Month: March 2023

What’s a Yield Curve?

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The hot topic is the yield curve or, more importantly, the inverted yield curve. A yield curve is a collection of interest rates, or yields, plotted on a chart, beginning with the One-Month US Treasury Bill and ending with the 30-Year US Treasury Bond, plotting all points in between to determine whether it is inverted.

Historically, the yield curve slopes upward and to the right because short-term rates have been lower than long-term rates. It makes sense. If you buy a 30-year bond, you want to earn more interest for your risk exposure.

The yield curve can be normal, flat, or inverted. A normal yield curve occurs when long-term rates yield more than short-term rates. If the yield curve is flat, it doesn’t matter which bond you buy because all rates are the same. When the yield curve inverts, you earn more interest from short-term bonds than from longer ones.

A normal yield curve signals a strong economy with no known issues on the horizon – ceiling and visibility unlimited. When the curve inverts, trouble awaits. What trouble? A recession. An inverted yield curve has previously been a reliable recession indicator, and it’s a sign the economy may be losing steam. The current yield curve is inverted. The US 2-Year Treasury Note yields 4.02% while the 10-Year yields 3.55%, and the spread between the two is the widest since 1980.

An inverted yield curve is a good recession indicator; however, the correlation between an inverted yield curve and a recession is not instantaneous. It may take one to two years before a recession occurs, if it happens at all, after the inversion because it takes time to slow down a $26 trillion economy.

The effective Fed Funds rate is 4.83%, the only rate the Federal Reserve controls. The remaining rates are left to market participants – buyers and sellers. Monitor the US 2-Year Treasury yield to determine where the Fed is heading. It currently yields 4.02%, down from 5.05% earlier this year.

In the movie Top Gun, Maverick and Goose inverted their F-14 Tomcat to take a picture of a Russian MIG pilot. After the encounter, they returned the plane to normal, flew back to Miramar, and buzzed the tower. Their inversion didn’t hinder their ability to fly their aircraft.

Slower growth doesn’t mean any growth. If our economy traveled 75 miles per hour a couple of years ago, it might be cruising at 55 MPH today.

Our economy is strong, corporate earnings are decent, interest rates are stabilizing, and taxes are favorable. These factors bode well for a higher stock market at some point. Follow your plan, diversify your assets, and think generationally; good things can happen.

Because I was inverted. ~ Maverick, Top Gun

March 30, 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.

16 Seed

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March Madness is in full swing, and first-timers from San Diego State, Miami, and Florida Atlantic are joining UCONN in the Final Four. The top seeds have NBA-caliber talent, and several players will be lottery picks in the upcoming draft, so it’s not surprising most people picked these schools to win the NCAA Tournament. However, Perennial blue-bloods like Baylor, Duke, UCLA, Kansas, and Kentucky are on the outside looking in, as there is not a single top seed in the Final Four.

According to ESPN’s Tournament Challenge, 19% of the people picked Alabama to win this year’s tournament,  not Florida Atlantic. The tournament started with a bang as sixteen-seed Fairleigh Dickinson University beat one-seed Purdue, and it was only the second time in tournament history that a one-seed lost to a sixteen-seed. In 2018, the University of Maryland Baltimore County destroyed Virginia 74-54. The Fairleigh Dickinson victory busted brackets as 8% of the people picked Purdue to win the tournament, and only .01% chose Fairleigh Dickinson, likely their alumni and students.

Investors constantly hunt for one stock to buy that will propel their portfolio to new heights. In doing so, they ignore the efficiency and power of a diversified portfolio. A balanced portfolio can deliver solid results without relying on a stock. In other words, you don’t need a one-seed to win the investment game. Over 20 million people completed a bracket on ESPN. No perfect brackets remain because selecting a winner for each tournament game is impossible, almost as challenging as constructing a portfolio of individual stocks that never fall.

A balanced portfolio of stocks and bonds can produce exceptional returns over time. Vanguard’s Balanced fund is a mix of stocks and bonds, and for thirty years, it generated an average annual return of 8%, turning $10,000 into $101,700. This fund has no star power, but it’s a steady performer. Low-cost index portfolios shun high-profile money managers but provide shareholders with market-driven returns. They rely on diversification and conservative investment strategies and can reward those who invest for the long term.

In addition to quality players, a winning team needs a good coach, and working with a financial planner who acts as your coach is a wise investment. A Certified Financial Planner Professional™ can help you develop a game-winning strategy based on your hopes and dreams.

As you build your winning team, focus on a diversified portfolio of low-cost index funds and hire a fee-only, fiduciary Certified Financial Planner ®.

Talent wins games, but teamwork and intelligence win championships. ~ Michael Jordan

March 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. Prices and yields are for today only and are subject to change without notice.

A Recovering Stock Picker

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The siren of individual stocks has drawn me in for decades since I entered the brokerage business thirty-plus years ago. I envisioned becoming the next Warren Buffett, Peter Lynch, or Jesse Livermore. I’ve read several books on investing, charting, and trading. The data has been priceless, and I also acquired tremendous knowledge talking to clients about their stock positions and investment strategies.

In the early ’90s, I answered calls from clients at my Dean Witter office who wanted stock quotes. I shared a Bunker-Ramo terminal with another broker, and I was limited to 12 stock symbols on my side of the monitor. Giving quotes was tedious, especially if a client had an extensive portfolio. If they wanted more information, they had to wait until the following day to read the newspaper or review their month-end brokerage statement.   

Merrill Lynch, Goldman Sachs, Smith Barney, Paine Weber, and Dean Witter dominated pre-internet information on common stocks. Individual investors coveted their voluminous research reports, and Wall Street firms controlled the information flow and held most of the power to move the market.

The internet is the ultimate equalizer. Investors can receive real-time quotes and trade with a click of the finger. Acting on company news is impossible because of how fast information travels. In addition, The Securities and Exchange Commission instituted Regulation Fair Disclosure (Reg FD), ruling that all publicly traded companies must release material information to all investors simultaneously, leveling the playing field, so trying to trade on news flow is futile.

Individuals still like to trade stocks, especially if a company like AMC or Gamestop goes viral on Twitter, Reddit, or TikTok. I understand the attraction to try and find the next big winner or needle in the haystack, but it’s challenging. And if you pick the wrong stock, it could destroy your portfolio. Recently, SVB Bank collapsed, wiping out shareholders. There are numerous studies on diversification and how many stocks you must own. According to The Motley Fool, you need at least twenty-five individual stocks to diversify your portfolio.[1] Apple, Microsoft, and Amazon account for 16% of the S&P 500 index, and the top twenty-five holdings comprise 41%. If you own twenty-five stocks or more, it will be hard to outperform an index fund, so you’re better off buying one and holding it for decades.

The data also support a move to index funds away from stock picking and actively traded mutual funds. A recent S&P SPIVA® study found that over 20 years, 96.73% of large-cap money managers failed to beat their benchmark. These results are similar for small, mid, and international money managers, and this underperformance also occurs on a 1, 3, 5, 10, and 15-year basis.[2] The data is historical, of course, so trying to select a stock or fund to top an index in advance is nearly impossible.

Vanguard’s Total Stock Market Index Fund (VITSX) gained 1,670% since 1992, averaging 9.73% annually, turning $10,000 into $176,000. A passive buy-and-hold strategy is challenging to defeat, and this fund gives you access to 3,941 publicly traded stocks.

Warren Buffett, the definitive stock picker, won a bet against hedge fund manager Protégé Partners. He bet them the S&P 500 Index would outperform a basket of five actively managed hedge funds over ten years. How did it turn out? The S&P 500 trounced the hedge funds by 89%! The S&P 500 returned 125%; the hedge funds, 36%.[3]

Over the years, I’ve converted most stocks to low-cost index funds, reducing my expenses and stress. It’s been hard to wean myself off stocks and move the money to a diversified portfolio of index funds, but it’s been for the better. I’ve been able to spend more time helping clients crystallize their goals through financial planning since I’m not tethered to a monitor watching stocks rise or fall. A similar move may benefit you, especially if you want financial peace and freedom.

Don’t look for the needle in the haystack. Just buy the haystack! ~ John Bogle

March 28, 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.

[1] https://www.fool.com/investing/how-to-invest/stocks/how-many-stocks-should-i-own/

[2] https://www.ifa.com/articles/despite_brief_reprieve_2018_spiva_report_reveals_active_funds_fail_dent_indexing_lead_-_works

[3] http://money.cnn.com/2018/02/24/investing/warren-buffett-annual-letter-hedge-fund-bet/index.html, by Jackie Wattles, 2/24/2018.

Retirement Job Opportunities According to ChatGPT

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Retirement is exciting for many, but some people want to remain active and connected to the workforce or their communities. I was curious about the opportunities for active retirees, so I asked ChaptGPT, and here is what it (he/she/they) recommended.

There are many great job options for active retirees, depending on their skills, interest, and availability. Here are some ideas:

  1. Consultant. If you have years of experience in a particular field, you can become a consultant and provide guidance to others in your area of expertise.
  2. Freelancer: Many retirees choose to become freelancers and work on projects they enjoy. This could include writing, graphic design, or consulting.
  3. Tour Guide: If you enjoy traveling and have a passion for sharing your knowledge with others, becoming a tour guide may be a good option for you.
  4. Fitness Instructor: If you are physically active and have experience in fitness, you could become a fitness instructor and teach classes.
  5. Retail Salesperson: Retail stores often need part-time workers to assist with customer service, restocking, and sales. This can be a great option for retirees who enjoy interacting with people.
  6. Tutor: If you have a background in education or a particular subject area, you could become a tutor and help students with their studies.
  7. Dog Walker or Pet Sitter: If you love animals, you could become a dog walker or pet sitter and help pet owners care for their furry friends.
  8. Event Coordinator: If you enjoy planning and organizing events, becoming an event coordinator may be a good fit for you.
  9. Volunteer: many retirees choose to volunteer their time and skills to organizations that align with their values and interests.

Overall, the best job for an active retiree will depend on their individual preferences and circumstances. It’s important to find a job that allows you to enjoy your retirement while also providing a sense of purpose and fulfillment.

ChatGPT has spoken!

I am completely operational, and all my circuits are functioning perfectly. ~ HAL, 2001 A Space Odyssey

March 23, 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.

A Recession Is Coming

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Is a recession imminent because of the collapse of Silicon Valley Bank? First Republic Bank, Signature Bank, and Silvergate Bank are also on the ropes, and I’m sure there are more to come as individuals withdraw their money to buy US Treasuries or bury it in the backyard. If bankers are nervous, they will stop lending funds to businesses and homeowners, which is not a good recipe for economic growth.

Because of the recent bank failures, loans to domestic banks touched an all-time high. The government has insured all deposits, causing the assets in the discount window to soar. According to PBS Newshour, the Fed loaned $300 billion to banks, allowing depositors to retrieve their funds.[1] As a comparison, the Feds loaned $50 billion to banks during COVID and $538 billion during the Great Financial Crisis.

In addition to bank failures, several technology companies have laid off tens of thousands of employees. Morningstar said more than 139,000 employees had lost their jobs this year.[2] The unemployment rate is hovering near historic lows at 3.60%, but it can climb quickly if the pace of layoffs intensifies.

Another headwind for the economy is the yield curve. Though rates have declined this past week significantly, the yield curve is still inverted. The yield on the US 2-Year Treasury is 4.14%, and the 10-Year yield is 3.56%. The yield curve is inverted when short-term rates are higher than long-term rates, which could signal a recession.

Gross Domestic Product (GDP) growth, or lack thereof, is a crucial recession indicator. The true definition of a recession is two consecutive negative GDP quarters, and so far, this metric is not flashing a warning. In fact, it continues to rise. GDP has increased by 5.68% over the past year, up 21.38% since COVID.

There have been thirteen recessions since the end of World War II, or about once every six years, lasting about ten months in length. Despite the recessions, the S&P 500 is up more than 23,000% since 1945, averaging 11.02% annually. The best three-year stretch for the S&P 500 occurred from 1984 to 1987, following the 1982 recession, averaging 33.4% annually, and the index never lost money during any 15-year rolling period. A one-dollar investment grew to $3,274. The one-month US T-Bill, the safest investment in the world, averaged 3.80% annually during this period, turning a dollar into $17.96.[3]

A recession is coming, but I don’t know when, nor does anyone else. According to historical data, the last one occurred in 2020, so we may experience another between now and 2026. If you’re concerned about a recession, sell stocks, buy bonds, and increase your cash balance. If your time horizon is three to five years or more, and you’re not worried about volatility, buy stocks in a globally diversified portfolio.

The recent bank failures are another thing to worry about, but don’t let them distract you from your financial goals. The stock market is resilient and has survived worse calamities. As I often say, follow your plan, think long-term, diversify your assets, and good things will happen.

As sure as the spring will follow the winter, prosperity, and economic growth will follow a recession. ~ Bo Bennett

March 18, 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.

[1] https://www.pbs.org/newshour/economy/federal-reserve-lent-300-billion-in-emergency-funds-to-banks-in-the-past-week

[2] https://www.morningstar.com/news/marketwatch/20230317465/more-than-139000-tech-sector-employees-have-lost-their-jobs-since-the-start-of-2023, James Rogers, March 17, 2023.

[3] Dimensional Fund Adviosr Returns Web Tool.

Nothing Is Working

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Another day, another market sell-off. The latest culprit is the failure and seizure of Silicon Valley Bank after a bank run. It’s two steps forward, one step back. Before COVID, the Ukraine War, rising interest rates, and persistent inflation, the S&P 500 was up nearly 200%, averaging 11.4% annually since 2010. However, most asset classes have traded down over the past two years. Frustrating.

The market has performed poorly for extended periods, but that does not make me feel better. Of course, the worst period for stocks was from 1929 to 1944, when the S&P 500 averaged 1.7% per year. It averaged 1.2% from 1965 to 1974, and from 2000 to 2011, it averaged 1.7%. The S&P 500 barely budged for thirty-eight years, or 40% of the time since 1926. Despite doing nothing for decades, the S&P 500 has averaged 10% annually for 93 years.

Each day the market gives us a reason not to invest. If it’s not a bank failure, it’s war or inflation, but if it were not for uncertainty or volatility, it would be impossible to create generational wealth. When stocks fall, they become cheaper, allowing enterprising and courageous investors to buy them at favorable prices. When the storm passes, they can sell them at higher prices – the best times to invest in this millennium occurred during the corrections in 2000, 2008, and 2020.

As the markets continue to suffer, here are a few ideas to fortify your financial future.

  • Keep an emergency fund of three to six months for your household expenses. If you spend $10,000 monthly, your emergency fund should range from $30,000 to $60,000. If your job is at risk or you’re concerned about the markets, extend your savings to nine to twelve months. An emergency fund allows your investments to recover without selling them at lower prices.
  • Buy US Treasuries because they act as a hedge against falling stock prices and are guaranteed. In times of uncertainty, investors flock to Treasuries. The yield on the 2-year US T-Bill dropped from 5% to 3.9% recently, a significant decline, as investors hunted for safety.
  • Allocate a portion of your assets to bonds. Long-term bonds have jumped 4.5% since the collapse of Silicon Valley Bank. As interest rates fall, bond prices rise.
  • Eliminate single-stock exposure. Over the past few days, First Republic Bank (FRC) wiped out a decade of gains. We typically sell stocks when they cut the dividend, lower earnings guidance, terminate thousands of employees, or face significant litigation. In my experience, it’s only a matter of time before companies fall or trade sideways for years after an adverse corporate event.
  • Continue saving and investing because markets eventually recover. After the Great Depression, stocks produced an annual gain of 11.3%; after the Great Recession, they generated a yearly return of 13.24%.[1] Investing during the darkest hours can deliver the best returns.
  • Diversify your assets across borders, sectors, and sizes. A globally diversified portfolio gives you the best opportunity to create long-term wealth. For example, international stocks climbed 36% from 2000 to 2011 as the S&P 500 faltered. Long-term bonds jumped 18% during the Great Recession, while stocks fell 53%.

Patience is a powerful tool for a successful investor. The ability to wait for stocks to recover is challenging but necessary. The Chinese Bamboo tree takes five years to start growing. For the first four years, it does nothing but fortify its roots, and then it can spurt more than ninety feet in weeks.[2] And the Agave Americana blooms once every 100 years.

Be patient, grasshopper.

The days are long, but the years are short. ~ Gretchen Rubin

March 15, 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.

[1] DFA Returns Web, period ending 2/28/2023.

[2] https://jdmindcoach.com/plant-takes-5-years-start-growing/#:~:text=While%20most%20trees%20grow%20steadily,grow%20at%20an%20astonishing%20rate. JD Mind Coach, January 28, 2018

Scary Times

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Silicon Valley Bank gives us another reason to panic and freak out over our financial future. The FDIC seized the sixteenth-largest bank in the country on Friday, the second-largest bank takeover in US history. At the time of the collapse, twenty-two Wall Street analysts rated the stock a buy or hold, and Jim Cramer urged investors to buy it last month.[1] It was a stellar performer until its collapse, rising more than 80,000 percent since going public, but now it’s gone – risk happens fast!

Silicon Valley Bank is the first bank failure since 2020 when four banks went belly up. The FDIC annexed 510 banks from 2007 to 2014, representing $700 billion in assets, and the current bailout is $209 billion.[2]

Honestly, I’m tired of writing about bank failures, stock market crashes, and financial calamities. Unfortunately, they’re embedded in our history and will continue for the foreseeable future. Despite constant headwinds, the stock market has been resilient. In the last twenty years, the market has recovered from the Tech Wreck, the Great Financial Crisis, and the bankruptcies of Lehman Brothers and Bear Stearns. In fact, since Lehman and Bear Stearns imploded in September 2008, the S&P 500 is up 124%.

In the meantime, here is a list of items you can employ to protect your family’s assets.

  • Buy US Treasuries because they’re insured and guaranteed regardless of how much you invest.
  • Review your cash balances held at your bank. The FDIC limit is $250,000 per person, per institution, and per account. If your balance exceeds the threshold, open a new account or buy US Treasuries. According to the FDIC website, no depositor has lost a penny of FDIC-insured funds since its founding in 1933.[3]
  • Reduce or eliminate your debt, regardless of the current interest rate. If your debt level is low, you can withstand a financial storm.
  • Buy physical real estate. My grandfather loved real estate and hated stocks despite my arguments that stocks can produce significant returns. He owned several homes, commercial properties, and a couple of ranches, and he did not panic when stocks dropped or banks failed. Real estate is a good inflation hedge that can generate substantial rental income and is excellent for transferring assets between generations. And you already know the key to successful real estate investing: Location, Location, Location.
  • Diversify your asset across investment categories, countries, etc. A globally diversified portfolio of stocks and bonds gives you access to thousands of investments designed to grow and protect your wealth over time.
  • Avoid single-stock exposure. Silicon Valley Bank wiped out thousands of shareholders in less than 48 hours, and I can give you a long list of companies that evaporated overnight. Instead, invest in mutual or exchange-traded funds to reduce your risk from individual stocks. The Invesco Small Cap Value fund (VSRAX) held a 1.50% position in the bank stock, and the fund was down less than 1% on Friday because it owns more than 112 securities.

The recent bank failure adds to a list of issues the stock market has dealt with recently, including COVID, the Ukraine War, and political turmoil. Still, it continues to rebound and recover, as it has historically. Today’s events will barely register on a long-term stock chart in a decade or two. For example, the October 19, 1987 stock market crash is but a blip on the chart below.

Markets like to climb a wall of worry, and many successful investors recommend buying when others sell. For now, follow your plan, think long-term, and good things will happen.

If you the bank $100, that’s your problem. If you owe the bank $100 million, that’s their problem. ~ J. Paul Getty

March 11, 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.

[1] https://www.foxnews.com/media/cnbcs-jim-cramer-eviscerated-touting-silicon-valley-bank-weeks-disastrous-collapse, Alexander Hall, Fox News

[2] https://www.fdic.gov/bank/historical/bank/

[3] https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance/

Can You Drink Coffee and Retire?

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A venti honey almond milk flat white coffee costs $5.95; if you drank one daily for a year, it would cost $2,171, and after forty years, you would have spent approximately $960,000, and that’s a lot of coffee beans. Of course, you could brew your coffee at home for about 15 cents, but that’s not as exciting as ordering from your local barista.

Starbucks went public in 1992, and if you invested $2,171 annually, it would be worth about $2.82 million today. It currently pays a dividend of 2.05%, generating an annual payout of $57,810, which would cover your coffee habit.

If you’re investing regularly, contributing to your retirement plan, and planning for your future, your daily coffee habit won’t derail your retirement plan. However, the more significant issue is to pay attention to your expenses, so they don’t bust your budget. I don’t drink coffee but spend money on diet cokes, mountain bike gear, and fly fishing equipment, and the expenses can increase quickly.

In addition to watching your expenses, keep an eye on your revenue. Most planners focus on cutting costs to the bone but ignore revenue generation. If you can increase your income, you can spend more on things you enjoy.

Here are a few ways to generate extra income.

  • Buy T-Bills. The one-year US T-Bill currently yields 5.3%. If your bank account balance is high, consider buying a T-Bill. For example, if your balance is $100,000, you could earn an extra $5,300 annually with government bonds.
  • Buy Dividend Paying Stocks. Several stocks pay generous dividends north of 3%, including Verizon, Pfizer, Amgen, UPS, Medtronic, and Cisco. You can search websites like Schwab and Yahoo! Finance to look for companies with superior payouts.
  • Write options. A covered call strategy generates income from stocks you own. Let’s say you own 1,000 shares of Apple (APPL). It closed today at $153, so write the May 19 option with a strike price of $165 to collect $3.10 per share, or $3,100. If Apple trades above $165, regardless of price, on May 19, the stock will sell. If it stays below $165, repeat the process.

In addition to these income-producing ideas, you can walk dogs, drive for Uber, deliver food through DoorDash, shop for groceries with Instacart, help people on TaskRabbit, or rent your boat you never use.

Revenue and expenses are linked, so pay attention to both sides of the ledger. Reducing costs in retirement is essential, but so is generating revenue.

Sometimes I go hours without drinking coffee; it’s called sleeping. ~ Anonymous

March 8, 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.

 Holding Pattern

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Several years ago, I flew from Connecticut to Los Angeles with a layover in Chicago. Nearing Chicago, the pilot informed us we were in a holding pattern due to a winter storm. I was stuck and could not do anything, and it lasted several hours before we finally landed.

Stocks are in a holding pattern as inflation and interest rates continue to rise, and there is no near-term catalyst for them to trade higher. Nor is there one to take them lower, an actual holding pattern. The Dow Jones is down 1.2%, while international stocks are down 0.30% over the past year. The markets remain stuck until inflation and interest rates turn lower.

Here are a few ideas to improve your portfolio since we are in a holding pattern and range bound.

  • Build a financial plan. As markets meander, now is an ideal time to build your financial plan, and it will guide your steps, give you a roadmap to financial freedom, and help you form a solid foundation for your future. At our firm, our clients with financial plans were calmer and less likely to panic during last year’s market rout.
  • Buy US Treasuries. If you hold a significant cash balance, buy US T-Bills. The 1-Year T-Bill yields 5.03%, better than CDs, money market funds, or savings accounts.
  • Review your asset allocation. Do you have the proper asset allocation based on your goals and risk tolerance? If you ignored your investments in the past year or two, your portfolio has probably drifted from the original allocation. As a result, your assets could be too aggressive or conservative for the next move in the market. Establishing an annual rebalancing program will solve this problem.
  • Buy dividend-paying stocks or funds. Companies that pay dividends have solid balance sheets and positive cash flow. Also, they tend to raise their dividends annually, giving you a raise. For example, Pepsi has grown its dividend by 102% over the past ten years, and the stock is up 117%. The dividend was $2.27 in 2013, and it is now $4.60. If you bought Pepsi in 2013 at $77, your current yield is 6%!
  • Increase your 401(k) contribution. If you’re not maxing out your 401(k) contribution, consider raising your amount by 2% to 3%. If you contribute 5%, increase it to 7%.
  • Consider a Roth conversion. Your IRA account balance is likely down in value over the past couple of years which is an excellent reason to consider a Roth conversion. After you convert your IRA to a Roth and the market recovers, all your gains are tax-free. And you no longer need to take your required minimum distribution.
  • Create an emergency or opportunity fund. Consider moving money from your checking account to your savings account each pay period. Most banks allow you to transfer funds automatically between accounts, and the funds in your savings account are liquid and accessible if you need them for any reason.
  • Pay off debt. Regardless of your interest rate, consider paying off your debt, especially if you carry a balance on a credit card. Returns are fleeting, but expenses are forever. You can give yourself a raise by eliminating your debt.
  • Give. You don’t need to wait until December to give money to charities or groups you support. People are hurting now and need help, and donating to your local food bank, non-profit, or church pays enormous dividends.

Stocks eventually recover, but it may take time. Be patient and follow your plan. In the meantime, use the current holding pattern to fortify your financial foundation.

Patience, persistence, and perspiration make an unbeatable combination for success. ~ Napoleon Hill

March 4, 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 A Preferred Stock?

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Preferred stocks can generate significant income and are hybrid investments, similar to stocks and bonds. The dividend income is usually higher than owning shares of common stock, and you may get some price appreciation. The preferred label comes from the pecking order on the balance sheet because shareholders receive their dividends before common-stock owners. In a corporate liquidation, bondholders receive their money first, followed by preferred holders, and common-stock shareholders receive whatever is leftover.

Preferred shares are typically issued at $25 per share and can’t be called or redeemed by the issuer before five years. If a preferred does get called, it’s at $25 per share.

The price of preferred stocks hovers around $25, and they may trade to $28 or $30 per share if rates are falling. When rates rise, the price may fall to $20 or $21 per share. They’re sensitive to interest rates, like bonds, and the prices adjust up or down based on the level of interest rates. Earning an income of six percent or more from preferred stocks is possible.

Preferred stocks are rated like bonds, so invest in ones with quality ratings. Standard & Poor’s and Moody’s apply ratings from AAA to D, depending on the quality of the issue. It’s rare to find AAA-rated preferred stocks; most ratings fall between BB and B . Ratings don’t tell the whole story, as we discovered in 2008, so pay attention to corporate balance sheets. During the Great Recession, several preferred stocks fell in price to single digits. Preferred stocks are sold with a prospectus, so you can read about all the features before purchasing your shares.

On the surface, a preferred stock sounds like a solid investment; however, the devil is in the details. As I mentioned, most preferred stocks get called after five years. If you purchased one intending to get your money back after five years, and it is not redeemed, you may hold your shares for thirty, forty, or fifty years or more!

Of course, you can sell your investment anytime, but you may get more or less than your purchase price. It is a risk for investors when interest rates rise because the value of your shares can fall. You can likely sell your holdings for a gain when interest rates drop.

Barron’s has a tremendous section of preferred stocks. In the stock tables, you can look for companies by name, price, yield, etc. Once you have identified a few, you can do further research online.

I recommend allocating approximately five percent of your fixed-income portfolio to preferred stocks if you want to give it a boost,

What do you prefer? ~ 1 Corinthians 4:21

March 3, 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.