Category: Investments

My Struggle with Alternative Investments          

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My struggle with alternative investments, private placements, and commodities dates back over three decades while working for one of Wall Street’s largest firms. I sat near a couple of commodity brokers touting the virtues of silver. They sounded smart and opined about the price of silver, but their predictions rarely materialized. Since 1990, Vanguard’s Long-Term Bond fund has outperformed silver.

The Wall Street firm where I worked was a major player in the commodity arena, and it packaged managed futures funds for brokers to sell as a hedge against a stock market correction or inflation. Brokers were paid 4% to 5% to sell the funds and got an ongoing commission of 5%. I don’t recall whether these funds performed as advertised during my tenure with the firm, but they seemed to fall when stocks fell, which is not a good hedge.

Limited partnerships and tax credits were popular “investments” for brokers to sell in the late 1980s, selling the offerings because they received a large commission of 8.5% or more, and some funds didn’t generate any returns but produced tax losses or credits clients could use to lower their taxes. The general partners sponsored lavish trips and showered brokers with gifts, golf outings, and steak dinners to market the funds. Like silver, the promise of these funds fell short of expectations.

Alternatives, commodities, and limited partnerships were attractive in the eighties and nineties because most investors remembered sky-high interest rates and inflation from the 1970s and the elevated tax rates in the early 1980s, which made these investments easy for brokers to sell. Also, the stock market barely budged from 1970 to 1982, and investors were hungry for something different.

Private placements were also attractive to the brokers because of the commission structure, but few advisors I talked to could adequately value the holdings. A lack of liquidity is also common with private placements. During COVID-19, some companies froze their funds so clients could not access their money. If general partners can’t liquidate their fixed assets, investors can’t make money or recoup their investment.

We’re in another era of firms marketing alternatives to a legion of investors. Today, firms position their offerings as a hedge against another virus, a stock market correction, a rising deficit, stubborn inflation, and higher interest rates, which brings me to Bitcoin and cryptocurrencies, a fashionable category for many. Bitcoin will offer 21 million tokens, the bull case for crypto enthusiasts. However, Yahoo Finance currently has 9,780 cryptocurrencies quoted! How do you choose the right one? How do you value cryptocurrencies? The price target for Bitcoin seems outlandish, with some calling for a price of $180,000 or more, a gain of 195% from the current level.[1] I struggle to find a use case.

I feel old-fashioned and sound like a curmudgeon, but I’ve seen this movie before. Will it be different this time? Maybe.

If you want to invest in alternatives, pay attention to fees, read the small print, and limit your allocation to 3% to 5% of your taxable portfolio.

I am no longer a curmudgeon. I am a curmudgeon emeritus. ~ James Gibbons

April 19, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

[1] https://cointelegraph.com/news/how-high-can-bitcoin-go-180k-btc-price-prediction

Where Are My Returns?

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The Nasdaq has risen 31% over the past year, and the S&P 500 is up  22%. Are you pondering your returns after reviewing your first-quarter statements? Likely, your accounts underperformed if you invested in bonds, international stocks, or small-cap holdings. Why not allocate 100% of your assets to large-cap United States stocks if this is the case?

Let’s explore some history.

  • International stocks outperformed the S&P 500 from 1970 to 2011. The MSCI EAFE Index averaged 10.17% annually, while the S&P 500 generated 10.03% yearly.
  • International small-cap stocks have outperformed the S&P 500 index from January 1970 to March 2024 by an annual margin of 2.6%. It might not sound like a big difference, but if you invested $10,000 into each index, you’d have $6.7 million more in the international small-cap index.
  • Since 1927, US small-cap value stocks have trounced the S&P 500 by 2.88%. A $1 investment in the small-cap index is now worth $163,289, whereas a dollar invested in the S&P 500 is worth $12,386.
  • During the lost decade from 2000 to 2010, the Nasdaq fell 74%, the S&P 500 lost 9.10%, while small-cap stocks, international investments, and bonds produced positive returns. (See chart)
  • During the Great Financial Crisis (GFC) from 2007 to 2009, the S&P 500 and Nasdaq fell by more than 50%. Long-term bonds jumped 24%.
  • Stocks and bonds crashed in 2022, but US T-Bills generated a positive return.

It’s normal to focus on recent returns and consider moving all your assets to the most popular investments like gold, Bitcoin, the Nasdaq, Nvidia, etc. However, diversification is still the best choice for most investors because you never know when, why, or how stocks will move. Also, trying to predict the best-performing investment is impossible.

Stay diversified, my friends.

Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window. ~ Peter Drucker

April 17, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

The data for interest rates, returns, prices, and yields are from Ycharts and Dimensional Funds Webtool.

I Like Long-Term Bonds

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I like long-term bonds, and I’m in the minority and have been for some time. Most people roll their eyes, raise a hand, or shut me off when discussing bonds. Who wants to own bonds when you get better returns from Nvidia, Bitcoin, or Hippo Holdings? Bonds are boring, and lately, they have produced questionable returns.

Rising interest rates decimated bonds in 2022. Vanguard’s Long-term bond fund fell 27.22%, and the Bloomberg US Aggregate Bond Index declined 13%. It was a drubbing, and you lost money if you allocated assets to bonds. I feel your pain. However, Vanguard’s Bond Fund returned 7.52% last year, 16.22% in 2020, 19.10% in 2019, and 10.86% in 2017. Since 1994, it’s up 431%, averaging 5.77% annually. A $100,000 investment is now worth $531,160, despite the correction in 2022.

Of course, you can’t eat past returns, so here are five reasons I like long-term bonds.

  1. Income. The current yield for Vanguard’s Long Term Bond fund is 4.80%, and the yield-to-maturity for the existing portfolio is 5.05%. The current yield for the 30-year US Treasury Bond is paying 4.74%.
  2. The Fed. If the Federal Reserve lowers interest rates, the yields and income stream will evaporate on money markets, savings accounts, CDs, and T-Bills, while the prices of long-term bonds will appreciate. When the Fed lowered rates in 2020, long-term bonds jumped 16.22%. The Fed lowered rates during the Great Recession, and from 2007 to 2012, Vanguard’s fund soared 58.4%.
  3. History. Long-term rates have averaged 4.49% since 1871. Current rates are in line with their 153-year average.
  4. War. The Ukraine war shows no signs of abetting, while the Middle East is boiling over. If these wars intensify, investors will rush to buy US Treasuries as a safety trade, and the Fed may act sooner rather than later if the global economy slows down.
  5. The Election. Half the country will be happy in November, while the other half will be upset. Historically, our great country has enjoyed a peaceful transfer of power, but this fall, the equity markets may experience abnormal volatility, which drives investors to bonds.

Bonds and bond funds cause the most angst for clients during our quarterly reviews; the vitriol is real. I’ve fielded many colorful comments from clients about the performance of their bond portfolios over the years, but I’m standing my ground. It’s time to buy bonds.

For the record, my asset allocation has remained 75% stocks and 25% bonds for over three decades, and I’ve owned Vangaurd’s Long-Term Bond fund for several years.

Bye-bye, and buy bonds.

Gentelman prefer bonds. ~ Andrew Mellon

April 15, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

The data for interest rates, returns, prices, and yields are from Ycharts.

Recalibrate?

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Have you driven a car with poor alignment? It’s not fun. A trip to your mechanic can balance, calibrate, and align your wheels to ensure a smooth ride. Of course, ignoring the issue can lead to several problems, like flat tires or difficulty steering.

As the second quarter begins, is it time to recalibrate your thinking about interest rates and inflation? Entering 2024, financial experts speculated that the Federal Reserve would lower interest rates six or seven times. They might not lower interest rates until next year because of the persistent inflation data. The current inflation rate is 3.48%, above the ten-year average of 2.79%. Though it dropped significantly since 2022, it has remained steady since last May.

In addition to the inflation rate, other metrics remained stable. Traditional indicators like the Consumer Price Index, Producer Price Index, Personal Consumption Expectations Survey, and wages continue to climb. Our Gross Domestic Product (GDP) has also been rising. It’s up 3.30% over the past year, and consumer debt has increased by 5.16%.

The wealth effect is another factor. What is the wealth effect? When assets like investment accounts, 401(k) balances, and real estate rise, individuals feel wealthy; when people feel rich, they spend money. Low unemployment and rising wages ensure consumers will continue to shop for the foreseeable future.

What does this mean for your investment portfolio? Interest rates could remain elevated, which is not bad because your fixed-income portfolio can generate above-average income. It’s possible to earn a consistent 5% or more from bonds. Long-term interest rates currently sit at their 153-year average rate.

If you entered this year expecting interest rates to decline, it’s time to recalibrate your thinking and focus on a globally diversified portfolio of stocks and bonds. Investors are still nervous about buying bonds after the rout they incurred in 2022, but it’s unlikely rates will spike as they did from 2020 to 2022. The interest rate composite index soared 6,400% when rates jumped from .08% to 5.2%. Can you imagine interest rates at 332%? I can’t, but rates will be higher for longer.

As always, focus on your financial plan, diversify your investments, rebalance your portfolio, and think long-term.

I know a lot about cars, man. I can look at a car’s headlights and tell you exactly which way it’s coming. ~ Mitch Hedberg

April 10, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

Market Top. Now What?

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The S&P 500 traded to an all-time high to close out the first quarter. What should you do now that the stocks are at all-time highs? Will stocks fall now that they have peaked, or will they continue to climb? Time will tell. After all, if you summit a mountain and reach the peak, your next move is to turn around and come down. Sir Edmund Hillary and Tenzing Norgay spent about fifteen minutes atop Mount Everest before descending.[1]

Should you buy stocks when they touch all-time highs? Let’s see. Suppose you purchased stocks at previous market peaks and held them through the end of the first quarter, March 31, 2024.

  • October 1928. The average annual return from this peak was 9.93% despite Black Tuesday, the stock market correction in October 1929, the Great Depression, and WWII.
  • August 1987. The S&P 500 was up 32% in 1987 before stocks fell 22% on Black Monday, October 19, 1987. However, if you bought stocks in August, your average annual return was 10.29%.
  • December 1999. The internet fueled the S&P 500 returns from 1995 to 1999 as the index soared 220% before it fell 49% from 2000 to 20003. If you purchased stocks at this peak, your average annual return was 7.63%.
  • October 2007. Stocks peaked in October 2007, before the worst recession since the Great Depression. During the Great Recession, stocks fell 56%. If you purchased stocks at this peak, your average annual return was 9.95%.
  • February 2020. If you purchased stocks in February 2020, your average annual return was 14.26% despite the COVID correction and the stock market crash in 2022.

The average return from these previous peaks was 10.41%, which is impressive considering you bought stocks at the “worst” time in history.

I started my career on May 9, 1989, when the S&P 500 index stood at 295; it’s now trading at 5,205, an increase of 1,600%! In 1991, Jack Vander Vliet of Dean Witter predicted that the Dow Jones would climb to 10,000 by the year 2,000. It was a crazy prediction, considering the index was trading at 2,619. However, he was right. The Dow crossed 10,000 in June 1999. Today, it’s approaching 40,000.

If you want to sell stocks when they near new highs, think again because you can miss out on significant gains. Stay invested, my friends.

Dow 100,000 by 2035?

Our peace shall stand as firm as rocky mountains. ~ Shakespeare

April 2, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

[1] http://www.history.com/news/7-things-you-should-know-about-mount-everest, Jesse Greenspan, May 29, 2013, accessed August 12, 2016.

8 Ways to Handle A Windfall

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Growing up, my friends and I regularly went to the Santa Anita Racetrack to wager on the horse races. One afternoon, I hit an exacta and won $150 – a fortune for me then, and I treated my friends to dinner at a nice restaurant with my windfall.

Financial windfalls can come from various sources like an acquisition, year-end bonus, tax refund, or lottery winnings. A windfall is a relative term, of course. A $10,000 windfall is pocket change for Bill Gates, but it is life-changing for someone with limited means.

A lucky winner in New Jersey recently won $1.13 billion through the Mega Millions lottery drawing, and last August, the Powerball lottery paid $2.04 billion to one fortunate individual in Los Angeles. While hitting the jackpot worth billions from the lottery might be rare, regardless of the source or the amount, you now have numerous financial choices. Here are eight ideas to help you with your new-found wealth.

Pause. Before you make any financial decisions, spend time deciding on the best course of action for you and your family. Avoid an impulse purchase. Hold a family meeting to get input and buy-in from your spouse and children.

Advice. Hire a team of attorneys, CPAs, and financial planners to guide you through the legal and financial maze of protecting your assets. If you received a significant windfall, creating systems to ensure your money lasts generations is essential.

Plan. A financial and estate plan will capture your hopes, dreams, and fears for you and your family. A proper plan is beneficial for today and tomorrow.

Give. Giving a portion of your windfall to help others will benefit many. In addition to helping others, you can write off your charitable contributions, and a donor-advised fund is an excellent vehicle for your donations. Here is a link to Schwab Charitable –  https://www.schwabcharitable.org/

Reduce your debt. If your windfall is substantial, reduce or eliminate your debt.

Create an emergency fund. An emergency fund is essential, and I recommend a three to six-month cushion. For example, If you spend $10,000 monthly, your emergency fund should be $30,000 to $60,000.

Invest. A globally diversified portfolio of low-cost funds is all you need to grow your assets. A simple buy-and-hold strategy will allow you to capture the long-term trends of the markets. Purchasing complicated investment products like limited partnerships, whole life insurance policies, or private placements is unnecessary.

Spend. Do you want to buy a vacation home or a new boat? How about a car? Are you ready to travel the world or remodel your kitchen? If your financial house is in order, go for it. It’s okay to spend money on things you’ve had your eyes on for a while, especially if you have dealt with the other issues highlighted above.

I almost forgot; congratulations on your windfall!

I love money. I love everything about it. I bought some pretty good stuff. Got me a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline-powered turtleneck sweater. And, of course, I bought some dumb stuff, too. ~ Steve Martin

March 27, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

Financial Travel Agents

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The travel industry has experienced significant changes since the birth of the internet. According to the Bureau of Labor Statistics, travel agents may decline by 12% to 72,000 by 2026.[1] Companies like Booking.com, Trivago, Expedia, and Kayak have filled this void as individuals book and schedule trips without leaving their couches.

With abundant travel websites now available, do you need a travel agent? It depends on your trip, of course. If you’re booking a flight from Austin to Denver or reserving a hotel room in San Diego, then it doesn’t make much sense. However, it’s wise to hire a travel agent if traveling to several countries by land, sea, and air. Your agent can help you navigate airports, customs, hotels, etc.

Travel agents can enhance your trip experience by tapping their resources and knowledge to deliver superior client services, and they can design a once-in-a-lifetime trip for you and your loved ones. The goal of the travel agent is to provide a hassle-free trip within your budget.

The investment industry, like the travel industry, has endured substantial changes because of the internet. The rise of discount firms, robo-advisors, and online calculators has changed the landscape in the investment world—firms like Schwab, Robinhood, Fidelity, and Vanguard have diverted billions of assets away from traditional Wall Street firms like Merrill Lynch, UBS, and Morgan Stanley. Online firms have made it easy for individual investors to point, click, and trade without any guidance from a professional.

Unlike the travel industry, the number of personal financial advisors may increase by 15% annually by 2026 to over 312,000.[2]  According to the CFP Board, 95,000 Certified Financial Planners comprise 25% of the advisor population. If you want to improve your investment understanding, work with a financial planner, a registered investment advisor, and a fiduciary.

A financial planner can expand your investment horizon by designing, allocating, and managing an investment portfolio based on your goals. A planner can also assist you with retirement, estate, education, and philanthropic planning, to name a few practice areas.     

A written financial plan represents your hopes, dreams, and fears. A good planner will align your goals, risk tolerance, and investments, and the alignment improves the investment experience.

Does everyone need a financial planner? Like the travel agent, it depends. If you want to buy a particular stock or fund, you can do this with the click of a mouse – no guidance is required. However, a financial planner can be a tremendous resource if you want input on planning for retirement, paying for your child’s education, creating a budget, analyzing your taxes, or reviewing your estate.

The role of a planner goes beyond financial advice. A planner can also provide emotional support when stocks gyrate violently, and portfolio values swoon. With a financial plan, they can direct you through the market turmoil by focusing on your goals. Market turbulence is often a short-term distraction from reaching your long-term goals.

As you embark on your financial journey, look to a Certified Financial Planner to guide you to your financial destination.

Bon voyage!

Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So, throw off the bowlines, sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. ~ Mark Twain

March 20, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

[1] https://www.bls.gov/ooh/sales/travel-agents.htm

[2] https://www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm

Spring Cleaning

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Snow melts, flowers bloom, grass grows, and Robins sing. Spring has arrived, and it’s time for some spring cleaning.  

When my family lived in Connecticut, we loved the arrival of spring. Once the snow melted, we’d put our yard back together. We picked up branches and tree limbs, cleared flower beds, and added layers of mulch. On the inside, we opened windows, let the fresh spring air whip through our house, and forced the stale winter air out of our home. 

Your investment portfolio and estate plan may need some spring cleaning as well. Here are a few tips to help you prune and trim as necessary.

  • Prune. If you’re holding a losing investment, it may be time to sell it and move the money into a new idea. Prune your portfolio as you prune your garden; it can pay dividends.
  • Trim. Do you need to trim some gains? If you own a stock that accounts for more than 25% of your portfolio, take some gains to reduce your risk exposure.    
  • Rebalance. Is it time to rebalance your portfolio? Rebalancing your account will reduce risk and keep your original asset allocation intact. For example, if your portfolio was 50% stocks and 50% bonds in 2019, today, it’s 67% stocks and 33% bonds. The stock market has soared since 2019, while the bond market has not. As a result, your portfolio is too aggressive based on your original allocation. (See chart)
  • Update. Do you need to update your will or trust? Has your family grown? Did you buy or sell any assets? Did you move to a new state? If so, make the appropriate changes so your estate documents match your final wishes.
  • Review. Review your beneficiary designations to ensure they align with your original intentions, especially if you were married or divorced this past year. Do you want your assets to go to your ex-spouse if something should happen to you?
  • Create. Create a financial plan. A well-constructed financial plan will help you with your annual spring cleaning. Your financial plan aligns your financial goals with your investment portfolio.

Sitting on a deck under sunny skies is an excellent backdrop to review your portfolio. A small change today can bear much fruit tomorrow.

Happy spring cleaning!

For behold, the winter is past; the rain is over and gone. The flowers appear on the earth, the time of singing has come, and the voice of the turtledove is heard in our land. ~ Song of Solomon 2:11-12.

March 13, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management. 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.

Investments are not guaranteed and do involve risk. Your returns may differ from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

Where to invest?

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I received a windfall, and I’m looking for the best investment. I plan to talk with friends, family, and acquaintances to learn how they invest their money. I will also watch videos on TikTok, YouTube, and Facebook to harness the wisdom of financial influencers.

My funds are currently in a checking account with a large bank, earning zero interest. After talking with a close friend, he recommended I invest in a high-yield money market fund paying 5%, which sounds good, especially since I’m not receiving any interest.

I mentioned to another friend that I would buy a money market fund, and he thought I was crazy because I could buy a T-Bill paying 5.4%, and it’s guaranteed. I would buy the T-Bill.

At lunch with another friend, I told him I would buy a T-Bill, and he said why would you do that when I could buy a corporate bond issued by Mattel paying 6.2%, which doesn’t mature until 2040! It’s not guaranteed, but you’ll earn more than a T-Bill.

I met an attorney at a networking event and told her I would buy a corporate bond because it paid 6.2%. She asked me why I would limit my investment to one bond when I could buy a junk bond fund paying 6.7%. The fund owns thousands of bonds and earns more than the Mattel bond. It sounds like a wise investment.

At a review meeting with my insurance agent, I mentioned I would buy a junk bond fund paying 6.7%, and she said why don’t you buy Allstate stock. It’s up 12% this year, and our prospects look good, much better than a bond fund. Stocks? I thought they were risky. Not if you buy the right ones, she said.

I went to my local AutoZone store because I was getting ready for a long trip, and I told the gentleman helping me that I would buy Allstate stock. It’s up 12%, I said. He laughed and said his company stock was up 20%, which would trade higher due to the summer driving season. I considered his logic, and it makes sense.

Insurance companies are safe and sound; however, a recent TikTok video was touting the virtues of Bitcoin and how it would replace the dollar and all the global currencies. The TikToker seems bright and knows what he is talking about, especially since he drinks champagne in front of his private jet. Bitcoin is up 49% so far, and if it will replace the global currencies, it must go higher.

I watch CNBC every day, and they constantly mention Nvidia. It must be a good stock because they always talk about it. It’s doing well this year, up 73%, much better than the other investments, and everyone knows AI is the future. Nvidia is an obvious choice; better than Bitcoin.

I was having dinner with a relative and told her I decided to invest all my money in Nvidia. She slammed her hand on the table and said why don’t you buy Super Micro. It’s up 287% this year, and it’s definitely going higher because AI is the future, which I already knew.

I met a friend for breakfast the following morning and mentioned my frustration with my windfall. After talking to friends and family, I’m more confused than ever. He said I should keep all my money in a checking account because he put his life savings in Great Tang Bid Technology stock and lost everything.

Moral. Talk with a professional financial planner, diversify your assets, think long-term, and good things will happen.

A fool and his money are soon parted. ~ Proverb

March 6, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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 from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

Does Valuation Matter?

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A few stocks are moving the market. If you own the Magnificent Seven and a few AI-driven stocks, you are making a killing, leaving value-oriented investors and diversified portfolios in the dust. AI is changing the world; investors want to cash in on this new paradigm, regardless of valuation. However, we have seen this movie before. Investors have always jumped into new technology, including electricity, railroads, automobiles, air travel, air conditioning, and the internet. Booms and busts. Will this time be different?

Investors focus on price when buying a stock without regard to internal valuations, like price-to-earnings, price-to-book, price-to-sales, current ratios, return on assets or capital, etc. If a stock trades higher, it must be a good investment – right? Momentum is an excellent strategy until it’s not.

Cisco was the poster child for the internet in the late nineties, rising more than 4,000% from 1995 to 1999. It was the internet, and investors could not own enough shares. It was a no-brainer. Everybody knew the internet would change the world, and Cisco was central to this paradigm shift. What happened? Cisco peaked in 1999 at $80.25 and has yet to breach the previous high touched twenty-five years ago, and it crashed 89%.

As a financial planner, my primary goal is to ensure you do not run out of money in retirement, which means we manage risk and diversify assets through balanced portfolios and index funds. We are not money managers, and our goal is never to generate the best return, as odd as that may sound. If it were our primary goal, we would buy leveraged ETFs on margin and roll the dice. However, our diversified investment strategy has performed well over time, and we currently have a decent allocation to AI companies through our funds. If your sole goal is to make money, you do not need a financial planner.

Speculation is not a bad strategy, especially if your risk tolerance is high. If you must speculate, limit your exposure to 1% to 5% of your portfolio, and if a stock climbs to more than 25% of your holdings, start selling.

Will AI change the world? Yes. Will the current basket of AI stocks trade higher forever? No. Valuation matters.

A fool is someone who knows the price of everything and the value of nothing. ~ Oscar Wilde

March 4, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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 from 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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.