Do You Make These Investment Mistakes?

The market is volatile, interest rates are falling, inflation is rising, and the Delta Variant is surging.  The Dow Jones fell 725 points on Monday, but it rebounded 549 points on Tuesday. The US 10-Year Treasury yield dipped to a recent low of 1.13%, despite the inflation rate touching 5.39%. And in Florida, COVID cases are climbing again. As headline risks multiply, you may be prone to make some forced errors that could impact your financial future.

Do you make these investment mistakes?

  • Do you panic when stocks fall 1% to 2%? It isn’t easy to create wealth if you sell every time stocks fall. Panicking is a wealth killer. Rather than selling stocks when they’re down, use it as an opportunity to buy great companies at lower prices.
  • Do you participate in your company’s retirement plan? If your company offers a retirement plan and you don’t participate, you’re leaving tens of thousands, if not millions of dollars, on the table. You’re allowed to contribute $19,500 to your 401(k), and if you’re fifty or older, you can add another $6,500. Investing $19,500 for forty years can grow to more than $4 million by the time you’re ready to retire. If you can’t afford to max out your retirement plan, then contribute whatever you can – every bit counts.
  • Do you match the match? If your company offers a 5% match to your 401(k), but you only contribute 2%, you’re missing an extra 3%. If your salary is $100,000, then 3% is $3,000 per year, which can add up to more than $600,000 during your working career.
  • You are not contributing after-tax dollars to your 401(k) plan. If you max out your 401(k) contributions, you can contribute to an after-tax account if your employer allows it, substantially increasing the amount of money in your retirement plan; in some cases, you can add an extra $38,500 per year. Some call this strategy the mega back door Roth.[1]
  • Are you too conservative? If your time horizon is ten years or more, own stocks. According to Dimensional Fund Advisors, stocks made money 95% of the time over continuous ten-year rolling periods from 1926 to 2018 and produced an average annual return of 10.4%.[2]
  • Are you too aggressive? Investing in stocks when you need money in one year or less is a mistake. In the short term, stocks are violent, volatile, and unpredictable. If you want to buy a home, pay for a wedding, or take a trip in one year or less, park your money in cash or bonds.
  • Are you impatient? Creating wealth requires patience. It can take years or decades for your wealth to grow, so don’t get impatient if you don’t experience early success.
  • You aren’t diversified. Diversification is considered the only free lunch on Wall Street. If one investment zigs, another will zag. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% comes from market timing and investment selection.[3]
  • Ignore small-caps. Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.1% from 1928 to 2020. A $1 investment is now worth $92,668.  The Dimensional Large-Cap Value Index averaged 11%. A $1 investment in this large-cap index is now worth $17,022.[4]
  • You attempt to time the market. Timing the market is impossible. If you invested $1,000 in the S&P 500 in 1970, it grew to $139,000 at the end of August 2019. However, if you missed the 25 best days from 1970 to 2019, or 18,139 days, your investment only grew to $32,763.[5]
  • You are investing with active fund managers. Passive index investing is better than active stock picking. The Standard & Poor’s study of passive vs. active reveals that over 15 years, 95% of active fund managers fail to outperform their benchmark, also the case for 1, 3, 5, and 10 years.[6]
  • You are only investing in US stocks. International stocks account for 43% of the world’s equity market capitalization, and if you only invest locally, you’re missing half of the world’s best investment ideas.[7]
  • You are not rebalancing your accounts. If you rebalance your portfolio, you’ll keep your risk level and asset allocation intact.
  • You are not automating your investments or payments. Automate everything like investing, paying your bills, and rebalancing your accounts. Reducing human error can improve your odds of financial success.
  • No Financial Plan. According to one study, individuals who complete a financial plan have three times the assets of those who do little or no planning.[8] Investing without a financial plan is like building a home without a blueprint. Good luck.
  • You are not working with a financial advisor. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[9] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more. 

We are our own worst enemies when it comes to investing and creating wealth. If you have a financial plan, diversify your assets, rebalance your accounts, invest often, good things can happen.

Happy Investing!

It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes. ~ Warren Buffett

July 21, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Happy anniversary to my parents – 58 years today!


[1] https://www.wsj.com/articles/a-little-known-back-door-trick-for-boosting-your-roth-contributions-11625848733, Anne Tergesen, July 9, 2021

[2] Dimensional Fund Advisors 1926 to 2020

[3] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[4] Ibid.

[5] https://my.dimensional.com/what-happens-when-you-fail-at-market-timing

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] DFA 2021 Matrix Book

[8] http://www.nber.org/papers/w17078

[9] https://www.vanguard.com/pdf/ISGQVAA.pdf

Should You Buy Your Kids A Home?

Home affordability is no longer affordable for most, especially for kids graduating from college. According to Zillow, the average home price is $293,349, up 15% from last year. In Austin, it’s $600,000. My daughter will graduate with her Master of Social Work degree next May, and she wants to buy a home in the Austin area, but home prices are skyrocketing. She regularly scans Zillow looking for bargains, but she is not finding many.

The low rate environment is helping fuel the housing boom, with mortgage rates below 3%. In 1981, they peaked at 18.5%! If you bought a $500,000 home in 1981, your mortgage payment was $7,739. Today it’s $2,081.

All interest rates are low, not just for mortgages. The yield on the 10-Year US Treasury Note is 1.30%, the one-month T-Bill rate is .06%, and your bank account is likely paying you zero percent. The current amount of savings deposits is $10.67 trillion, up 14.44% from last year, so there’s a lot of cash sitting on the sidelines earning close to nothing.

Low rates, rising home prices, and large cash balances are a perfect storm for helping your children buy their first home. Here is how it works. Your child wants to buy a $500,000 home, but they’re getting outbid because they can’t pay cash. If you have $500,000 in your savings account or invested in a low-yielding bond portfolio, consider using the proceeds to buy a home for your child. Once the home purchase closes, your children can pay you back in the form of a mortgage payment. If you charge them 3%, they’ll pay you $2,108 monthly, or $25,296 per year.[1]

If you follow this strategy, your cash flow will increase. For example, if you park your money in a bank savings account, the interest rate is probably .01%, so your annual interest payment will be $50 on a $500,000 balance. If you purchase a 10-Year T-Note at 1.30%, your annual income will be $6,500, far below $25,296!

Another benefit of this program is that you can eventually forgive the loan and transfer the home’s title to your children. The forgivable loan is not taxable to your children, and you remove the asset from your estate. Of course, you can make them pay you until the loan matures, and if you pass away before it comes due, they’ll continue to make payments to your estate.  

National Family Mortgage® can assist you with the transaction, and they will help you manage the mortgage allowing your children to receive a tax deduction for their payments. Here is a link to their website: https://www.nationalfamilymortgage.com/

Owning a home is an American dream for most, but it’s slipping away because of the rapid rise in prices. Buying a home for your kid will give them an economic boost, build equity, avoid wasting money on rent, and get them out of your basement.

Happy house hunting!

If I were asked to name the chief benefit of the house, I should say: the house shelters daydreaming, the house protects the dreamer, the house allows one to dream in peace.” — Gaston Bachelard

July 15, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] Payment based on a 30-year mortgage with a 3% interest rate.

Should You Own Bonds?

Long-term interest rates are near historic lows. In 1981, rates peaked at 15.32%; today, they’re 1.37% – a drop of 91%. The yield on the US 10-Year Treasury Note is currently 1.3%, and the inflation rate is 4.99%, so if you bought a bond today, your real rate of return is negative 3.69%. Negative interest rates aren’t too compelling.

Investors buy bonds for income and safety, especially in retirement, as stocks are considered risky investments. Bondholders have enjoyed generous returns since 1981 as interest rates fell because when interest rates drop, bond prices rise. For example, if you buy a 30-year bond for $100 paying 5%, and interest rates fall to 2%, the price of your bond would soar to $229. Bond fund managers have enjoyed a one-way trade for the past forty years, but now that rates are near all-time lows, is the party finished? And if the party is over, does it make sense to own bonds in your portfolio?

In 1982 bond prices soared 40%. It was the beginning of the end for bondholders; it just wasn’t evident yet. If bonds continue paying real negative rates, are they safe? When interest rates start to rise, bond prices will fall. For every 1% interest rates rise, the price of a 30-year bond will lose 16%.

However, don’t be quick to jettison your bonds. During the lost decade of 2000, bonds outperformed stocks by nearly 90%. Vanguard’s Total Bond Index rose 80%, while the S&P 500 lost 10%. Bonds can add protection to your account when stocks crash. If you have a balanced portfolio, you can sell your bonds to buy stocks. For the most part, bonds and stocks are negatively correlated – when one rises, the other falls.

Also, adding bonds to your investment accounts will lower your risk level. According to Riskalyze, a 100% stock portfolio dropped 53.1% during the Great Recession, whereas a portfolio consisting of 60% stocks and 40% bonds fell 34.2%, or 36% less than the all-stock portfolio. So, if you want to reduce risk in your portfolio, add bonds.

Most of us already own a substantial bond portfolio in the form of Social Security. For example, if you receive $24,000 in annual benefits, this is equivalent to owning a $2.4 million bond portfolio if interest rates are 1%. Also, your Social Security benefits increase with the cost of living. Last year the adjustment was 1.3%, and in 2022 it may climb 6.1% – the most in forty years![1] If you consider Social Security as part of your portfolio, it reduces the need to own bonds.

Few people have the stomach to handle an all-stock portfolio, especially during challenging market environments like the crash of 1987, the Tech Wreck, the Great Recession, or the Covid Correction. It’s easy to hold stocks when they rise 10% to 20% per year, not so much when they fall 40% or 50%. When investors are scared, and fear is high, they sell stocks to buy bonds. As they say, anybody can sail a ship when the seas are calm.  

I still recommend diversified portfolios because no one knows which asset class will perform well in any given year. Diversifying your assets across sectors is still a prudent strategy, but think about reducing your bond allocation if you’re a long-term investor with diamond hands and a strong stomach.

“Confronting a storm is like fighting God. All the powers in the universe seem to be against you and, in an extraordinary way, your irrelevance is at the same time both humbling and exalting.” ―Francis LeGrande

July 14, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.cbsnews.com/news/social-security-cola-2022-increase-biggest-nearly-40-years/, Aimee Picchi, July 13, 2021

I’ll Do It Tomorrow

Why do it today when you can do it tomorrow? Have you ever delayed starting a diet? An exercise program? Yardwork? House cleaning? The list goes on and on; we have all procrastinated about something. As Wimpy says, “I’ll gladly pay you Tuesday for a hamburger today.”

According to Merriam-Webster, procrastination means to put off intentionally and habitually, putting off something that should be done. The keyword in the definition is intentional because we decide not to act. It’s deliberate. For example, I should have mowed the lawn on Saturday, but I put it off until Sunday. I procrastinated.

Procrastinating on certain things is not life-altering. Delaying my lawn mowing by one day will not impact anything in my life. Waiting to wash my car is no big deal. However, habitually delaying dieting, exercising, or investing can have negative consequences.

The best time to start investing was yesterday; the second-best time is today. Starting your investment program is essential if you want to create wealth, regardless of your current situation. If you’re waiting for perfect timing, you’ll never start.

The Fidelity 500 Index fund (FXAIX) is one of the largest mutual funds in the world, with $343 billion in assets. It is a perennial performer, and since 1990 it’s generated an average annual return of 10.4%. A $10,000 investment is now worth $231,000, but if you delayed your purchase until 2000, ten years later, your $10,000 only grew to $44,500, a difference of $186,500.[1]

Becoming a millionaire is still a goal for many – a 25-year old only needs to save $380 per month to reach the milestone by age 65, but a 35-year old must save $819 monthly. If you wait until your 55, you need to save $5,777 per month or more than fifteen times the amount of a 25-year old.

How can you create wealth and avoid procrastination? Let’s explore a few ideas.

  • If you have access to a 401(k) or 403(b), sign up today. Your investment will automatically deduct from your paycheck, making it easy for you to save and invest. Every pay period, you’ll contribute to your retirement account. How much should you invest? At a minimum, match the match. For example, if your company offers a 5% match, you should contribute the same percentage, so your total investment amount is 10% of your pay.
  • If you struggle with saving money, open a savings account and set up a monthly draft from your checking account. The automatic savings program will grow over time while allowing you access to your money if you need it.
  • Open an IRA. You can automate your IRA investment program as well. The maximum contribution for individuals under 50 is $6,000, and those 50 or older can add another $1,000.
  • Invest for growth by opening a brokerage account and dollar cost average into a mutual fund. Investing monthly into a mutual fund or two will grow over time. Investing in a taxable account allows you to access the money at any time, for any reason.
  • Set financial goals, write them down, commit them to paper, and review them often. Do you want to retire early? Buy a second home? Travel the world? Your written goals will motivate you to keep moving.
  • Work with a Certified Financial Planner™. A financial planner can serve as your accountability partner, gently pushing you towards your goals, like a coach. Sharing your goals with others is another motivating factor.
  • Reward yourself. When you achieve a goal, celebrate – enjoy the fruits of your labor. Rewarding yourself for doing well will give you the courage to keep moving forward.

In 2009, I decided to run the Boston Marathon; however, to run the race, I needed to qualify, meaning I had to run another marathon or two before Boston. I committed my goals to paper and set a timeline for my journey. Once I identified my qualifying races (Austin and Los Angeles), I started running. I didn’t wait. And, to be clear, when I started running, I was not in marathon race shape, so I set daily, weekly, and monthly goals to improve my performance. I ran the Austin marathon in 2010 and qualified for Boston with a time of 3:25. A month later, I ran the Los Angeles marathon for backup. In 2011, I finished the Boston Marathon with a time of 3:22. If I delayed my training or waited until I was in better shape before running, I never would have run the Boston Marathon.

Don’t delay; start today! I know you can do it!

 “The miracle isn’t that I finished. The miracle is that I had the courage to start.” – John Bingham

July 13, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] YCharts

My Investment Tool Kit

A friend once told me you could fix anything with the right tool. Tom was a chain-smoking retired Air Force pilot frustrated with people who tried to fix everything with a screwdriver or a hammer. He often ranted that your project will turn out looking horrible if you don’t have the proper tools.

It’s true, the right tools help, and no one tool is better than the next. Each one has a unique purpose: a screwdriver or a hammer are each designed for something specific. My tool kit collection has grown over the years, adding to it as I worked on more construction projects. I now own several tools allowing me to tackle various projects.

Investors often look for the best single investment. They want to know what is working now. If stocks are good, bonds must be bad. However, it doesn’t work that way. Like tools, investments are designed for a specific purpose. Each one has pros and cons, but when used together, the pros outweigh the cons.

Stocks are best suited for long-term growth. If you buy stocks, you expect them to grow, and, hopefully, they’ll be worth more tomorrow than they are today. If you’re patient, they can increase your wealth over time and generate dividend income. They’re one of the best investments to own, but there is a dark side – stocks often fall significantly. Each year it’s not uncommon for stocks to lose 10% or more, and occasionally they can drop 40% to 50% as they did from 2000 to 2003, 2008, and 2020.

Bonds are safe, designed to generate income and preserve wealth, especially US Treasury bonds. Interest rates on bonds are currently low, so they’re not generating much income, but they still provide a level of protection not found in other investments. Also, treasury bonds are guaranteed. Bonds and stocks pair well together because they’re inversely related. Risks to bonds include inflation and rising interest rates. If rates rise, bonds fall. A 1% rise in interest rates will cause a 30-year bond to drop about 16%.

Cash is an investment, and it plays a vital part in portfolio construction. If you’re purchasing something today, you will likely use cash, not stocks or bonds. Cash is liquid. In addition to buying goods and services, it can be used as an opportunity fund, allowing your other assets to grow or generate income. If stocks fall, you can dip into your cash reserve to add to your holdings. Cash is an excellent short-term investment, but it will not keep pace with inflation.

Gold, silver, and other alternative investments on their own don’t do much. They don’t pay dividends, and historically their returns have been sub-par when compared to stocks, but if you fear a steep spike in inflation, then allocating a few dollars to this sector might work.

Investing in one asset class is speculation; investing in several is diversification and prudent. A portfolio of numerous asset classes will give you the best opportunity to make money. Rebalancing your portfolio at least once per year between stocks, bonds, and cash keeps your asset allocation and risk tolerance in check.

In addition to traditional assets like stocks, bonds, gold, and cash, you can add supporting tools like real estate, options, or crypto-currencies, depending on your risk tolerance.

Investments, like tools, are designed for a purpose, and they are unique to the owner. When you build your investment portfolio, make sure it fits your time horizon, goals, and personality.

Hammer away!

Work whatever tools you may have at your command, and better tools will be found as you go along. ~ Napoleon Hill

July 7, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

What’s Your Life Worth?

I hate hearing stories about people dying young like Chadwick Boseman, John Candy, Gilda Radner, Pat Tilman, or Kobe Bryant. I could list hundreds of people who died early, including close friends and relatives. Of course, we will all die at some point, hopefully after a long, healthy life.

A common knock on financial planners is that we only want to sell life insurance. There might be some truth to the complaint, but why is it true? One reason planners recommend insurance solutions is because you probably need them, and insurance can turn a horrible situation into a better one. You likely own fire or car insurance, and, hopefully, you never have to use it. You might even insure a TV, computer, or iPhone. If we are quick to insure material things, why not our most valuable asset – ourselves?

In addition to life insurance, owning disability and long-term care insurance can protect your assets for generations. I consider these insurance policies the big three of estate planning.

Life Insurance

Life insurance is a must if you have a family with young children or own a home with a mortgage. Dying is hard, but dying without assets or life insurance to care for your loved ones is even more complicated. Insurance may appear expensive, but it’s cheap relative to the benefit it will provide to those you leave behind.

How much life insurance do you need? At a minimum, you need enough coverage to pay off all your debts. If you’re married, providing financial support for your spouse is recommended. If you have children, then paying for their college with life insurance proceeds is recommended. Let’s look at some numbers.

Let’s say your 30 years old, earning $100,000 per year, married with two kids age three and five, and you own a home with a mortgage balance of $250,000. If you die today, then you would need to provide support to your spouse for thirty-five years. Over a thirty-five-year career, you could earn more than $9 million in income, so the amount of life insurance required today is $1.6 million.

According to Money Guide Pro, the annual tuition for a four-year public college is $26,500, so paying for college for your children will cost $531,432; the amount of insurance needed today is about $255,000.

If we add spousal income, college tuition, and debt, the amount of insurance you need today is $2.105 million. As your assets grow, your children leave the nest, and you eliminate your debt, then the need for life insurance diminishes significantly.

Should you insure a non-working spouse? Yes, of course. Your “non-working” spouse is probably working harder than you are as they raise children, shop for groceries, clean the house, etc. If your non-working spouse died today, you must replace all the services they provide, and it won’t be cheap. Also, emotionally speaking, you might not want to return to work after losing the love of your life.

Disability Insurance

Disability agents are quick to tell you that you only die once, but you can become disabled multiple times. If you’re working, disability insurance is a necessity. Disability insurance provides you and your family monthly income if you become incapacitated. According to Guardian Life, disability insurance costs between 1% to 3% of your annual salary and covers 60% to 80% of your salary.[1] For example, if your income is $100,000, your projected premium costs about $1,000 to $3,000 per year, and your policy will provide an annual income of $60,000 to $80,000.

Long-Term Care Insurance

Long-term care insurance can protect your assets if you enter an assisted living facility or require home healthcare. According to Genworth Financial, the average monthly cost for assisted living last year was $4,300.[2] However, your expenses can climb significantly, and it’s not uncommon for payments to exceed $10,000 per month. According to Money Guide Pro, someone age fifty can expect to spend more than $750,000 for three years in a nursing home if they enter a facility at age 80.

Self-Insure

If you own substantial assets, you can self-insure to care for your family after your gone. After calculating your insurance needs, you can determine if it makes more sense not to purchase commercial insurance and self-insure. However, for a few cents on the dollar, you can protect your family and your assets and transfer the liability to an insurance carrier.

Next Steps

Completing a financial plan can help you determine the exact amount of insurance you need to protect you and your family. Your plan will review your assets, goals, wishes, wants, and needs to assess your situation.

In addition to insurance, don’t forget to create a family will or trust. Your estate documents will help distribute your assets according to your wishes. More importantly, the health care directives will allow your family to discuss your medical situation with your doctors while you’re incapacitated.

Discussing your mortality with loved ones is not easy, but it’s beneficial. Adding insurance to your investment and financial plan will bring peace and comfort to those you love.

Only the good die young. ~ Billy Joel

July 5, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.guardianlife.com/disability-insurance/long-term-disability-insurance-cost

[2] https://www.seniorliving.org/assisted-living/costs/, May 27, 2021, Scott Witt and Jeff Hoyt

Financial Independence

As we approach Independence Day, I pondered what it means to be financially independent. Warren Buffett and Charlie Munger are still working; are they financially independent? What about Whitney Wolfe Herd or Robert Johnson or Jeff Bezos? If billionaires are still working, does it mean we need several billion dollars to be independent? I doubt it, but let’s crunch some numbers to find out.

Other terms for independence include self-reliance, autonomy, and freedom. Self-reliance stands out because if I’m financially independent, I rely on myself[1] to make ends meet, not a job, government assistance, or family support. If I retire from my vocation to take a less stressful job as a cabana boy at a beach club to cover my expenses, I’m not independent; I just changed jobs.

Retiring from your day job requires courage and financial assets. How much do you need to retire comfortably? The answer varies greatly, but, at a minimum, you need enough money to cover your living expenses. For example, if you spend $100,000 per year, you need enough assets to generate income to cover your costs. To produce an annual income of $100,000, you will need about $2 million to $2.5 million in assets. If your account balance is $2.5 million and you need $100,000 to live, then you’re financially independent. If you’re curious about your specific number, multiply your expenses by 20 or 25.

To start your journey towards financial independence, calculate your annual spending. Where does your money go? How much do you spend? After reviewing your expenditures, can you reduce or eliminate items from your budget because the less you spend, the less money you need to save.

What can you do if you’re not financially independent? If you’re short of your goal, reduce your spending, increase your savings, and allocate more money to stocks. Let’s say you’re forty, and your goal is to become financially independent at age sixty. After calculating your expenses, you determined you need $5 million. If your current account balance is $1 million, you need to save $1,845 per month to reach your target. Of course, you can retire whenever your account balance touches $5 million, regardless of your age.

Saving money is your best investment strategy, and the more you can save, the better. Contributing to your company retirement plan, an IRA, and a brokerage account provides several income distribution options when you’re ready to stop working. Automating your savings plan allows you to manage your cash better, eliminating human error and emotions.

Investing in stocks eclipses bonds and cash. For the past five years, stocks produced a return of nearly 100% compared to 4% for bonds and .06% for T-Bills. Since 1926, stocks generated an average annual return of 10.3% compared to 3.3% for U.S. T-Bills.[2] If you want to achieve financial independence, you must own stocks.

However, don’t kill yourself by chasing financial independence. Life is to be enjoyed and shared with others, don’t live like a pauper. What’s the point of becoming independent if you’re living in the middle of nowhere eating SPAM® every day? Instead, set a reasonable goal and timeline that allows you to live for today and dream for tomorrow.

If you live for having it all, what you have is never enough. ~ Vicki Robin

July 1, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] In a human sense, not a spiritual one. I am the vine; you are the branches. If you remain in me and I in you, you will bear much fruit; apart from me you can do nothing. ~ John 5:15

[2] DFA Matrix Book 2021

Fear the Fed?

The market dropped last week because the Federal Reserve hinted they may raise interest rates in 2023, two years from now.  The Dow Jones fell about 3% as the topic of rising interest rates covered the airwaves.  The Federal Reserve also published their dot plot chart, a chart of where their members expect interest rates to be over the next few years, and several members expect rates to rise above 1.5%. Should we be concerned?

In 1994 and 1995, the Federal Reserve raised interest rates seven times, from a low of 3.25% to a high of 6%. From February 4, 1994, to February 1, 1995, interest rates jumped 85%.[1] What happened to the stock market? In 1994 the S&P 500 rose a paltry 1.3%, but it did not fall. However, in 1995 the index soared 37.6%.

From 1999 to 2000, the Federal Reserve hiked interest rates six times from 5% to 6.50%. The S&P 500 rose 21% in 1999, but it dropped 9.1% in 2000.

From 2004 to 2006, the Federal Reserve boosted interest rates seventeen times! On June 30, 2004, the Fed Funds Rate sat at 1.25%, and on June 29, 2006, it swelled to 5.25%, an increase of 320%. Despite several rate spikes, the S&P 500 rose 10.9% in 2004, 4.9% in 2005, and 15.8% in 2006.

From 2015 to 2018, the Federal Reserve increased interest rates nine times, climbing from .25% to 2.50% or 900%. The S&P 500 rose 1.4% in 2015, 12% in 2016, 21.8% in 2017, and it dropped 4.4% in 2018.

Rising interest rates are a sign of a robust economy and, potentially, higher inflation. Rising interest rates and higher inflation spells trouble for stocks. If rates rise high enough, investors will sell stocks to buy bonds or park their cash in a money market fund. For example, some investors would prefer to earn a safe 5% from a bond rather than risk their capital in the stock market.

Lately, though, long-term interest rates are falling. The Federal Reserve can only regulate the Fed Funds Rate, whereas the market (investors) control everything else, including longer-dated bonds. For the past three months, yields on the US 10-Year Treasury Note and the US 30-Year Treasury Bond are each down more than 15%. If investors are nervous about rising interest rates or inflation, the bond market is telling us otherwise.

Wayne Gretzky once said he’s successful because he skates to where the puck is going, not to where it has been. He is the rare athlete who sees plays develop before others. But Mr. Gretzky is not on the Federal Reserve Board, and predicting the direction of interest rates is hard; trying to identify the actual rate is impossible.

Jamie Dimon, the CEO of JP Morgan Chase, said in 2019, “We’ve actually been effectively stockpiling more and more cash, waiting for opportunities to invest at higher rates,” Dimon said during a virtual conference held by Morgan Stanley. “So our balance sheet is positioned (to) benefit from rising rates.” At the time of the quote, his firm was sitting on $500 billion in cash, waiting for interest rates to rise.[2] What happened? The CBOE Interest Rate Composite Index fell 98.57% over the next two years! If Mr. Dimon can’t predict the direction of interest rates, who else can?

The effective Federal Funds Rate is currently .06%. The 67-year average has been 4.74%, so who cares if it rises a percent or two? I don’t.

When the market falls again because of rising interest rates, use it as an opportunity to buy great companies at discounted prices. Since February 4, 1994, the S&P 500 is up 797%, or 8.34% per year, despite several corrections. A $10,000 investment grew to $89,740!

Rather than waiting for the Federal Reserve to hike interest rates in two years, diversify your portfolio, follow your plan, save your money, and invest often.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ~ Henry Ford

June 21, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm

[2] https://www.reuters.com/business/finance/jpmorgan-stockpiling-cash-waiting-interest-rates-rise-ceo-2021-06-14/, Jeenah Moon, April 9, 2019

Giving It Away

My family donates money through tithes and offerings, so I incorporated the practice into my business model when I started my investment firm. Giving is not a budget item because contributions come from the top – 10% of our firm revenue. At the end of each quarter, my wife and I sit down to pray over our offerings before giving any money away. It’s a joyful time, and it’s the best part of my job.

  • Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver. ~ 2 Corinthians 9:7

Our charitable giving spans the globe from Austin to Africa. We help local groups like Partners in Hope, Candlelight Ranch, The Heart of Texas Pregnancy Resource Center, and International organizations like Arise Africa, Eagle’s Nest International, and the Nicaragua Resource Network. We also support organizations we met through serving and our travels, like Galveston Urban Ministries, Mission Waco, Wellspring Church, and Wind River Ranch. Giving is part of our DNA. It’s what we do, and I can’t imagine a time where we’re not helping others with our resources.

  • 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

It was easy to commit to a giving program when we had no revenue, but our firm is growing, and so are our donations. My goal is to manage a billion dollars in assets to give more than $500,000 per year. At our current growth rate, we expect to reach this milestone in fourteen years. God willing.

  • Jesus sat down opposite the place where the offerings were put and watched the crowd putting their money into the temple treasury. Many rich people threw in large amounts.But a poor widow came and put in two very small copper coins, worth only a few cents. Calling his disciples to him, Jesus said, “Truly I tell you, this poor widow has put more into the treasury than all the others. They all gave out of their wealth; but she, out of her poverty, put in everything—all she had to live on.” ~ Mark 12:41-44

To be clear, we do not give to get. We’re not looking for quid-pro-quo relationships. Rather, we strive to be humble servants through giving, and it forces us to be sage stewards of our capital. When I launched my firm, industry experts and consultants panned my business model, saying my fees were too low and I can’t give away 10% of our revenue. They foreshadowed doom and gloom. However, five years later, we’re thriving, and we recently moved to the Securities and Exchange Commission (SEC) for regulation – a big deal for a small firm.

  • Give, and it will be given to you. Good measure, pressed down, shaken together, running over, will be put into your lap. For with the measure you use it will be measured back to you.” ~ Luke 6:38

Our giving has increased each year, but I’m not alone, thankfully. Americans gave $449 billion in 2019, and corporations added $21 billion – record amounts.[1] As stocks climb to new highs and real estate prices soar, I expect the amount people donate to charitable organizations will increase substantially this year. The wealth effect is in full force.

  • Do not neglect to do good and to share what you have, for such sacrifices are pleasing to God. ~ Hebrews 13:16

If you’re curious, here is a list of organizations we supported through the years.

https://www.parrottwealth.com/community

Give early, give often, and be well.

June 15, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/

Inflation?

Chipotle announced they’re increasing menu prices by 4% because of rising wages.[1] Likewise, Campbell’s Soup is raising prices this summer due to higher costs.[2] According to AAA, gas prices at the pump have increased 48%. The price of lumber jumped more than 32% in the past year. And there is currently a shortage of everything from computer chips to potato chips.

The Consumer Price Index jumped in May, and it’s up 4.93% for the past year – a hot number. The US Inflation Rate currently stands at 4.99%. The 107-year average inflation rate is 3.22%.

Despite the surge in CPI, inflation, gas, lumber, and burritos, the bond market signals a different story. If investors were anxious about inflation, interest rates would be rising, but this is not the case. The yield on the 10-year US Treasury Note is 1.53%, down from 1.74% in March. The 50-year average yield on the 10-year is 5.98%. Also, the yield on the 1-month US T-Bill is .01%, down 93% from last year!

The Federal Reserve said the current surge in inflation is transitory, resulting from the pent-up demand from COVID. Other words for transitory are brief, fleeting, or short-lived. I agree. I believe the surge in inflation will be transitory. If history is a guide, inflation spikes are ephemeral. If you traveled recently or dined in a restaurant, you know the economy is in full swing, but the pace will slow down at some point.

However, if you’re concerned about inflation, here are a few things you can do today to protect your purchasing power.

  • Buy stocks. If Chipotle raises prices, they’ll make more money, and when they do, its stock price will rise. If you’re a shareholder in Chipotle, you’ll also profit. For example, the price of a Disney World Ticket in 1980 costs $7.50, today it’s $109, an increase of 1,353%,[3] whereas Disney’s stock price increased 18,850% during the same time frame. Stocks are an excellent tool for combating inflation.
  • Buy real estate. Real estate prices have historically tracked the rate of inflation. Therefore, if inflation rises, real estate prices should follow.  
  • Buy TIPS. Treasury Inflation-Protected Securities (TIPS) will pay you more income as inflation rises. TIP bonds are up more than 7% over the past year. Long-term bonds, by comparison, have fallen 9.5%.
  • Buy commodities. Anything coming out of the ground can perform well in an inflationary environment. Commodities like oil, gold, silver, copper, wheat, soybeans, and sugar are short-term inflation hedges. For example, the Invesco DB Commodity Tracking ETF (          DBC) is up 57% over the past year, but it’s down 21% for the past fifteen years. I’m not a fan of commodities because they don’t perform well over time, but if you want to allocate a few dollars to this asset class, limit your purchase to 5% of your portfolio.
  • Invest in a money market fund. The yield on a money market can rise if interest rates go higher but don’t keep a large cash balance in a money market fund, checking account, or savings account because your purchasing power will fall over time. For example, a US postage stamp cost 10 cents in 1974, so you could buy ten stamps for a dollar. Today you can buy one stamp for one dollar.[4]

Don’t fear a steady rise in inflation. It’s healthy because it signals the economy is growing. A more significant concern is deflation, where prices fall as they did during the Great Depression. The moral of the story is to diversify your assets in stocks, bonds, and cash to take advantage of all market conditions.

There are two main drivers of asset class returns – inflation and growth. ~ Ray Dalio

June 10, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.cnbc.com/2021/06/08/chipotle-hikes-prices-to-cover-the-cost-of-raising-wages.html, Amelia Lucas, June 8, 2021

[2] https://www.wsj.com/articles/campbell-says-inflation-weighed-on-quarterly-profit-11623245692, Annie Gasparro, June 9, 2021

[3] Money Guide Pro My Blocks

[4] https://about.usps.com/who-we-are/postal-history/domestic-letter-rates-since-1863.htm