Month: February 2023

My Daughter Bought A House

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My daughter bought a house, but that is not the story. The story started when she was born, and I opened a Uniform Transfers to Minors Act account (UTMA) to help her pay for college. A contribution to a UTMA is an irrevocable gift, and most advisors don’t like to use it because the child may turn out to be a bad seed, but I had faith that Hannah would age well, and she did.  

Spread Sheets

After she was born, I created a spreadsheet with about fifty colleges, including Harvard, Yale, Occidental, USC, UCLA, San Diego, Texas, Texas A&M, and Baylor. I updated the list often as she grew older, eliminating some colleges while adding others. Each year, the average cost increased by 5% to 10%, and paying for college would be expensive, and my goal looked daunting. I eventually widdled the list down to one school: Baylor, where she obtained her undergraduate and graduate degrees.

The Lost Decade

My daughter was born in 1998, and two years later, the market peaked and entered the lost decade, where the S&P 500 lost 24% from 2000 to 2010. During the Tech Wreck, 2000 to 2003, it fell 43% and dropped another 56% in the Great Recession from 2007 to 2009. It was the worst time to invest since the Great Depression, and from her birth to her first semester of college, the S&P 500 returned a measly 3.41% per year, less than its 97-year average annual return of 10%.

Investments

Regardless of the poor market conditions, I continued to buy stocks, acquiring ten shares here, 20 shares there, and so on, and I rarely made a significant contribution to Hannah’s account. Her great-grandparents and grandparents occasionally gave her financial gifts, which I used to purchase more companies.

I funded her account with 100 shares of Philip Morris, which generated a return of 265%. Some of the other stocks I bought were Alphabet, up 710%; Microsoft, up 511%; Apple, up 336%; Cisco, up 111%; and Pepsi, up 103%. However, Amazon provided rocket fuel for her account, which I purchased in 2001 after it crashed by 90%, for a split-adjusted cost of 82 cents. Her average gain was 6,665% and had I invested everything into Amazon, she’d be retired today.

Returns and Predictions

Paying for college is a simple financial goal because you know the inputs – the cost and timing, usually eighteen years. I fixated on accumulating enough money to pay the room, board, and tuition, and I ignored market forecasters, economists, money managers, TV personalities, and influencers. I was a net buyer of stocks regardless of the market or economic conditions, and I only sold them to pay for college. Nor did I panic during corrections. In fact, I used the selloffs to buy quality stocks at discounted prices. If I did panic, I would not have achieved my original goal.

I don’t know my returns for her college account nor care because I achieved my goal of paying for college.

Goals

By the grace of God, her account continued to rise, far exceeding my expectations. After Hannah graduated from Baylor, she had enough funds to pay for graduate school. Her account kept growing, and after she obtained her master’s degree, enough money was left to buy a house.

Moral

Focus on your goals, and don’t let market conditions or financial experts distract you on your journey. Returns matter, of course, but it is better to be a consistent investor so you can use your funds to pay for college, buy a second home, travel the world, or retire. Again, I don’t know what her returns were – 5%, 6%, 10%, I’m not sure, but it doesn’t matter because we paid for six years of college, and she now owns a home.

Start children off on the way they should go, and even when they are old, they will not turn from it. ~ Proverbs 22:6

February 27, 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. Prices and yields are for today only and are subject to change without notice.

Should You Buy US Treasuries?

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The one-year US T-Bill currently yields 5.1%. It’s an attractive rate compared to the 1.15% the S&P 500 has returned over the past two years, and it’s guaranteed. Stocks are volatile, interest rates are rising, the Ukraine War rages on, and China is a constant threat, so buying T-Bills sounds like an excellent investment choice. It seems like a no-brainer.

The current rate is the highest since 2007 and well above its 30-year average of 2.57%. If you invest $1 million in a one-year US T-Bill, you’ll earn $51,000 annually at today’s rate – not too shabby.

Let’s explore reasons to buy a one-year US Treasury Bill.

  • Buying a T-Bill makes sense if you need your money in one year or less, and it is a wise investment.
  • You can earn more interest in a T-Bill than you can from your checking account, savings account, CD, or money market fund. If you are sitting on a large cash balance, buy a T-Bill.
  • If you’re worried about a stock market crash or a financial disaster, buy a T-Bill. The US Government guarantees a T-Bill and offers tax benefits if you live in a state with an income tax, and it’s an excellent hedge for a stock portfolio.

Let’s explore reasons not to buy a one-year US Treasury Bill.

  • The current inflation rate is 6.41%, so you lose 1.31% annually.
  • The T-Bill produced an average annual return of 1.12% over the past thirty years, while inflation averaged 2.67%, so your net yearly loss was 1.55%.
  • Over the past thirty years, the S&P 500 has increased 811%, inflation 121%, and T-Bills 39%. The S&P 500 has outperformed the one-year T-Bill by 772% since 1990.
  • Buy stocks if your time horizon is three to five years or more.

Consider buying a T-Bill if you need the money in one year or less, as a stock market hedge, or if you hold a significant cash position. A T-Bill can be part of a diversified portfolio, but it’s a poor choice for creating generational wealth.

Despite the headline news and recent market turbulence, stocks are still the best investment for the long run.

Inflation is taxation without legislation. ~ Milton Friedman

February 25, 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. Prices and yields are for today only and are subject to change without notice.

Inflation or Recission?

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Inflation is climbing, while some market indicators are predicting a recession. The market gauges are in flux, leaving investors confused and concerned about their financial future. Which battle should you fight – inflation or recession?

The current inflation rate is 6.41%. The rate is down sharply from its peak but up significantly from the low. The recent readings indicate a flattening, or, in other words, the inflation rate may hover around the current level for a while. The 6.41% inflation rate is crushing, and at that rate, the value of your dollar will drop by 46% over ten years as the value of goods and services will continue to rise. Have you purchased eggs lately?

On the other hand, a few market indicators forecast a recession. The 10-2 Year Treasury Yield Curve is inverted, where the yield on the US 10-Year Treasury is lower than the yield on the US 2-Year: the 10-year yields 3.86%, the rate on the 2-year is 4.62%, a difference of negative 0.76%. What does this mean for investors? Historically, when the yield curve inverts, a recession follows, but it’s not instantaneous, and it could be several months if one arrives, if at all.

What should you do to protect your portfolio from inflation or a recession? Let’s look at a few ideas.

  • Stocks are an excellent hedge against inflation. If a company raises its prices to combat inflation, it will eventually earn more money, and when they make money, you could also. For example, Microsoft earned $1.21 per share in 2006 and $9.21 per share in 2022, an increase of 661%. The price of Microsoft increased by 817% during that period.
  • Bonds are an excellent hedge against a recession. If a downturn arrives, then interest rates will fall. The Federal Reserve is raising interest rates now but will lower them if our economy falters, and when rates drop, bond prices rise.
  • Cash is a short-term haven. A robust cash allocation can protect your portfolio against a stock market correction, but it will hinder the growth of your portfolio. US Treasuries now offer an attractive rate of nearly 5%, allowing you to earn some interest if you decide to sell your stocks or long-term bonds.
  • Alternative investments may protect your portfolio against inflation or a market correction. A real estate investment trust can perform well when inflation rises; everybody loves real estate primarily because their homes have appreciated over time. Gold is a decent hedge against a stock market crash, but you must time it correctly. Despite popular opinion, I’m not fond of gold as an inflation hedge. The inflation rate has jumped 175% over the past three years, and gold has increased by 12%.

Owning a globally diversified portfolio will help you fight inflation and a recession. What is a globally diversified portfolio? It is one where you own US stocks, large companies, small companies, international holdings, bonds, cash, and alternative investments. Some industry experts refer to this as an all-weather portfolio. The portfolio works well because the individual components react to changing market conditions at different times, and it’s impossible to time the market or accurately predict inflation or a recession.

To fortify your portfolio, diversify your investments and follow your plan.

The is no such thing as bad weather, only different kinds of good weather. ~ John Ruskin

February 21, 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. Prices and yields are for today only and are subject to change without notice.

Three Ways To Generate Income

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Here are three ideas for generating investment income.

Systematic Withdrawal Plan (SWP). If you own an equity mutual fund, consider creating a systematic withdrawal plan where you receive monthly distributions from your fund. The SWP allows you to receive income with equity-type returns. However, the income is not truly income because it includes a return of principal, capital gains, interest payments, and dividends. Let’s say you invest $100,000 in a mutual fund, and you want to receive $5,000 per year. If the fund earns 7% yearly, your projected growth in ten years is $127,632 after receiving $50,000 in payouts.  

Covered Calls. If you own 1,000 shares of Apple, sell ten option contracts against your position to generate income. Apple is trading at $153 per share, and the April 160 option premium is $4.80 per contract. If you sell the April  $160 call, you can receive $4,800 in income, and if Apple trades at $160 or higher on April 21, 2023, the stock will automatically sell at your strike price of $160. If Apple trades below $160 per share, you retain your shares, and you can write more contracts.

Bond Ladder. The yields on US Treasuries are the highest they’ve been in years, so now you can generate safe, conservative income with a short-term bond ladder. For example, you can buy US T-Bills maturing monthly – March, April, May, etc., and when the March T-Bill comes due, you can buy one due in June. The average yield for the 1-, 3-, 6-, and 12-month T-Bills is 4.82%.

Never depend on a single income. Make investments to create a second source. ~ Warren Buffett

February 13, 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. Prices and yields are for today only and are subject to change without notice.

What Is Financial Planning?

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What is financial planning? According to the Certified Financial Planner’s Board, it involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals.[1]  A comprehensive plan can help you make informed decisions about your future, giving you a baseline and roadmap based on your goals. It’s a living document that constantly changes and reacts to your needs and market conditions, and it is an invaluable tool.

A well-constructed financial plan encompasses your whole financial picture, touching on such topics as retirement, estate, education, investment management, budgeting, insurance, taxes, and giving. In addition to finances, a good planner addresses the emotional and psychological side of planning. It’s a two-piece puzzle – financial and emotional.

Here is a look at a few of the critical financial planning areas:

  • Retirement. Retirement is a primary goal for most of our clients. An analysis of your current assets, savings, spending, and goals will determine your retirement date and asset level.
  • Estate. Estate planning is essential for your loved ones, and a good one can ensure your assets are in your beneficiary’s hands, not the government’s. A valid will or trust is paramount to protect your resources, and the appropriate beneficiary designations on your investment accounts, retirement plans, and insurance policies are required.
  • Education. Do you have young children? If so, a 529 education account is an excellent way to save for college. The assets inside a 529 plan grow tax-free if used to pay for tuition, room, board, books, etc. Why save for college? The current annual tuition for a public college is $27,330.[2]
  • Investment Management. Prudently investing your money to achieve your goals requires skill, patience, and wisdom, especially in down markets. It’s vital to your success. Are your assets appropriately diversified and in line with your risk tolerance? Investing is not speculating, so don’t gamble your assets on risky investments that could derail your plans.
  • Budgeting. Do you know where your money is going? Budgeting provides valuable information on how you spend your dollars. A deep dive into your spending habits can free up assets for saving and investing. Also, a budget allows you to spend money without shame or guilt.
  • Insurance. An insurance policy can protect your family and possessions. Insurance premiums are expensive but necessary, and it’s foolish to plan for your future without proper coverage. Buying term insurance is acceptable; avoid whole-life policies or Maximum Premium Indexing contracts (MPI). And, yes, a non-working spouse should purchase life insurance too.
  • Taxes. Tax planning allows you to make tax-efficient decisions, especially when receiving funds from your investment and retirement accounts. It also ensures you’re making wise decisions about deductions and credits.
  • Giving. Philanthropic planning benefits your bottom line and helps those in need. A gift-giving program can help charities by correctly using donor-advised funds (DAF) or charitable remainder trusts (CRT). You can also give away $17,000 yearly to your loved ones without tax or estate issues.
  • Emotions. Are you ready to retire? What will you do, and how will you spend your time? Do you have hobbies? Are you prepared to donate your assets to charities or loved ones? Are you comfortable living without a paycheck? Will you move to a new state or country when you retire? Managing your emotions is just as important as managing your finances.

If you’re looking to hire a financial planner, ensure they are certified by the CFP Board. A Certified Financial Planner Participant has passed a rigorous test and years of study to obtain the valuable and powerful CFP® designation. In addition to the initial requirements, CFP® professionals must get thirty hours of continuing education credits every two years.

According to the CFP Board, 90% of consumers value an advisor’s credentials, and 86% prefer one who passed a certification exam and rigorous education program.[3] Once individuals obtain the CFP® designation, they’re now fiduciaries, required to act in your best interest. However, be warned of false prophets, especially on Tik Tok. I’ve seen several posts from financial coaches, insurance sales representatives, and influencers masquerading as financial planners. Before you commit to an advisor, check their credentials. Here is a link to find a CFP® professional in your neighborhood: https://www.letsmakeaplan.org/

Good luck and happy planning.

Let our advance worrying become advance thinking and planning. ~ Winston Churchill

February 10, 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.

[1] https://www.cfp.net/why-cfp-certification/career-guide/what-is-financial-planning

[2] Money Guide Pro College Calculator

[3] https://www.cfp.net/why-cfp-certification/the-standard-of-excellence

Bond Math

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As rates rise, investors struggle to understand why bond prices are falling, especially after last year’s rout in the bond market. Bonds are supposed to be stable and boring, not a volatile asset class, yet, they are complicated instruments, providing something for all investors.

The Federal Reserve raised interest rates from 0% to 4.5% last year, a significant increase and the steepest rise in history. As a result, the rate increase destroyed bonds, causing damage to numerous portfolios.

Bonds are fixed-income investments, meaning the coupon does not move, but the other yields can gyrate significantly. A bond is a contract with terms outlined in the prospectus, a legal document. Let’s explore some bond pricing to help you make better investment decisions.

Terms and Data

Coupon: The coupon is the fixed rate on your bond.

Current Yield: The current yield is a function of your coupon rate and today’s price.

Yield To Maturity: The yield to maturity rate is what you’ll earn on your bond at maturity, based on the coupon rate and the price of your bond.

Stable Rates

If interest rates are stable, flat, or not moving, then the coupon, current yield, and yield-to-maturity are equal. For example, if a bond trades at $100 with a 4% coupon, the current yield and yield to maturity are also 4%. You will earn $4,000 annually if you own a $100,000 bond.

Falling Rates

If interest rates are falling, your bond’s price rises like a see-saw in the park. For example, if the coupon is 4% and the price of your bond increases to $110, then the current yield is 3.64%, and the yield to maturity is 2.84%. When rates fall, the coupon is higher than the current yield, which is higher than the maturity yield. You will earn $4,000 annually if you own a $100,000 bond, regardless of the current yield or price.

Rising Rates

If interest rates are rising, then the price of your bond is falling. For example, if your bond has a 4% coupon and the price drops to $90, the current yield is 4.44%, and the yield to maturity is 5.3%. When rates rise, the coupon is lower than the current yield, which is lower than the yield to maturity. You will earn $4,000 annually if you own a $100,000 bond, regardless of the current yield or price.

One Percent Decrease

If you own a ten-year bond, then a one percent decrease in interest rates will increase the price of your bond by 8.5 percent, rising from $100 to $108.50.

One Percent Increase

If you own a ten-year bond, then a one percent increase in interest rates will decrease the price of your bond by 7.7 percent, falling from $100 to $92.30.

Bond Funds

What about bond funds since they don’t have a fixed interest rate or maturity? Vanguard’s Intermediate-Term Bond fund owns 2,144 individual bonds with an average duration of 6.29 years. The yield to maturity is a function of the portfolio’s average coupon, duration, and the prices of their bonds.

Bonds can be simple and complicated. A US T-Bill is simple, but a junk bond issued by a cryptocurrency company is complex. Pay attention to the rating and yield to maturity if you buy individual bonds. If you don’t want to sift through thousands of bonds, purchase a bond fund.

Bye, bye, and buy bonds.

When I was a kid I got no respect. I had no friends. I remember the see-saw. I had to keep running from one end to the other. ~ Rodney Dangerfield.

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.