Month: October 2023

I Hate Diversification       

Posted in InvestmentsTagged , , , , Leave a comment

Warren Buffett described diversification as “diworsification.” He is not a fan of it and prefers to concentrate his bets on a select group of companies. I can’t argue with his strategy or success. Diversification means you must constantly apologize for something.

If diversification works correctly, some investments are up, and others are down; some outperform, others underperform. For example, the S&P 500 is up this year while long-term bonds are down. Last year, everything fell except for commodities. Most asset classes finished in positive territory in 2016, 2017, and 2019. If you own a basket of diversified funds, your portfolio will never match the best or worst-performing asset class. During COVID, the S&P 500 was up 18.29%, while real estate and commodities dropped 4.68% and 7.84%, respectively. However, a globally balanced portfolio was up 8.63%. Below is an investment quilt, and you can see assets fluctuate significantly. If you track the yellow cells for the S&P 500, you can see the variation in its annual performance.

Long-term bonds are down this year, as they were last year and the year before, and they’re producing their worst three-year performance ever. The consistent comment I hear from clients is, “Why do we own bonds?” I understand. It’s frustrating to look at a losing position.

Conversely, no one has asked me why we own the S&P 500, which is up this year. During his review, one client asked why we can’t put everything in Apple stock. Another client questioning his bond allocation said, “It feels like the apocalypse.” And everybody wants to own the Magnificent Seven Stocks, which are up, on average, 76% this year – a no-brainer. However, in 2022, they were not magnificent. On average, the seven stalwarts were down 46%, and few people wanted to buy the lot. Hindsight is lovely.

Despite my hatred for diversification, I’ve yet to find a better investment strategy, and I’ve tried many, like market timing, seasonal trading, value, growth, income, momentum, charting, etc. The list goes on and on, but the one tried-and-true strategy is owning a diversified portfolio of stocks, bonds, and cash and holding them forever because you never know when, where, why, or how markets will move. During the COVID correction, investors liquidated billions of dollars worth of stocks before the S&P 500 rocketed 63% from March 2020 to January 2021.

A diversified portfolio gives you access to thousands of securities worldwide, including the Magnificent Seven. A well-constructed portfolio exposes you to several investments and asset classes, diversified by size, sector, type, and location.

The classic diversified model is the  60/40 portfolio – 60% stocks and 40% bonds. It struggled last year, like everything else, but it has rebounded nicely since last October. Vanguard’s Balance Fund tracks the 60/40 model; since 1992, it’s up 923%, averaging 7.79% annually. A $10,000 investment is now worth more than $102,000.

Times are dark and difficult, with wars raging in Israel and Ukraine, rising interest rates, and political unrest, so investing your money in a US T-Bill to ride out the storm makes sense. A guaranteed 5% rate sounds good. T-bills are safe and have never lost money, averaging about 3% annually from 1926. A $1 investment in 1926 is now worth $22 – no risk, no reward. We are experiencing another challenging investment environment, but that’s an ideal time to buy, and the best way to invest your money is through a diversified portfolio of low-cost funds.

Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it. ~ Will Rogers

October 26, 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.

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. Past performance is not a guarantee of future performance.

My Experience on Ski Patrol

Posted in UncategorizedTagged , , Leave a comment

In 1989, I was on the ski patrol staff at Mammoth Mountian, but I only lasted a few weeks because I couldn’t ski well, a vital skill for working on a mountain. I spent most of my days fixing fences or adjusting pads on lift towers. It was not a good career fit.

When I moved to Mammoth, I lived in San Diego on Mission Beach and worked a mindless job at Bank of America. My roommate said he was moving to Mammoth to join their ski patrol, so I went with him on his journey. He knew what he was getting into, but I did not. He grew up ski racing in Tahoe and was about as close to a professional skier as you can get. He taught me to ski and said the only way to learn was to ride the lift to the top of the mountain and ski down – on-the-job training, and was it ever! I love the outdoors, so working with the ski patrol made sense.

I had recently graduated from college and did not have any direction or goals. I was like a ship without a rudder, so every opportunity sounded exciting. My grandfather’s motto was fake it until you make it, and it worked well for him, so I thought I would have the same experience. Not so. I needed a plan and structure. My few weeks on the mountain were fun, but I felt guilty because I was not utilizing my college degree. At the time, I felt the only way to succeed financially was to work in business, so I quit and returned to Los Angeles to start my career as a stock broker.

Here are a few takeaways from my time working with the ski patrol.

  • Goals are essential, and direction matters. Knowing where you’re going is vital. A ski map is necessary for a fun and safe ski day. The maps are detailed with color-coded ski runs to help you gauge your risk level, and if you get lost, the ski patrol will rescue you and get you home safely.
  • Planning is paramount. A plan keeps your goals in line, allowing you to focus on what’s important. It also permits you to say no to things that distract you from achieving your goals.
  • Know your risk level. When I moved to Mammoth, I was over my skis and was taking too much risk. I was outside my comfort zone, and it was a difficult job because I felt insecure in my abilities. It’s crucial to align your risk tolerance to your goals.
  • Quit. It’s okay to quit and cut your losses. I resigned from the ski patrol after realizing it would not work out. Cutting your losses can pay dividends and free up your time to focus on things where you can succeed.
  • Review. After cutting your losses, reflect on what worked and what didn’t. Spend time analyzing your move, and try to learn from your mistake. Every loss or mistake is an opportunity to learn and grow.

To succeed as an investor, focus on your goals, follow your plan, know your risk level, cut your losses, and review your strategy.

A pair of skis are the ultimate transportation to freedom. ~ Warren Miller

October 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.

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. Past performance is not a guarantee of future performance.

Do You Have A Spending Problem?

Posted in UncategorizedTagged , , Leave a comment

Are you living paycheck-to-paycheck? If so, you’re not alone. According to a recent study, 65% of adults struggle to make ends meet, and 30% say they run out of money monthly.[1] The data is sobering, considering the unemployment rate is near historic lows, and assets are rising.

Does the name Ronald Read ring a bell? Probably not. He was a gas station attendant and janitor in Vermont who passed away in 2015 with a net worth of $8 million. His friends described him as frugal, driving used cars and chopping firewood. His portfolio consisted of blue chip stocks that he owned for decades. He lived well below his means and bought high-quality stocks, critical ingredients for creating wealth.[2] Must you live a frugal lifestyle like Mr. Read to achieve your financial goals? Maybe not, but spending less money than you earn is necessary if you want financial independence.

I don’t believe there is a spending problem for most people because of the current economic headwinds of rising interest rates, inflation, food and gas prices. Prices at the pump, grocery store, and mortgage payments absorb a majority of paychecks, items all necessary to live. However, some people try to keep up with their neighbors and spend to appear wealthy, which does not end well.

Personal spending has averaged 6.57% annually since 1960; since COVID, it has jumped to 9.43% per year, a significant increase. It recently topped $18.3 trillion, and the consumer does not appear to be slowing down soon.

Credit cards are efficient financial tools, but a tool in the wrong hand is dangerous. Credit card debt recently topped $1 trillion, and with interest rates topping 22%, it’s easy to see how individuals can spiral into uncontrollable debt. According to USA Today, a household’s average credit card balance is $7,951, with annual interest payments of $1,749. In this scenario, it will take you five years to pay off your balance, and your total payments would equal $12,882, according to Experian’s Credit Card Payoff Calculator. Here is a link: https://www.experian.com/blogs/ask-experian/credit-card-payoff-calculator/

Americans love to spend money, and we are a consumer-driven economy. US Retail Sales have averaged 4.61% annually for the past thirty years, but since COVID, they’ve averaged 15.38% annually! The government pumped money into the economy to boost it, and we have difficulty turning off the spigot. And with the holiday season nearing, this number will likely increase.

Here are a few suggestions to help you with your spending and expenses.

  • Track your spending through sites like Mint or EveryDollar. These sites enable you to find the good, bad, and ugly for your spending patterns.
  • Create a budget or spending plan. A budget can provide targets or limits for spending and investing.
  • Differentiate between needs and wants. I don’t need a new fly rod, but I want one.
  • Avoid impulse purchases and shopping. Shop with a list and stick to it, and don’t let shiny objects distract you at the checkout counter. I’m a sucker for peanut M&M’s.
  • Shop for the best item or lowest cost. If buying big-ticket items, look for the best deal or price through comparison shopping. Do your homework.
  • Credit cards are financial staples, but using cash can help reduce your spending. Parting with my benjamins is painful when I use cash to pay for an item. Using cash may make you less inclined to buy the latte or super-size your meal.
  • Automating your expenses can reduce late charges and penalties.
  • Downsize your home. Tapping your home equity can free up capital to help you reduce your spending. When my wife and I downsized, we reduced the number of AC units and refrigerators necessary for our new home. My previous home required about four hours of yard work, and my current one only takes about 40 minutes, saving both time and money.
  • Move to a different state. Do you want to live in Oklahoma, West Virginia, or Mississippi? These states offer tremendous value. You can significantly reduce your taxes and living costs if you move from California to Nevada or New York to Connecticut. I lowered my taxes when I moved from Connecticut to Texas.
  • Delay your gratification. We live in a microwave world where we want everything quickly, but saving money to buy an item can save you thousands of dollars in interest payments. I struggle with delayed gratification because I’m impatient.
  • Give money to others. Donating to charities can reduce your taxes and potentially improve your health. Despite your current financial situation, someone else probably needs a helping hand. Here is what God says about giving, “Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,” says the Lord Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that there will not be room enough to store it.” ~ Malachi 3:10. This is the only Bible verse where God says, “Test me.”

Curtailing spending is difficult but possible, so be patient on your journey to control your expenses. I know you can do it; I’m rooting for you!

If you can count your money, you don’t have a billion dollars. ~ J. Paul Getty

October 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.

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. Past performance is not a guarantee of future performance.

[1] https://www.barrons.com/articles/living-paycheck-consumer-economy-bb16b8e8, Megan Leonhardt, October 15, 2023.

[2] https://finance.yahoo.com/news/janitor-vermont-amassed-8m-fortune-140000770.html#:~:text=Read%2C%20a%20retired%20gas%20station,much%20of%20Read’s%20local%20community. Vishesh Raisinghani, August 29, 2023

Five Percent, guaranteed!

Posted in InvestmentsTagged , , , Leave a comment

The United States Treasury Bill is enjoying its fifteen minutes of fame as interest rates soar. The T-Bill currently pays more than 5.5%, so should you T-Bill and chill?

Growing up, I often went to First Interstate Bank with my mom to cash checks, make deposits, or withdraw money. Our visits were pre-everything, so we had to enter the lobby, and I remember signs and posters touting T-Bills. The rates were attractive because this was during the inflation-fueled days of the 1970s, but I was too young to realize that inflation was destroying their actual return.

The T-Bill is outperforming most stocks in the S&P 500 this year. There are 315 companies, or 63%, in the index earning less than 5.50%. The T-Bill is also beating the Dow Jones Industrial Average.

The full faith and credit of the United States Government back the T-Bill. It’s guaranteed, and they have zero default risk if you hold it to maturity. It is considered the safest investment in the world and has never lost money since 1926. If it is paying 5.50%, guaranteed, why wouldn’t you put all your money in this vital asset class? A $1 million investment can pay you $55,000, not bad.

However, interest rates fluctuate, and from 2008 to 2016, the one-month T-Bill paid less than 0.25% and earned 0.00% on several occasions. During COVID, it yielded less than 0.07%, and 0.00% was the norm. T-bills can also offer double-digit rates as they did in the 1970s and early 1980s. In 1981, earning more than 14% was possible.

Treasury Bills track inflation. Since 1926, they averaged 3.25% annually, but inflation averaged 2.95%, so your net return was 0.30% before taxes. Over the past decade, T-Bills returned 1% annually, and inflation averaged 2.76%, so you lost 1.76% every year. The S&P 500 averaged 12.81% this past decade and 10.24% for the past 97 years.[1]

A T-Bill is a valuable short-term investment if you need money in one year or less or it’s required to meet an obligation like buying a new car or paying tuition, but it’s a poor choice for the long haul. Buy stocks if your time frame is three to five years or more.

I understand the craving for a safe, secure investment paying more than 5%, especially after the volatility of stocks over the past five years. Despite the periodic losses in 2018, 2020, and 2022, the S&P 500 averaged 10.34% annually, compared to the T-Bill return of 1.58% per year.

Safety is in the eye of the beholder.

A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic and more likely to remain invested, benefitting from the wealth building power of stocks. ~ Christopher Davis

October 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.

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. Past performance is not a guarantee of future performance.

[1] DFA Returns Web 1926 – September, 2023

Twenty Years of Observations

Posted in InvestmentsTagged , , , Leave a comment

I’m celebrating my twentieth anniversary as a CERTIFIED FINANCIAL PLANNER™ Practitioner, and in honor of this milestone, I’m posting twenty observations.

  1. Successful investors have financial plans. A plan is your financial GPS that helps you achieve your stated goals.
  2. A family will or trust is a must. A properly constructed estate plan saves dollars, headaches, and heartaches. A simple estate planning strategy is to update your beneficiary designations because they override everything.
  3. Insurance is a lifesaver. Insure big-ticket items like your life, home, and auto. Umbrella policies are underrated, and your non-working spouse needs life insurance.
  4. Diversification gives you access to global markets and reduces risk.
  5. A taxable investment account is a secret weapon, especially if you want to retire early. Assets in a brokerage account receive favorable tax treatment, and you don’t need to worry about complicated retirement distribution rules.
  6. Low fees are paramount. Check the fees you pay your advisor, broker, insurance agent, etc. In addition, review your investment holdings to ensure your expenses are reasonable.
  7. A spending plan is better than a budget. A spending plan gives you the freedom to invest and spend with confidence, and it’s less restrictive and punitive than a budget.
  8. Buying a home is central to creating generational wealth. However, if you move every few years, you’re better off renting.
  9. Debt is a financial killer. Limit your total debt payments to 38% of your gross income. If you earn $10,000, cap your debt payments to $3,800.
  10. Emergency funds can help you weather the storm if you lose your job or need to replace a car, roof, refrigerator, etc. An emergency fund allows your stocks and bonds to grow without interruption.
  11. Speculation is appropriate and recommended if you limit your investment to 1% to 3% of your taxable assets.
  12. It’s okay to break the rules now and then. I believe in diversification, but my best investment has been Amazon. Amazon violated all my tenants for buying a stock, but I bought it anyway. It helped pay for my daughter’s six years of college (undergrad and graduate), allowing her to graduate without student loans.
  13. If you want to create long-term wealth, you must own stocks. Full stop.
  14. The one-month US T-Bill is the safest investment in the world, and if you want to preserve wealth, there’s nothing better. However, they’re poor investments for creating wealth because they struggle to outpace inflation.
  15. Intentional giving benefits everyone. A philanthropic strategy will help maximize your efforts.
  16. I’ve not found a use case for commodities, private placements, or whole-life insurance policies.
  17. Focusing on economics and politics is a waste of time.  
  18. Emotional intelligence trumps everything. Of course, being wicked smart helps, but staying grounded when investments are crashing is a superpower, and the ability to buy when others are selling takes courage and intestinal fortitude.
  19. Stocks always recover.
  20. Prayer works.

The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. ~ Benjamin Graham

October 5, 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.

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. Past performance is not a guarantee of future performance.

Happy Anniversary To Me!

Posted in UncategorizedTagged Leave a comment

I received my CERTIFIED FINANCIAL PLANNER™ practitioner designation twenty years ago, on October 6, 2003, and what a long, strange trip it’s been.  

During the Tech Wreck from 2000 to 2002, I attended a Morgan Stanley Branch Manager’s conference where a speaker shared how his dad told him to improve himself during difficult times when business was slow and markets were in turmoil. At the time, I was managing the Morgan Stanley office in New Haven, Connecticut. When I returned from the conference, I offered to pay for the CFP® training for any advisor who wanted to obtain the designation. Initially, twelve advisors, including me, started the program. I contacted a professor at Albertus Magnus College who agreed to teach us every Tuesday morning. Our first lesson was a crash course on handling the HP 12c calculator efficiently because if we could become proficient with it, we could save precious minutes on the exam.

After we finished our first course and exam, several advisors quit, and we lost more after the second one; we only had three remaining after the third test. The professor could no longer come to our office because of dwindling attendance, and that’s when we lost the final advisors. I was alone on my CFP® journey. Two years after my calculator course, I registered for the July 2003 exam.

During the spring of 2003, I transferred to Austin, Texas, to manage Morgan Stanley’s office. My wife and I relocated to the Live Music Capital of the World with our five-year-old daughter. I was working in a new office in a new city, living in a new home. In addition to managing the Austin office, I oversaw the College Station and Temple locations. I had little time for studying and spent many hours in meetings and traveling as I navigated the lay of the land, so I studied late at night and on weekends. It was a long, exhausting stretch.

The test was a written exam covering two days. My family joined me in San Antonio, and we turned my exam weekend into an adventure. Since it was a written test, my fate was uncertain for several weeks. I routinely checked the CFP® website to see if I had passed, and I finally found out about six weeks later that I had. I remember the evening well because my parents were visiting from Los Angeles, and I was glad they could join us in celebrating my two-year voyage.  

The CFP® is demanding and difficult. Of the 1,963 individuals who sat for the exam, only 1,123 passed, or 57%. I remember my professor telling me that if I felt like I failed the exam, I likely passed. He added that those who were overconfident and thought the exam was easy probably failed, and he was right based on my straw poll.

When I launched my career, I was unaware I could become a planner because most training programs offered through major Wall Street firms focused on product sales, with little emphasis on investments and even less on planning. Initially, I concentrated on selling stocks, bonds, and mutual funds and thought I had everything figured out until I started studying for the CFP® exam. It opened my eyes to everything I did not know, like insurance, estate, and tax planning. I was venturing into new territory, and it was thrilling.  

The fun began after I earned my designation because it felt like I was starting a new career. Financial planning is a unique field full of twists and turns, engulfing every aspect of a family’s life from birth to death and all points in between. To complete a successful plan, a planner must wear several hats to help clients achieve their financial goals – investments, insurance, estate, taxes, education, etc. It’s a long, thorough list. In addition to the financial aspect, I sometimes feel like a psychiatrist, marriage counselor, and confidant.

The CFP® profession is celebrating its fiftieth year, and currently, there are 97,575 professionals, a far cry from the original 35 members who launched the industry in 1973. But we still have a long way to go, especially regarding minorities. Currently, less than 10% of planners are minorities. However, the CFP board is excellently advancing the industry and designation, strongly focusing on pro-bono planning, ethics, continuing education, and diversification. They are proactive in elevating our profession.

I’m glad I started my planning certification journey more than two decades ago, and I look forward to celebrating my fiftieth anniversary in 2053 at age 88!

Happy planning!

Financial planning is like navigation. If you know where you are and where you want to go, navigation isn’t such a great problem. It’s when you don’t know the two points that it’s difficult. ~ Venita VanCaspel

October 2, 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.

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. Past performance is not a guarantee of future performance.