Diversification

A young ruler owned several racehorses. His stable was full of powerful thoroughbreds, but one yearling stood out from the others – a beautiful chestnut with a wide blaze. It had an easy gait and ran like the wind while galloping. The young ruler was mesmerized.

One day, while watching his young horse trot, he ordered the trainer to sell all the horses in his barn except for the yearling. The trainer pleaded with him not to do this, and he reminded the ruler that the other horses were champions, and they had won many races. It would be foolish to concentrate your bets on one horse that has yet to run a sanctioned race. The ruler ignored the trainer’s advice and demanded he move the horses today.  The trainer acted on the command.

The yearling continued to progress as the young ruler projected. The horse looked more majestic with each passing day.

Since the ruler sold the other horses, his stable was not generating any income, so he borrowed money to keep his property afloat.

After several months of training, he entered his horse in its first race. It won by four lengths, pulling away at the finish. His horse continued winning, and the ruler had dreams of great wealth. In addition to the winnings, he planned on retiring his horse to stud to generate more income.

At three-years-old, the horse was undefeated. The ruler enjoyed the winnings, but he continued to borrow money. The race of the year was on the horizon, and his horse was the favorite. After the race, he planned to cash in his winnings, pay off his debts, and start the stud operation.

His horse sprang from the gate cleanly and roared to the front of the pack. The horse continued to separate itself from the field, soaring down the backstretch. At the top of the stretch, the horse tumbled and threw its rider. The crowd fell silent as the ruler and the medical team sprinted to the track. The horse popped up, but it was clear it had a broken leg. They put the horse down.

The young ruler sold his farm to pay off his debts, and he lost everything.

The moral of the story? Diversify your assets.

The future is always coming up with surprises for us, and the best way to insulate yourself from these surprises is to diversify. ~ Robert J. Shiller

November 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.

Thankful

As we approach Thanksgiving, here are twenty things I’m thankful for in 2020.

  1. Family
  2. Friends
  3. Faith
  4. Neighbors
  5. Pets
  6. Health
  7. Long walks
  8. Good books
  9. Provision
  10. Democracy
  11. Zoom
  12. Netflix
  13. Amazon
  14. Barbeques
  15. Vaccines
  16. The Dodgers
  17. The Lakers
  18. My guitar
  19. Fly Fishing
  20. Holidays

Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus. ~ Philippans 4:6-7

Happy Thanksgiving!

November 23, 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. Turkey with mashed potatoes, gravy, corn, and crescent rolls is my go-to meal on Thanksgiving. What is yours?

Price and Value

A young ruler had a magnificent painting hanging in the main hall above his fireplace. Guests and visitors were attracted to its beauty and assortment of colors. It was the focal point of his mansion; he admired it greatly.

While viewing his artwork, the young ruler asked his curator what he thought it was worth.

It’s only worth what someone else will pay.

How do I know what they will pay?

What did you pay?

I paid very little.

Is the painter still alive?

What difference does it make?

If the painter is dead, and there’s only one picture, it will be worth a lot.

I think he’s alive; I have no idea. He was traveling through town with the painting when I bought it. I have not seen him since, and I don’t know where he was going. He was in a hurry, so he let me buy the painting at a low price.

Well, in that case, let’s post an ad to let people know you want to sell your magnificent painting. If they feel it’s worth a lot, the price will climb. Of course, if they don’t like it, the price will be low.

Okay, let’s see what they’ll pay.

The people were excited for a chance to own the majestic painting owned by the young ruler. Hundreds of people walked through his main hall to get a glimpse of the great artwork. The crowd was amazed by its beauty, and a bidding war ensued. The price of the painting climbed to dizzying heights. The young ruler could hardly believe how much money he would receive once it sold, more money than he had ever made in his entire life.

He asked the curator what he should do as the price continued to rise. The curator told him to sell it to the highest bidder, but the young ruler was greedy. If people were willing to pay a high price today, they would surely pay a higher price tomorrow. The young ruler canceled the sale.

The next day he let the people bid again, and he was right; the price of the painting soared. He was now the wealthiest person in the land, but he wanted more, so he canceled the auction again.

On the third day, the people returned to bid on his precious art, and the price reached a staggering sum. The young ruler could hardly believe his good fortune, but he still wanted more, so he stopped the bidding for the third day in a row. The people were angry, but the young ruler knew they’d return tomorrow to bid again.

On the fourth day, the people did not show up. The young ruler was confused, so he ventured into town to find out what was happening, and to his horror, he saw the traveling artist selling hundreds of copies of his painting. The townspeople paid very little for their artwork.

The young ruler’s painting looked like everyone else’s. It was no longer unique, and he couldn’t sell it for a king’s ransom; the price plummeted. It was worthless.

Moral of the story: Price and value are not the same things.

Nowadays, people know the price of everything and the value of nothing. ~ Oscar Wilde

November 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.

The Hare, The Tortoise, & Stocks

The Hare and the Tortoise is a classic Aesop fable. A story we know well.  The hare mockingly asking the tortoise, “Do you ever get anywhere?” Of course, we know how the story ends. The tortoise “kept going slowly but steadily, and, after a time, passed the place where the Hare was sleeping.” Practicing a life of slow and steady is harder than it looks. We are an impatient nation addicted to getting our way as quickly as possible.

I recently lost a client who wanted to arrive at the finish line faster than scheduled. He mentioned a relative who was investing in growth stocks and generating returns of “20% to 30% or more.” Since the market low on March 23, the NASDAQ has risen 71%, and stocks like Shopify and The Trade Desk have risen more than 320%. The recent pandemic has turned Robinhood traders into stars, and one celebrity repeatedly mocks Warren Buffett and has said, “Trading is easy.”

The curious thing about my call with my former client is that it resembled one I had with another client in December 1999. At the time, the NASDAQ had risen 53% in two months as investors speculated on internet and dot com stocks. He, too, wanted to grow his account faster. He was not satisfied with his returns, and he felt like he was missing his chance to strike it rich. The NASDAQ would rise another 24% as it reached a peak in March 2000. The NASDAQ would fall 78% before it hit rock bottom in December 2002. If you invested at the market top in 2000, you had to wait sixteen years before the index eclipsed its previous high.

At times, I think it’s easier to make 50%, 100%, or more in short-term trading bursts than earn 8% for 10, 20, or 30 years. It’s possible to catch lightning in a bottle, but the key to creating generational wealth is how you react after a market crash. How many investors in 1999 remained invested for sixteen years to recover their costs or buy stocks at low prices? My guess, not many.

When the market corrects, the slow and steady crowd takes over, systematically investing while following their plan. Warren Buffett said, “The stock market is a device for transferring money from the impatient to the patient.”

The 100 year average for stocks has been 10%, and it’s been 5.6% for long-term bonds. Since 1926, a portfolio consisting of 50% stocks, 50% bonds generated an average annual return of 8.55%, and it has made money 79% of the time, which means 21% of the time it lost money.[1] And, in some years it lost a lot. In 1931, the portfolio lost 38%; from 1984 to 1987, it dropped 19.8%. How you manage your investments and emotions in down years determines your wealth in up years.

A 50/50 portfolio has performed well for 1, 3, 5, and 10-years, averaging 12.18%, 12.10%, 10.54%, and 10.73%, respectively.[2] The 20-year average annual return has been 7.87%. You don’t need to make substantial gains to achieve your goals, though it would be nice. If you earn 8% per year, you can double your money every nine years.

I started my investment career in May 1989, and since then, the NASDAQ, Dow Jones, and the S&P 500 are up considerably, rising 2,660%, 1,130%, and 1,070%, respectively. However, during the past thirty years, the market has fallen several times. The NASDAQ fell 78% from 2000 to 2002. In 2008 and 2009, the S&P 500 dropped 48%. In December 2018, the Dow Jones pulled back 18.15%. This year, the three indices fell an average of 33.5%.  If you invested in each index equally for the past three decades, your average annual return was 8.94% before dividends. A $10,000 investment is now worth $130,500.

Individuals who complete a financial plan are likely to stay invested through good markets and bad. If you don’t have a plan, you may panic and sell your stocks when times are tough. In March and April, we fielded several calls from clients who wanted guidance on how to handle the sell-off. We reviewed their plans and told them to remain invested because the market correction did not impact their financial goals.

The hare lost the race because he was impatient and overconfident. If he had a plan and followed it, he would have beaten the tortoise by a mile, and Aesop would not have written his famous fable.

The race is not always to the swift. ~ Aesop Fable

November 13, 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] Dimensional Funds Returns Web 

[2] Ibid

Buy Bitcoin?

Should you buy Bitcoin or other cryptocurrencies? Maybe. Bitcoin has performed well this year, up 107%. Though it has done well, it still hasn’t eclipsed its all-time high set in 2017. If you want to buy Bitcoin, I would consider it an alternative investment, not as a substitute for cash or a money market fund.  

Global currencies from developed countries are relatively stable, and a consistent store of value. The US Dollar, Euro, Pound, Yen, and Canadian Dollar fall into this category. Bitcoin may eventually become a stable currency, but it’s not there yet. In 2018 it fell 81%, and in 2019 it dropped 55% before bottoming in March of this year.

If Bitcoin is an alternative asset, then I’d recommend allocating no more than 3% to 5% of your investable assets to this class. For example, if you have $1 million in assets, an investment of $30,000 to $50,000 is appropriate.

How do you buy and sell cryptocurrencies? If you want to trade Bitcoin or other cryptocurrencies, I would recommend opening an account on Coinbase. On their site, you can trade Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. According to their website, they’ve exchanged more than $150 billion worth of cryptocurrencies across 102 countries through 30 million customers. If my math is correct, each customer has risked about $5,000.[1]

Bitcoin is a digital asset tracked and stored on the blockchain. Bitcoin is the original cryptocurrency, and there is only 21 million Bitcoin. I’m sure I’m missing something about supply and demand, but I have always wondered why the price isn’t higher or why no one tries to corner the market. Bitcoin trades for $15,127, giving it a market cap of $317 billion. For example, Apple currently has 17.4 billion shares outstanding, and it’s selling for $119 per share. If Apple only had 21 million shares, it would trade for $96,523. In the 1980s, the Hunt Brothers tried to corner the silver market[2]. The price of silver jumped from about $4 an ounce to a high of $48.70 for a gain of 1,117%. Silver would eventually fall to under $4 an ounce after their coup d’état failed.

Bitcoin is making its way to main street as Square and PayPal allow customers to buy and sell it on their platforms. Companies like Microsoft, Home Depot and Starbucks now accept cryptocurrency.

Do you need to own Bitcoin to create wealth? I don’t think so. Do you own a Van Gogh, da Vinci, or Picasso painting? Do you own thousands of acres of timberland? The Hope Diamond? A 1962 Ferrari 250 GTO? Drawers of Patek Philippe watches? Of course, these are extreme examples, but you’ll be fine without owning Bitcoin if you want to create generational wealth. If you’re going to use it to buy goods and services, that’s another story.

Here are a few links if you want to learn more about Bitcoin.

Happy mining!

We have elected to put our money and faith in a mathematical framework that is free of politics and human error. ~ Tyler Winklevoss

November 11, 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.

This blog is not an offer to buy and sell Bitcoin. I do not own any cryptocurrencies because I don’t understand them as well as I should. If you want to trade this asset class, do your homework.


[1] https://www.coinbase.com/, website accessed 11/11/20

[2] https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp, Andrew Beattie, June 25, 2019.

Evidence

I like math. It’s pure and definite; the answers are indisputable. In junior high and high school, I had spirited conversations with my English teachers because our interpretation of events differed considerably. It was my opinion against theirs, and they frequently won because they were grading my papers. However, I always felt a little cheated because if they didn’t like my topic or handwriting, they’d knock me down a notch or two. One teacher didn’t like athletes, so she was upset when I turned in a book report on Roberto Clemente. On the other hand, my math teachers evaluated my work based on facts and time-tested formulas, which made sense.

Opinions, guesswork, and assumptions run rampant on Wall Street, especially in the absence of facts. Without facts, individuals create a story that is often wrong. Convinced the market would fall if Biden won the election, investors sold stocks. Others felt COVID would continue to drive stocks down in value. But, since election day, the Dow Jones Industrial Average is up almost 8%. Helping propel the Dow higher is news from Pfizer that they may have found a vaccine for COVID.[1] Short-term thinking is an investor’s worse enemy.

A bit of market knowledge may help you stay invested during times of turmoil and ambiguity. Here are a few facts.

  • Individuals who complete a financial plan have three times the assets of those who do little or no planning.[2]
  • Stocks outperform bonds. The 93-year average annual return for common stocks has been 10.2%, while long-term government bonds returned 5.6%. A $1 investment in large-company stocks is now worth $9,237, while $1 invested in bonds is worth $175.[3] 
  • Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.2% from 1928 to 2019. A $1 investment is now worth $90,337.  The Dimensional Large-Cap Value Index averaged 11.2%. A $1 investment in this large-cap index is now worth $17,219.[4]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% comes from market timing and investment selection.[5]
  • Passive index investing is better than active stock picking. The Standard & Poor’s passive v. active study reveals that over 15 years, 95% of active fund managers fail to outperform their benchmark, also the case for 1, 3, 5, and 10 years.[6]
  • Lower fees are imperative. Less is more. Your advisor should provide you a list of charges for their services, including the investments they offer. If your advisor is charging you more than 1% of your assets, a high hourly rate, or a monthly retainer, you may need to make a change.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[7] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more. 
  • US stocks rise about 75% of the time. Since 1926, the S&P 500 has risen 69 times and fallen 25.
  • Since 1926, inflation has averaged 2.9%, and US T-Bills have returned 3.3% per year. Your net return, before taxes, has been .4%.
  • The stock market always recovers. In March, the Dow Jones was down 37%, falling to 18,591. Today it’s approaching 30,000 – a record level.

To create generational wealth, own stocks, overlook short-term moves, focus on facts, ignore conjecture, and good things will happen.

“These are the facts of the case – and they are undisputed.” ~ Kevin Bacon, A Few Good Men

November 9, 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.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against

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

[3] Dimensional Funds 2020 Matrix Book.

[4] Ibid.

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

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

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

Same As It Ever Was

Election day has come and gone, and pollsters once again missed their mark. In 2016, they forecasted a Clinton landslide, and she lost. This year, Biden was projected to win by double digits, and a blue-wave would overtake the House and Senate. The election is not officially over, but it won’t be a double-digit victory, and we did not experience a blue-wave. Same as it ever was.

In 1948, Thomas Dewey was declared a winner over Harry Truman by the Chicago Tribune. They were wrong. Harry Truman famously held up their newspaper with the headline: “DEWEY DEFEATS TRUMAN.”[1]

In 1946, Darryl Zanuck, movie producer at 20th Century Fox, said, “Television won’t last because people will soon get tired of staring at a plywood box every night.”[2] Have you binged on Netflixed lately?

Decca Recording Company refused to sign the Beatles in 1962 because “We don’t like their sound, and guitar music is on the way out.”[3] They probably had a hard day’s night by not signing the Beatles.

Ken Olson, president, chairman, and founder of Digital Equipment Corporation, said, “There is no reason for any individual to have a computer in his home.”[4] Can you imagine working from home without a computer during the pandemic?

The San Francisco 49ers were a pre-season favorite to win Super Bowl 55, but since they started playing actual games, they will finish in the middle of the pack, at best.

Forecasting anything is challenging, especially in the short-term.

It will snow in Colorado this year, but who knows when it will start, how much will accumulate, and when it will end. No one knows if it will snow on December 7 in Estes Park, but it may.

Trying to predict the direction of the stock market may be the most challenging to forecast. Fortune Magazine told readers last week to “Buckle up, investors: it might be a rough few days.” One Wall Street veteran said, “The S&P 500 ‘could easily dip into correction territory on Monday; it wouldn’t be surprising if that happened.'”[5]  What happened? The Dow Jones rose 5.08% or 1,346 points.[6]

The stock market has averaged 10% per year for the past 100 years regardless of who wins the Super Bowl, snows in Colorado, or occupies the White House.

The bottom line is that no one knows what will happen today, tomorrow, next week, or next year.

As an investor, what can you do if no one can predict the future? Here are my suggestions.

  1. Invest according to your goals. A financial plan can help you quantify and prioritize your goals. Are you saving for college or retirement? Do you want to buy a new car or a vacation home? Your goals will determine your asset allocation. If you need your money in one year or less, invest in cash. If your time horizon is five years or more, invest in stocks.
  2. Invest for growth. For the past twenty-five years, my asset allocation has been 75% stocks, 25% bonds regardless of market conditions. When stocks rise, I rebalance my portfolio to buy more bonds. When they fall, I sell bonds to buy stocks. I don’t care what the stock market does today because I don’t need my money for another fifteen years or so. And, on some days, I can’t remember if the market was up or down.
  3. Don’t time the market. After the market correction in March, several investors sold stocks and parked their money in cash, missing a 50% rebound in stocks. Last week, I fielded a few calls to see if we should sell stocks before the election and repurchase them after it was over. I told them to stay invested, thankfully. Investing is not a binary event. Moving from stock to cash and back is a loser’s game.
  4. Save early and invest often. The amount of money you save will significantly impact your wealth more than trying to time the market. Investing $1,000 per month at 7% will be worth $1.2 million in thirty years. The more money you save today, the larger your account balance will be tomorrow; it’s simple math.
  5. Invest in a globally diversified portfolio of low-cost funds. Global exposure will give you access to large, small, and international companies. A diversified portfolio works well over time because you never know when, where, or why which markets will move.

Trying to predict the future is a waste of time and energy, so don’t do it. Rather than worrying about what will happen tomorrow, live for today, enjoy your life, love your neighbor, and count your blessings.

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthew 6:36

November 5, 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.history.com/news/7-failed-predictions-from-history

[2] https://www.boredpanda.com/bad-future-predictions-timeline-history/?utm_source=google&utm_medium=organic&utm_campaign=organic

[3] http://www.atchuup.com/famous-predictions-proven-wrong/

[4] Ibid

[5] https://fortune.com/2020/10/30/the-sp-500-could-easily-dip-into-a-correction-before-the-election-on-tuesday/, Anne Sraders, October 30, 2020

[6] YCharts – DJIA, 10/30/2020 – 11/4/2020