correctly, I get to my destination. When I travel, I usually arrive at my location without any issues. However, I may arrive late, miss a connection, or get diverted to another airport. Regardless, I eventually get home.

One of my primary duties as a financial planner is to help my clients achieve their goals. I try to do this carefully and efficiently. Often, clients achieve their goals without much fanfare, but occasionally, things get a little messy, especially when stocks fall. During a correction, dreams may be delayed or deferred, but we can reach them if we stay focused on their plan.

A financial plan, like a flight plan, will be your guide to help you achieve your goals. Don’t invest without one!

“Every takeoff is optional. Every landing is mandatory.” ~ Anonymous

October 29, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

The Tallest Tree in the Land

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A young ruler wanted a majestic garden with towering trees. He met with his gardener to share his vision. His gardener recommended planting 100 giant Sequoia trees to surround his land. The Sequoia is the most massive tree in the world, fitting for a young ruler. The ruler was pleased with the suggestion, and he authorized the project.

The young ruler checked his garden often. He was not satisfied with his freshly planted trees, especially compared to his friends. He became more frustrated when he saw the beautiful trees they posted on social media. He was jealous and angry.

He approached his gardener, demanding he remove the Sequoias and plant a faster-growing tree. His gardener pleaded with the young ruler to leave the trees alone. Majestic trees take years to mature. If he let them grow, his patience would be rewarded. The young ruler did not care. He wanted faster results.  The gardener reluctantly succumbed to his ruler’s request and planted Weeping Willows.

The gardener removed the Sequoias, except for one. He let it stand because the young ruler could not see it from his estate, it would be hidden for years.

After several years, the young ruler left his estate to attend college. When he left, the Weeping Willows matured and looked beautiful. Standing about 35 feet tall, they sprinkled his garden, and he was pleased. He finally had a garden worthy of respect.

The gardener tended the property while the ruler was away, trimming trees, watering plants, and planting seasonal flowers. And, he paid particular attention to the lone Sequoia.

When the ruler finished his studies, he pursued a career as a doctor in another country. While away from his estate, his garden flourished.

While working his rounds, he met a young lady, also a doctor. They married and had several children. He missed his estate and his Weeping Willows, but he loved his life, growing family, and new country.

The children continued to grow and eventually left home to attend college, find jobs, and start their own families.

The ruler was now old and wise. It was time for him to return to his homeland and his beloved estate with his extended family – children, in-laws, grandchildren, and great-grandchildren. He was excited to showcase his lush garden and majestic Weeping Willows.

As the ruler and his family arrived at the estate, they were in awe of the massive tree looming in the distance. Standing more than 200 feet tall, it towered over his estate and his tiny Weeping Willows. It was visible for miles and commanded admiration and reverence. It was the tallest tree in the land.

The wise ruler approached his gardener, wanting to know when he planted the beautiful tree. The gardener said he planted it when the ruler told him to do so many years ago. He informed the ruler that he let it stand, reminding the ruler it would take years and patience for majestic trees to grow.

The ruler was disappointed in his Weeping Willows. If he had listened to his gardener, he would have hundreds of giant Sequoias and the most fantastic garden in all the land.

Diversified investment portfolios, like majestic Sequoias and beautiful gardens, take time to mature. Be patient.

Someone is sitting in the shade today because someone planted a tree a long time ago. ~ Warren Buffett

October 24, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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 Correction Is Coming!

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Warning, a stock market correction is coming. The political environment, lack of a financial stimulus package, the pandemic, corporate bankruptcies, civil unrest, and so on will be too much for the market to bear. To prove my point, let’s examine a few previous market cycles.

March 9, 2009, to October 16, 2020

The S&P 500 soared 415% from March 9, 2009, to October 16, 2020. The historic climb started after the market plunged more than 50% during the Great Recession. If you invested $100,000 at the beginning of this bull market, your account would be worth $515,000.

Despite the bull market’s stellar performance, the S&P 500 fell 34% in March 2020. It lost more than 10% nine times and dropped more than 5% on thirteen separate occasions. The average decline during this bull market was 2.71%.

January 1, 1991, to April 1, 2000

The S&P 500 climbed 353% during this bull market, including the late nineties’ melt-up in internet stocks from 1995 to 1999. This market was the first time where investors could trade online, and firms like Schwab, T.D. Ameritrade and E*Trade rose to prominence. A $100,000 investment at the beginning of this bull market grew to $453,800 on April 1, 2000.

However, the late nineties bull market experienced many significant drops, including a 20% drop in 1998 and more than a dozen declines of 5% or more. The average decline during this bull market was 1.89%.

January 1, 1982, to September 1, 1987

The S&P 500 rose 163% during the great ’80s bull market. After a dormant 1970s, the market increased significantly, fueled by declining interest rates. A $100,000 investment grew to $263,900.

Like previous bull markets, this one experienced several severe corrections. In 1982, the market fell more than 16%, and in 1984 it dropped 14%. The average decline for this five-year run was 3.97%.

October 16, 1987 – October 16, 2020

The crash of 1987 occurred 33 years ago today. If you invested $100,000 on the Friday before Black Monday, your account would be worth $1.23 million today, producing an average annual return of 7.9%. In addition to Black Monday, where the index fell 23%, your portfolio also endured the Tech Wreck of 2000, where stocks sank 43%, the Great Recession when stocks dropped 56%, and the recent pandemic where the index tumbled more than 30%.

A correction is coming, but I don’t know when. It could happen tomorrow, next week, next year, or next decade. I don’t know, nor does anyone else. And, people who claim they can predict market moves are full of rubbish.  During every bull market, there are sizeable corrections. If you liquidate your holdings during a crisis, you will miss exceptional gains when stocks recover. If you panic, you lose.

Investors can also lose money while waiting for a stock market correction. If you sold your investments in May expecting a summer pullback, you missed a 16.5% return. Since the market low on March 23, 2020, the S&P 500 is up 56%, and year-to-date it’s up 7.41%.

To be a successful investor, think long term, invest often, buy the dips, and follow your plan.

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” ~ Peter Lynch

October 19, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Data Source = YCharts

A Mosquito In Your Tent

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I love the great outdoors. Hiking, fishing, camping are the hobbies I enjoy most. My wife and I spent a few days hiking in the Rocky Mountain National Park this summer, and it was beautiful. Our best vacations tend to be outside enjoying nature. We have visited several national parks over the years, including Yellowstone, Yosemite, and Grand Teton.

Camping in the mountains, on a beach, or near a river is peaceful and serene. The views. The sounds of nature. The clean, crisp air. A robust fire. Sleeping under the stars in a tent is lovely until you hear the buzzing sound of a mosquito, a single mosquito. It’s hard to imagine how much sound a small insect can produce, but it’s enough to keep you awake and annoyed for hours. Trying to locate and kill the mosquito is even more challenging than struggling to fall asleep. Though a mosquito is tiny, it can quickly ruin the joy of spending time outside.

A mosquito is like a bad investment in a diversified portfolio; it’s hard to ignore. If an investor owns ten mutual funds – nine up, one down, they’ll focus on the loser. It’s human nature. An investment down in value can distract you from the positive returns from the rest of your holdings. Several years ago, I was reviewing my parent’s account. It was a good year for returns, and most of their stocks were up except Qualcomm.  My mom wanted to know what was wrong with it, why was it down? There was nothing structurally wrong with Qualcomm; it was just out of favor – a temporary pause in a long-term uptrend. It has since recovered.

The mosquito in the tent this year is small-cap value. Small-cap value stocks are down 11.5%, and investors are losing patience. These stocks are distorting the view of better-performing asset classes like large-cap growth stocks, up 31%.

During my quarterly reviews with clients, all eyes turn to their small-cap holdings. Why do we own these stocks again? Is there anything better? Can we sell these losers? I don’t like losses either, but there will always be an investment out of favor in a diversified portfolio. If all your assets went up or down at the same time, you’re not diversified. Over time, your investment holdings will fluctuate between leading or lagging. Sectors trade in and out of favor often.

It’s hard to imagine today, but small-cap value stocks have outperformed large-cap growth stocks for the past twenty years. A $10,000 investment in the small-cap value index is worth $58,380, whereas the same investment in the large-cap growth index grew to $39,050, a difference of $19,330.[1]

During the early 2000s, investors wanted to ditch large-cap growth stocks. From January 2000 to January 2010, they lost 24%. A $10,000 investment fell to $7,635 during the decade – a huge loser. If you sold them in 2010, you missed a 411% return for the past ten years.

It takes patience to be a successful long-term investor. Peter Lynch, the legendary investor of the Fidelity Magellan Mutual Fund, would typically own a stock for three to five years or more before it showed significant gains.

Here are a few suggestions to help you better manage your investments.

  • Buy and hold a diversified portfolio of stocks, bonds, and cash because you never know when, where, or why investments will decide to take off.
  • Invest early and often.
  • Be a net buyer of stocks. Ignore the market.
  • Rebalance your accounts annually.
  • Be patient; today’s losers can be tomorrow’s winners.
  • Think long-term to create generational wealth.
  • Develop a plan, set goals.
  • Follow your plan.

Happy Camping!

“In the stock market, the most important organ is the stomach. It’s not the brain.” ~ Peter Lynch

October 16, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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] YCharts

Late to the party?

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It’s a bit awkward to arrive late for a party, especially if it’s very late. Walking into a room full of strangers once a party has started can be intimidating or embarrassing because it forces you to interrupt conversations or eat food picked over by the punctual guests.

I was late to a junior high roller skating party once because I wrote down the wrong starting time. When I entered the rink, my friends were already having a good time, and there were no more skates available in my size, so I rented a size 15 skate (about six sizes too big). I was uncomfortable and nervous about joining one of the cliques, and my large skates didn’t help.

If you’re late to your retirement party, have no fear because all is not lost. If you’re in your forties or fifties and have not saved any money for retirement, it may feel like you’re doomed to work forever, but that’s not the case.

The best time to start saving for retirement is in your teens or early twenties and invest thousands of dollars in high-flying stocks like Amazon or Tesla. An eighteen-year-old investing $1,000 monthly will have about $13 million at age 65. However, this is lunacy because few teenagers have the foresight, wisdom, or money to start investing (except Warren Buffett). When I was eighteen, I didn’t have a job, and I only had $60 in my savings account.  Besides winning the lottery or inheriting millions of dollars, what can you do to improve your retirement shortfall? Here are a few suggestions.

  • Inventory your assets and review your investment holdings. Locate your investment statements for your 401(k), IRA, and brokerage accounts. What do you own? What is the current value of your investments? How are your assets allocated?
  •  Calculate your liabilities. Identify your debts – home, car, credit card, student loans, etc. to figure out which ones you can refinance, reduce, or eliminate. How much money do you owe to others? What are your monthly payments? What interest rate are you paying on your debts?
  • Review your monthly expenses. Where is your money going? Establishing a budget or spending program will help you find excess dollars for savings. In a post-COVID world, you’re probably paying for things you no longer need or aren’t using, such as a gym membership. Look for items in your spending that can be reduced or eliminated.
  • Invest for growth. Stocks outperform bonds, cash, and inflation. Purchase stocks for the long haul, and they will help you make up for the lost time. The 94-year average annual return for stocks has been 10.1%.
  • Avoid speculating or gambling. It’s tempting to daytrade, buy penny stocks, or purchase options but avoid the urge. If you continually try to hit home runs, you’ll strike out often. Speculating with money you can’t afford to lose is madness.
  • Contribute the maximum amount of money to your 401(k) and IRA accounts. The government allows you to contribute $19,500 to your 401(k) plan, or $26,000 if you’re 50 or older. You can contribute $6,000 to an IRA plus an extra $1,000 if you’re 50 or older.
  • Automate your savings. Establish a monthly investment program into a few mutual funds and a savings account. Automating your savings will eliminate human error and emotions.
  • Ignore the stock market. Trying to time the stock market is impossible and a waste of time. While you’re building your retirement nest egg, be a net buyer of stocks, notably when they fall.
  • Review your progress. A quarterly review of your spending habits will allow you to adjust your plan as needed.
  • Work with a financial planner. Your planner will be your guide, accountability partner, and financial Sherpa. Working with an advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[1]   

Your retirement journey may feel insurmountable, but you can do it – particularly with a financial plan.  Saving money is akin to starting an exercise routine. It won’t be easy, but each day will get better than the next. It’s challenging to see results at first, but you will notice significant changes over time.  

Happy Retirement!

“Life is a party. Dress for it.” ~ Audrey Hepburn

October 15, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.vanguard.com/pdf/ISGQVAA.pdf

1,472,583 Things To Do Before You Retire

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Retirement planning involves millions of inputs. When will you retire? Where will you retire? How much money do you need? Will you travel the world? Play golf? Fish? Surf? The list of questions is endless, and it can be overwhelming.

Financial planning can help you alleviate your concerns. It isn’t easy to pinpoint your future goals, particularly if you’re retiring in twenty or thirty years. Financial planning is great until life gets in the way. I was born and raised in Southern California. I thought I’d live there forever, but I’ve lived in three different states because of job transfers. Life happens.

If you’re unsure how to start planning for your retirement, create a file to track the important things to you and your family. For example, if you want to spend your days surfing, you’re not going to retire to Topeka, Kansas. Retirement planning is also a process of elimination. What don’t you like? What can you cross off your list? Narrowing your choices will help you make better decisions on how to spend your golden years. Of course, your plans will change often before you finally decide to retire.

Of the more than one million items to focus on for retirement, I’ve narrowed the list down to four necessary items – all things you can control to grow your nest egg.

  1. Spending. Spending is a large driver for your retirement, a key component. If your spending level is high, you will need more assets to cover your expenses. Tracking your monthly expenses is vital to determine how much money you need to retire.  After you get a handle on your annual spending, multiply your results by twenty-five. If your annual spending is $100,000, then your asset goal is $2.5 million ($100,000 x 25 = $2,500,000). If you’re on pace to reach your target, congratulations. If not, then you need to adjust your spending.  When your assets can produce enough income to cover your expenses, you can retire at any time – regardless of your age.
  2. Savings. Spending and savings go hand in hand. The less you spend, the more you can save. Contributing to your 401(k), IRA, and investment accounts early and often may yield substantial retirement assets. While working, you should be a net buyer of stocks. Don’t worry about the economy, the election, the market, etc. When I started working, the Dow Jones was at 2,376. Today it’s 28,250 – an increase of 1,089%![1] Who cares what the market is doing daily. It’s a waste of energy to try and time the market, especially if you’re going to work for another ten or twenty years.
  • Allocation. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is due to market timing and investment selection.[2] Allocating more money to stocks is your best chance to build substantial wealth. Since 1980, the S&P 500 has generated an average annual return of 11.8%, while short-term bonds returned 4.2%, a difference of 7.6% per year.
  • Emotions. Of all the items that will impact your retirement, your emotions will be at the top of the list. You will be your most prominent advocate and your worst enemy. The stock market has produced extraordinary gains for the past century, but several large corrections forced investors out of the market. How you react during the dark days of the stock market will significantly impact your retirement assets. When the market fell in March, investors liquidated $348 billion in assets from mutual funds. They panicked and sold their holdings at the bottom, potentially missing a 52% return as stocks recovered. If you panic and sell during corrections, you will impair your future benefits. It takes courage to be a buy and hold investor, but you must do so if you want to create generational wealth.

It’s essential to plan for your future. Dream big, shoot for the stars, have fun, enjoy the journey, but concentrate on the things you can control and ignore the rest. If you focus on your spending, savings, asset allocation, and emotions, you will give yourself a chance at a successful retirement.

See you at the beach!

If you can’t control your emotions, you can’t control your money. ~ Warren Buffett

October 6, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Photo credit: DisobeyArt, I Stock Photo

[1] Dimensional Funds 2020 Matrix Book

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