Can I Get A New Toy?

On a recent trip to Target I heard several kids asking their parents if they could buy a toy, a shirt, a game, and so on. The kids were relentless in their pursuit of acquiring something, anything. Their parents were equally relentless in the denial of their children’s wants. This is a battle that will be waged for years to come.

My daughter wasn’t immune to acquiring new toys. She had a strong desire to own as many My Little Ponies and Breyer Horses as she could. Her mom and I had to tell her no quite often. When she’d get upset, we called it the Green-Eyed Monster from the Bernstein Bears Book: The Bernstein Bears and the Green-Eyed Monster.

When she was five years old, we gave her a weekly allowance of $1. When she received her first dollar, she wanted to visit the toy store to buy a very large Breyer Horse. I knew how this was going to turn out as her dollar was going to fall about $45 short of her goal. She was not going to be happy. When we arrived at the toy store, she pointed to the horse she wanted to buy and together we looked at the price tag – instant tears. She was upset because she couldn’t buy the horse, and, worse, it would take her months to save enough money to buy it. It was a great learning experience.

Her allowance taught her how to save money for buying things she wanted. More importantly, she stopped asking us if she could get a new toy every time we went shopping. If she had the money, she could buy what ever she wanted. In addition to saving her money, she started to give some of it away to her Church. She was learning the gifts of saving money, living within her means, and giving money away to help others. As a young adult, she has kept these important habits.

Here are a few suggestions to help you turn your child into a super-saver and smart spender.

  • Give them an allowance. A few dollars a week will allow them to start saving money and give them a sense of ownership.
  • Establish a savings account. It’s easy to open a savings account. Since they’re young, you’ll need to be listed on the account as well. They will, or should, get excited to see their account balance grow. I still remember my first savings account at a local bank, I was thrilled to see it climb above $60.
  • Let them spend their money. If they have $50 in their wallet, let them spend $50 at the store. At some point, they’ll get tired of spending their own money on things that won’t last. It will also be painful for them to see their bank account get depleted.
  • Encourage them to give money away. Let them decide on how best to donate their money. They can decide when and where it makes sense to help others. The joy of giving brings happiness to all.
  • Teach them to invest. After they have saved a few dollars, teach them how to buy a stock or mutual fund. Let them identify a few companies they have an interest in owning like Apple, Facebook, Coke, Pepsi, McDonald’s, etc. They’ll take pride in their ownership. They’ll also learn about the stock market, the economy, and investor behavior.
  • Invest for growth. Young investors should invest 100% of their funds in stocks or growth-oriented investments.
  • Open a Roth IRA. Once your children start working and earning income, open a Roth IRA. A summer job might pay them a few thousand dollars, so contribute a portion of their salary to a Roth. Kids can invest 100% of their income or $6,000, whichever is less, per year to an IRA. Contributing to an IRA at age 18 will pay huge dividends when they get older. In fact, your kids can let their money grow tax-free for more than 50 years! Investing $1,000 per year in the Investment Company of America Mutual Fund (AIVSX) for 50 years is now worth $2.14 million![1] Not bad for a summer job.

It’s unlikely your five-year-old will ask you to open a Roth IRA or set up a dollar cost averaging program. However, giving your child money to spend, save and give away will establish lifelong benefits. It will change their narrative and make your trips to the store more enjoyable.

Don’t let anyone look down on you because you are young, but set an example for the believers in speech, in conduct, in love, in faith and in purity. ~  1 Timothy 4:12

July 9, 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. 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.

 

 

 

[1] Morningstar Office Hypothetical: June 30, 1969 to June 30, 2019.

Stocks or Funds?

Is it better to buy individual stocks or mutual funds? It depends, of course, on several factors like how much to invest or how much risk you’re willing to take. If you have a high tolerance for risk and millions of dollars to invest, you may be a good candidate to own individual stocks. If you only have $1,000 to invest, a mutual fund is a better option.

When building a portfolio for your future focusing on your goals will help you determine the best strategy. How much to invest? What is your tolerance for risk? How involved will you be in managing your assets? How much time will you commit to researching new investment ideas?

A portfolio of 30 individual stocks or more is recommended for a diversified portfolio.[1] A report on Morningstar’s website suggests 18 to 20 names.[2] When individuals pick their own stocks, they focus primarily on large companies with brand name recognition like Apple, McDonald’s, or Pfizer. Few investors add small or international stocks to their portfolio.

RiskAlyze® helps investors and advisors quantify risk. The risk score for the S&P 500 is 74 on a scale of 1 to 99. A T-Bill, by comparison, has a risk score of 1. I sent a list of 20 large-cap companies to a client for review. The risk profile for the portfolio was 73, or 1 point lower than the S&P 500 Index. If the risk levels are similar, why not buy the index? The Vanguard S&P 500 fund owns 500 companies with exposure to every sector; it’s also cheaper than buying 20 individual stocks.

What about the FAANGs – Facebook, Amazon, Apple, Netflix and Google? Yes, if you owned these 5 stocks you destroyed the S&P 500 over the past 5 years. The FAANG portfolio soared 272%, bettering the S&P 500 by 205%!  How do you identify these companies in advance? The best performing stock in the S&P 500 index this year is Xerox, a stock that has underperformed the market by more than 100% for the past 10 years. Last year it dropped 30%. Xerox was probably not on your radar screen. The other stocks rounding out the top ten are Cadence Design, Advanced Micro Devices, Chipotle, MSCI, Anadarko Petroleum, Total System Services, Synopsys, Global Payments, and DISH Network. These 10 stocks have outperformed the FAANGs by 33% this year! Finding consistent winners to beat the market each year is tough – if not impossible.

Investing in large companies with brand name recognition makes sense on the surface, but it ignores a fair chunk of the global market. Vanguard’s Total World Stock fund invests 73% of its assets in large-cap stocks with 57% allocated to the United States. An all large-cap U.S. portfolio ignores bonds, small companies, real estate, gold, and international investments.

Picking individual stocks also takes time. An hour per stock, per week has been suggested. If you own 20 stocks, you’ll need to set aside 20 hours per week for research. Can you commit 20 hours per week to review your portfolio?

For most investors a globally diversified portfolio of low-cost mutual funds based on your financial goals is the best path to take.

Diversification is your buddy. ~ Merton Miller

July 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

 

 

[1] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, Jason Whitby, June 25, 2019.

[2] https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

Dry Powder

Active stock traders need to keep some dry powder so they can buy stocks when the stock market falls. Dry powder usually means cash. Allocating a portion of your portfolio to cash will be a drag on your returns, especially in a low interest rate environment with a rising stock market.

Traders need to be nimble so they can pounce on stocks when they drop. A cash hoard gives them the opportunity to act quickly without selling another position. This strategy works well when stocks fall, and they act on their impulse. If they time their purchase correctly, they can make a lot of money. Of course, if they don’t act quickly or time their purchase correctly, their strategy is for not. In a stock picker’s market cash is needed.

Traders look for fallen angels and Boeing is a classic example. Due to their unfortunate tragedies, the stock has dropped from its high of $440. Traders felt that Boeing below $400 was a bargain. The stock went through $400 like a hot knife through butter, falling another $62 to $338. Traders took their dry powder to buy it at $400 only to see their investment fall 15%.

Timing the market is extremely difficult. According to one study, asset allocation accounts for 93.6% of your investment return with the remaining 6.4% attributed to market timing and investment selection.[1]

During the fourth quarter of 2018 the Dow Jones fell 12.5% and investors withdrew $183 billion in mutual fund assets. Investors were storing up some dry powder, I guess. This year investors have added $21 billion to mutual funds, or 11.5% of what they took out last year. Meanwhile, the Dow has risen 13.8%. Dry powder?

A better strategy for most investors is to own a portfolio of low-cost index funds, diversified across asset classes, sectors and countries. This portfolio will give you exposure to thousands of securities doing different things at different times. It will allow you to stay fully invested because you never know when, where, why, or how the stock market will take off. It reduces your risk of market timing and eliminates the cash drag on your performance.

But what if, or when, the market falls? In a balanced portfolio you will own bonds of different maturities. For example, during the Great Recession stocks fell 56%. Long-term bonds were up 16.6% while intermediate bonds stayed steady at 2.94%. Dimensional Fund Advisors Five-Year Global Fixed Income fund rose 4.9%. True, they did not offset the entire drop-in stocks, but they did hold their own.

It’s possible, and recommended, to rebalance an index portfolio on a regular basis. When your asset allocation changes, rebalance your portfolio to return it to its original allocation. This strategy allows you to buy low and sell high on a regular basis. I once heard an advisor compare rebalancing to getting your haircut. When your hair gets too long, cut it back to its original length.

Shouldn’t stock pickers make money in a stock picker’s market? According to Morningstar only 24% of active equity mutual fund money managers beat their passive index over a 10-year period.[2] Is it possible to pick the top quartile funds every year for the next ten years? Doubtful.

Dimensional Fund Advisor’s found that over a 20-year period only 42% of equity funds survived. Their database started with 2,414 funds and only 1,013 survived twenty years. If more than half the funds fail, how will you be able to pick the top 25%?[3]

Rather than keeping dry powder or trying to time the market, focus on your financial goals and invest in a balanced portfolio of low-cost index funds.

Don’t let dry powder blow up your portfolio!

My mission in life is not merely to survive, but to thrive; and to do so with some passion, some compassion, some humor, and some style. ~ Maya Angelou

June 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. 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.

 

 

 

 

[1] 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.

[2] https://office.morningstar.com/research/doc/911724/U-S-Active-Passive-Barometer-7-Takeaways-from-the-2018-Report, Ben Johnson, February 7, 2019

[3] file:///C:/Users/parro/Downloads/2019%20Mutual%20Fund%20Landscape_%20Report.pdf

Stocks & Yogurt

Consumers are stressed out over yogurt.

The Wall Street Journal recently published an article about declining yogurt sales – Yogurt Sales Sour as Options Proliferate. The main theme of the article is that consumers have too many choices.

According to the article “the average U.S. Supermarket carries 306 different yogurt varieties”[1] and the consumer is overwhelmed. The article added: “Some consumers say all that choice is giving them yogurt fatigue.”

Investors face the same dilemma as yogurt shoppers – too many investment choices. Morningstar’s database includes the following securities:

  • 115,000 Global Stocks
  • 27,000 U.S. Mutual Funds
  • 17,000 Global Exchange Traded Funds
  • 5,000 529 Portfolios
  • 13,000 Closed-End Funds
  • 15,000 Separately Managed Accounts
  • 208,000 Variable Annuity Subaccounts
  • 14,000 Unit Investment Trusts
  • 6 Million Individual Bonds

Wow! If a consumer is anxious about 300 different types of yogurts, how will they pick a few choice investments from more than 2 million securities? Information overload can cause investors to suffer from financial paralysis.

Being exposed to more choices doesn’t make things easier or better. In a famous 2000 study on jams, psychologist Sheena Iyengar and Mark Lepper published a paper on choices. The first test included 24 varieties of jam; the second sample included six. They found that the larger sample attracted more people, but less buyers. The smaller sample yielded ten times more purchases.[2]

Here’s a simple portfolio consisting of five different exchange traded funds. The funds are allocated to 60% stocks, 40% bonds and rebalanced annually. Dating back to 2003 it generated an average annual return of 7.05%. A $50,000 investment in 2003 is now worth $144,650. The best year was in 2009 with a gain of 15.89%, the worst year occurred in 2008 when it lost 20.05%.

The funds include:

  • iShares Core S&P 500 Fund – IVV
  • iShares Core S&P 600 Fund – IJR
  • iShares MSCI EAFE Fund – EFA
  • iShares US Real Estate – IYR
  • iShares Core US Aggregate Bond Fund – AGG

If five funds are too many, here’s a portfolio consisting of three Vanguard mutual funds. The funds were allocated to 60% stocks, 40% bonds and rebalanced annually. This portfolio originated in 1996 and it has generated an average annual return of 6.63%. A $30,000 investment in 1996 is now worth $130,793. 2009 was the best year for this portfolio when it jumped 25.21%. The worst year occurred in 2008 when it fell 23.3%.

The three funds include:

  • Vanguard Total Stock Market Index – VTSMX
  • Vanguard Total International Stock Market Index – VGTSX
  • Vanguard Total Bond Market Index – VBMFX

If three funds are too much, here’s one mutual fund – Dimensional Fund Advisors 60/40 Global Allocation Fund (DGSIX). Since 2003 it has generated an average annual return of 6.2%. A $10,000 investment in 2003 is now worth $25,180. Its best year was 2009 when it climbed 25.5%. Its worst year occurred in 2008 when it dropped 25.7%.

As you decide on the best investments for your portfolio, don’t make it complicated. A simple portfolio of a few, low-cost, funds is all you need. Your account will be easy to understand and follow. In addition, with fewer moving parts you’ll no longer have to watch the daily moves in the stock market.

So, dig in and simplify your investments.

The more you have, the more you are occupied. The less you have, the more free you are. ~ Mother Teresa

April 11, 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.wsj.com/articles/yogurt-sales-sour-as-options-proliferate-11554811200?mod=searchresults&page=1&pos=2, Heather Haddon, 4/9/2019

[2] https://hbr.org/2006/06/more-isnt-always-better, Barry Schwartz, June 2006 issue

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.

Buy or Rent?

To buy, or not to buy, that is the question.

A home can be both an asset and a liability. Over time, real estate is a solid investment, but in the short-term it can cause financial heartache.

My parents have lived in their home for more than 45 years and they have significant equity. They’ve used their home throughout the years as a source of funds to pay for weddings and college educations. However, they’ve also had to replace roofs, windows, garage doors, air conditioning units, etc.

It takes time to build equity in your home, so if you plan to stay in your city for ten years or more, then buy a home. According to Freddie Mac, the average length of homeownership at the end of 2017 was ten years.[1]

My first reaction is that owning a home trumps renting. A home builds equity through monthly mortgage payments. The old argument is that it’s a forced savings vehicle. In addition, interest payments and property taxes are deductible to a point.

The Case-Shiller Home Price Composite 20 Index has averaged an annual return of 4.1% since January 2000 despite a 34% drop in housing prices during the great recession.[2] The S&P 500 Index, by comparison, averaged 5.3% for the same period.[3]

Aside from financial benefits, there are several emotional reasons to own a home. A home is a place to hang your hat, a refuge for children to return to during college breaks, and a storehouse for generational gatherings. And, regardless of economic conditions, it’s your home.

We lived in Connecticut for a few years and our home had a finished basement covering about three quarters of the area. The remainder of the basement was storage for our tools, kayaks, bikes, workbench, etc.  When my daughter was young, we painted some fall leaves on butcher paper.  In addition to the butcher paper, we also painted a portion of the floor. At first, I was upset but then I thought this is our house and we can do whatever we want. It also added a touch of character to the basement and when I saw the paint on the floor it was a nice reminder of the joy my daughter and I had that afternoon.  We also used our pantry to measure her height. Each new notch on the door frame represented growth for our family.

Owning a home does not guarantee nirvana as there’s always something that needs a tweak or twist and every few years a major expense pops up. Replacing windows, a roof, or an air conditioning unit is not cheap. Annual maintenance and upkeep can cost you about 1% of the value of your home. If your home is worth $500,000, expect to spend about $5,000 per year.[4] Depending on where you live you may have additional fees like HOA dues.

Renting makes sense if you’re on the move every few years. If you’re in the military or some other profession that requires you to relocate often, renting makes sense. Also, if you’re new to a city and you want to get the lay of the land, renting a home is better than buying – especially in a city that is experiencing rapid growth, like Austin. Renting will give you an opportunity to explore different neighborhoods and travel patterns. The average rent in Austin, New York and San Francisco is $1,518, $3,415, and $3,772, respectively.[5]

Saving money for a down payment is another reason to rent. If you don’t have enough money for a 20% down payment, then renting a cheaper home or apartment while you build up your cash reserve is a smart move. The median home price at the end of December was $253,600, so a 20% down payment is $50,720 – a big nut to cover for most people.[6]

I’ve found that people who rent to save money usually don’t. If you’re renting to save, then you should invest the difference. Establishing an automatic investment plan will help you be intentional about saving. It will also remove the temptation to spend the difference.

Affordability is another issue. Don’t buy a home you can’t afford. Your monthly mortgage payment should be less than 28% of your gross pay. If your gross income is $10,000, then your monthly payment should be $2,800 or less. A mortgage payment of $2,800 equates to a $372,000 mortgage for a 15-year loan and $569,000 for a 30-year loan.

A couple of downsides to renting is that your landlord can sell the land under your feet or raise your rent. Renting is forever and you never have an opportunity to build equity. I know renters will say they don’t have to pay property taxes, but taxes are deductible, and rent is not. Several cities will cap their property taxes at a certain rate or age as well. Packing and moving every couple of years is also a deterrent to renting.

Here’s a recap to help you with your decision to buy or rent your next home.

  • If you plan to live in your city for ten years or more, buy a home.
  • If you want to build equity, purchase a home.
  • If you move every few years, rent.
  • If you don’t have enough money for a down payment, rent.
  • If you want to be mobile and explore new cities, rent.
  • If you’re a homebody and don’t like to pack, purchase a home.

Be it ever so humble, there’s no place like home. ~ John Howard Payne

February 18, 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] http://www.freddiemac.com/blog/homeownership/20180206_2017_housing_trends.page

[2] YCharts. Case-Shiller Composite 20 Index, 1/1/2000 – 11/30/2018.

[3] Morningstar Office Hypothetical Tool, SPY ETF, 1/1/2000 – 11/30/2018.

[4] https://www.thebalance.com/home-maintenance-budget-453820, website accessed 2/14/19

[5] https://www.rentjungle.com/average-rent-in-san-francisco-rent-trends/, website accessed 2/14/19

[6] https://ycharts.com/indicators/sales_price_of_existing_homes, 12/31/2018

Can You Save $500 Per Month?

Saving money shouldn’t be difficult, but it is. Trying to find a few extra nickels to save at the end of each month is a challenge, but is it possible for you to find an extra $500?

Professionals often recommend strategies to help you reduce your expenses. Some of the more popular suggestions include taking your lunch to work, clipping coupons, or drinking less coffee. These are good ideas, but I believe you can have your latte and drink it too.

One way to start saving more money is to automate your contribution and treat it like a monthly expense similar to your car or mortgage payment. You can link your bank account to your investment account and once it’s established, your savings will start to pile up.

A mutual fund is the best investment for your monthly contribution. A stock mutual fund will give you the greatest opportunity to create wealth, but it will be volatile. If you don’t like volatility, a bond fund is a conservative option. A balanced fund is a combination of the two, giving you the best of both worlds.

If you start saving $500 per month today and earn 7% on your investment, you will have $86,542 after 10 years.

If you had invested $500 per month in the Vanguard S&P 500 index fund, here is what your account would have been worth at the end of 10, 20, 30, and 40 years.[1]

The value of your account after 10 years was worth $129,457.

The value of your account after 20 years was worth $325,530.

The value of your account after 30 years was worth $968,374.

The value of your account after 40 years was worth $3.7 million.

Why is it important for you to save money monthly? In a recent report by Northwestern Mutual, they found 50% of Americans have less than $75,000 saved for retirement.[2] I don’t want you to be part of this group.

What if you can’t save $500 per month? If you can’t, save whatever you can afford. After all, saving something is better than saving nothing.

After I graduated from college, I set up an automatic investment plan with a Franklin Mutual Fund. I started saving $25 per month and after my first year I had accumulated more than $300! I was on my way to financial freedom. I have not stopped saving money monthly and it has allowed me to build a nest egg, buy a home, pay for my daughter’s education, and so on. The key to my financial success has been the monthly contributions.

Can you invest $500 per month? I believe you can.

The creation of a thousand forests is in one small acorn. ~ Ralph Waldo Emerson

9/3/2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

 

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

 

 

 

 

[1] Morningstar Office Hypothetical, period ending 8/31/2018.

[2] https://www.cnbc.com/2018/05/15/how-much-americans-have-saved-for-retirement.html, Emmie Martin, 5/16/2018.

What’s Your Home Worth – Right Now?

Did you check the price of your home today? Did you get a text on your phone that your home appreciated 5%? Did the commentators on CNBC mention it on TV?

Zillow, and a few other real estate sites, let you check the price of your home daily. When the value rises, do you call your real estate agent to sell it? When it falls in price, do you panic?

The S&P Case/Schiller Index tracks home values across the country. The 12-month return for the 20-city index was 6.31%, the 10-year return was 2.42%. The index fell 20.5% from May 2008 to March 2012.[1]  Did you sell your home because of these price changes? I doubt it. If you’re like most real estate investors, you did nothing.

Home owners are the ultimate buy and hold investors because it’s not easy to move in and out of houses on a regular basis. On a recent trip to Los Angeles I noticed a friends’ home was for sale. He purchased it about 50 years ago for $35,000; it’s currently listed for $850,000. On a gross basis, he generated an average annual return of 6.58% – a decent return. However, if he invested $35,000 in the Investment Company of America mutual fund, he’d have $5.7 million today![2]

Stock investors are obsessed with daily price movements. A tick up, they get excited. A tick down, they get depressed. Stocks are expected to rise so when they fall, investors want to know what’s wrong with the market. Why is it down? Is this the beginning of a correction? Should I sell? Has the market peaked?

Did you know the S&P 500 fell 23% from August 5, 1974 to September 30, 1974? The market lost about a quarter of its value in less than two months and I bet a few investors panicked and sold their stocks. If you apply short-term thinking to long-term problems, you’ll make catastrophic mistakes. The S&P 500 has risen 4,574% since September 30, 1974.[3]

Here are a few suggestions to keep you invested for the long haul.

  • Think generationally. Focus on decades, not days. You may work for 40 years and be retired for another 35. Once you start working and contributing money to your investment accounts, it’s possible you won’t touch your money for 50, 60 or 70 years.
  • Plan. A financial plan will keep you focused on your short and long-term goals. If you know where you’re going, you’re less likely to get distracted by bumps in the road.
  • Buy the dip. The market does fluctuate, so take advantage of down days. Historically, the stock market has risen 73% of the time. When it does drop, use it as an opportunity to buy great companies at discounted prices.
  • Disconnect. TV shows, radio programs and social media sites that report on the stock market cause angst and stir the pot. If you disconnect from TV and social media, you won’t get caught up in the hype. Real estate investors are fortunate because they don’t have to listen to commentator’s pontificate about price movements or stare at a ticker tape scrolling across the bottom of their TV set.
  • Diversify. Purchase several low-cost mutual funds and hold them forever.

Most real estate investors succeed because they think long term and they don’t make thoughtless sell decisions. When they purchase a home, their intent is to own it for several years. Stock investors would be wise to follow their lead. Who cares if the market fluctuates because in the end, it usually wins.

“It fluctuates.” ~ J.P. Morgan

August 30, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

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

[1] https://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index

[2] Morningstar Office Hypothetical Tool – 7/1/1968 to 7/31/2018.

[3] https://finance.yahoo.com/quote/%5EGSPC/history?period1=-630957600&period2=1535518800&interval=1wk&filter=history&frequency=1wk

Losers

The Washington Generals have been playing basketball since 1952. During their tenure they’ve won three games, one in each of the following years – 1954, 1958 and 1971.[1] Despite their lackluster output they repeatedly play in front of sold out crowds at over 450 events per year. Why? It’s because their primary opponent is the Harlem Globetrotters.

The Globetrotters win most of their basketball games and, as a result, the Generals must endure a constant thumping. They are perennial “losers” because of their role, however, they’re really winners because of their long-term association with the Globetrotters.

Some investors are classified as “losers” because they routinely purchase stock at the wrong time. They buy stocks when the market hits an all-time high or just before a correction.

The last three corrections in the stock market have been the Great Recession, The Tech Wreck, and Black Monday. If you invested 100% of your money in the stock market on the eve of these three catastrophic events, how would your portfolio have fared?

The Great Recession occurred from October 2007 to March 2009 and the S&P 500 fell 57%. A $100,000 investment in October 2007 fell to $43,000 in March 2009. If you sold during the dark days of the recession, you would’ve lost 57% of your investment. If you held on, your original investment is now worth $226,000 – a gain of 127%! You generated an average annual return of 7.84% from 2007 to 2018.[2]

The Tech Wreck happened from April 2000 to October 2002. During this rout, the S&P 500 dropped 43%. A $100,000 investment in April 2000 fell to $60,000 by September 2002. You lost 43% if you sold at the bottom.  If you held, your original investment is now worth $263,000 – a gain of 163%.[3]

The stock market crash on October 19, 1987 was frightening. The market fell 22% on Black Monday after falling 4.5% the previous Friday. If you invested $100,000 on Thursday, October 15, 1987, you were down more than 26% by the market close on Monday. After two days of investing you lost $26,000. However, 31 years later, your original investment is now worth $1.64 million. You made 1,543% on your investment, or 9.5% per year![4]

If you happen to be a loser and buy stocks at the wrong time, hang on, because, like the Globetrotters, the stock market usually wins in the end.

“I have never known anyone who could consistently time the market. And in fact, I’ve never known anyone who knows anyone, who was able to consistently time the market.” ~ Burton Malkiel

August 26, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

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

Photo Credit: Andrey Popov

[1] https://en.wikipedia.org/wiki/Washington_Generals#Beating_the_Harlem_Globetrotters, website accessed 8/28/18.

[2] Morningstar Office Hypothetical – results as of 7/31/2018.

[3] Ibid

[4] Ibid

Los Angeles to New York

The sound of a train whistle piercing the night sky conjures up images of distant lands and the rhythmic clickety-clack of the wheels on the track is therapeutic.

Riding a train from Los Angeles to New York is an exciting way for passengers to see our amazing country. If a passenger boards the train at Union Station, they’ll arrive at Grand Central in about three and a half days.

Travelling by train is mostly hassle free, but at times it can be frustrating. For example, when the train is going slow or stopped, passengers can become anxious. Some passengers may disembark from the train to explore alternative forms of travel such as a car or plane. If a passenger discards his plan, he might not reach New York. However, if he stays on the train he’ll arrive at his desired destination.

When the train is travelling fast, don’t get too excited. When it’s travelling slow, don’t get overly depressed. When it’s stopped, don’t abandon your trip.

Investing has a lot of similarities to riding a train. In short, if you stay with your plan, you’ll arrive at your destination. If you make too many changes, your plan may get derailed. Investors in a diversified portfolio may own investments going fast, slow or stopped. The urge to reduce your holdings in non-performing assets and purchase better performing ones may be high, but this strategy is not recommended.

The world markets are giving us a mixed bag of results so far. Large-cap growth stocks have risen 10.75% and micro-cap stocks have climbed 11%. International investments, emerging markets, and bonds are down for the year.

What makes for a successful trip? The first component is to select a destination. Once you’ve identified your location, you can complete the rest of the travel process. When will you leave? What will you pack? What train will you take?

A successful investor, like our traveler, needs a destination. Financial goals are paramount if you want to succeed as an investor. Do you want to retire early? Buy a vacation home? Travel the world? Start a business? Once your goals are identified, your financial plan can help you quantify and prioritize them.

You need to commit to your goals for the duration. Jumping in and out of the market because it fluctuates is not wise. If you reject your plan before your goals are reached, you may derail it forever.

The market constantly goes up, down and sideways so don’t abandon your long-term plan because of short-term market moves. All aboard!

There’s something about the sound of a train that’s very romantic and nostalgic and hopeful. ~ Paul Simon

August 26, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

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