The Masters

Tiger Woods roared to life by winning the 2019 Masters – his fifth green jacket.  He last won at Augusta in 2005 and it’s his first major win in 11 years. Athletically, his win marks one of the greatest comebacks in all of sports.

His trials and tribulations are well documented, and few people gave him much of a chance of returning to glory. After his fall from grace, experts weighed in on his golfing future:

Stephen A. Smith, “His short game is gone. His health is gone.”[1] Mr smith is now suggesting “Tiger will catch Jack Nicklaus for the most major wins.”[2]

Jamele Hill said his next press release should be, “I’m retiring.”[3]

Colin Cowherd considered him a “former golfer.”[4]

Shannon Sharpe added, “He will never, ever be that guy again.”[5]

It takes perseverance and courage to pursue your goals after an 11-year dry spell. It’s even harder when people are telling you to quit and you’re a has been, but he kept swinging. Several sponsors dropped him after his fall including AT&T, Accenture, PepsiCo, Proctor & Gamble and Tag Heuer. Nike, Bridgestone Golf Balls and Taylor Made, however, stayed the course with Mr. Woods and they were rewarded when he conquered Augusta on Sunday.[6]

Investors would be wise to follow his lead, especially when it comes to perseverance. A few investment sectors have been out of favor for a long time, even decades. The urge to move your money from underperforming sectors may be high, but history tells us this may be a mistake. Ask Tiger.

Let’s look at a few investment categories in need of a win.

International Investments. Foreign markets have trailed U.S. stocks for the past 1-, 3-, 5- 10-year periods – by a lot. A $10,000 investment ten years ago in the Vanguard S&P 500 index fund (VOO) is now worth $26,280. By comparison, the same investment in the iShares MSCI EAFE ETF (EFA) is only worth $12,830 – a difference of $13,450. International stocks account for about 48% of the world’s market capitalization, so an allocation to this sector still makes sense.

Value Stocks. Growth stocks have outperformed value stocks over the past 1-, 3-, 5-, 10-, and 25-year periods.  Value stocks did outperform during the lost decade of the 2000s. What is a value stock? Some popular names include Johnson & Johnson, Exxon Mobile, Pfizer, AT&T, Walmart, and IBM. Growth names include Apple, Amazon, Microsoft, Facebook, Disney, Netflix and Mastercard.

Fixed Income. Stocks have trounced bonds for the past 92 years by a ratio of 49 to 1. A dollar invested in stocks in 1926 is now worth $7,025. The same dollar invested in bonds grew to a paltry $142. Bonds have shown brief moments of brilliance by rising 25.9% in 2008, 27.1% in 2011, and 24.7% in 2014. Despite their lackluster returns and low yields, bonds are needed for safety and liquidity, especially during times of stock market turmoil.

In hindsight, allocating 100% of your portfolio to U.S. large-cap growth stocks makes sense. But this is not a prudent strategy for most investors. Dating back to 1992, the Vanguard Growth Index fund (VIGIX) generated an average annual return of 9.7%, but it fell 58.5% during the Tech Wreck (2000 – 2002) and 49.6% during the Great Recession (2007 – 2009). During the fourth quarter of last year it fell 19.8%. Not many investors would have had the courage, or foresight, to stay invested during those tumultuous days.

At times we must walk through the valley to reach the mountain top. During the dark days it takes faith and fortitude to hold on for better days. To be a successful investor, focus on the long term, ignore the noise, diversify your holdings, invest often, rebalance annually, and keep your fees low.

So, tee it up and invest for the win.

Not only so, but we also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.  And hope does not put us to shame, because God’s love has been poured out into our hearts through the Holy Spirit, who has been given to us. ~ Romans 5:3-5

April 16, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] Skratch TV, https://www.youtube.com/watch?v=Fue0sQs5jtI, website accessed 4/15/19.

[2] http://www.espn.com/golf/, accessed 4/15/2019

[3] Skratch TV, https://www.youtube.com/watch?v=Fue0sQs5jtI, website accessed 4/15/19.

[4] Ibid

[5] Ibid

[6] https://www.wsj.com/articles/tiger-woods-rewards-nikes-loyalty-with-masters-win-11555351215?mod=searchresults&page=1&pos=1, April 15, 2019, Suzanne Vranica and Khadeeja Safdar

7 Ideas For A Healthy Retirement

Ida Keeling is 103 years old and a fitness buff. She holds the world record for the 100-meter dash with a time of 1 minute and 17 seconds for the age category of 100 to 104. She started running at age 67 after one of her sons passed away and said, “Running to me is like medicine.”[1]

You don’t have to run like Miss Ida but staying physically fit during your golden years can generate multiple benefits like controlling your weight, fighting diseases, improving your mood, boosting your energy, and helping you sleep. Health is wealth.[2]

Remaining active in retirement is vital, especially if you want to be mobile later in life.

Here are a few ideas to keep you moving.

Walking or Running. Walking, and running, is an easy activity. All you need to do is put on your running shoes, open your front door, and put one foot in front of the other. Walking is a low impact activity that can keep you moving for decades. If you have good bones, then running allows you to increase your heart rate and cover more territory. You can also participate in races like 5ks or marathons. The Centers for Disease Control recommends 2.5 hours per week, or 30 minutes a day.[3] Walking 10,000 steps daily is the new normal. You can track your progress with a Fitbit or Apple Watch.

Hiking. A hike in the mountains is good for the soul and the heart. A good trail with varying terrain and endless vistas is hard to beat. Hiking in Yosemite, Yellowstone, or Rocky Mountain National Park is both challenging and exhilarating.  National parks, state parks, or local municipalities have miles of trails that you can explore while hiking.

Cycling.  Cyclists have several opportunities to log miles. Gear heads can ride a road or mountain bike if they live in area that’s safe for cyclists. However, SoulCycle® and Peloton® give you access to the road, and community, in a controlled environment. If you own a Peloton®, you don’t even have to leave your house!

Swimming. Is swimming the ultimate full body workout? Swimmers would probably say yes, and I’d agree. Like walking, swimming is a low impact sport.  Most cities offer a masters swimming program giving you exposure to coaches, pools and fellow swimmers. In fact, April is adult learn to swim month. You can find a club near you at www.usms.org.

Lifting Weights. Do you remember Hans and Franz from Saturday Night Live? Their skit was called “Pumping Up with Hans & Franz.” Lifting weights builds muscle and muscle fights fat and osteoporosis. It also lowers your risk of diabetes, prevents back pain, and improves your balance.[4] Joining your local gym will give you access to trainers and community.

Yoga. Yoga enhances your flexibility, improves your balance and builds muscle. It’s a low impact sport that can be mastered at any age. You can join a class, watch a video, or do it on your own. Yoga can also help you manage your stress level. Yoga pants are in fashion – an added bonus!

Community. Harvard has been conducting an eight decades study on adult development. They found social connections (not social media) to be good for your health while loneliness to be toxic.  A community can also improve your memory.[5] You may also learn new skills, meet new people, and live longer.

In my neighborhood, there’s a group of about 15 senior women who walk a few times per week and they’re usually laughing and talking while walking at a pretty good clip. They’re enjoying the outdoors, exercising and staying in community. A good mix for longevity.

So, get off the couch, get outside and find an activity that brings you joy. Your life may depend on it!

We want to pump you up! ~ Hans and Franz. 

April 5, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

In 2011 he finished the Boston Marathon with a time of 3:22. He currently hikes, bikes, and lifts weights.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] https://www.runnersworld.com/runners-stories/a20866241/102-year-old-track-star/, Cindy Kuzma, 3/14/2018

[2] https://www.mayoclinic.org/healthy-lifestyle/fitness/in-depth/exercise/art-20048389, Mayo Clinic Staff, 12/14/2018

[3] https://www.livestrong.com/article/513495-how-much-walking-to-get-in-shape/, Dani Arbuckle, website accessed 4/5/2019

[4] https://www.livestrong.com/slideshow/1008208-13-benefits-weightlifting-one-tells/?slide=11, Jody Braverman, 3/1/2018

[5] https://www.health.harvard.edu/mental-health/can-relationships-boost-longevity-and-well-being, Published June 2017, website accessed 4/5/2019.

What Is Your Fee Schedule?

Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator and today we’ll talk to a panel of financial advisors, planners and brokers to discuss their fee schedules and how they charge clients.

Our distinguished panel includes the following individuals: Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.

Let’s meet the panel.

Andy AUM. Andy charges an asset under management fee of 1%.

Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500 depending on your annual income.

Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour depending on your annual income, assets, and complexity.

Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless if it’s a stock, bond, mutual fund, or insurance product.

Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.

Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.

Nate:

Andy tell me about your assets under management model.

Andy:

Thanks Nate! My model is based on your level of assets. The fee, as a percentage, will drop as your assets grow. The fee includes financial planning and investment management. It’s all rolled into one fee.

Nate:

Thank you. As the accounts grow in value, you’ll also make more money – correct?

Andy:

Yes, but so will my clients.

Nate:

What if the accounts drop in value like they did in 2018?

Andy:

The fee will go down if the accounts drop in value. My income will be lower as well.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting will last an hour. The financial plan, preparation and presentation typically takes 8 to 10 hours. I should add, the initial consultation is free.

Nate:

So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?

Hank:

Yes, that’s correct.

Nate:

At $500 an hour, your fee will run $4,000 to $5,000?

Hank:

Yes, that’s correct. It could also be more or less depending on the project. Some clients come to me for an investment review, others for a full-blown plan. It also includes driving time, research, etc.

Nate:

Thanks Hank. Rebecca, please tell me about your retainer model.

Rebecca:

Thanks Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income. The fee works just like a car or mortgage payment. The client can add my fee to their monthly budget like they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, with a one year minimum, depending on income.

Nate:

Interesting. So, if someone had income of $50,000, their retainer fee will be less than someone with $500,000 income, correct?

Rebecca:

That’s correct. It’s based on income.

Nate:

How long do your client’s pay a retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients stay with us for about three to five years before they move on.

Nate:

What if a client wants to invest based on your recommendations?

Rebecca:

We don’t manage money. We refer them to another fee-only advisor or recommend a robo-advisor platform.

Nate:

Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.

Cindy:

Thank you, Nate. Commissions have been around forever and it’s a straight forward fee model. If a client places a trade, a commission is charged.

Nate:

So, the more you trade, the more you make?

Cindy:

Yes, that is true. However, our investment recommendations are made with the client’s best interest in mind.

Nate:

Of course. What’s the commission on a mutual fund trade?

Cindy:

The front-end commission on a mutual fund will cost the client 4% to 5% of the purchase price.

Nate:

If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?

Cindy:

Yes, it’s a one-time charge.

Nate:

What about an annuity purchase?

Cindy:

The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate during the deferred sales charge period.

Nate:

Give us an example please.

Cindy:

Sure, if a client purchases ABC annuity with $100,000, then 100% of their money goes to work from day one. If they sell their annuity during the first 10 years, they will incur a fee of 10% to 1%.

Nate:

10%? That seems outrageously high. Am I wrong?

Cindy:

It’s a high fee, but we encourage our clients to be long-term investors.

Nate:

What would your fee be if they purchased the ABC annuity?

Cindy:

It is 5%, or $5,000.

Nate:

Will the client incur any other fees?

Cindy:

Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. The individual stocks and bonds don’t carry a monthly fee after their purchase.

Nate:

Thanks Cindy. Frank, tell us about your flat-fee model.

Frank:

Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.

Nate:

A client with $50,000 in assets will pay just as much as someone with $5 million in assets?

Frank:

That is true. However, we have an account minimum of $500,000.

Nate:

If a client pays you a flat fee, what’s your incentive to manage their account? You get a flat, consistent fee regardless if their account goes up, down or sideways.

Frank:

Well, the fee is more than asset management fee. I also get paid for advice and financial planning.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

They do. The fee is $25 per trade which goes to the custodian. I don’t receive the fee.

Nate:

Thanks Frank.

Nate:

Let’s her from Patty. Patty tell us about your fee structure.

Patty:

Thank you, Nate. I only charge client for advice and financial planning.

Nate:

Interesting. What about managing assets?

Patty:

I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor, like Rebecca does.

Nate:

Okay. If a client comes to you for financial planning and advice, what does it look like?

Patty:

The financial planning fee ranges from $2,500 to $25,000 depending on a client’s complexity.  Once the plan is done, the client is free to choose any investment platform they desire. I’ll give them suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.

Nate:

Okay, thank you all for your input. Let’s look at a client with $500,000 in assets with an annual income of $250,000 so we can compare the different models. Who wants to go first?

Andy:

I will. My fee would be $5,000 per year, or 1% of $500,000.

Rebecca:

My fee would be $6,000 per year, or $500 per month.

Hank:

For a client with this profile I’d charge $500 per hour. We’d meet for about 10 to 12 hours during the year, so the fee would range from $5,000 to $6,000.

Cindy:

Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.

Frank:

My flat fee remains the same regardless of a client’s assets or income, so it would be $5,000.

Patty:

This planning fee for this client, based on her assets, would be $5,000.

Nate:

Hmmm… It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period all your fees will be about the same, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you’re all getting paid?

Panel:

Yes.

Nate:

Last question: Who’s model is best?

Panel:

(In unison): Mine.

Nate:

(laughing), Okay! Thank you all for your time today.

“A rose by any other name would smell as sweet.” ~ Romeo and Juliet

April 3, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

At PWM we charge .5% on the first $10,000,000 and then .35% above this amount. Our financial planning fee is $800.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

What Is Financial Planning?

Peggy called me one afternoon to ask me if she could afford to buy a new car. I told her she could buy two. I knew this because we had just completed a financial plan for her and her husband.  Buying a new car, let alone two, wouldn’t make a dent in their financial situation. Twenty-five plus years later her plan is still bearing fruit. It has allowed her to live a life free of financial worry and turmoil, which is my definition of financial planning.

The text book definition of financial planning is “the process of determining whether and how an individual can meet life goals through the proper management of financial resources.”[1]

The planning process comprises of six steps:

  • Establishing and defining the client relationship.
  • Gathering the client data and identifying client goals.
  • Analyzing and evaluating the client’s financial status.
  • Developing and presenting recommendations.
  • Implementing the recommendations.
  • Monitoring the recommendations.

The key section, to me, is gathering the data and identifying the client’s goals. These items are vital to the success of your plan. Wrangling up statements from Social Security, your bank, investment firm, employer, insurance agent, credit card company, and accountant should be easy, if you’re organized. Items listed on a statement are easy to quantify. It’s much harder to value personal property, collectibles or a business interest. Furthermore, trying to put a dollar figure on your life goals may be impossible. What is it worth to you to spend time hiking with your daughter in Yellowstone? Priceless?

After your information is captured, the financial planner will go to work analyzing your data using powerful software from Money Guide Pro, eMoney, or Right Capitol. If a planner has been creating plans for years, they will also rely on Excel, Word and their trusted HP-12c calculator.

Your plan will consist of several pages quantifying your financial goals, dreams and concerns. It will highlight your risk level, investment management fees, cash flow projections, insurance needs, estate options, investment suggestions, college cost data, and much more. At the heart of the analysis is the Monte Carlo simulation. Most financial planning software providers include this in their analysis. The plan will run hundreds, or thousands, of scenarios to give you a probability of success ranging from 0% to 99%. Of course, a higher number is preferred.

Are all financial professionals created equally? No, definitely not. It’s imperative to hire a Certified Financial Planner® practitioner. An individual who has obtained the CFP® designation has spent years studying to become certified. Once certified, the planner must adhere to strict guidelines which includes obtaining 30 hours of continuing education every two years. Beware of brokers or insurance agents who offer financial planning, because, often, their end game is to sell you a product.  And, to be clear, financial planning is not a product.

I’ve done thousands of financial plans over the years and there is no good plan and there is no bad plan, there’s only your plan. Your plan is customized to you and your current situation. It’s a moment in time, like a photograph. But, once completed, it gives you a road map, a guide to help you obtain your financial goals. It will affirm your financial situation allowing you to maintain the status quo or make some serious financial decisions.

Does financial planning work? According to one study, individuals who completed the financial planning process had three times the assets of those individuals who did little or no planning.[2]

Several years ago, a client wanted to retire early. He approached me with a scenario that he thought might work for him and his family. After I completed his plan, I told him he could retire early. He was elated, but he wasn’t so sure – yet. He sent me another scenario and the plan confirmed his adjustments; he could still retire early. Still not sold, he sent me another request. It produced the same result. In short, we ran ten different scenarios and they all confirmed he could retire early. After the tenth and final plan he gave his notice to his employer and retired. He’s still retired.

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? ~ Luke 14:28

April 2, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/current-standards-of-professional-conduct/compliance-resources/frequently-asked-questions/financial-planning

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

The Los Angeles Lakers

The Los Angeles Lakers are iconic. A dynasty. They’re one of the great franchises – not just in basketball, but all sports. They’ve won 16 NBA Championships. Their roster has included legendary players like Magic, Kobe, Shaq, Wilt, Kareem, Mikan, Worthy, Baylor, Jamal, LeBron and The Logo.

I grew up watching the Laker’s in the ‘80s with Show Time. Their battles with the Celtics, Pistons and Bulls were epic. A Magic led fast break, or a Kareem sky hook was magical. Listening to Chick Hearn enhanced the experience.

This season the Laker’s have fallen on hard times with a dismal record of 32-41. They’ll miss the playoffs for the 6th year in a row and snap LeBron James playoff streak. He had made the playoffs every year since 2005 and appeared in eight consecutive NBA Finals.

LeBron James is arguably the greatest player of all time. Despite his pedigree, it wasn’t enough to get his team into the playoffs. His abilities couldn’t make up for a less than stellar roster. When Mr. James was winning championships, he was surrounded by strong teammates like Dwayne Wade, Chris Bosh and Kevin Love.

It takes more than one strong performer to generate wins. It takes a team balanced with specialists.

Most investors are familiar with story stocks like Facebook, Apple, Amazon, Netflix, or Google (Alphabet). These high-flying brand names probably anchor most individual portfolios. It may be easier to identify these companies because they’re constantly mentioned on the airwaves and social media. But how do you expand beyond these highfliers? How do you build a supporting cast? How do you identify the 15th best stock in your portfolio?

Is it possible for a superstar company like Apple or Amazon to carry a portfolio of average, or below average, stocks? If you owned Weight Watchers, Camping World, Stamps.com, PG&E, PetMed Express, Red Robin Gourmet Burgers, Shutterfly, Kraft Heinz, Tupperware, United Rentals or Zillow your portfolio would have had disastrous results as each of these stocks was down more than 35% last year.

A portfolio of individual stocks may leave you exposed to concentrated losers, especially if you only own a handful of companies.  In addition, your portfolio may ignore categories like small companies, emerging markets, real estate holdings, or (gasp) bonds.

A diversified portfolio of low-cost mutual funds or ETF’s will give you an opportunity to find winners around the globe.

Dimensional Fund Advisors Global Allocation Portfolio is an excellent example of a diversified portfolio. The fund’s asset allocation is 60% growth, 40% income. It owns more than 13,500 securities scattered around the globe through eleven different mutual funds with exposure to stocks, bonds and real estate. It has generated an average annual return of 9.47% for the past 10 years.[1] It’s not dependent on one superstar stock. It performs well because it’s diversified with a strong supporting cast.

Rather than trying to find one stellar stock, build your investment portfolio with a broad mix of low-cost mutual funds based on your financial goals. Your diversified account will give you exposure to several magnificent companies. It will also remove anxiety by eliminating the need to find the “best” stock. You’re no longer dependent on the daily movements in the stock market because you now own thousands of investments from around the world.

So, go ahead and draft a portfolio of low-cost funds based on your goals and start winning the investment game today!

The game’s in the refrigerator, the door’s closed, the light’s out, the eggs are cooling, the butter’s getting hard and the Jell-O’s jiggling. ~ Chick Hearn

March 26, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] YCharts: March 2009 – March 2019

Beware Ten Year Track Records

Mutual fund companies and asset managers will start touting their 10-year performance record with dazzling numbers. The marketers will try to lure you in based on their outsized performance. But, before you invest, dig deeper. Ask to see their 15-year track record. If they don’t have one, review their performance from 2008. How did the fund perform during the Great Recession?

These companies are rejoicing, as they should, because it’s March 2019 and they’re now able to report their 10-year track record without including the disastrous year of 2008. The bear market is finally in the rearview mirror for reporting purposes.

How significant is this change? Well, the 10-year average annual total return for the S&P 500 from March 2009 to 2019 has been 16.5%. By comparison, the 10-year return ending 2018 was 7.13% – a difference of 9.37%! Since 1926 the S&P 500 Index has averaged 10%, so the recent returns are well above the historical average.

Of course, the returns are what they are, but they’re exaggerated due to the sharp sell-off during the Great Recession when the S&P 500 Index fell 53%. The index bottomed on March 9, 2009 and then it went on an extraordinary run for the next 10 years, rising 317%! If, and it’s a big if, you invested $10,000 at this juncture it would be worth $41,750 today.[1]

Despite these outsized gains a majority of U.S. Large Cap Funds still underperformed their index. In fact, only 10.9% of actively managed mutual funds beat their index over the past 10 years. The funds with the lowest cost did slightly better as 17.3% of this group beat the index. However, funds with high fees were destroyed as only 2.1% managed to do better than the market.[2]

Here are a few suggestions to help you build a mutual fund portfolio.

  • Invest in low-cost mutual funds managed by Dimensional Fund Advisors or Vanguard. Adding Exchange Traded Funds (ETFs) from Blackrock or Vanguard will help keep your costs low.
  • Diversify your assets across large, small and international funds. Adding bonds and real estate holdings will further diversify your portfolio.
  • Build your portfolio around your financial goals and risk tolerance. These two ingredients will help determine your asset allocation.
  • Time is your friend when investing in the stock market. A time horizon longer than five years should include a heavy dose of equity funds.
  • Rebalance your investments once or twice per year. This will keep your asset allocation and risk tolerance in check.
  • Review past returns for as long as the data is available on your fund. You can research this data on several sites including Yahoo! Finance, Morningstar, YCharts, or the Wall Street Journal.
  • Analyze the fee structure. Avoid funds with a front-end sales charge, a deferred sales charge, or a 12b-1 fee.
  • Incorporate a buy and hold philosophy. Don’t fret the daily fluctuations in the market or listen to the “experts” about the pending correction.

This past decade has treated investors well. What will the next decade bring? Who knows, but if history is a guide, it will be a good one.  Stay invested my friends.

I can only control my own performance. If I do my best, then I can feel good at the end of the day. ~ Michael Phelps

March 20, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Past performance does not guarantee future results.

 

 

 

 

 

 

 

[1] YCharts – March 9, 2000 – March 20, 2019

[2] https://office.morningstar.com/research/doc/Feb%2007%202019_US_ActivePassive_Barometer_-_7_Takeaways_from_the_2018_911724, Ben Johnson, 2/7/2019

7 Ways to Handle A Windfall

Growing up, my friends and I often attended the horse races. One afternoon, I hit an exacta and won $150 – a fortune for me at the time. I bought dinner for my friends with my windfall.

Financial windfalls can come from various sources like an acquisition, year-end bonus, tax-refund, or lottery winnings. A windfall is a relative term, of course.  A $10,000 windfall is pocket change for Bill Gates, but life changing for someone with limited means. Regardless of the source or the amount, you’re now faced with several financial decisions. Here are 7 ideas to help you with your new-found wealth.

Give. Giving a portion of your windfall to help others will benefit many. According to the World Bank, half the world lives on less than $5.50 per day, so donating your money to an organization or group you support will pay dividends to a multitude of people.[1]  In addition, you’ll be able to write off your contribution on next year’s tax return.

Reduce your debt. If your windfall is substantial, reduce, or eliminate, your debt. Let’s say you have 20 years left on a $300,000 mortgage. If you paid off your note, you’d save about $238,000 in interest and $19,000 in annual mortgage payments. Can you find a better way to invest or spend $19,000 per year?

Create an emergency fund. Use your bounty to establish an emergency fund. Your enhanced cash flow can be used as a financial buffer. A recommended amount to save is 3 to 6 months of expenses deposited in a savings account or money market fund. If your expenses are $10,000 per month, then the value of your emergency fund should be $30,000 to $60,000.

Invest. Investing your haul will help grow your nest egg. A $10,000 investment in the Vanguard 500 Index Fund five years ago, is worth $16,400 today.[2]

Spend. Do you want a new boat? Car? If your financial house is in order, go for it. Spend a portion of your windfall on something you’ve had your eyes on for a while.

Take a trip. Hiking in the mountains or walking on the beach is good for the soul. Spending money on experiences may be more beneficial than buying things. A lifetime of family memories is worth the expense. Top travel destinations this year include the Amalfi Coast, Machu Picchu, and Yellowstone National Park.[3]

Remodel. Is your kitchen ready for an upgrade? Is it time to put in a swimming pool? Now’s your chance. The projects generating the best payback are kitchens, garage doors, and decks.[4]

Before you make any financial decisions spend time deciding on the best course of action for you and your family. Avoid an impulse purchase. Hold a family meeting to get input and buy in from your spouse and children. Regardless of what you do, don’t borrow to leverage your windfall. Pay cash and stay out of debt.

Working with a financial planner to help you decide on how to proceed would be a wise decision. A planner can guide you and your family on the best way to allocate your resources.

I almost forgot, congratulations on your windfall!

Money can’t buy happiness, but it will certainly get you a better class of memories. ~ Ronald Reagan.

March 19, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] https://www.worldbank.org/en/news/press-release/2018/10/17/nearly-half-the-world-lives-on-less-than-550-a-day, website accessed March 18, 2019

[2] Morningstar Office Hypothetical Tool: 2/28/2014 – 2/28/2019

[3] https://travel.usnews.com/gallery/the-worlds-30-best-places-to-visit-in-2018-19?

[4] https://www.bankrate.com/finance/real-estate/best-home-fixes-for-the-money-1.aspx, By Natalie Campisi, April 13, 2018

Operation Varsity Blues

Operation Varsity Blues is the FBI investigation used to charge 50 people “with being part of a long-running bribery scheme to get privileged kids with lackluster grades into big-name colleges and universities.”[1] The FBI sting netted two actresses: Felicity Huffman from Desperate Housewives and Lori Loughlin from Full House. In addition, 33 parents have been charged including the former CEO of PIMCO and the founder of TPG Growth.[2]

The alleged scheme involved bribes, donations to fake charities, changed SAT and ACT scores, and “athletes” recruited for sports they never played.

The amount of money involved in this alleged scheme is staggering – $25 million!  Lori Loughlin and her family reportedly paid $500,000 to get their daughters admitted to USC as part of the crew team though they don’t row.[3]

We want the best for our children, of course, but how far should we go? Does attending the “right” school matter? Is a private school better than a public one?

Chris Hogan, the author of Everyday Millionaires, sheds light on this subject. According to Mr. Hogan, 62% of millionaires graduated from a public college, 8% attended a junior college and 9% never graduated. In addition, 43% of millionaires had a B average or lower in college.  Former president George W. Bush said, “To those of you who received honors, awards and distinctions, I say well done. And to the C students, I say you, too, can be President of the United States.” Mr. Bush graduated from Yale with a GPA of 2.35.

The University of Wisconsin currently has the most CEOs on the Fortune 500 list with 14. Wisconsin is a public university.[4]  The current tuition to attend Wisconsin is $22,500, including room, board, books and supplies.[5] Go Badgers and On Wisconsin!

If you have children who will eventually attend college, here are a few suggestions to help you with your journey.

  • Invest early and often in a 529 plan. The money will grow tax-free and when you’re ready to pay tuition your distributions will also be tax free.
  • If you have the financial resources to send your kid to a small private school, then go for it. However, if you don’t, then explore the junior college – state college combination. You and your family will save hundreds of thousands of dollars in tuition. You might avoid student loans as well.
  • Involve your children in charity work. Let them help others through volunteering, mission trips, or tutoring. This will give them a strong work ethic and keep them humble by serving others who are less fortunate.
  • Get them involved, legally, in athletics, band, choir, theater, or robotics. Extracurricular activities will build character. It will also give them the gift of team work and fair play.
  • It’s okay for your child to work during high school and college. Earning a paycheck and learning the language of business will serve them well for decades. Working at a fast-food restaurant, grocery store, or big-box retailer will teach them much about life. It may even provide a better education than they’ll receive in the classroom.
  • Grandparents, and others, can give $15,000 per person, per year including your child. Utilizing the gift tax exclusion is a great way for grandparents to reduce their estate and help pay for college. If grandparents are willing and able, this is a great funding option.

I was disgusted and upset as I read articles about the scam. The fraud and deception involved is off the charts. More importantly, there’s some kid out their working a part time job trying to save money so she can go to college and her spot may have been taken by one of these fraudsters.

“You got to be the dumbest smart kid I know.” —Bud Kilmer, Varsity Blues

March 13, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

 

[1] https://www.washingtonpost.com/podcasts/post-reports/operation-varsity-blues-a-college-entrance-bribery-scheme/?noredirect=on&utm_term=.9bb7f2a0c178, March 12, 2019,

[2] https://www.wsj.com/articles/who-are-the-33-parents-charged-in-the-college-admissions-cheating-scandal-11552443487?tesla=y&mod=article_inline, March 12, 2019, WSJ Staff

[3] https://www.wsj.com/articles/lori-loughlins-daughter-a-social-media-celebrity-is-caught-up-in-college-admissions-scandal-11552430211?mod=article_inline, March 12, 2019, Erich Schwartzel

[4] https://www.cnbc.com/2018/11/28/these-30-colleges-produced-the-most-current-fortune-500-ceos.html, November 29, 2018, Abigail Hess

[5] Money Guide Pro

Free Solo

Free Solo is a remarkable movie about Alex Honnold’s ascent of El Capitain. It was a masterpiece of a movie and the voters agreed as it won an Academy Award® for best documentary feature. The New York Times said, “Alex Honnold’s Free Solo climb should be celebrated as one of the great athletic feats of any kind, ever.” I concur.

My palms are still sweating thinking about his climb, especially when he successfully completed his karate kick maneuver near “The Boulder Problem.” He climbed the Freerider route that has 30 pitches and “it was newsworthy when a climber was able to summit using ropes for safety.”[1]

El Capitain is a beast and it dominates the Yosemite Valley. It’s 3,000 feet from base to top, an imposing vertical wall of granite.

Mr. Honnold didn’t wake up one morning and decide to free solo El Capitain. He spent years planning his route, working with his team, and taking copious notes. He was singularly fixated on achieving his mission.

Investors can learn much from Mr. Honnold’s incredible achievement.  Here are a few ideas that you can employ today.

Team. Mr. Honnold did the climbing, but he was surrounded by a team of elite climbers including his long-time climbing partner, Jimmy Chin. Mr. Chin and his team not only filmed the climb, but they helped him plan much of his ascent. Mr. Honnold consulted his team constantly. He and his team climbed El Capitain often exploring routes, holds, angles, nooks, and so on.

A team of advisors can help you achieve your goals. Working with a financial planner, CPA, and estate planning attorney will provide you with insight and data to make sure you’re making the best decisions for you and your family. Surrounding yourself with wise counsel is, well, wise.

Plan. He journaled often, taking notes whenever he had the opportunity. His notebook was filled with detailed notes and figures about his route.

Committing your plans to paper and taking notes about your progress can improve your investment and planning results. A quick review of your notes to make sure you’re on the right track is recommended. Your plan and journal will be your financial guide.

Live. He lived (lives) frugally and well below his means. In fact, he lived in a van down by the river during much of the shoot and it had everything he needed to live. When he and his girlfriend bought a home in Las Vegas he looked uncomfortable and even more uncomfortable shopping for a refrigerator. He finally settled on a small refrigerator, one too small for the space in his house. His house looked like the Taj Mahal compared to his van.

Living below your means is paramount if you want to obtain financial success. Controlling your expenses and watching your bottom line will allow you to live a stress-free financial life. Lowering your expenses will help build margin in your life allowing you to do the things you love.

Patience. It took him nearly 4 hours to complete the climb. And, prior to his amazing climb, he abandoned his first attempt. He was patient and deliberate with each move. At times he moved quick, others slow – his moves were calculated. At one point during his climb, he had to descend before he could ascend.

Investing success takes time – years, so don’t worry about the short-term moves in the market. Concentrate building wealth slowly, over time. Avoid quick-rich schemes and other promises of short-term profits.

Give. Mr. Honnold has established the Honnold Foundation (www.honnoldfoundation.org). Its mission is to reduce environmental impact and address inequality by supporting solar energy initiatives worldwide.

You can follow his lead by establishing your own foundation, contributing to a donor advised fund, or donating to organizations you support. Using your resources to help others will benefit many, including yourself.

You may not want to free solo El Capitain, or any other rock for that matter, but his techniques and tactics may help you improve your investment results. Focus on your long-term goals, follow your plan, save often, live below your means, and give to those you support.

Happy climbing!

Trust in the Lord forever, for the Lord God is an everlasting rock. ~  Isaiah 26:4

March 8, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. I went rock climbing once in Joshua Tree and it was a blast. I used a rope.

 

 

 

 

 

 

[1] https://www.nationalgeographic.com/adventure/features/athletes/alex-honnold/most-dangerous-free-solo-climb-yosemite-national-park-el-capitan/ Mark Synnott, October 3, 2018.

A Watched Pot

A watched pot never boils, or so I’m told. When I was much younger, I put this theory to test and, to my surprise, the water did boil as I kept my eyes glued to the pot.

Watching water boiling, grass growing, or paint drying is boring and a waste of time. Similarly, watching your investment accounts daily is not productive. Your investments will rise or fall whether you watch them or not. In fact, they may perform better if you don’t watch them at all.

In a study by Greg B. Davies and Arnaud de Servigny the authors discuss how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[1]

Last December stocks gyrated dramatically. If you looked at the stock market on Christmas Eve, it was down 3%. Had you waited until the day after Christmas to check in on the stock market, it climbed 5%. The Dow Jones averaged a 9.4% average annual return for the past five years. A $10,000 investment in the Dow Jones Industrial ETF (DIA) five years ago is now worth $17,798. However, during this impressive run, the market experienced several down days. The Dow had 107 down days of 200 points or more and two days where it fell over 1,000 points. And, 45% of the time, the index closed in negative territory. If you were micro-managing your portfolio, your urge to sell may have been high during these down days.

Trying to time the market is near to impossible. Rather than focusing on the daily moves in the market, pay attention to those things you can control. Here’s a list of items you should be watching.

  • Focus on your long-term goals and review them annually. Your goals will help guide your financial decisions.
  • Review your accounts quarterly or semi-annually. If they are allocated properly, you won’t need to make daily adjustments.
  • Review your fees often. Read the small print to make sure your fees are inline, and you’re not being over charged for services you didn’t agree to.
  • Check your credit reports annually. Credit Karma also recommends checking them before a major purchase or applying for a new job.[2]
  • Credit card and bank statements should be viewed monthly. A scan of your statements is wise to make sure your debits and credits are being applied correctly.
  • Utility bills and other household statements should be checked semi-annually. Your statements may be delivered electronically, and your payments deducted automatically from your bank account, so checking these accounts for additional fees and balances is recommended.
  • Your asset allocation should be reviewed annually. Over the course of a year, your accounts may move substantially. If your account balances are not in line with your risk profile, rebalance them to your original asset allocation.
  • Your financial plan should be reviewed every two to three years.
  • If you have a family will or trust (and you should), it should be reviewed every five years unless you have a major lifestyle change.
  • Your insurance policies – home, life, auto, should be reviewed annually.

Keeping a watchful eye on your household metrics is paramount. It’s important to be on guard and vigilant when watching your finances and other items that are important to your family, so you don’t get boiled accidentally.

Be alert and of sober mind. Your enemy the devil prowls around like a roaring lion looking for someone to devour. ~ 1 Peter 5:8

March 5, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] Greg B. Davies, Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory (McGraw-Hill, 2012), p. 53. The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 1423, accessed 2/10/19.

[2] https://www.creditkarma.com/credit-cards/i/how-often-check-credit-reports/, by Christy Rakoczy Bieber, 12/4/2018.