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.

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.