Are You Too Frugal?

The person who dies with the most toys – loses!

John Bogle, the founder of Vanguard, recently passed away with a net worth of $80 million. By Wall Street standards $80 million is pocket change, especially for someone who founded one of the largest investment and asset management firms in the world.  Vanguard has about $5.3 Trillion in assets under management.[1]  By comparison, Stephen A. Schwarzman, the CEO of The Blackstone Group, has a net worth of $12.4 billion. Blackstone’s assets under management are $427 billion, or 8.5% of Vanguard’s total.

Mr. Bogle is known for being frugal, probably to a fault. He once said, “I don’t like going into stores, I don’t like the whole process of buying things.” He didn’t like spending money on himself, but he did donate to charities and schools including The John C. Bogle Center for Financial Literacy, Blair Academy and Princeton.

Mr. Bogle could have sprinkled his assets to individuals or groups he supported, including himself, without risk of running out of money.

It’s good to be frugal and watch your budget, but is it possible to be too frugal? I think it is. For example, if you drop your daily Starbucks habit, you could save $152,000 over the next 30 years, but would you be happy? I’ve seen individuals who look to save a dollar or two on small ticket items but hold 100% of their assets in cash, CDs or T-Bills. Rather than trying to save a few nickels by kicking your coffee habit, move your assets to stocks so you have an opportunity to make more money. Since 1945 stocks have averaged 11.3% per year while T-Bills have returned 3.9%, a difference of 7.4% per year! With the money you make from stocks you can now afford multiple lattes!

Mr. Bogle followed an asset allocation of 60% stocks, 40% bonds in his retirement accounts. His taxable allocation was more aggressive with 80% stocks, 20% bonds.[2]

Here are a few suggestions for you to spend more money and be less frugal.

Spend. The goal is not to die with the most assets but to use your net worth to live and enjoy life. Cash is a use asset, so use it accordingly. If you’re concerned about spending money on things, spend it on experiences. A family trip to a national park is not only a great experience, it’s also economical.

Give. If your assets are burning a hole in your pocket, give them away. Donate your resources to charities or organizations you support. Your gift will bless the organization and you’ll benefit from a tax write off.

Retire. Retiring early will give you an opportunity to travel to distant lands, spend more time with your loved ones, or volunteer your time. If you retire early, you’ll spend your money sooner rather than later. In addition, you can use your resources while you’re young and mobile. A former client saved his money to travel with his wife, but she died one month after his retirement. Don’t wait to enjoy your resources because you don’t know when you’ll leave God’s green earth.

What if you’re not blessed with a net worth of $80 million? How do you know how much money you can spend before you run out of money? A financial plan will help you create a spending plan based on your current assets. It will also recommend an appropriate asset allocation and risk tolerance level in hopes of maximizing your return.

So, go ahead, buy the latte and enjoy your life!

A nickel ain’t worth a dime anymore. –Yogi Berra

February 14, 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. Happy Valentine’s Day!

 

 

 

[1] http://fortune.com/2019/01/16/john-bogle-vanguard-founder-created-index-funds-dies-89/, by Kevin Kelleher, 1/17/2019

[2] https://www.investopedia.com/articles/financial-advisors/012716/where-does-john-c-bogle-keep-his-money.asp, Richard Best, 4/26/2018

Better Off Dead?

Dr. Daniel Crosby is the author of The Behavioral Investor. In his book he highlights a story about Fidelity Investments and their attempt to identify their best performing retail accounts. They found that the individuals who owned these accounts had forgotten they existed, or the original account owner had passed away.[1] Fidelity was probably looking for an investment theme to duplicate. However, they discovered that these accounts weren’t being traded or tainted by human hands – living or deceased.

He tells of another story from the book Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory written by Greg B. Davies and Arnaud de Servigny. The authors discuss a study about how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[2]

Stocks have never lost money during a rolling 20-year period according to multiple studies. From 1926 to 2018 there have been 74 rolling 20-year periods and stocks have made money 100% of the time.[3] The most recent period, 1998-2018, finished with a positive return. An investment in the SPDR S&P 500 ETF (SPY) on 1/1/1998 generated an average annual return of 7.10% through 1/1/2018. However, during this 20-year period you would’ve experienced significant losses on several occasions. From 2000 to 2002 the market fell 43.07% and in 2008 it dropped 36.81%. As I mentioned, if you checked your balances daily, your chance of a realized loss was high.[4]

It’s hard to ignore your accounts especially if you’re connected to Twitter, Facebook, and other social media sites. Custodians and brokerage firms also have apps allowing you to check your accounts 24/7. Investment firms offer trading alerts and other notices to keep you in the know. It’s a fast-paced world and reacting to headline news stories may wreak havoc to your long-term wealth.

To protect your wealth from irrational reactions turnoff your account alerts and notices. Rather than reviewing your balances daily, try extending it to a month, then three months, and so on. Extending the time frame for reviewing your accounts will reduce your anxiety and potentially increase your returns.

You don’t have to die to generate solid returns. Rather, incorporate a buy and hold investment strategy with a balanced portfolio of low-cost investments. A diversified portfolio of low-cost mutual funds will reduce your dependence to constantly check your accounts. In doing so you’ll be able to enjoy your life while you’re living.

And lead us not into temptation, but deliver us from the evil one. ~ Matthew 6:13

February 11, 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] The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 2673, accessed 2/10/19.

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

[3] Ibbotson® SBBI® 2015 Classic Yearbook

[4] Morningstar Office Hypothetical – SPY, 1/01/1198 to 1/1/2018.

Is 300 A Perfect FICO Score?

The FICO score ranges from 850 to 300 – exceptional to very poor. Of course, if you tried to get a loan from a bank with a credit score of 300, you’d be laughed out of the lobby. So why is 300 a perfect credit score? Let’s look at some data to answer this question.

First, this is how your credit score is calculated.[1]

  • 35% = Your debt history.
  • 30% = Your debt level.
  • 15% = The numbers of years you’ve been in debt.
  • 10% = Your new debt.
  • 10% = Your debt type.

Do you notice a theme? A key word? Debt! Your debt drives your credit score. It has nothing to do with your income, savings rate, asset level, or net worth.

Consumer debt is staggering and growing.[2] Banks, credit card companies, and other lenders have little incentive for you to pay off your debt because the more you owe, the more they make. According to Credit Karma the average credit card rate is 15.96%![3] With an interest nearing 16%, why would they want you to stop borrowing money?

  • Total Household Debt = $13.5 Trillion.
  • Mortgage Debt = $9.14 Trillion.
  • Auto Debt = $1.65 Trillion.
  • Student Loan Debt = $1.44 Trillion.
  • Credit Card Debt = $844 Billion.

Debt is a four-letter word and it will hold you back from reaching your dreams. The Bible taught us this centuries ago: The borrow is slave to the lender. ~ Proverbs 22:7.

Rather than trying to increase your credit score by going into debt, why not use your resources to eliminate it? Reducing or eliminating your debt will be freeing. A monthly payment for a $30,000 auto loan with a rate of 4.5% is $684. If you invested this same amount at 5%, your balance would be worth $46,516 after five years.

Here are a few suggestions to help you reduce your debt:

  • Use your debit card instead of a credit card. Your payment will be deducted directly from your checking account. If your checking account balance is $500, then your spending limit is $500.
  • Buy a used car, with cash. The moment you drive your new car off the dealer’s lot it starts depreciating. A new Land Rover Range Rover Sport costs about $67,000. A 2015 model costs about $40,000 – a difference of 40%!
  • Attend a community college for two years and then transfer to a state school. The annual tuition to attend SMU is $52,500, so two years of study will cost you, before room and board, $105,000.[4] Attending Austin Community College costs $5,100 – a difference of 95%!
  • Buying a home with 100% cash is challenging. If you buy a home with debt, limit your mortgage payment to 28% of your income. For example, if your monthly pay is $10,000, then your payment should be $2,800, or less. Of course, if you have resources to pay cash, then pay cash. Who’s going to lend you money if you don’t have a credit score? Dave Ramsey says you can request a manual underwriting from your bank.[5]

Once you stop using credit cards and other debt tools your credit score will start to disappear. It will take about six months for this process to occur. No debt. No FICO.

If you can’t afford it, don’t buy it. However, we, as a nation, no longer adhere to this philosophy. If we want it, we buy it – regardless of the cost. Before you decide to buy, calculate the cost. If you have the money, then buy it. If you fall short, save until you have the resources to do so.

Good luck and happy saving!

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

January 11, 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.daveramsey.com/blog/the-truth-about-your-credit-score, website accessed 1/11/19.

[2] YCharts

[3] https://www.creditkarma.com/credit-cards/i/average-apr-on-credit-card/, Janet Berry- Johnson, 1/2/2019

[4] Money Guide Pro

[5] https://www.daveramsey.com/blog/the-truth-about-your-credit-score

Riptides

Growing up in Southern California I spent a considerable amount of time at the beach – Huntington, Newport, Laguna and Mission – boogie boarding, body surfing, snorkeling, or scuba diving. On occasion I’d get stuck in a riptide.

Riptides are dangerous and can be life threatening. The most important thing to do if you’re caught in one is to relax. Don’t try to swim directly back to shore because the riptide is pulling you out to sea. It’s exhausting to swim against the tide and this is when you’ll get in trouble. To escape, swim horizontally to the riptide, parallel to the shore. Once you start swimming across the tide, identify a lifeguard tower to help you keep your bearings. After a while, you’ll be out of the riptide and you can swim safely back to shore.

Investors probably feel like they’re stuck in a financial riptide because the markets, all markets, are struggling this year.

Mutual funds are having a lackluster year. In fact, 82.5% of all mutual funds are in negative territory.  There are a few funds up more than 10% for the year, very few. The percentage of funds in double digit territory is .74%. Ned Davis Research recently reported that no asset class has generated a return of more than 5% – a first since 1972.[1]

Individual stocks aren’t faring much better as 70% of U.S. stocks are trading in negative territory.

What should you do if your portfolio is stuck in a financial riptide?

  • Don’t panic or make rash decisions.
  • Review your plan and your investments. Are you still on track to reach your goals? If you are, do not make any changes.
  • Look for bargains. In a down year, locate good investments that are oversold to add to your portfolio for future growth.
  • Rebalance your portfolio. As markets fluctuate, it’s possible your asset allocation is out of sync. For example, if your original allocation was 50% stocks, 50% bonds, it may now be 40% stocks, 60% bonds. When you rebalance, it will return your portfolio’s asset allocation to your original stance of 50%/50%.

Sometimes you must go sideways to reach your goals. It would be nice to generate a 10% return every year, with no downside, but this isn’t possible. Like tides, markets rise and fall. They fluctuate. The market will eventually recover. In the meantime, keep your eyes fixed on the horizon and focus on your long-term goals.

Life is a little like a message in a bottle, to be carried by the winds and the tides. ~ Gene Tierney

December 11, 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 to help our clients 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] MSCI Bloomberg Barclays Indices, Ned Davis Research, Inc. Russell, Source: S&P GSCI, Ed Clissold, Chief U.S. Strategist for Ned Davis Research Group, 11/26/2018,

Di-worse-i-fi-ca-tion?

Diversification or concentration? To create wealth, concentrate; To preserve it, diversify. A concentrated portfolio can produce huge gains, if you own the right stocks. Of course, if you own the wrong ones, your wealth will be wiped out. Buying the right sector, at the right time, at the right price requires multiple factors, most of which are out of your control. The primary ingredient for consistently picking a winning stock is luck.

Let’s look at the best performing sectors for the last 10 years and the returns they generated.

2008: Long term bonds = 33.92%

2009: Emerging Markets = 76.28%

2010: Real Estate = 28.37%

2011: Long term bonds = 33.96%

2012: International Small Cap Stocks = 21.28%

2013: U.S. Small Cap Stocks = 41.32%

2014: Real Estate = 30.36%

2015: International Small Cap Stocks = 9.10%

2016: U.S. Small Cap Stocks = 26.61%

2017: International Small Cap Stocks = 32.73%

2018 U.S. Small Cap Stocks = 14.47%

It might appear easy to pick the winner in advance, but this is not the case. For example, the emerging markets rose 76% in 2009, but lost 51% in 2008. How many investors had the courage or wisdom to invest in emerging markets in 2008? If they did, they were rewarded handsomely one year later.

International small-cap companies have been the best performing sector for 3 out of the last 10 years, so it would make sense to allocate some money to this sector. However, it does come with risks because it generated negative returns in 2008, 2011, and 2014.

Warren Buffett prefers a concentrated portfolio and it doesn’t pay to argue with the greatest investor of all time. Mr. Buffett concentrates his wealth in Berkshire Hathaway stock. Is Berkshire a concentrated or diversified holding?

Let’s look at some of the holdings listed in the 2017 Berkshire Hathaway annual report.[1] Berkshire owned the following publicly traded companies: American Express, Apple, Bank of America, Bank of New York, BYD Company, Charter Communications, Coca-Cola, Delta Airlines, General Motors, Goldman Sachs, Moody’s, Phillips 66, Southwest Airlines, U.S. Bancorp and Wells Fargo.

In addition, Berkshire also owned several privately held companies, including: Acme Brick, Ben Bridge Jeweler, Benjamin Moore, Brooks, Borsheim Jewelry, Burlington Northern, Clayton Homes, Duracell, FlightSafety International, Fruit of the Loom, GEICO, General Re, Helzberg Diamonds, Johns Manville, Jordan’s Furniture, Justin Brands, Kraft Heinz, Lubrizol Corporation, Marmon Holdings, McLane Company, MidAmerican Energy, MiTek Industries, NetJets, Nebraska Furniture Mart, Oriental Trading Company, Pampered Chef, Precision Castparts, Precision Steel Warehouse, Scott Fetzer Companies, See’s Candies, Shaw Industries, and Star Furniture.

Is his portfolio concentrated or diversified? I’ll let you come to your own conclusion, but I think it’s the later.

A balanced portfolio of 60% stocks, 40% bonds generated a 6.93% return for the past 10 years – including the sharp drop in 2008. A million-dollar investment on 8/1/2008 is worth $1.97 million today.[2]

It would be great, and financially rewarding, to always invest in the best investment but this is not possible. For most investors, a diversified portfolio of low-cost mutual funds is recommended. Your portfolio will benefit from the long-term growth generated from global markets.

I am not saying this because I am in need, for I have learned to be content whatever the circumstance. ~ Philippians 4:11

9/27/2018

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] http://www.berkshirehathaway.com/subs/sublinks.html

[2] Morningstar Office Hypothetical – 8/1/2008 – 8/31/2018. IVV, IJR, EEM, EFA, AGG. Returns are gross of fees and taxes.

Where Do Stock Returns Come From?

Peanut butter and jelly. Thelma and Louise. Calvin and Hobbes. Fish and Chips. Wayne and Garth. Some things are better in pairs!

Stock returns consist of two components: dividends and price appreciation. Dividends are paid to shareholders on a quarterly basis from the company’s profits regardless if the stock is up, down or sideways. In addition, investors can profit from price appreciation. Your total return is a combination of the two.

For example, you decide to purchase ABC company at $40 per share. If ABC pays a $1.00 dividend, your current yield will be 2.5% ($1/$40). If you sold your stock at $50, you made 25% ($10/$40). Combining your dividend income with the price appreciation, your total return was 27.5%. If you purchased 1,000 shares, you received $1,000 in income and gained $10,000 giving you a total return of $11,000.

Let’s look at a real-world example. Let’s say you purchased $100,000 worth of Coca-Cola (KO) stock on 8/1/1988 and held it through 8/31/2018. In this example, you generated an annual return of 12.66%. Your $100,000 investment grew to $3.62 million and you received $1.1 million in dividend income. Your dividend income accounted for 31.5% of the total return.

Currently there are 1,269 stocks with a dividend yield of 2% or more. Dividend Aristocrats are companies that have paid, and increased, their dividend for at least 25 years. A few companies on this elite list include: Aflac, Coca-Cola, McDonald’s, Pepsi, Procter & Gamble, Sherwin Williams, Target, and Walmart.

Of course, there are plenty of excellent companies that don’t pay a dividend. Two of the more popular ones are Amazon and Berkshire Hathaway. They plow their profits back into their company rather than pay them to you, the shareholder. In this case, the entire gain comes from price appreciation.  Amazon has generated a 10-year average annual return of 38% while Berkshire has returned 10.5% per year over the same time frame.

The key term to focus on is total return. It doesn’t matter how you make money, so long as you make money.

 two and two, male and female, went into the ark with Noah, as God had commanded Noah. ~ Genesis 7:9

9/12/2018

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.

Steak Dinners

About twice a month I receive an invitation to a steak dinner at a local restaurant from two different investment firms. These firms are offering retirement planning seminars to make sure I don’t run out of money during my golden years.

As I scan their elaborate mailers, I drop my eyes to the bottom of the invitation to read the small print. These firms don’t offer investment, estate, or tax advice. What do they offer? Insurance. They come in under the guise of offering educational retirement planning workshops, but their real intent is to sell annuities and expensive life insurance policies.

These firms spend several thousand dollars to get a few people to attend their steak dinners. To get an audience of 50 people, they’ll send 10,000 mailers. The mailing will cost about $5,000 and the dinner will add another $8,000. If they host their event at a hotel, it may add another $1,000 to the cost. So, all in, it may cost $14,000 or more to host an event.

Why would these firms spend $14,000 per month to offer free retirement workshops? Because if they sell a few insurance policies, they’ll recoup their cost and make a substantial profit.  For example, if their guests purchase $1 million in annuities, the sales representatives will generate commissions of $50,000 or more!

Here are several questions to ask the speakers, and yourself, if you attend one of these gatherings.

  • Are they fiduciaries?
  • What is their financial planning process?
  • Do they own the investments they’re recommending?
  • If you do purchase the investment, what is the initial cost?
  • What is the fee to redeem your investment if you need access to your money?
  • Are there alternative, less expensive investments to the ones they are recommending?
  • Do you have to annuitize your investment to receive the highest possible interest rate?
  • Do they work with multiple insurance providers?

If you have questions about retirement or Social Security, meet with a Certified Financial Planner (CFP)® who charges a flat fee or hourly rate. CFPs are fiduciaries and are required by law to act in your best interest and disclose any conflicts of interests – not so with brokers or insurance agents. In addition, most CFPs offer a free consultation before starting the planning process and you are under no obligation to act on their recommendations.

The fall is seminar season so be on guard for elaborate mailers offering “free” dinners. If you live in a high-income zip code and you’re over the age of 50, you are a prime target for these mass mailings.

Caveat Emptor.

Beware of false prophets, who come to you in sheep’s clothing but inwardly are ravenous wolves. ~ Matthew 7:15

9/6/2018

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.

 

 

 

Funding Secured

On August 7, Elon Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” His tweet caused a storm on Twitter and in the stock market. At the time of his tweet, Tesla shares were trading around $343 per share before soaring to $387. Since the tweet, it has traded in a range of $345 to $380 as market participants and regulators focus on the “funding secured” part of his announcement. Does he have the financing? I hope so, because I’m rooting for him to succeed.

After he sent his tweet, I wondered how many individuals have secure funding for retirement.

What does it mean to be financially secure? In short, it means you have the resources to pay for your day to day expenses for the rest of your life. To find out if this is possible, I recommend taking an inventory of your personal assets, Social Security and pension benefits. Also, it’s paramount to keep tabs on your annual expenses, because this will determine the amount of assets you’ll need for a comfortable retirement.

Let’s say your annual expenses are $100,000 and you’ll receive $25,000 in Social Security benefits per year. After subtracting your Social Security benefit from your expenses, you’re responsible for funding $75,000 per year. At a 4% distribution rate, you’ll need $1.875 million in assets to cover your expenses ($75,000/4%). If you also receive an annual pension of $25,000, it will lower your funding requirement to $50,000 and your asset goal to $1.25 million.

Today most companies don’t offer a pension plan, and this is putting a strain on retirees. In a recent Wall Street Journal article, the rate of individuals filing for bankruptcy age 65 or older has tripled since 1991.[1] One of the factors sited for the rise in bankruptcies is the reduction in corporate pension plans.[2] The responsibility for retirement has shifted from corporations and the government to the individual. When my wife’s grandfather retired from a large oil company in Texas, he received Social Security, a pension, and healthcare benefits. He made more money in retirement than he did while working. His safety net was so strong that he didn’t need to save money for retirement. Today’s workers aren’t as lucky.

How can you fortify your financial future? Here are a few ideas.

Safe early and often. The sooner you start investing, the more money you’ll have for retirement. If you start investing $200 per month at age 25, you’ll have $1.3 million at age 65[3]. If you wait until age 45, you’ll end up with a paltry $155,000 – a difference of $1.1 million!

Buy stocks. The stock market is the best way to create long-term wealth. Since the end of World War II, the S&P 500 has averaged 11.3% per year despite numerous dips, drops, and downturns.

Keep an eye on inflation. Inflation has historically averaged 3% per year. If your annual expenses are $100,000 today, in 30 years they’ll be $242,000. A dollar today will be worth 41 cents three decades from now. To avoid the erosion of your dollar, allocate a substantial portion of your assets to stocks.

Don’t retire your money. A “safe” portfolio of CDs, U.S. Treasuries, cash, and money market funds might appear attractive in the short term, but over time they’ll barely produce a positive return. The 91-year average annual return for U.S. T-Bills has been 3.4%, after subtracting inflation of 2.9% your net return would’ve been .5% – before taxes!

Plan. A current financial plan will keep you on the path towards a profitable retirement. It will help you quantify your financial goals and allow you to prioritize items that are important to you and your family.

As you rocket towards retirement, follow your financial plan, invest your money, and think long-term. If you do these things, you will have an electrifying future.

When something is important enough, you do it even if the odds are not in your favor. ~ Elon Musk

August 13, 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://www.wsj.com/articles/bankruptcy-filings-surge-among-older-americans-1533641401, Anne Tergesen, 8/7/2018

[2] Ibid

[3] FV calculation at 10.2% interest, the 91-year average annual return for the S&P 500, before taxes and inflation.

Sears or Turkey?

Every now and then a small country seeps its way into our financial engine. A few years ago, it was Greece, today it’s Turkey. Turkey is in crisis with the Lira falling 30% and its stock market dropping 17%.[1] The Turkey ETF (TUR) is down 50% for the year and it is inflicting havoc on emerging markets despite accounting for less than 1% of the index.

Turkey’s stock market has always been volatile. From 1998 to 2017 it generated an average annual return of 22.89%. The range, however, has been wide. In 1999 it rose 252% and fell 62% in 2008. Investors who commit capital to this market must be bold and courageous.

As an American investor should you be concerned about Turkey? I don’t think there’s much risk as most individuals only allocate a small percentage of their holdings to emerging markets. A bigger concern for Americans should have been the downfall of Sears, Roebuck & Co., and if we can survive a crisis in Sears, we can certainly survive one in Turkey.

In 1969 Sears Roebuck was the largest retailer in the world, employing over 300,000 people. We relied on Sears for almost everything because they carried almost everything. Their massive catalog offered thousands of items from underwear to log cabins. Their real estate footprint was massive and in 1973 the Sears Tower was completed. It was one of the largest buildings in the world, fitting for a gigantic company like Sears. A visit to the Sears store was an event. You could drop off your car at their auto-center and stroll their store aisles munching on their tasty popcorn.

Sears had 555 stores at the end of April 2018. In May the announced they were closing 72 stores, followed by another 78 in June.[2] In 2005 they had 3,500 locations.

Sears housed iconic brands like Kenmore, Craftsman, Dean Witter, Coldwell Banker, and Discover. In 1984 it launched Prodigy with IBM and CBS. Prodigy was an early precursor to the internet and it offered email and games.[3] They were on the front lines of all things new.

Sears stock was once a juggernaut. It was part of the Nifty-Fifty, a group of stocks that were never expected to fall in price. They were considered one-way trades in the ‘70s. In 1998 Sears had a market cap of $22.5 billion. Today it’s $206 million, a drop of 99%.  The current stock price for Sears Holdings is $1.90 and Morningstar classifies its stock as distressed.

Turkey and Sears are where they are today because of poor financial decisions and hubris. Unlike Turkey, Sears was a major player in our markets and a member of most indices, including the Dow Jones Industrial Average. If you’ve been a long-term investor, it’s likely you had substantial exposure to Sears stock without knowing it.

If you survived Sears, you’ll survive Turkey.

My dad’s idea of a good time is to go to Sears and walk around. ~ Jay Leno

August 11, 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: Brunomili

[1] https://www.bbc.com/news/business-45113472, Andrew Walker, 8/9/18

[2] https://en.wikipedia.org/wiki/Sears

[3] https://www.techrepublic.com/blog/classics-rock/prodigy-the-pre-internet-online-service-that-didnt-live-up-to-its-name/, Michael Banks, 12/18/2008

The Wolfpack

The wolf was eradicated from Yellowstone during the 1930s. They weren’t protected in the national park because they’re predators and, as result, there were no wolves left to maintain order. At first, there was little change to the ecosystem, but over time it changed dramatically. With one less predator to worry about, the elk taxed the park’s food chain by eating flora and fauna. Their devastation of the park led to erosion and other unintended consequences.

The campaign to reintroduce the wolf back into Yellowstone started in the 1940s by a gentleman named Adolph Murie. He wrote a report based on his study of the wolf titled: Ecology of the Coyote in the Yellowstone National Park.[1] His work started a movement to restore order in the park. It took 55 years, but the wolf finally returned to Yellowstone as 14 wolves from Canada were captured and moved to their new home.[2]  In 2016 there were 108 wolves in 11 different packs.

After the wolves became acclimated to their new home, the ecosystem started to return to normal. The elk population had been culled and they now roam the park to avoid being eaten. Their movement has allowed willows and meadows to return to their former glory. The additional growth has allowed the beaver population to flourish.  Prior to the return of the wolf, there were few beaver dens, today there are hundreds. The beaver dens have also benefited the fish in the river.[3] Yellowstone looks amazing, but it’s still evolving, and the full restoration won’t be known for decades.

Investors live in a financial ecosystem.  As the park needs the wolf to maintain order, investors need a balanced portfolio. If you remove a key component from your portfolio, it may cause long-term unintended consequences to your wealth.

Stocks are the alpha-investment for your portfolio and there’s no greater security to own if you want to create wealth. Of course, stocks are volatile, irrational and erratic. Because of this behavior, it might be difficult for investors to hold stocks through good times and bad. However, to capture long-term returns from stocks it’s necessary to employ a buy and hold strategy.

The average annual return for stocks, dating back to 1926, has been 10.2% per year. This exceptional growth rate has allowed individuals to increase their assets and outpace inflation. Inflation has averaged 2.9% for the past 91 years so failure to own stocks will erode your purchasing power.

In addition to their exceptional growth, stocks also provide an income stream through dividends. Dividends have historically accounted for about 42% of the total return.[4]

International Investments expose you to 48% of the world’s stocks domiciled outside our borders.  A global portfolio gives you access to thousands of companies with headquarters in Europe, Asia, and Latin America.  Since 1998, the U.S. has never held the top spot for the best performing stock market. The U.S. stock market gained 21% last year, underperforming 31 countries.

Bonds are desirable for income and safety. Adding them to your account will reduce your risk level and provide you security during a market stampede. During the 2008 correction, long-term U.S. bonds rose 25% and during the Tech Wreck they soared 43%. Yes, interest rates are low, and the Federal Reserve has been raising rates, but bonds are still a must own item if you want to maintain a balanced portfolio. From 1926 to 2017 bonds produced an average annual return of 5.5%.

Cash is required for liquidity. A cash position allows your other investments to grow or produce income. If the market does pullback, you can rely on your cash position to meet your short-term needs.

To maintain order, invest in a globally diverse portfolio. Stocks, bonds and cash produce an ecosystem that work in harmony for your benefit. It might not be evidently clear what happens to your portfolio when you remove one of the key components, but over time it will become obvious.

For the strength of the Pack is the Wolf, and the strength of the Wolf is the Pack.” ~ Rudyard Kipling, The Jungle Book.


August 9, 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://en.wikipedia.org/wiki/History_of_wolves_in_Yellowstone

[2] Ibid

[3] https://www.nps.gov/yell/learn/nature/beaver.htm

[4] https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf