Corporate retirement plans are valuable tools for employees. In addition to personal savings and Social Security, a corporate retirement plan can help you retire in style, but what the heck is a 401(k) plan?
A 401(k) plan is a savings plan offered by your employer, allowing you to contribute a percentage of your pay to your retirement account. Your employer may also match your contribution, but more on that later. Let’s review some critical components of a 401(k) plan.
Contributions
The IRS allows you to contribute $22,500 of your pay to your plan; if you’re fifty or over, you can deposit another $7,500 for a total of $30,000. How much should you contribute? My recommendation is to contribute the maximum amount allowed by the IRS. If you can’t contribute the full amount, then aim for 10%. If 10% is too much, then match your employer’s match. If that is too high, contribute what you can because something is always better than nothing.
Profit Sharing
The 401(k) plan can include a profit-sharing match. However, from all sources, the maximum contribution to your plan is $66,000 or $73,500 with the catchup provision. Let’s say you’re fifty-five, earn $200,000 annually, and contribute 20% of your pay, and your employer matches 5% and offers a 10% profit-sharing match. Your regular contribution is $22,500, the catchup provision is $7,500, the match is $10,000, and the profit-sharing contribution is $20,000 for a total of $60,000.
Vesting
You are always 100% vested with your contribution because it’s your money, but your employer may restrict the employer match or profit-sharing contribution. For example, a six-year vesting schedule means that 20% of your employer contribution becomes yours every year. Then after six years, the entire balance belongs to you, regardless if you remain employed or move to a new company.
Traditional or Roth
Most 401(k) plans allow for traditional or Roth contributions. If you choose the traditional route, your contributions are pre-tax, and a Roth contribution allows for after tax-contributions, regardless of your income. If you’re a high-income earner, consider a Roth 401(k), so your funds will grow tax-free.
SPD
Each 401(k) plan comes equipped with a summary plan description (SPD), a resource guide for your plan. The SPD highlights the plan’s name, benefits description, vesting schedules, fees, investment funds, etc. Your HR manager or plan administrator should deliver it when you enroll.
Investments
Your plan fund lineup can include mutual, exchange-traded, and target-date funds. The lineup allows you to select funds and build your portfolio based on your risk tolerance. If you don’t want to make your own portfolio, you can choose a target-date fund based on your retirement year. For example, if you’re retiring in 2055, select the 2055 fund. The 2055 fund will get more conservative as you get closer to your retirement date. The investment process is automatic if you choose funds from the pre-selected list, meaning you do not need to invest the money every pay period.
Brokerage Window
A brokerage window allows you to select investments beyond the pre-selected fund lineup provided by your employer. You can buy individual stocks, bonds, mutual funds, and ETFs if your plan has a window. You may also trade options but tread lightly. If you select this option, you must make the investments each pay period; it’s not automatic. Several years ago, a client called because his 401(k) was invested in the money market account, and he was upset because the market was marching higher. I informed him he selected the brokerage account and had to invest the money himself, which he did not want to do, so we moved his funds back to the traditional side of his plan.
Loans
Most 401(k) plans permit loans, allowing you to borrow 50% of your vested balance to a maximum of $50,000. You can use the funds to purchase a home, pay for college, or cover medical expenses. Leaving your employer before you repay the loan is a distribution, subject to taxes and penalties. If you’re under age 59.5, the tax penalty is 10%.
Retirement
When you retire, you can leave your assets in the plan or roll them over to an IRA. If you keep your funds in the corporate account, you still must take your required minimum distribution at age 73, similar to an IRA.
Start
A 401(k) plan is an excellent way to create generational wealth, especially if your employer offers a generous match. Congratulations if you’re contributing the maximum to your plan, but if not, start today because the sooner you start, the sooner you can finish!
If you’re just starting out in the workforce, the very best thing you can do for yourself is to get started in your workplace retirement plan. Contribute enough to grab any matching dollars your employer is offering (aka the last free money on earth). ~ Jean Chatzky, Financial Journalist and Media Personality
January 31, 2023
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 your asset level.
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.
It’s the start of a new year, and investors want answers, especially regarding the stock market and the economy. They want to know how the market will perform this year or if a recession materializes. Market experts, analysts, economists, and media personalities try to predict market moves and the economy’s direction. Yet, it’s a giant guessing game because no one can forecast the future, yet everybody tries to do it.
Last year, twenty-four market analysts predicted the S&P 500 would close at 4,904 in 2022.[1] How did they do? The index closed at 3,389, falling 19.44%, and they missed their target by thirty percent! Despite not knowing the future, the stock market has left several clues about the future of stock prices, and here is what I know.
Stocks Outperform Bonds
Since 1926, the S&P 500 has trounced long-term bonds by a wide margin. A dollar invested in stocks is now worth $11,526, but that same dollar invested in bonds is worth only $130, and one dollar invested in T-Bills barely grew to $22. Over the past decade, the S&P 500 is up 170%, while Vanguard’s Total Bond Market Fund is down 11.3%. It’s impossible to predict the daily or yearly direction of the stock market. Still, over time, it has increased significantly, and you can create generational wealth if you stay invested in stocks and commit to long-term investing.
Small Caps Outperform Large Caps
Good things come in small packages, and this is true for investments. Since 1927, The Dimensional US Small Cap Index has bettered the S&P 500 index. A $1 investment in Dimensional’s Small Cap index is now worth $50,435, while the S&P 500 index value is $10,327. The valuation of the small-cap index has been five times greater than large caps over the past 95 years. The iShares S&P 600 index has been up 529% for the past twenty years, whereas the iShares S&P 500 index is up 362%. Though small-caps have been more volatile than large companies, they produced superior returns.
Diversification Wins
As the saying goes, the only free lunch on Wall Street is diversification. It’s typical for last year’s winners to be this year’s losers. In 2017, international small-cap stocks were the best-performing sector, soaring 32.7%, but a year later, they finished in last place, falling 17.63%, while short-term bonds were the best asset class in 2018; they were the worst in 2019. Large-cap stocks rose 28.7% in 2021 but fell 18.1% in 2022. Emerging markets lost 17.99% in 2022 but are up 10.77% this year. However, a globally diversified portfolio of stocks and bonds stayed in the middle of all asset class returns, never the best nor the worst. Asset allocation accounts for 93.6% of your investment return, and the remaining 6.4% comes from market timing and investment selection.[2]
Now What?
I don’t know what will happen with the market or the economy this year, but your portfolio can grow, over time, if you own stocks in a globally diversified portfolio. Rather than worrying about the direction of markets, interest rates, or the economy, focus on things you can control, like spending and savings.
Forecasts create the mirage that the future is knowable. ~ Peter Bernstein
January 29, 2023
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 your asset level.
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.
[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.
Writing options on stocks you own, or want to own, is an excellent way to generate income and reduce risk. Below are three stock and options ideas.
Lyft, Inc
Symbol: LYFT
Price: $15.63
Strike Price: $18.00
Expiration: 2/24/2023
Premium: $0.64
Option Income (1,000 shares): $640
Potential Stock Return: 15.16%
Potential Option Return: 4.09%
Potential Total Return: 19.26%
Potential Annualized Return: 242.38%
Royal Caribbean Group
Symbol: RCL
Price: $63.72
Strike Price: $71.00
Expiration: 2/17/2023
Premium: $0..92
Option Income (1,000 shares): $920
Potential Stock Return: 11.42%
Potential Option Return: 1.44%
Potential Total Return: 12.87%
Potential Annualized Return: 213.51%
Spotify
Symbol: SPOT
Price: $101.19
Strike Price: $118
Expiration: 02/03/2023
Premium: $1.00
Option Income (1,000 shares): $1,000
Potential Stock Return: 16.61%
Potential Option Return: 0.99%
Potential Total Return: 17.60%
Potential Annualized Return: 803.03%
Options trading involves risk and is not suitable for every investor. Your returns could differ significantly from those posted in this blog, and you could lose money. Do not use margin or leverage to trade options. Please refer to the Characteristics and Risks of Standardized Options to learn more about options trading and writing – https://www.theocc.com/. We have no affiliation with the OCC or the Options Industry Council.
Price and return data is from January 8, 2023, and is subject to change without notice. Data sources: Value Line, YCharts, TD Ameritrade and Yahoo! Finance
Bill Parrott is the President and CEO of Parrott Wealth Management – www.parrottwealth.com
January is an excellent time to crank up your 401(k) plan, and it probably needs a refresh after a year of losses, dividends, interest payments, and contributions. Here are a few suggestions to help you get started.
Max out your contributions. The maximum amount is $22,500. If you’re fifty or older, you can add another $7,500.
Increase your annual contribution if you’re not maxing out your plan. If you’re contributing 10% of your pay, consider increasing it to 12%. For example, if your annual salary is $50,000, an extra 2% is $1,000 per year, which could grow to more than $57,000 in twenty years. Also, the additional $1,000 annual contribution equates to about $40 per pay period.
Increase your stock allocation. If your current stock allocation is 60%, consider raising it to 70% or 80%. After a losing year, the extra stock exposure could boost your plan as the stock market recovers.
Rebalance your account. The market did not perform well last year, and your asset allocation is probably out of whack. For example, if you started last year with 60% stocks and 40% bonds, it could now be 50% stocks and 50% bonds. January is an excellent time to rebalance and adjust your investments.
Consider a target-date fund if you don’t want to hassle selecting specific investments or rebalancing your accounts. Target-date funds are all-in-one, so all you need to do is pick the year you’re retiring and move your assets to that holding. For example, if you’re retiring in 2030, choose the 2030 target-date fund. Simple.
Update your beneficiary designations. Did you incur a life event last year? Did you get married or have a child? Did you lose a loved one or get divorced? If so, then change your beneficiary designation to reflect your current status.
IRA Rollover. If you lose your job, you can roll over your 401(k) plan to an IRA, leave it with your previous employer, roll it to your new employer, or cash it out. You may incur taxes and penalties if you decide to cash in your plan.
Retirement comes at you fast, so make sure you’re doing all you can today to ensure your golden years are truly golden.
Retirement is not the end of the road. It is the beginning of the open highway. ~ Anonymous
January 23, 2023
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.
Hope is in short supply, and people are hurting. We’re battling a global pandemic, fires, floods, racial tension, economic uncertainty, a war, and political turmoil – dark days. It’s hard to imagine times getting better, but they will. Try to find the good among the bad. Mr. Rogers once said, “When I was a boy, and I would see scary things in the news, my mother would say to me, ‘Look for the helpers. You will always find people who are helping.'” Great advice. There’s always a silver lining, and it takes courage to rely on hope and faith, but they are essential ingredients if you want to succeed.
What is hope? Webster’s dictionary defines it as a desire with expectations of obtaining and expecting with confidence. Powerful words. In addition to confidence, it takes patience, humility, and wisdom to rely on hope because we can’t see it or touch it, but it’s there.
The investment community says hope is not a strategy, but I disagree. Financial planners and investment managers, including me, tell clients they must have a plan to achieve their goals. A financial plan is needed, but you also need hope, especially when the stock market crashes like last year. As Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” When your plan is not working and the days are dark, you need faith that things will eventually improve.
I rely on financial planning software, Excel spreadsheets, and my faithful HP12c calculator to help clients obtain their goals. I was full of hope and faith when I launched my firm seven years ago because it’s all I had. I was confident my business would flourish, so I didn’t worry about not having clients. I pursued each day with optimism. And, day by day, I built my business.
In helping others reach their financial goals, I must believe in the stock market’s long-term trend and our country’s economic resilience. I have centuries of data supporting my thesis when I talk to clients about their future, but the information is historical. It already happened, and how do I know it will continue? How do I know the stock market will be higher 100 years from now? I don’t, nor does anyone else. It’s a guessing game. However, based on history, I like my odds of success.
Illustration of lonely boy with bird wing shadow, surreal painting, concept art, conceptual idea of freedom hope and imagination
When times are tough, like now, it’s imperative to have faith in the future. I was talking to a client this week who is struggling. We talked through a few issues, and I suggested he focus on the good things in his life. It’s hard to be upbeat, but it’s necessary to keep moving forward.
Here are a few suggestions to help you keep putting one foot in front of the other.
Serve others. Volunteer your time to help those in need. Serving people who can only repay you with a smile, hug, or handshake is time well spent.
Donate. Consider donating money to your local food bank or soup kitchen if you have financial assets. A Google search for non-profits in your neighborhood will produce several results. Pick one and send them a check.
Deliver. Do you know a neighbor who can use a helping hand? Cook them a meal. Mow their lawn. Wash their car. Buy them a cup of coffee. Listen to their story.
Sing. It’s hard to feel sorry for yourself when singing, especially with others. For the record, I have a horrible voice, and I can’t sing, but I do it anyway.
Mentor. Kids and young adults need mentors and tutors now more than ever. Do you have time to help someone with their studies or give them career advice?
Plant. Plant some trees, bushes, or flowers. Start a garden. Add some color to your backyard. Hang up a hummingbird feeder or install a birdbath.
Laugh. Watch a comedy or read comics. My family has a collection of Far Side cartoons by Gary Larson, and we flip through the pages occasionally to get a belly laugh.
Exercise. A walk or run can give you a quick reset. Play tennis or golf. Ride a bike. Go for a swim.
Watch. Wake up early to watch the sunrise. When I lived in Mission Beach (San Diego), hundreds of people would walk to the boardwalk to see the sunset. I’ve never been disappointed by the beauty of nature.
Adopt. A dog or cat can bring joy to your household. Visit your local humane society to adopt an animal. If you don’t want to care for a pet, watch some Youtube videos about animals – it will put a smile on your face.
Pray. Plug into the highest power source.
As a nation, we have endured worse. It’s a difficult time for all, but it will pass. Focus on the things you can control, don’t worry about tomorrow, and keep the faith.
Gotta have hope!
Now faith is confidence in what we hope for and assurance about what we do not see. ~ Hebrews 11:1
January 17, 2023
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.
Have you been wondering if you should have buried your money in the backyard or stuffed it under the mattress? After all, as you review the year and the performance of our recommendations, it seems evident that stocks and bonds would fall. In 2022, we experienced rising interest rates, inflation, the war in Ukraine, and China’s COVID woes, yet, with those same headwinds and thousands more, the S&P 500 produced an average annual return of 10.12% since 1926, turning $1,000 into $11.5 million. I have the utmost confidence in our models, investments, and financial plans because I have seen them work for over three decades, and I know they will perform well in the future. I’ve learned from more than thirty years in the business that clients who diversify their assets, invest regularly, follow their plans, and remain patient will reap benefits.
The Tortoise and the Hare
Warren Buffett, the CEO of Berkshire Hathaway, is the most successful investor of our generation, with a net worth of $107.6 billion, and his stock currently trades at $468,711 per share and finished last year up 4%. Despite his staggering net worth and stock market performance, he has experienced many down years since 1965. His stock fell 48% in 1974, 23% in 1990, and 32% in 2008. It also fell 30% during COVID and dropped more than 50% in the Great Recession, and from 2007 to 2013, it lost 4.3% per year. If investors panicked and sold the stock over the past thirty years, they would have missed returns of nearly 4,000%. Mr. Buffett believes in patience and said, “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” He prefers companies with earnings, revenues, cash flows, and dividends – a slow and steady model that we try to emulate.
In contrast, Cathie Woods ARK Innovation fund trades daily and is highly active. The fund owns growth companies that may pay off in the future, like Roku, Robinhood, and Coinbase. During the peak of COVID, her fund soared 152% and, at one point, outperformed Warren Buffett and Berkshire Hathaway by 200%! However, her fund hit a brick wall last year, losing 67%, as investors shifted their focus to companies with solid balance sheets. As a result, Berkshire Hathaway has outperformed ARK by 80% since the crazy days of COVID. The tortoise wins again!
Indices
The S&P 500, Dow Jones, and NASDAQ suffered terrible losses last year, falling 8.78%, 19.44%, and 33.10%, respectively. What’s interesting about the S&P 500 is that it peaked on January 3, 2022, and fell 12.4% from January to March before the Federal Reserve started raising interest rates. Since the middle of June, it climbed by 2.24%, so most of the damage occurred in the first two and a half months, and five days accounted for 100% of the losses – April 29, May 5, May 18, June 13, and September 13.
As a comparison, the Vanguard Balanced Fund, a low-cost index fund, fell 16.87% last year, and I tracked an unmanaged group of twenty indices, and they fell, on average, 16.5%. There was no place to hide in 2022, but when stocks have dropped by 20% or more since 1957, they returned 29% the following year.
Regardless of the poor performance last year, the indices have performed admirably over the past thirty years. Despite crashes, inflation, rising interest rates, recessions, wars, and pandemics, the Dow Jones soared 1,944%, the NASDAQ jumped 1,845%, and the S&P 500 climbed 1,484%. The average annual return for the big three has been 10.21%. A $100,000 investment in January 1993 is now worth $1.85 million. And, since 1993, stocks have risen 87% of the time. Again, patience rewards successful investors.
Bonds
Bonds produced their worst year ever as the Federal Reserve raised interest rates to try and combat inflation. The yield on the one-month US T-Bill soared 8,140%, rising from 0.00% to 4.12%, and when interest rates rise, bond prices fall. The iShares 20+ Year Treasury Bond Fund ETF (TLT) crashed by 31.24% last year, losing almost as much as the NASDAQ. For the past fifty years, long-term government bonds have averaged 7.20%.
Bonds could be one of the best-performing asset classes this year if the Federal Reserve lowers interest rates. In 1994, the Federal Reserve raised interest rates by 100%, only to start reducing them in 1995. In 1995, long-term bonds soared by 31.7%.
Despite the carnage in the bond market, it now benefits us because we can offer investments yielding 3%, 4%, 5%, or more, and some of the rates are guaranteed. We have not had the luxury of higher rates for some time. For example, the last time the one-month US T-Bill yielded more than 4% was in 2007.
Stay the Course
Few people like advice that says, “Stay the course.” It’s boring, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good and could put your financial future at risk.
We recommend a buy-and-hold strategy when managing money which is easy when stocks rise but tough when they fall. It’s a prudent recommendation because stocks rise about three-quarters of the time, and no one can time the market.
When we recommend staying the course, we review multiple components like your financial plan, asset allocation, cash flow needs, and Riskalyze report. We do not make the recommendation lightly. If the data gives us a positive reading, we do not make any changes to your portfolio; if your goals change, we will adjust your plan and investment program accordingly.
Financial Planning
Since I started the firm seven years ago, we have completed more than one hundred and forty financial plans, covering $300 million in assets.
The top five retirement goals are travel, purchasing a new car, home improvement, buying a new home, and celebrations (weddings, anniversaries, etc.).
The most popular expectations for retirees are pursuing an active lifestyle, spending time with friends and family, and living less stressfully. However, don’t wait until you retire to enjoy your life.
The two most common retirement concerns are running out of money and suffering investment losses. Running out of money in retirement is not good, and we want to ensure clients can retire on their terms and, more importantly, stay retired. Running out of money and suffering investment losses are competing concerns, and you must choose between risk now or later. If your investments are too conservative early in your career, you may run the risk of running out of money. If your assets are too aggressive later in life, suffering a significant investment loss can have dire consequences. A financial plan will assist you in selecting the proper balance between risk and reward.
Last year, our clients with financial plans were calm and more confident about their financial future and did not panic. If you want to join this impressive group, give us a call to complete your financial plan.
Recession
Will there be a recession? According to media outlets, pundits, and influencers, the answer is yes. However, the consensus on Wall Street is mixed, and we won’t know if one occurred until long after it has passed. Countless analysts are trying to read the tea leaves and signals from the stock and bond markets to forecast the recession, and, as Paul Samuelson said, “The stock market has predicted nine of the past five recessions.”
The projected global growth for 2023 is 1.8%, and so long as unemployment remains low, job openings stay high, and wages rise, it will be challenging to enter a recession. Still, if the Federal Reserve continues to raise interest rates, we could face a mild recession. Since 1945 we have experienced thirteen recessions, lasting, on average, ten months. If we enter a recession, the Federal Reserve will lower interest rates, which is positive for stocks and bonds.
Cash
The one-month US Treasury Bill is a proxy for cash and is considered the safest investment in the world. It currently yields 4.1%, above its 96-year average annual return of 3%. The S&P 500 closed down 19.4% last year, so a positive 4% return looks appealing.
Cash is a short-term haven if you need liquidity or safety, but it’s a poor investment. The current inflation rate is 7.11%, and the dollar will lose more than half its value over ten years; at the historical inflation rate of 3.25%, the dollar loses 60% of its purchasing power over thirty years. The S&P 500 has risen 1,484% over the past thirty years, averaging 9.65%. Cash always loses the inflation battle, but stocks offer a hedge.
Another negative for cash is that it never grows. Stocks are volatile but allow you to recoup your losses over time; cash won’t. Once you sell stocks to buy T-Bills, you never recover your losses. For example, if you bought the S&P 500 Index in January 2007, you lost more than half your investment (56%) by March 2009. If you panicked and sold, you never recouped your original investment, but if you remained invested through the end of 2022, you could have earned 274%, turning $10,000 into $37,410. In addition to the Great Recession, stocks fell 20% in 2018, lost 30% during COVID, and dropped 20% last year. Even though the market suffered four significant corrections in fifteen years, it almost tripled. The one-month T-Bill returned 0.84% per year before taxes and inflation during the same time frame.
ESG
Environmental, social, and corporate governance (ESG) remain hot topics for investors. Through Morningstar, we can offer direct indexing allowing you to avoid investing in particular companies or industries that do not align with your beliefs. Also, if you work for a company like Apple, we can exclude it from your portfolio, so you’re not adding to your concentrated position. The minimum investment for this service is $250,000.
Expectations
How will the stock market perform in 2023? I don’t have a clue, but I like what JP Morgan said, “It will fluctuate.” Over the past thirty years, the S&P 500 has averaged 9.65% per year, turning $10,000 into $158,400, and was positive 80% of the time. The index experienced consecutive negative years once – from 2000 to 2002. The best one-year stretch occurred from April 2020 to March 2021, when it jumped 56%. The worst one-year period happened from March 2008 to February 2009, when the index dropped 43%.
Inflation has probably peaked, and interest rates should stabilize, benefiting stocks and bonds. A weaker dollar will boost international investments, while lower inflation and interest rates could spell trouble for commodities like gold and silver.
Cash remains attractive for short-term needs. The one-month US T-Bill currently yields 4.25%, significantly higher than rates available from money-center banks like Wells Fargo or Bank of America. The interest rates on US Treasuries could remain at these levels for the foreseeable future.
We continue to shun Bitcoin and other cryptocurrencies and avoid them at all costs. It’s an asset class that continues to fail on several fronts.
Janet Jackson
Janet continues to support our firm with excellence by working directly with our clients helping them open accounts, transfer funds, or handle the required minimum distribution. In addition, she is leading our efforts to join the Schwab platform. Though the merger won’t close until Labor Day, we joined Schwab early through a pilot program, and she has been instrumental in our smooth transition.
Spencer Engelke
Spencer has been a fantastic addition to our team this past year, and he handles most of our financial planning duties and directs our weekly podcasts. He continues to flourish at PWM, and his future is bright.
He completed his coursework for the Certified Financial Planner® designation and will sit for the exam in July.
Starbucks
Our firm continues to grow; we now work with more than 160 households across fourteen states. As a result, our Starbucks growth indicator remains strong, as we increased our card mailing this year by 11%.
Thank You
I know it was a challenging year, and my heart aches for your pain, but markets always recover. We appreciate your loyalty, faith, and trust in our firm.
Sincerely,
Bill Parrott
Bill Parrott
President and CEO
Parrott Wealth Management
Austin, TX
January 7, 2023
Rejoice in hope, be patient in tribulation, be constant in prayer.
~ Romans 12:12
Note: The Financial data is from YCHARTS, TD Ameritrade, Dimensional Funds, and Yahoo! Finance. Past performance does not guarantee future performance,
Owning stocks is a pain in the rear. They constantly gyrate, bobbing up and down like buoys on the ocean. It’s two steps forward and one step back; they rise slowly and fall quickly. Frustrating.
Stocks dropped like stones last year, led by the Nasdaq, falling 33%. The S&P 500 and Dow Jones followed suit tumbling 19.44% and 8.78%, respectively, wiping out years of gains. Since 2013, the S&P 500 has had four corrections of 12% or more and numerous pullbacks between 3% and 5%. This century, the index has experienced two significant drops, plummeting 46% during the Tech Wreck and 56% during the Great Recession. Most investors still remember Black Monday, October 19, 1987, when the Dow Jones Industrial Average crashed by 22%.
When stocks crash, investors want to sell their holdings, park their funds in a money market account, and wait for the storm to pass. And, when stocks rise 10%, investors want 20%. It’s a no-win situation.
Stocks get a bad rap. Yet, they are more than tickers moving across a screen or certificates in a vault; they are companies that run the world. Can you live your life without Apple, Amazon, or Google? Is it possible to ignore General Mills, Conagra, JM Smucker, or Campbell Soup? What about Krogers or Albertsons or Walmart, or Costco? You possibly drive a car manufactured by Ford, GM, Toyota, or Tesla. Do you drink coffee from Starbucks or eat at Mcdonald’s, Wendy’s, Chipotle, Domino’s, or Texas Roadhouse? Do you binge-watch shows from Disney, Netflix, or Paramount? You may bank at JP Morgan, Bank of America, Wells Fargo, or Citigroup. Your local utility company or phone company trades publicly as well. Your life revolves around common stocks; if you treat them as companies, you’ll do well over time.
Because the Federal Reserve has been raising interest rates to fight inflation, buying individual bonds yielding 4%, 5%, 6%, or more is now possible. Many bond ETFs and mutual funds currently have above-average dividend yields. Why bother with stocks if you can generate decent returns from bonds? It’s a good question. If you want safety and income, buy bonds, but if you’re going to create generational wealth, invest in stocks.
Despite the negative stories surrounding stocks, they create wealth for individuals with the courage and patience to own them through multiple market cycles. Since 1973, the S&P 500 has generated an average annual return of 10.47%, turning $10,000 into $1.43 million. In contrast, the one-month US T-Bill, the most secure asset in the world, averaged 4.38%, and a $10,000 investment is now worth $85,000. Inflation averaged 3.98% for the past fifty years, wiping out most of the gains from the T-Bill.
Though stocks fell last year, they have performed well these past ten years, rising, on average, 191%, while bonds lost 11.5%. If we extend the chart to twenty years, the three indices gained 461%, and bonds lost 6.5%.
Stocks may cause short-term heartache but provide benefits over time, and you must own them if your time horizon is three to five years or more. Turning out the noise and distractions is a superpower for successful equity investors.
Should you own stocks? Yes, without a doubt!
Bye, bye, and buy stocks.
Sponges grow in the ocean. That just kills me. I wonder how much deeper the ocean would be if that didn’t happen. ~ Steven Wright
January 12, 2023
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.
Writing options on stocks you own, or want to own, is an excellent way to generate income and reduce risk. Below are five stock and options ideas.
Advanced Micro Devices
Symbol: AMD
Price: $63.96
Strike Price: $67.50
Expiration: 1/20/2023
Premium: $1.06
Option Income (1,000 shares): $1,060
Stock Return: 5.53%
Option Return: 1.66%
Total Return: 7.19%
Annualized Return: 218.76%
AstraZeneca
Symbol: AZN
Price: $70.80
Strike Price: $75
Expiration: 2/17/2023
Premium: $0.88
Option Income (1,000 shares): $880
Stock Return: 5.93%
Option Return: 1.24%
Total Return: 7.18%
Annualized Return: 65.47%
The Walt Disney Company
Symbol: DIS
Price: $93.92
Strike Price: $110
Expiration: 03/17/2023
Premium: $1.38
Option Income (1,000 shares): $1,380
Stock Return: 17.12%
Option Return: 1.47%
Total Return: 18.59%
Annualized Return: 99.79%
Expedia Group
Symbol: EXPE
Price: $94.11
Strike Price: $115
Expiration: 04/21/2023
Premium: $3.04
Option Income (1,000 shares): $3,040
Stock Return: 22.2%
Option Return: 3.23%
Total Return: 25.43%
Annualized Return: 90.11%
Eli Lilly and Company
Symbol: LLY
Price: $362.94
Strike Price: $400
Expiration: 02/17/2023
Premium: $2.30
Option Income (1,000 shares): $2,300
Stock Return: 10.21%
Option Return: 0.63%
Total Return: 10.84%
Annualized Return: 98.96%
Options trading involves risk and is not suitable for every investor. Your returns could differ significantly from those posted in this blog, and you could lose money. Do not use margin or leverage to trade options. Please refer to the Characteristics and Risks of Standardized Options to learn more about options trading and writing – https://www.theocc.com/. We have no affiliation with the OCC or the Options Industry Council.
Price and return data is from January 8, 2023, and is subject to change without notice. Data sources: Value Line, YCharts, TD Ameritrade and Yahoo! Finance
Bill Parrott is the President and CEO of Parrott Wealth Management – www.parrottwealth.com
I went mountain bike riding this morning with a group of guys, good guys, and I got dropped like a hot potato. I could not keep up. Their bikes were dual-suspension, and a couple rode e-bikes while mine was a lowly hard-tail, equipped only with pedal power. It was a humbling experience, but I thought about the parallels between mountain bike riding and investing while driving home.
During the crazy COVID market of 2020, everybody allegedly made money trading meme stocks, Bitcoin, or speculative growth stocks – friends, neighbors, co-workers, relatives, and high-school students. Like my recent mountain bike excursion, I felt the investment world was leaving me in the dust.
Meme stocks were the rage during COVID, and it was a bizarre time as stocks like AMC Entertainment Holdings soared 800%, and GameStop rocketed 3,200%; since they peaked, AMC dropped 73%, and GameStop fell 66%. Other meme stocks, like Virgin Galactic, Bed Bath & Beyond, and FUBO TV, also came back to earth.
Bitcoin was another fan-favorite, soaring mightily during the COVID years before peaking last November. Since peaking, it crashed by 72%. It is now languishing because of the headwinds and difficulties from cryptocurrency companies like FTX and Coinbase.
The ARK Innovation Fund was the poster child for growth stocks during the COVID season. It climbed 152% in 2020, only to fall 23.88% in 2021, and lost 67% last year. The fund owns several stocks that are currently struggling but may pay off big in the future, companies like Tesla, Roku, Teledoc, Draftkings, Roblox, and Robinhood.
So what is the connection between mountain biking and investing? Here is a short list.
Know your limits. I’m a plodder when I ride, and I go slow, don’t take risks, and know my limits. You may be a gearhead that likes to push the boundaries, go fast, and take significant risks – that’s awesome. You will succeed at mountain bike riding and investing if you know your limits.
Slow and steady. As I mentioned, I go slow while riding, and I’m in no hurry to finish or set a land speed record. As meme stocks, bitcoin, and Ark Innovation were screaming higher during COVID, no one cared about buying IBM, Pfizer, McDonald’s, Coca-Cola, or, gasp, an S&P 500 index fund; however, they have performed well the past couple of years, rising on average, 24%.
Cut your losses. While riding this morning, I knew I would not keep up with the pack, so I cut my losses and turned around. I did not want to hold the group back, nor did I want to continue. If your investments are not working, or you’re not comfortable owning them, cut your losses and buy something you want to hold.
Take Risks. If you want to speculate and take risks, limit your exposure to 3% to 5% of your investment pool. It is okay to take fliers now and then, but don’t commit all your capital because it will cause significant financial damage if it doesn’t work.
Reevaluate. After I got off the trail, I evaluated my performance. What worked and what didn’t? What could I have done differently to improve my ride? I had several conclusions that will help me next time. If you lost money speculating on meme stocks, bitcoin, or Ark, reevaluate your trades. Why did you buy them in the first place, and what will you do differently next time? You can’t avoid investing mistakes, but you can learn from them.
I love mountain bike riding and investing when I stay within my limits but struggle when I try to push the envelope. If I were younger, my experience today would have bothered me greatly, but now that I’m older (wiser), I dust off my bike and chalk it up to experience.
Happy Riding!
Once we accept our limits, we can go beyond them. ~ Albert Einstein
January 7, 2023
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.
