Are Zero Commission Rates Good?

Schwab dropped a bombshell on Tuesday when they announced they’ll reduce commission rates on stocks, ETFs, and options to zero! Not to be outdone, TD Ameritrade and E*Trade quickly followed suit. As a result of the announcement, Schwab’s stock fell 14%, TD Ameritrade slumped 28%, and E*Trade plunged 19%. The loss of trading commissions will result in a significant drop in revenue for these firms. Their pain is your gain.

Trading with zero commission reminds me of a visit to an all-you-can-eat buffet. Walking into a buffet is exciting when you see the endless sea of culinary delights. On your first pass through the buffet line, you pile your plate high with a wide variety of food items. You know it’s not a good idea to make a fifth trip through the buffet line, but you need to try several desserts before you leave. Eating at all-you-can-eat buffets will have harmful consequences on your health as will excessive trading on your wealth.

Now that commission-free trading has gone mainstream, this may entice individuals to trade more often, and more trading is not good. During the internet boom, Morgan Stanley introduced a commission-free trading account called Choice. Clients paid a fee based on the level of their assets. As a branch manager, I reviewed accounts and trades. One of our clients was trading more than 200 times a month, and it wasn’t going well. She was not a good trader, incurring significant losses. The losses didn’t detour her because she felt empowered to trade by not paying commissions on each trade.

An unfortunate byproduct of excessive trading is short-term capital gains. Short-term capital gain rates are much higher than long-term capital gain rates because they’re taxed as ordinary income. Another potential issue is the wash rule. The wash rule disallows a loss if you buy or sell the same security within 31 days before or after your trade.

Warren Buffett, Bill Gates, Jeff Bezos, Mark Zuckerberg are billionaires because of their stellar business skills and the excellent performance of their company stock. A significant portion of their wealth has come from sitting, not trading. Most of the time, they’re doing nothing with their shares. Do you think Bill Gates and Warren Buffett day trade their accounts? LOL.

Commission rates were deregulated on May 1, 1975. With commission rates no longer fixed, Wall Street firms were now able to set their own rates. Charles Schwab (the person) launched his firm as a result of the new rule, and a revolution was born.[1] Commission rates have been low for years, and some firms already offer free trades through zero-fee trading on ETFs.

Long-term wealth is created by being patient, and one of the best ways to increase your wealth is to buy and hold a globally diversified portfolio of low-cost mutual funds.

As commissions drop, how can you take advantage of lower rates and fees? Here are a few ideas.

  • Move your account to a custodian currently offering zero-rates for trading like TD Ameritrade, Schwab, or E*Trade.
  • Most registered investment advisors work with a custodian to handle client accounts. Make sure your advisor uses one of the custodians from above.
  • Hire a Certified Financial Planner® with low fees, ideally well below the industry standard of 1% of your assets.
  • Conduct a fee audit on your accounts. Brokers post their charges, and advisors list theirs in their ADV. A Certified Financial Planner® can help you review your statements to make sure your costs are low.
  • Hire a firm that offers financial planning in addition to investment management. The financial plan should be included in the fee you’re being assessed to manage your assets
  • Avoid manufactured products like annuities or permanent life insurance. These insurance products have substantial fees and deferred sales charges, meaning if you sell your investment early, you’ll incur heavy penalties.

Are zero commission rates good? Lower rates are a boon to investors. The less you pay, the more you keep. However, there’s no free lunch, so read the small print to find out how your firm makes money.

 “I have the right to do anything,” you say—but not everything is beneficial. “I have the right to do anything”—but not everything is constructive.  No one should seek their own good, but the good of others. ~ 1 Corinthians 10:23-24

October 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

[1] https://www.wsj.com/articles/charles-schwab-ending-online-trading-commissions-on-u-s-listed-products-11569935983, By Alexander Osipovich and Lisa Beilfuss, October 1, 2019

 

A Few Ways to Lose Money in The Stock Market

The market loves to rip wealth from the hands of investors who panic as stocks fall. The Dow Jones fell about 7% from its high last week because the yield curve inverted for a few minutes.

Markets have been rising and falling for centuries. Since 1926 they’ve risen about 75% of the time. A quarter of the time they’re falling – hard. When stocks fall, investors panic.

Stocks have risen 173% over the past ten years. A $10,000 investment in 2009 is now worth $27,260. However, during this great bull run, the Dow Jones has fallen several times. It fell more than 10% in 2010, 2011, 2015, 2016 and 2018. In December it fell 25% from its high-water mark. Despite the drops, the market has always recovered. Investors who sold their stocks last December missed a 19% rebound in 2019.[1]

The graph below shows all the drops in the market for the past ten years. Despite these drops, the market has risen substantially since 2009.

^DJI_chart

The chart below shows the gain in the Dow Jones Industrial Average from 1950, producing a gain of 17,790%. Since 1950 the U.S. economy has experienced 17 recessions.

^DJI_chart (1)

As stocks gyrate, here are a few ways to lose money in the stock market.

  • You don’t have a plan on how to invest your assets. You trust your financial future to luck, hope, and chance, playing a guessing game as to which investments will do well.
  • Your investment ideas come from cable television shows or social media sites. Remember, the commentators aren’t talking to you directly; they’re broadcasting their message to millions of viewers.
  • You don’t do any research or homework before you buy a stock. And, more importantly, you don’t have a sell strategy. To make money in stocks, you must have discipline when you buy and sell. Knowing your entry and exit points are paramount to make money when you invest.
  • Investors mistake volatility for risk. If you do, you’re more likely to sell stocks when they’re down. The Dow Jones has a standard deviation of 1%, meaning a 1% drop in the Dow is about 260 points. When investors hear that the market is down 260 points, they panic. However, this move is typical and expected.
  • Time matters when you invest in stocks. The market is efficient in the long-term, but not so much in the near term. If you need money in one year or less, don’t buy stocks.
  • Trying to time the market is impossible. From 1990 – 2018, the S&P 500 returned 9.29%. If you missed the 25 best days, your return dropped to 4.18%.[2]
  • A lack of diversification hurts investors in a downdraft. A well-diversified portfolio owns several investments that rise and fall at different times. If all your investments are moving in the same direction, you’re not diversified. For example, the Dow Jones has fallen 5% for the past month, but long-term bonds have risen 10%.

Over the next 100 years, the U.S. will experience several recessions, maybe even a depression. The market will rise substantially and fall dramatically. No one knows! It’s impossible to predict a recession since most of the economic data is trailing, so by the time it’s been identified, it’s probably half over.

I do understand that market drops are scary. However, holding and buying stocks through market troughs has proven to be a winning strategy. If you invested $10,000 in the Dow Jones on October 1, 2007, just before the start of the Great Recession, your balance would be worth $18,340 today. At the market low, your balance dropped to $6,547. If you sold, you locked in a loss of $3,453. If you held on, you made $8,340.

What I do know is that investors who follow their plan, save money, diversify their assets, invest for the long-term usually win in the end.

Stay the course, my friends.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me. ~ Psalm 23:4

August 23, 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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. Options involve risk and aren’t suitable for every investor.

 

 

[1] YCharts. Website Accessed August 23, 2019

[2] Dimensional Fund Advisors, Investment Principles

Headwinds

The stock market has hit a rough patch recently, falling 5.75% since the Federal Reserve cut interest rates on July 30. Headwinds have been stout as market participants react to the trade war, protesters in Hong Kong, Brexit, Trump’s tweets, and calculated language from Chairman Powell.

The recent selloff follows the May decline when stocks fell 7%. For the past 50 years, the average decline from a market top has been 10.7%.[1]

Are this year’s headwinds worse than in previous years? You might say yes because of recency bias. However, it’s in-line with previous market pullbacks.

Here are a few facts.

  • The Dow Jones is up 9.23% for the year and 171% for the past ten.
  • International markets are up 4.32% for the year and 19% for the past ten.
  • Long-term bonds are up 20.8% for the year and 57% for the past ten.
  • A globally diversified portfolio of stocks and bonds (60% stocks, 40% bonds) is up 10% for the year and 104% for the past ten.
  • The 30-Year U.S. Treasury bond is currently yielding 2.03%, a historic low. In 1990, it paid 8%.
  • The current U.S. inflation rate is 1.81%. In 1980 it was 14.5%.

Let’s review how a 60% stock, 40% balanced index performed during past routs if you held on until the end of last year.[2]

  • Stocks fell 48% from 1973 to 1974. If you purchased the index before the drop, your average annual return was 10.4%.
  • Stocks fell 19% in 1990 during the Gulf War. If you purchased the index before the drop, your average annual return was 8%.
  • Stocks fell 43% during the Tech Wreck. If you bought the index in 2000, before the drop, your average annual return was 6.8%.
  • Stocks fell 53% during the Great Recession. If you bought the index in 2007, before the drop, your average annual return was 4.7%.

Markets turn quickly, so it’s best to own a globally diversified portfolio of low-cost funds.

I understand that emotions trump facts when stocks fall 500 points or more. It’s human nature to want to sell your investments and wait for trouble to pass. When fear is high, investors want to trade stocks for bonds until the coast is clear. If you invest in a portfolio of U.S. Treasuries, your current yield would be approximately 1.8%, or about the rate of inflation, so after subtracting inflation, your net return would be zero. It will be less than zero after paying taxes on the income you received.

Are you concerned about the loss of your principal? If so, here are a few steps you can employ today.

  • Reduce your stock exposure. If your stock allocation is 60%, lower it to 40%. Lowering it will reduce your risk by 25%.
  • Increase your cash position to cover three years’ worth of household expenses. If your annual expenses are $100,000, keep $300,000 in cash or short-term investments. A three-year cash cushion will allow you to ride out most market corrections. For example, if you had a high cash reserve from October 2007 to October 2010, it would’ve allowed your stock investments time to recover. In other words, you didn’t need to sell your stocks at the bottom of the Great Recession.
  • Rebalance your accounts to keep your allocation and risk level in check. Since stocks and bonds fluctuate, your asset allocation will change if you do nothing. If you started with a 50% stock, 50% bond portfolio ten years ago, it would have a current allocation of 72% stocks, 28% bonds. By doing nothing, your risk level increased by 37%. An annual rebalance will keep your portfolio allocation at 50/50.[3]
  • Buy the dip. It takes courage and wisdom to buy stocks after they’ve fallen dramatically. Investors who purchased stocks in March 2009, after falling 53%, were rewarded with a gain of 322%! An investment of $100,000 is now worth $422,200.[4] Using the past 100 years as a guide, then buying stocks when they’re down is an intelligent strategy.

Investing is a courageous act, especially when your investments are tumbling. Short-term trading, mixed with short-term thinking, will derail your long-term plans. Rather than acting on impulse, focus on your financial plan. A well-designed plan accounts for multiple scenarios, including broad market declines. If you’re not sure how your investments will impact your financial future, give me a call and let’s figure it out.

I believe the market is going to fluctuate. ~ J.P. Morgan

August 15, 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] YCharts: August 1, 1969 – August 14, 2019

[2] Dimensional Funds 2018 Matrix Book. Returns ending 12/31/2018.

[3] Morningstar Office Hypothetical.

[4] YCharts: March 9, 2009 to August 14, 2019.

Trifecta

Picking a trifecta is difficult, at best. Identifying the first three winners of a horse race, in order, is called a trifecta. The 2019 Kentucky Derby had 19 finishers, so you had to choose from 5,814 potential combinations! If you were correct, the $2 trifecta paid $22,950.

During my career in financial planning, I’ve found three things to be true: individuals aren’t aware of the type of investments they own, how much risk they’re taking, or what level of fees they’re paying.

After meeting with someone, I’ll review their investments to give them an idea of their financial situation. Often, they’re surprised how they’re allocated, their risk level, and the fees they’ve paid. I’ll then compare the results to their financial plan to make sure all three (allocation, risk, and fees) are in sync. The goal is to achieve a financial balance.

Let’s look at the three components.

Asset allocation. Your asset allocation determines most of your returns and your risk level. You might be able to improve your results by investing when the market is low; However, the odds of picking a bottom are extremely rare.

For the past 45 years, a portfolio of 100% stocks generated an average annual return of 12.9%. A portfolio consisting of 100% bonds produced an average annual return of 6%. A balanced portfolio of 60% stocks, 40% bonds made an average annual return of 10.4%.[1]

The returns varied depending on the market conditions. The 100% bond strategy never lost money from 1973 to 2018. The returns have dropped dramatically since 1999; the average annual return has been less than 3% for the past 20 years.

The 100% equity portfolio has produced the best returns, but with the highest risk. From 1973 to 1974, it dropped 41.5%. In 2008 it fell 41.8%. Last year it was down 11.8%. To achieve double-digit returns, you need to take some risk.

The balanced portfolio had considerably less downside than the all-equity portfolio. From 1973 to 1974, it dropped 20.8%. In 2008 it fell 24.8%. Last year it was down by 6.2%. The losses have been about half those of the all-equity portfolio.

Risk level. Risk has several definitions. Losing money is a risk. Volatility is a risk. Longevity is a risk. Inflation is a risk. Liquidity is a risk. Investing all your money in a fixed income portfolio will expose you to inflation and longevity risk. Investing everything in the stock market exposes you to volatility and principal risk. It’s hard to identify your risk level, especially after a 10-year bull market. One test is to review your trading during the 2008 Great Recession. When stocks fell 50%, what did you do? Did you sell your shares? Did you buy stocks? Did you buy bonds? Did you do anything?

Using a service like RiskAlyze or Finametrica can help you determine your risk tolerance. If you’re curious, you can take a quiz on my website by clicking on the “free-portfolio risk analysis” tab located on the upper right-hand corner of my website. Here’s the address: www.parrottwealth.com.

Fees. The fees you pay for your investments matter. Of course, the lower your costs, the higher your return (all things being equal). If you and your brother-in-law own the same fund, but your advisor charges you 2% per year, and his advisor charges .5%, he’ll have better returns. Fees vary, so be aware. Your advisor may bill you by the hour, charge a flat fee, assess a percentage of your assets, or take a commission. Regardless, a fee is a fee. Also, your investments may include other charges if you own mutual funds, exchange-traded funds, or insurance products. If your investment is sold with a prospectus, you’re paying a fee.

If you’re not sure about your investments, then hire a Certified Financial Planner® to help you figure it out. But, before you do, ask your planner how they get compensated and what type of investments they recommend.

Last, completing a financial plan will help you organize and quantify your goals, so they’re in sync with your asset allocation, risk level, and fee structure – a trifecta!

A horse gallops with his lungs perseveres with his heart and wins with his character. ~ Federico Tesio

August 13, 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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. Options involve risk and aren’t suitable for every investor.

[1] 2019-Dimensional Matrix Book returns from 1973 – 2018.

Financial Mystery Dinners

Murder mystery dinners are popular. At these dinners’ guests try to guess who committed the crime based on a series of clues. Guests are also part of the show and may be prime suspects. You might have attended one of these events in the past, but have you ever been to a financial mystery dinner?

Let’s say you’re invited to a financial mystery dinner to solve a financial crime. The storyline is that four of the guests will run out of money in retirement. Why four?

According to The Employee Benefit Research Institute, 40.6% of households are projected to run out of money in retirement.[1] They have been conducting this survey since 2003 and the numbers are grim, especially for single women.

In another study from the World Economic Forum, they found that men could outlive their savings by 8 years and 11 years for women.[2]

The Federal Reserve estimates the average retirement account balance is $60,000.[3]  If your IRA balance is $60,000, you can expect an annual income of $2,400 – before taxes!

If you depleted your savings and had to rely solely on Social Security, the average monthly benefit is $1,345 or $16,248 per year.[4]

Here are the guests. Can you identify which four will run out of money during their retirement?

Marty Millennial. He’s a young man living at home. He earns a decent salary but keeps his money in a low yielding savings account at a major bank. He reluctantly contributes 2% of his salary to his 401(k) plan.

Tammy Teacher. Tammy has been an elementary school teacher for several years. She contributes to a 403(b) plan and she’ll receive a pension payment from her state when she retires. Her husband is a firefighter who will also receive a state pension.

Sandy Salesman. Sandy is a hard charging salesman who drives a Ferrari and wears a gold Rolex watch. He’s self-employed, has a small IRA, and changes jobs every 1 to 3 years to pursue a larger sales territory with better leads.

Robby Retiree. Robby has been retired for a few years. He and his wife love to eat out and travel. They own a large home, live on a golf course, and drive a Range Rover. He has an IRA and a few investment accounts. He’ll receive Social Security in two years. His wife was a homemaker and she’ll receive spousal benefits from Social Security when Robby files for his benefits.

Donna Doctor. Donna is a surgeon at a huge hospital in a major city. She graduated from medical school with several thousand dollars’ worth of student loans. She is a high-income earner who works long, stressful shifts.

Peter Pilot. Peter is a pilot for a major airline. He’s been flying for about 15 years. His airline offers a pension, but he is concerned about the financial stability of his employer. He knows the sad history of airline carriers going bankrupt. He’s now a first officer. He has three kids and they all participate in club soccer.

Linda Lawyer. Linda is a trial lawyer. She and her husband have two daughters who are about to get married. Her firm has generous benefits including profit-sharing and cash balance plans. Her husband is a staff accountant for a local municipality.

Danny Developer. Danny is a computer programmer for a high-tech company. He’s paid handsomely for his coding skills and he’s been rewarded with stock options and restricted stock. His company will go public this year.

Ashley Athlete. Ashley is a professional soccer player for a team located on the East Coast. Her salary isn’t great, but she earns extra income from endorsements and coaching soccer clinics.

Frank Farmer. Frank owns a farm in Texas on several thousand acres. He grows corn and wheat and earns a decent living from his crops. He and his wife have four children and seven grandchildren. His family will have an estate tax issue when Frank and his wife pass away.

How did you do? Which four guests will run out of money? Of course, there’s no way to know with the limited clues given, so time will tell. However, here are a few things you can incorporate today to improve your odds of enjoying a successful retirement.

  • Invest for growth. Over time, stocks outperform bonds and cash by a wide margin. Stocks do carry risk, but not bigger than the risk of running out of money in retirement. If you invested $10,000 in stocks ten years ago, it would be worth $26,220 today. The same amount invested in short-term bonds would be worth $10,060.
  • Save early and often. The sooner you start saving, the better. Even if you’re going to receive a pension, Social Security, or other guaranteed payouts, you still need to save your money. How much? A suggested amount is 10% to 15% of your annual income.
  • Contribute to your company retirement plan. A 401(k) plan is a great tool for creating wealth, especially if your company offers a match. If you contribute 5% of your income and your company matches 5%, your making 100% on your investment. 401(k) plans are efficient and easy to use. Invest for growth because you won’t be able to touch this money for 10, 20, 30 years or more.
  • Pay off debt. Eliminate high credit card debt, auto-loans, student loans and mortgages before you enter retirement. High levels of debt will be a hindrance to a successful retirement. According to one study, the average debt balance for individuals age 75 or older is $36,757.[5]
  • Create an emergency fund. A cash hoard will help you when trouble hits. It will also allow you to pay for things without using a credit card and accruing more debt. A recommended cash amount is three to six months of household expenses.
  • Develop a spending plan. A spending plan will help you identify how your money is being spent. It will give you an opportunity to reduce, or eliminate, your expenses.
  • Generate a financial plan. A financial plan solves a lot of financial mysteries. It will reveal the clues needed to produce a fruitful retirement. It will give you direction.

Don’t be caught short in retirement. Do all you can today to make sure you have financial assets when it matters most. It would be a crime not to!

Just the facts ma’am. ~ Joe Friday

June 14, 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.fool.com/retirement/2019/05/19/heres-how-many-us-households-will-run-out-of-money.aspx, Christy Bieber, May 19, 2019

[2] https://www.barrons.com/articles/outlive-retirement-savings-world-eonomic-forum-retiree-global-51560453625?mod=hp_DAY_6, Reshma Kapadia, June 13, 2019

[3] https://smartasset.com/retirement/average-retirement-savings-are-you-normal, Amelia Josephson, April 16, 2019.

[4] Ibid

[5] https://www.cnbc.com/2018/04/04/growing-debt-among-older-americans-threatens-retirement.html, Annie Nova, April 4, 2018

Do Investment Returns Matter?

The S&P 500 rose 13% in the first quarter.  Are you satisfied or frustrated if your investment portfolio “only” made 12%?

During the quarterly review season investors want to know how well their accounts performed. Did they make money? Did they outperform the market? Will the trend continue? These are common, and logical, questions investors ask their advisors – but are they the right ones to ask?

Of course, returns matter. However, rather than focusing solely on your investment returns, you should review your financial goals and savings target. Are you saving money? Are you investing for a purpose? Do you have written financial goals? If you aren’t saving any money, your returns won’t matter. Nor will they matter if you’re not investing for a purpose like buying a new home, saving for retirement, or funding an education.

Identifying your investment goals is paramount to determining if you’re on the right track. For example, if your goal is to retire with $1 million and your current account balance is $1.2 million, you don’t need to take aggressive risks with your money. A conservative mix of investments will help you grow and preserve your wealth. On the other hand, if your balance is $250,000, you’ll need to own a growth-oriented portfolio loaded with quality stocks.

Time is also a factor. A 25-year old who saves $500 per month needs to earn 6% per year to reach $1 million in assets by age 65. A 50-year old needs to earn 25% – an unrealistic rate of return.

Investment goals and time frames are linked. Will you need your money in one year or less? If so, invest in short-term investments like U.S. T-Bills, money market funds, or CDs. These low-yielding investments will underperform stocks over time, but your goal is not to generate the highest return because you’ll need the money in the near term.

Saving for college is also time dependent – 18 years or less. If you recently had a baby, then an all-stock portfolio makes sense. As your child approaches age 18, move the assets to safer investments. When my daughter was born her account was filled with individual stocks. When she entered college, I moved half her assets to U.S. T-Bills so I could pay for her tuition, rent and food. She’s graduating from college in December and this strategy worked well.

Retirement is a primary goal for most. Saving as much as possible for your retirement is recommended. You’re allowed to contribute $19,000 per year to your 401(k). If you’re 50 or older, you can add another $6,000. You can also contribute $6,000 to an IRA. You can contribute another $1,000 if you’re 50 or older

During your next quarterly review, focus on your goals rather than your returns. Here are a few suggestions to help you transition from returns to goals.

  • Establish goals. If you don’t have a target, you can’t measure your progress. Once you document your financial goals, you’ll know if you’re on track – or not. Set up a system to monitor your progress. You can create a savings thermometer like you see at fund raising events! If you’re on track, stay the course. If not, make the necessary adjustments.
  • Increase your savings. You can’t control the stock market and returns are fleeting, but you can control how much money you save. In 2017 the S&P 500 rose 21.8%. It fell 4.4% last year. Let’s return to our 25-year old investor. She needs to earn 6% per year to reach $1 million at age 65 if she saves $500 per month. If she increases her monthly savings to $1,000, she only needs to earn 3.32%.
  • Control your spending. To retire, you need to cover your expenses. The lower your expenses, the less money you’ll need to save for retirement. For example, if your annual expenses are $100,000, you’ll need at least $2.5 million to pay for your expenses. If you can lower them to $75,000, then the amount you’ll need to save is $1.875 million. Do you track your expenses? Creating a spending goal or budget plan will help you establish your asset target. Multiply your expenses by 25 to figure out how much money you’ll need for retirement. Are you on track?
  • Adjust your asset allocation. An allocation to 100% stocks will give you the best opportunity to create long-term wealth, but it will be a bumpy ride. In 2008 the S&P 500 fell 37%. A portfolio consisting of 50% stocks and 50% bonds fell 20%. Adding bonds to an all equity portfolio will reduce your risk. What is your appropriate asset allocation? It depends on your tolerance for risk, financial goals, and time horizon. You can click on this link to identify your risk tolerance: https://clients.riskalyze.com/risk-questionnaire/questionnaire-intro
  • Big wins. The largest investment in your account will have the biggest impact on your returns. My parents best performing stock has been Starbuck’s, it’s also their smallest position. It has little impact on their account. Denmark’s stock market has outperformed the U.S. market by 4% per year for the past 20 years. Denmark accounts for 1% of the global market capitalization while the U.S. accounts for 54%.[1] When U.S. stocks move it makes an impact, not so much with Denmark.

It’s important to generate positive long-term returns, but it’s more important to have financial goals. Take some time to identify your goals so at your next quarterly review meeting you can focus on your progress.

Risk comes from not knowing what you’re doing. ~ Warren Buffett

May 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] Dimensional 2019 Matrix Book

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

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

Time Frames

Warren Buffet recently published his much-anticipated annual letter to shareholders. Per usual, it was chock-full of wisdom.

Mr. Buffett started investing 77 years ago with an investment of $114.75 in Cities Service Preferred Stock. Had he invested this amount in an unmanaged S&P 500 Index fund it would have grown to $606,811 at the end of January 2019 – a gain of 5,288%![1]

He discusses deficits and gold: “Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.”[2]

He’s no fan of gold. To be fair to the price of gold, it was fixed at $35 per ounce from 1944 to 1976 before President Nixon abandoned the gold standard.[3] Since Nixon set it free, gold has averaged an annual return of 8.8% per year. The S&P 500 averaged 8.3% per year, before dividends, during this same time frame.

Time frames matter. From January 2005 through January 2019 Gold (GLD) outperformed the S&P 500 (SPY) by 56%.  If the start date is changed to January 2009, stocks outperformed gold by 164%. Gold has posted a negative return for the past 5 years while stocks have risen 51%.[4]

Had you purchased Amazon in 2000, you would’ve lost 86% of your investment by the end of 2001. A $10,000 investment dropped to $1,421. If you told anybody you owned Amazon, they would’ve called you an idiot. However, from January 1, 2000 to January 31, 2019 it returned 2,157% to investors. The S&P 500 rose 181% during this stretch.[5]

Last year, cash outperformed stocks – a first since 1994. Since 1926 cash has generated a negative return after deducting taxes and accounting for inflation.

It’s important to watch time frames when comparing investments because it’s easy to make any investment look good for a while.  Rather than focusing on investments that appear attractive in the near term, concentrate on the ones that can help you reach your financial goals. Here are a few guidelines to help you make better portfolio decisions.

  • If you want to own gold, or some other alternative investment, limit it to 3% to 5% of your account balance.
  • Stocks outperform bonds and cash over time. If your horizon is three years or more, allocate a healthy portion of your assets to stocks.
  • International stocks make up half of the world’s equity market capitalization, so allocate a portion of your assets to companies outside of the United States.
  • If you need money in one year or less, invest in short term cash investments like T-Bills, CDs or money market funds.
  • Adding tax-free municipal bonds to your account can improve returns, especially if you’re a high-income earner living in California or New York.
  • To reduce risk, add bonds and cash to your account.
  • Rebalancing your accounts once or twice per year will keep your risk level and asset allocation in check.
  • Keep your fees low. You can check the fees of your holdings at Yahoo! Finance, Morningstar, or several more financial websites.

Mr. Buffett made a fortune by buying and holding great companies that can raise their earnings over time. His time frame has been forever. He bought investments that fit his model and shunned things that didn’t, like gold. Following the investing habits of Mr. Buffett will pay dividends.  A great place to learn about his philosophy is by reading his annual letter. Here’s the link:

http://www.berkshirehathaway.com/letters/2018ltr.pdf

“Facts are stubborn things, but statistics are pliable.” ~ Mark Twain

February 27, 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] Berkshire Hathaway Letter to shareholders, accessed 2/27/2019, http://www.berkshirehathaway.com/letters/2018ltr.pdf

[2] Ibid

[3] https://www.thebalance.com/gold-price-history-3305646, Kimberly Amadeo, 1/7/2019

[4] YCharts, GLD & SPY, accessed 2/26/2019

[5] Morningstar Office Hypothetical Report

A Quiet Billionaire

Most investors have heard of Warren Buffett, Peter Lynch and Sir John Templeton, but what about Herbert Wertheim? Dr. Wertheim is worth $2.3 billion according to Forbes. In a recent Forbes Magazine article, he credits his substantial wealth to buying individual stocks and holding them forever. Dr. Wertheim said, “My goal is to buy and almost never sell.”[1]

His strategy follows the tracks of Messrs. Buffett and Lynch of owning great companies and holding them for years. His two largest holdings are Apple and Microsoft “purchased decades ago during their IPOs.”

Apple and Microsoft look like no-brainers today, but these industry titans suffered mightily on their way to greatness.  Since 1980, Apple has suffered 14 calendar year losses. In 2000, it fell 71% followed by a 57% drop in 2008.  If you purchased Apple in 1980 and held it through 1997 you made $8. Would you have held it for 17 years only to make $8?[2]

Microsoft stock fell 63% in 2000, 22% in 2002, and 45% in 2008. If you purchased Microsoft in January 2000, you had to wait until November 2015 before it traded above your purchase price.[3]

Dr. Wertheim is an optometrist by training and is keen on understanding patents. He put his knowledge to work when he discovered a “small airline-parts maker” by the name of Heico. At the time of his discovery it was trading for 33 cents per share.  At the time of his purchase “Heico was a disaster.” However, he understood what needed to be done to make the company better. His original investment of $5 million is now worth $800 million![4]

How can we benefit from Dr. Wertheim’s insight?

  • Buy companies and investments you know – a classic Peter Lynch move. In addition, make sure you understand what you’re buying. If you can’t explain what a company does to others, don’t buy it.
  • Apply courage and fortitude as needed. During the dark trading days of Apple and Microsoft, he held on to the stocks. He did not panic and sell his holdings. He adds, “If a stock continues to go down, and you believe in it and did your research, then you buy more.”
  • Buy and hold. If you own good investments, then hold them forever. Trying to time the market based on economic indicators, price levels, or expert opinions is folly.
  • Give your money away. Dr. Wertheim and his wife Nicole have pledged to give half their wealth away to groups and organizations they support. In fact, they have signed the Bill Gates and Warren Buffett Giving Pledge.
  • Enjoy your life. He and his wife travel often and enjoy the gift of time. According to Dr. Wertheim, “Having time is the most precious thing.”

His story is one of rags to riches and worth a read. You probably won’t become a billionaire, but you may pick up a few extra dollars by following the lead of great investors like Dr. Wertheim.

Humble yourselves before the Lord, and he will exalt you. ~ James 4:10

February 21, 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.forbes.com/sites/maddieberg/2019/02/19/the-greatest-investor-youve-never-heard-of-an-optometrist-who-beat-the-odds-to-become-a-billionaire/#7e309eb722e8, By Madeline Berg, 2/19/2019.

[2] Morningstar Office Hypothetical.

[3] Ibid

[4] https://www.forbes.com/sites/maddieberg/2019/02/19/the-greatest-investor-youve-never-heard-of-an-optometrist-who-beat-the-odds-to-become-a-billionaire/#7e309eb722e8, By Madeline Berg, 2/19/2019.