What Is Your Fee?

A prospect recently visited a financial planner’s website and had the following conversation.

Welcome to my office. How can I help you today?

I viewed your website and am impressed with your credentials and firm status, but I have several questions regarding your fees.

Sounds good; fire away.

Okay. I noticed you have several fee options, but I don’t understand the difference. Can you explain why you have so many choices?

Absolutely. We offer multiple fee schedules because clients like to choose the best structure that fits their needs. We offer four distinct plans: an asset management fee, a flat fee, an hourly rate, and a financial planning fee.

I Got it. What’s the difference?

It’s simple, really. We charge a 1% asset management fee for managing your money and completing a financial plan. For example, if you invest $1 million, the cost is $10,000, and if your account increases to $2 million, your new rate is $20,000.

I see. The 1% fee seems high. Is it not?

No way. It’s the industry standard, and we profit when you profit.

What’s next?

We offer a flat fee for asset management and financial planning of $10,000 per year.

If my account is $1 million, I pay $10,000. Is that not a 1% fee?

It is, but it’s a flat fee. Do you see the difference?

No, not at all.

If your account rises or falls, you only pay $10,000.

What if my account drops to $500,000?

It’s still $10,000.

Now my fee is 2% per year – correct?

Technically, yes, but it’s a flat fee of $10,000, and we don’t use percentages or refer to it as a fee-based account if we charge you a flat fee. Does this help?

No. Let’s move on to your hourly rate.

You bet. Our hourly rate is $500 per hour.

Wow. How many hours does it take to finish a plan?

About twenty hours, give or take.

Really? Your hourly rate is $500, which takes twenty hours, so your fee is $10,000? It Is the same rate as your two other options.

I guess it is, but different because it’s an hourly rate.

Let’s move on to the last one, financial planning only. Let me guess. Is it $10,000?

How did you know?

It’s just a hunch.

Our financial plan only module is $10,000. We set up your plan with instructions on how to implement it yourself.

My self? What do you mean?

We give you the finished document, and then you select your investments, manage your assets, and rebalance your accounts. Also, you’ll need to implement our recommendations for creating trusts, buying life insurance, changing beneficiaries, etc. It’s a simple process.

Simple?

Absolutely. You can open a Vanguard account, select two or three mutual funds, and you’re up and running! After opening your accounts, you can Google estate planning attorneys, life insurance agents, CPAs, etc. They will assist you with the remaining areas of your financial plan.

It sounds like I’m doing most of the work. Is your plan worth $10,000?

Yes, on both accounts.

What if I need to update my plan?

Your fee is good for one year; we charge $500 per hour to update your plan.

All your fees are almost identical.

I guess they are. I’ve never noticed that before. Odd.

I’m going to check with a few more firms to compare notes. I’ll get back to you soon if I want to proceed.

Thank you. When you check out other firms, please ensure you only work with an advisor with an “O” and not an “E.” There is a big difference.

Really?

You bet. Good luck with your due diligence, and thank you for coming to my office today.

May 30, 2022

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.

Buy The Dip

The Nasdaq is getting crushed, and the trend is lower. The tech-heavy index includes Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla. Since 1987, it’s up 3,100%, but it has incurred numerous corrections, including a 75% decline from 2000 to 2002 and the crash on  Black Monday, October 19, 1987, where it dropped 29%. It’s a bleak time to invest, so should you buy the dip?

Buying the dip has historically paid dividends, but is this time different? Should you buy the dip? Successful investors employ a strategy to automate their investment program through dollar-cost averaging. Let’s review four challenging investment times – 1987, 2000, 2008, and 2020 and assume that you started with an initial amount of $10,000 and automatically invested $500 per month.

1987

On October 19, 1987, the market crashed by more than 22%. There were many sellers that day, but what if you established a monthly investment program and bought stocks during the collapse? If you applied the metrics from above, your account grew to $2.1 million by this May. Your net investment was $220,000, generating an average annual return of 10.05%. Despite the rough start, you made 9.5 times your original investment.

2000

The Nasdaq fell 75% from 2000 to 2002 as the tech-wreck crushed stocks and vaporized many dot com companies. If you invested in January 2000, it took more than ten years to breakeven through your monthly investment program. Today, your account is worth $538,257 after investing $144,000 for twenty-two years. Your average annual return was 9.6%, and you made 3.5 times your money.

2008

The Great Recession was vicious as the Nasdaq fell more than 50% from 2007 to 2009. If you invested monthly, you turned a profit in 2009 and averaged close to 13% per year from 2008 to 2022. Your account balance is now worth $297,203 after a net investment of $96,000, or three times your money.

2020

The COVID correction occurred in March 2020, when stocks fell about 30% in thirty days. If you started a monthly investment program in January 2020, you were down more than 13% at the end of the first quarter but recovered quickly. If you established a monthly investment program, you would be up about $375 through this May. At one point, you gained more than 46% before this year’s pullback reduced your profits.

Dollar-Cost Averaging

If history is a guide, buying the dip is a profitable strategy. The tech-heavy index is aggressive, and you likely own a portfolio of stocks and bonds, diversifying your assets by not putting all your eggs in one basket. You can set up a monthly investment program into a single fund, multiple funds, or an entire portfolio – the more, the better, and automating this process will force you to buy stocks when others are panicking

The bottom line is that automation lowers the risk of human error and adds some intelligence to the enterprise system. ~ Stephen Elliot

May 23, 2022

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.

Data Source: Yahoo! Finance!

A Tale of Two Trees

During my morning walk, I noticed two trees. One tree touched the sky with giant limbs, dark green leaves, and rich fruit. The other tree was short and lifeless, and I was curious why they were radically different.

My curiosity led me to the homeowner of the healthy tree. I knocked on her door, and when she answered, I asked her about her magnificent tree. She planted it years ago, waters it sparingly, and prunes it occasionally. She added, “I planted it and let mother nature do the rest.”

After I left her house, I approached the owner of the dead tree and met him in the front yard to learn more about his situation. He said he wakes up early to get the latest news from the Weather Channel and then spends hours scrolling social media sites to listen to experts about trees and the weather.  

He said, “I planted my tree decades ago, and ever since then, I’ve worried about it constantly.” He continued, “After my morning routine, I run outside and pull the tree out of the ground to ensure the roots are still growing and they’re getting enough water.”

“You rip it out of the ground every day?” I asked.

“I do because it’s not going to grow if I don’t check the roots daily.”

“If you uproot it daily, the roots can’t grow.”

“It will grow someday. I know it will, but I worry about the elements hurting my little tree. I cover it during the day so the sun won’t beat down on it, and when there’s a storm warning, I bring it inside to protect it from the rain and wind.”

“Trees literally need rain and sun to grow. Why would you not leave your tree in the ground?”

“Well,” he said, “I already told you I’m scared it will get hurt, and I don’t want anything to happen to it, so I care for it every day.”

“I see.”

“Do you?”

“Not really. It will grow like your neighbor’s beautiful tree if you leave it alone.”

“I guess so, but she has to rake leaves, pick fruit, and trim branches. It’s too  much work for me.”

“Okay, well, good luck with your strategy.”

The moral of the story: Stocks, like trees, take time to grow and bear fruit.

May 20, 2022

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.

What If I’m Wrong?

During my final semester of college, I discovered the stock market through an investment class. The professor opened my eyes to the possibility of creating wealth by owning great American companies. In the Fall of 1987, I experienced Black Monday in my college classroom; I didn’t lose money because I didn’t own stocks. Despite the crash, or because of it, I became enthralled with equities.

Since 1987, I’ve been a student of the stock market reading thousands of books and articles, studying legendary investors like Graham, Buffett, Lynch, Templeton, Miller, Bogle, Marks, etc. – each one a raging capitalist who believed in America’s economic engine. These notable investors bought stocks during troubled times, which is why they’re worth multi-millions and billions. Warren Buffett, at 91, continues to purchase companies and could care less about market drops or corrections. In fact, he has been on a buying spree this year, despite the decline in the market.

Since 1926, stocks have averaged 10% per year despite wars, recessions, corrections, and inflation spikes. The market has always rebounded from previous pullbacks, but what if this time is different? What if stocks don’t recover? Is this the beginning of the end for equities? What if the sun does not rise tomorrow? Is it time to bury your money in the backyard or under your mattress? Maybe it is. Perhaps now is the time to abandon equities and embrace cash.

It feels like the end of times because stocks are off to their third-worst start ever while bonds posted their worst returns. The S&P 500 is down 19%, and Bloomberg’s US Aggregate Bond index is off nearly 10%! It’s unusual for stocks and bonds to perform poorly simultaneously. Historically, when stocks fall, bonds rise. During the previous five S&P 500 Index corrections, where stocks fell 20%, bonds rose 2.2%.[1] According to the Capital Group, the average annual return for the ten years ending December 2021 was 16.5%, and the average annual return for 10-year rolling periods dating back to 1974 was 15.74%. From 2012 to 2021, a $10,000 investment grew to $37,900, but if you missed the 40 best days, your valuation dropped to $10,050.[2] According to Bloomberg, bonds have made money 100% of the time during every rolling 5-year period dating back to 1926.[3] Time in the market is more important than timing the market.

Inflation spikes have occurred about fifteen times over the past 108 years or every seven years. We last experienced a severe increase more than forty years ago, from 1977 to 1980. Once inflation started to wane, the stock market soared to all-time highs from 1982 to 1999, rising by 1,211%. The market declined slightly in 1990, closing down 6%, but the bull run did not end until 2000, when stocks crashed during the Tech Wreck.[4] What about 1987? On October 19, 1987, stocks fell more than 22% or 508 points. Despite the drop, the market finished the year in positive territory.

Is it possible that McDonald’s stops selling hamburgers or Apple no longer offers earbuds? Will people stop shopping at Amazon, Target, or Walmart? Will Budweiser halt selling beer at baseball games? Will Norfolk Southern and Union Pacific quit shipping materials across the country? Will Tesla stop building electric cars? Will Southwest Airlines leave the airline industry, or gasp, Starbucks exits the coffee business? It’s possible but not probable.

I spent considerable time a McDonald’s while attending college, and when I ordered food, I didn’t care if its stock was up or down. I started my investment career in 1990, and my first recommendation was McDonald’s because people must eat. It fell 15% in 1990, and clients were worried it would fall further. I told them to visit any McDonald’s in the world at noon, and if it was empty, we would sell the stock. I never received a call. Since 1990, McDonald’s stock has risen 5,210%. A $100,000 investment is now worth $5.35 million.

The Dow Jones has weathered many storms and achieved several milestones, but investors were nervous when the index was 30, 300, 3,000, and 30,000. When it reaches 300,000, investors will be anxious —human nature. Do not let your short-term fears derail your long-term goals, and don’t bet against great American companies.

Rather than worry about the market, invite a friend to McDonald’s and enjoy the day.

It’s the end of the world as we know it, and I feel fine. ~ REM

May 19, 2022

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://www.capitalgroup.com/ria/insights/articles/how-to-handle-market-declines.html

[2] IBID

[3] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf

[4] DFA 2022 Matrix Book

Cut In Half

Please do me a favor. Add up all your financial assets – retirement accounts, investment accounts, checking, savings, etc. After calculating your asset amount, divide it in half. How do you feel? Could you survive financially? Do you need to adjust your lifestyle? The answer to your question will determine how to pursue your future investment strategy.

Since 1930, the Dow Jones Industrial Average has lost half its value on a few occasions, like the Great Depression and the Great Recession. It has declined more than 30% many times, and it appears like it falls at least 10% annually. The average decline since 1930 has been approximately 18.5%, and this year the Dow has dropped 12.5%. Despite the downdrafts, the market has averaged 10% per year since 1926. Unfortunately, we must endure painful down days to reap the rewards from the long-term trend in the stock market.

One client recently said, “If you know the market will drop, why the ***k do we own stocks?” It’s a fair question despite the added color. We don’t know why or when stocks will recover, but they always have, and if you don’t own stocks when they rebound, you’ll miss significant returns. After the Dow Jones fell 31% in March 2020 due to COVID, the market soared 55% from March to September. If you panicked and sold, you missed a robust recovery. During the Great Recession, the Dow crashed 53%. If you sold during the onslaught, you missed a 150% return from 2009 to 2013. I’ve noticed that people who sell stocks when they fall rarely repurchase them when they start to recover.

Let’s revisit my original question. How would you feel if you lost half your assets? Of course, you’re upset, and you’re probably sick to your stomach because no one likes to lose money. However, if a 50% reduction in your assets does not impact your life, a market correction is a mere inconvenience and a buying opportunity.

If the market falls by half and significantly impacts your life, consider changing your investment allocation. Here are a few suggestions:

  1. Reduce your stock allocation. If a market correction alters your lifestyle, reduce your stock exposure to lower your risk level. Less risk equates to less return and less volatility.
  2. Buy bonds. Individual bonds are safe and predictable, especially US Treasuries, and they have performed well in previous corrections. During the 2008 correction, long-term US Treasuries climbed 26%. When stocks fell 43% from 2000 to 2003, bonds soared 43%.
  3. Increase cash. An emergency fund provides liquidity during a market collapse. If you can access some money during a crisis, it will allow your stocks time to recover.
  4. Reduce spending. If you reduce your spending, then you need fewer assets to live.

The Dow Jones is up 54% over the past five years, and if you’ve been a long-term investor, you’re still making money, but this brings little comfort to new investors or those who bought stocks a few months ago. I know it’s a challenging environment, but markets have always recovered. In the meantime, review your asset allocation, expenses, investments, fees, and goals.

If you think of the stock market as a cauldron of minestrone soup that occasionally somebody sticks a ladle in and stirs up, it takes a while before all the vegetables float back to the level that they were at before. ~ Seth Klarman

May 18, 2022

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.

5 Things Worse Than A Stock Market Crash

Stocks are tumbling, led by the Nasdaq. The tech-heavy index is down more than 25 percent this year. Numerous stocks have fallen more than 50 percent as investors sell speculative growth stocks, including Peleton, Teledoc, Palantir, Roblox, Redfin, Shopify, and Coinbase. Giant companies like Amazon, Disney, and Facebook have dropped more than 30 percent. It’s an ugly market.

However, I’m not worried because the market has always recovered. The Nasdaq crashed in 2000, 2008, and 2020, and despite the corrections, it bounced back to all-time highs. I’m optimistic the Nasdaq will return to its winning ways.

Stock market corrections are terrifying, but here are five items that can permanently destroy your family’s financial future.

  1. No savings. Saving money is the ultimate way to create generational wealth. After you get paid, allocate money to your retirement account, savings account, and emergency fund. How much should you save? As much as you can! A recommended savings percentage is 10% of your income. Timing is also essential, and the sooner you start, the better. If you habitually save money, then market corrections become less of an issue because you built a margin of safety, allowing your stocks to rebound and recover. I’ve noticed individuals who do not save money panic and sell when their investments fall because they don’t have a margin of safety or financial cushion. I don’t know how much your account balance will be worth if you regularly save money, but I do know if you don’t save any, it will be worth zero.
  2. No emergency fund. An emergency fund is essential during uncertain times and extreme market volatility. Investors prefer not to allocate funds to cash when stocks are soaring because it’s an earnings drag, but when stocks crash, cash is king. An emergency fund allows you to meet your obligations as stocks fall. What is the recommended amount? An emergency fund covering nine to twelve months of expenses is suitable if you’re working. For example, if your monthly expenses are $10,000, an emergency fund of $90,000 to $120,000 is appropriate. If you’re considering retirement, plan to cover three years of expenses. If your annual expenses are $120,000, then prepare for a balance of $360,000. A three-year cash cushion will help if you retire during a stock market collapse.
  3. No will. Dying without a will or estate plan is unacceptable, especially if you’re married or have children. Don’t leave your estate distribution plan to a probate court or state-appointed attorney. If you have substantial assets, hire an estate planning attorney. A good estate planning attorney is expensive but cheaper than trying to settle your estate without the proper documentation.
  4. No life insurance. Providing for your loved ones is paramount. If you owe money to your bank, have young children, or a spouse, then providing for their needs after you’re gone is a must. A lack of insurance planning can leave your family desperate to make ends meet. Spending a few dollars on insurance premiums can eliminate a lifetime of worry for your heirs.
  5. No financial plan. A financial plan quantifies your hopes and dreams and addresses the first four issues in this blog. During challenging markets, a financial plan brings financial peace. One of the first things we check when conducting financial reviews for our clients is the financial plan, and it gives us the confidence to make sound recommendations void of emotions or opinions. Most financial planning software accounts for wide market swings, so a significant market correction will not derail the majority of plans, which is the case for our clients.

Market corrections are painful, disruptive, and untimely but temporary. If you don’t save money, have a will, or own life insurance, you can permanently damage your family’s financial future.

The time to repair the roof is when the sun is shining. ~ John F. Kennedy

May 16, 2022

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.

What Is Safe?

What Is Safe?

When I started my investment career more than thirty years ago, a Wall Street veteran said investing in stocks is not for the faint of heart. He added it takes courage, stamina, and faith to remain invested during the difficult years. He knew what he was talking about because he started his career during the bear market of 1973 and 1974, when the S&P 500 fell 41%. I was young and didn’t appreciate the power of his words then, but I do now. Investing is a game of survival, and if you can hold on, stocks usually win in the end.

During times of a market rout, it would be nice to sell stocks, buy T-Bills and ride out the storm, but it’s impossible to time a market correction or its duration. Investors panic when stocks fall and buy US Treasuries because they’re safe, but what is safety? In the near term, investing in T-Bills appears prudent, especially when stocks fall, because you can protect your assets. In October 1987, the S&P 500 fell 21.5%, while 1-Month T-Bills rose 0.60%. Last month, stocks tumbled 8.7%; T-Bills were flat. In fact, since 1972, T-Bills have outperformed stocks forty percent of the time! In other words, over the past fifty years, T-Bills beat stocks for a combined twenty years.

If T-Bills beat stocks 40% of the time, why not invest in this safe asset class? Well, the long-term returns for T-Bills are anemic. Fifty years ago, a dollar invested in T-Bills is worth $8.66 today for an average annual return of 4.4%. It’s true that T-Bills are safe and have never lost money, but their returns have trailed inflation before taxes. A T-Bill is an excellent choice if you need money in the near term, but it’s a poor investment for creating generational wealth.

On the other hand, stocks are volatile, and they often crash, including this year. Since 1972, the S&P 500 has finished a calendar year in negative territory ten times or twenty percent of the time. From July 1982 to July 1983, the index fell 43%, and during the Tech Wreck from 2000 to 2002, it dropped by the same amount. In 2008, it declined 37%, and this year the index is already down 16%. And, from 2000 to 2010, stocks averaged a paltry 0.6% per year!

Despite violent moves, stocks produced an average annual return of 10.7% since 1972, and $1 turned into $162, or more than nineteen times that of the “safe” T-Bill. If your goal is to create wealth, buy stocks.

Tennessee Williams said, “You can be young without money, but you can’t be old without it.” Don’t let your short-term fears derail your long-term goals. Your older self will thank you!

May 11, 2022

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.

Six Reasons to Sell Stocks

Markets are reeling, and there are few places to hide. Investors are scared of inflation, rising interest rates, and the Ukraine war. This year, the S&P 500 is down 16%, and the NASDAQ is fairing much worse. Long-term bonds are down 22%, while real estate holdings have dropped 17%. Investors are selling stocks to buy safe investments like short-term U.S. Treasuries. In uncertain times investors seek a port in the storm.

Does it make sense to sell stocks? Maybe. Here are six reasons to sell.

  1. You’re 100% invested in stocks. If you’re allocated 100% to equities, sell shares to add bonds or cash to your portfolio. Bonds and cash can lower your volatility and allow you to buy stocks at lower prices through portfolio rebalancing.
  2. You need the money in one year or less. Stocks are unpredictable in the short term. On an annual basis, stocks finish in positive territory 73% of the time. Over twenty years, they have never lost money.[1] However, on occasion, they do fall.
  3. You need money to buy a new home, pay for college, or acquire a new car. Invest in short-term bonds or money-market funds because liquidity is paramount if you need to meet financial obligations.
  4. Your risk exposure is too high. Last year, stocks soared and elevated your stock exposure. For example, if your target equity exposure is 70%, and it jumped to 80% last year, sell 10% of your holdings to reduce your risk. 
  5. Your goals have changed. If your financial goals change, adjust your asset allocation and investment portfolio to meet your needs. Regularly reviewing your financial goals is recommended.
  6. Are you retiring? If you’re retiring this year – congratulations! If so, buy bonds to cover three years of expenses to avoid worrying about the stock market volatility. For example, if your annual expenses are $100,000, purchase $300,000 in bonds.

Selling from a position of fear has historically been a poor decision because stocks recover. When you react to volatility or a drop in prices, you’re most likely selling near a bottom. If you sell your shares, when do you repurchase them? Uncertainty is a central theme for investors, and we never know what will happen tomorrow. What is the price of safety? Currently, a one-year Treasury Bill yields 2%, and the inflation rate is 8.54%, so you’re losing 6.54% before taxes. Does it make sense to lose 6.5% per year while waiting for stocks to recover?

A financial plan can help you focus on your goals and investment allocation. Through Monte Carlo simulations, most financial planning models allow for significant stock market corrections. Money Guide Pro, for example, runs a thousand scenarios to determine the soundness of your plan, and it’s better to be partially right than entirely wrong when it comes to planning.

If your time horizon is longer than two years, use down days to buy great companies at lower prices. It’s hard to buy low and sell high, but you’ll be happy when prices rebound. Will people stop purchasing cell phones, hamburgers, or electric vehicles? I don’t think so, so take advantage of people’s fears to add to your stock holdings.

Stocks, like the tide, fluctuate daily, and they have been doing so for centuries. Rather than worrying about the volatility, create a plan, focus on your goals, think long-term and good things will happen.

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthews 6:34

May 9, 2022

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 Classic Year Book – 2015

What To Do Now?

What a crazy week! Last week I was at Wind River Ranch in Colorado with a few mighty men from my church, helping the ranch hands prepare for the summer season. Shortly, the ranch will welcome hundreds of horses and thousands of guests. We shoveled snow, oiled saddles, dug holes, mended fences, moved furniture, cleaned signs, greased bearings, cut logs, and trimmed trees. Ranch work is hard, especially for a city slicker like me who rides a desk for a living.

Working in the Rocky Mountains is exhilarating and challenging. In addition to the elements, we worked near cows and horses and saw moose, elk, eagles, and rabbits. It was a wild week in the mountains, and it was also a rough week on Wall Street.

Last week, the markets were volatile as investors reacted to the Fed’s rate hike and comments. The Federal Reserve raised its primary interest rate by one-half percent or fifty basis points, its second hike this year. The market soared 3% Wednesday but fell 3.5% on Thursday. Despite the volatility, the S&P 500 finished down a measly 0.21%.

It’s a challenging year for investors as most asset classes are trading in negative territory. Stocks, bonds, and real estate holdings are down double digits, and there is no end in sight as to when the carnage will end. Investors continue to fret over inflation, rising interest rates, and Ukraine, and, as a result, they’re selling securities and moving their funds to cash.

As markets continue to tumble, what should you do now? Here are four suggestions to help you manage your investments.

  1. Sell all your investments and ride out the storm from the safety of your savings account or money market fund. Transferring your assets to cash will preserve your capital and bring you peace. You can wait on the sidelines and watch others worry about declining stock prices and falling asset values. In the short term, you will look smart as others lose money. However, how long will the storm last? Days? Weeks? Months? Years? No one knows. And when the storm passes, stocks and bonds will return to their winning ways. When they start to climb again, will you be wise enough to get back in the market? When you decide to liquidate your holdings, you must be right twice – when you sell and buy. During the COVID correction, the S&P 500 fell 30% in thirty days. It was a bloodbath, as investors sold stocks for fear of entering another bear market or recession, but the market soon recovered, and by the end of the year, it had gained 16.3%. In addition, the S&P 500 soared 26.9% in 2021. If you sold during the panic and failed to buy back your holdings, you missed a 48% gain!
  2. Buy US government-guaranteed bonds If you’re worried about losing your principal. They’re currently yielding more than 3% interest. The 5-year Treasury Note now offers a yield of 3.06%, while the 20-year Treasury Bond pays 3.4%.[1] The rates are guaranteed if you hold them to maturity. If you buy these bonds, you don’t need to worry about market fluctuations because you’ll receive a constant income stream and a guaranteed return on your principal. For every $10,000 you invest, you’ll receive approximately $300 per year. Guaranteed income sounds nice until you factor in inflation and taxes. Since 1914, inflation has averaged 3.24%, so your net return is less than zero before you pay taxes on your income.
  3. Buy stocks if your time horizon is two years or more. Time heals all wounds, especially when it comes to stocks and markets. I don’t know when markets will recover, but they’ll eventually rebound. It is scary to buy stocks, but that’s usually the best time to add great companies or funds to your portfolio. It pays to be a buyer when others are selling, especially if they’re in panic mode, and they are.
  4. Hunker down and do nothing. If you’re comfortable with your investments and asset allocation, ride out the storm. It takes patience and courage to sit tight while others panic and sell, but your assets should recover over time. A classic 60% stock and 40% bond portfolio is down 14.15% for the year as stock and bonds fall. Despite the negative year-to-date return, it has averaged 10.04% over the past fifty years. It averaged 9.31% for three years, 9.74% for five, and 9.84% for ten. It soared 49.66% from July 1982 to June 1983, after the market fell 26% in the previous months.[2] If you adopted a buy-and-hold strategy, you would have enjoyed generous returns.

Working on the mountain reminds me that life finds a way to recover and returns to normal. There were signs of life under the snowmelt, dead trees, and broken limbs as flowers, seedlings, and the grass were starting to sprout. A rebirth is taking shape, and the long dark winter will soon be a distant memory, and the markets will recover, and the painful bear market will be a thing of the past, just like the previous twenty-eight bear markets.[3]

Our peace shall stand as firm as rocky mountains. ~  William Shakespeare

May 8, 2022

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.

Photo Credit: Mr. James Stanley


[1] YCHARTS as of 5/8/2022

[2] Dimensional Funds Returns web, 4/30/1972 to 4/30/2022.

[3] https://seekingalpha.com/article/4483348-bear-market-history