Category: Investments

A Recession Is Coming

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Is a recession imminent because of the collapse of Silicon Valley Bank? First Republic Bank, Signature Bank, and Silvergate Bank are also on the ropes, and I’m sure there are more to come as individuals withdraw their money to buy US Treasuries or bury it in the backyard. If bankers are nervous, they will stop lending funds to businesses and homeowners, which is not a good recipe for economic growth.

Because of the recent bank failures, loans to domestic banks touched an all-time high. The government has insured all deposits, causing the assets in the discount window to soar. According to PBS Newshour, the Fed loaned $300 billion to banks, allowing depositors to retrieve their funds.[1] As a comparison, the Feds loaned $50 billion to banks during COVID and $538 billion during the Great Financial Crisis.

In addition to bank failures, several technology companies have laid off tens of thousands of employees. Morningstar said more than 139,000 employees had lost their jobs this year.[2] The unemployment rate is hovering near historic lows at 3.60%, but it can climb quickly if the pace of layoffs intensifies.

Another headwind for the economy is the yield curve. Though rates have declined this past week significantly, the yield curve is still inverted. The yield on the US 2-Year Treasury is 4.14%, and the 10-Year yield is 3.56%. The yield curve is inverted when short-term rates are higher than long-term rates, which could signal a recession.

Gross Domestic Product (GDP) growth, or lack thereof, is a crucial recession indicator. The true definition of a recession is two consecutive negative GDP quarters, and so far, this metric is not flashing a warning. In fact, it continues to rise. GDP has increased by 5.68% over the past year, up 21.38% since COVID.

There have been thirteen recessions since the end of World War II, or about once every six years, lasting about ten months in length. Despite the recessions, the S&P 500 is up more than 23,000% since 1945, averaging 11.02% annually. The best three-year stretch for the S&P 500 occurred from 1984 to 1987, following the 1982 recession, averaging 33.4% annually, and the index never lost money during any 15-year rolling period. A one-dollar investment grew to $3,274. The one-month US T-Bill, the safest investment in the world, averaged 3.80% annually during this period, turning a dollar into $17.96.[3]

A recession is coming, but I don’t know when, nor does anyone else. According to historical data, the last one occurred in 2020, so we may experience another between now and 2026. If you’re concerned about a recession, sell stocks, buy bonds, and increase your cash balance. If your time horizon is three to five years or more, and you’re not worried about volatility, buy stocks in a globally diversified portfolio.

The recent bank failures are another thing to worry about, but don’t let them distract you from your financial goals. The stock market is resilient and has survived worse calamities. As I often say, follow your plan, think long-term, diversify your assets, and good things will happen.

As sure as the spring will follow the winter, prosperity, and economic growth will follow a recession. ~ Bo Bennett

March 18, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

[1] https://www.pbs.org/newshour/economy/federal-reserve-lent-300-billion-in-emergency-funds-to-banks-in-the-past-week

[2] https://www.morningstar.com/news/marketwatch/20230317465/more-than-139000-tech-sector-employees-have-lost-their-jobs-since-the-start-of-2023, James Rogers, March 17, 2023.

[3] Dimensional Fund Adviosr Returns Web Tool.

Nothing Is Working

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Another day, another market sell-off. The latest culprit is the failure and seizure of Silicon Valley Bank after a bank run. It’s two steps forward, one step back. Before COVID, the Ukraine War, rising interest rates, and persistent inflation, the S&P 500 was up nearly 200%, averaging 11.4% annually since 2010. However, most asset classes have traded down over the past two years. Frustrating.

The market has performed poorly for extended periods, but that does not make me feel better. Of course, the worst period for stocks was from 1929 to 1944, when the S&P 500 averaged 1.7% per year. It averaged 1.2% from 1965 to 1974, and from 2000 to 2011, it averaged 1.7%. The S&P 500 barely budged for thirty-eight years, or 40% of the time since 1926. Despite doing nothing for decades, the S&P 500 has averaged 10% annually for 93 years.

Each day the market gives us a reason not to invest. If it’s not a bank failure, it’s war or inflation, but if it were not for uncertainty or volatility, it would be impossible to create generational wealth. When stocks fall, they become cheaper, allowing enterprising and courageous investors to buy them at favorable prices. When the storm passes, they can sell them at higher prices – the best times to invest in this millennium occurred during the corrections in 2000, 2008, and 2020.

As the markets continue to suffer, here are a few ideas to fortify your financial future.

  • Keep an emergency fund of three to six months for your household expenses. If you spend $10,000 monthly, your emergency fund should range from $30,000 to $60,000. If your job is at risk or you’re concerned about the markets, extend your savings to nine to twelve months. An emergency fund allows your investments to recover without selling them at lower prices.
  • Buy US Treasuries because they act as a hedge against falling stock prices and are guaranteed. In times of uncertainty, investors flock to Treasuries. The yield on the 2-year US T-Bill dropped from 5% to 3.9% recently, a significant decline, as investors hunted for safety.
  • Allocate a portion of your assets to bonds. Long-term bonds have jumped 4.5% since the collapse of Silicon Valley Bank. As interest rates fall, bond prices rise.
  • Eliminate single-stock exposure. Over the past few days, First Republic Bank (FRC) wiped out a decade of gains. We typically sell stocks when they cut the dividend, lower earnings guidance, terminate thousands of employees, or face significant litigation. In my experience, it’s only a matter of time before companies fall or trade sideways for years after an adverse corporate event.
  • Continue saving and investing because markets eventually recover. After the Great Depression, stocks produced an annual gain of 11.3%; after the Great Recession, they generated a yearly return of 13.24%.[1] Investing during the darkest hours can deliver the best returns.
  • Diversify your assets across borders, sectors, and sizes. A globally diversified portfolio gives you the best opportunity to create long-term wealth. For example, international stocks climbed 36% from 2000 to 2011 as the S&P 500 faltered. Long-term bonds jumped 18% during the Great Recession, while stocks fell 53%.

Patience is a powerful tool for a successful investor. The ability to wait for stocks to recover is challenging but necessary. The Chinese Bamboo tree takes five years to start growing. For the first four years, it does nothing but fortify its roots, and then it can spurt more than ninety feet in weeks.[2] And the Agave Americana blooms once every 100 years.

Be patient, grasshopper.

The days are long, but the years are short. ~ Gretchen Rubin

March 15, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

[1] DFA Returns Web, period ending 2/28/2023.

[2] https://jdmindcoach.com/plant-takes-5-years-start-growing/#:~:text=While%20most%20trees%20grow%20steadily,grow%20at%20an%20astonishing%20rate. JD Mind Coach, January 28, 2018

Scary Times

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Silicon Valley Bank gives us another reason to panic and freak out over our financial future. The FDIC seized the sixteenth-largest bank in the country on Friday, the second-largest bank takeover in US history. At the time of the collapse, twenty-two Wall Street analysts rated the stock a buy or hold, and Jim Cramer urged investors to buy it last month.[1] It was a stellar performer until its collapse, rising more than 80,000 percent since going public, but now it’s gone – risk happens fast!

Silicon Valley Bank is the first bank failure since 2020 when four banks went belly up. The FDIC annexed 510 banks from 2007 to 2014, representing $700 billion in assets, and the current bailout is $209 billion.[2]

Honestly, I’m tired of writing about bank failures, stock market crashes, and financial calamities. Unfortunately, they’re embedded in our history and will continue for the foreseeable future. Despite constant headwinds, the stock market has been resilient. In the last twenty years, the market has recovered from the Tech Wreck, the Great Financial Crisis, and the bankruptcies of Lehman Brothers and Bear Stearns. In fact, since Lehman and Bear Stearns imploded in September 2008, the S&P 500 is up 124%.

In the meantime, here is a list of items you can employ to protect your family’s assets.

  • Buy US Treasuries because they’re insured and guaranteed regardless of how much you invest.
  • Review your cash balances held at your bank. The FDIC limit is $250,000 per person, per institution, and per account. If your balance exceeds the threshold, open a new account or buy US Treasuries. According to the FDIC website, no depositor has lost a penny of FDIC-insured funds since its founding in 1933.[3]
  • Reduce or eliminate your debt, regardless of the current interest rate. If your debt level is low, you can withstand a financial storm.
  • Buy physical real estate. My grandfather loved real estate and hated stocks despite my arguments that stocks can produce significant returns. He owned several homes, commercial properties, and a couple of ranches, and he did not panic when stocks dropped or banks failed. Real estate is a good inflation hedge that can generate substantial rental income and is excellent for transferring assets between generations. And you already know the key to successful real estate investing: Location, Location, Location.
  • Diversify your asset across investment categories, countries, etc. A globally diversified portfolio of stocks and bonds gives you access to thousands of investments designed to grow and protect your wealth over time.
  • Avoid single-stock exposure. Silicon Valley Bank wiped out thousands of shareholders in less than 48 hours, and I can give you a long list of companies that evaporated overnight. Instead, invest in mutual or exchange-traded funds to reduce your risk from individual stocks. The Invesco Small Cap Value fund (VSRAX) held a 1.50% position in the bank stock, and the fund was down less than 1% on Friday because it owns more than 112 securities.

The recent bank failure adds to a list of issues the stock market has dealt with recently, including COVID, the Ukraine War, and political turmoil. Still, it continues to rebound and recover, as it has historically. Today’s events will barely register on a long-term stock chart in a decade or two. For example, the October 19, 1987 stock market crash is but a blip on the chart below.

Markets like to climb a wall of worry, and many successful investors recommend buying when others sell. For now, follow your plan, think long-term, and good things will happen.

If you the bank $100, that’s your problem. If you owe the bank $100 million, that’s their problem. ~ J. Paul Getty

March 11, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

[1] https://www.foxnews.com/media/cnbcs-jim-cramer-eviscerated-touting-silicon-valley-bank-weeks-disastrous-collapse, Alexander Hall, Fox News

[2] https://www.fdic.gov/bank/historical/bank/

[3] https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance/

Can You Drink Coffee and Retire?

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A venti honey almond milk flat white coffee costs $5.95; if you drank one daily for a year, it would cost $2,171, and after forty years, you would have spent approximately $960,000, and that’s a lot of coffee beans. Of course, you could brew your coffee at home for about 15 cents, but that’s not as exciting as ordering from your local barista.

Starbucks went public in 1992, and if you invested $2,171 annually, it would be worth about $2.82 million today. It currently pays a dividend of 2.05%, generating an annual payout of $57,810, which would cover your coffee habit.

If you’re investing regularly, contributing to your retirement plan, and planning for your future, your daily coffee habit won’t derail your retirement plan. However, the more significant issue is to pay attention to your expenses, so they don’t bust your budget. I don’t drink coffee but spend money on diet cokes, mountain bike gear, and fly fishing equipment, and the expenses can increase quickly.

In addition to watching your expenses, keep an eye on your revenue. Most planners focus on cutting costs to the bone but ignore revenue generation. If you can increase your income, you can spend more on things you enjoy.

Here are a few ways to generate extra income.

  • Buy T-Bills. The one-year US T-Bill currently yields 5.3%. If your bank account balance is high, consider buying a T-Bill. For example, if your balance is $100,000, you could earn an extra $5,300 annually with government bonds.
  • Buy Dividend Paying Stocks. Several stocks pay generous dividends north of 3%, including Verizon, Pfizer, Amgen, UPS, Medtronic, and Cisco. You can search websites like Schwab and Yahoo! Finance to look for companies with superior payouts.
  • Write options. A covered call strategy generates income from stocks you own. Let’s say you own 1,000 shares of Apple (APPL). It closed today at $153, so write the May 19 option with a strike price of $165 to collect $3.10 per share, or $3,100. If Apple trades above $165, regardless of price, on May 19, the stock will sell. If it stays below $165, repeat the process.

In addition to these income-producing ideas, you can walk dogs, drive for Uber, deliver food through DoorDash, shop for groceries with Instacart, help people on TaskRabbit, or rent your boat you never use.

Revenue and expenses are linked, so pay attention to both sides of the ledger. Reducing costs in retirement is essential, but so is generating revenue.

Sometimes I go hours without drinking coffee; it’s called sleeping. ~ Anonymous

March 8, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

 Holding Pattern

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Several years ago, I flew from Connecticut to Los Angeles with a layover in Chicago. Nearing Chicago, the pilot informed us we were in a holding pattern due to a winter storm. I was stuck and could not do anything, and it lasted several hours before we finally landed.

Stocks are in a holding pattern as inflation and interest rates continue to rise, and there is no near-term catalyst for them to trade higher. Nor is there one to take them lower, an actual holding pattern. The Dow Jones is down 1.2%, while international stocks are down 0.30% over the past year. The markets remain stuck until inflation and interest rates turn lower.

Here are a few ideas to improve your portfolio since we are in a holding pattern and range bound.

  • Build a financial plan. As markets meander, now is an ideal time to build your financial plan, and it will guide your steps, give you a roadmap to financial freedom, and help you form a solid foundation for your future. At our firm, our clients with financial plans were calmer and less likely to panic during last year’s market rout.
  • Buy US Treasuries. If you hold a significant cash balance, buy US T-Bills. The 1-Year T-Bill yields 5.03%, better than CDs, money market funds, or savings accounts.
  • Review your asset allocation. Do you have the proper asset allocation based on your goals and risk tolerance? If you ignored your investments in the past year or two, your portfolio has probably drifted from the original allocation. As a result, your assets could be too aggressive or conservative for the next move in the market. Establishing an annual rebalancing program will solve this problem.
  • Buy dividend-paying stocks or funds. Companies that pay dividends have solid balance sheets and positive cash flow. Also, they tend to raise their dividends annually, giving you a raise. For example, Pepsi has grown its dividend by 102% over the past ten years, and the stock is up 117%. The dividend was $2.27 in 2013, and it is now $4.60. If you bought Pepsi in 2013 at $77, your current yield is 6%!
  • Increase your 401(k) contribution. If you’re not maxing out your 401(k) contribution, consider raising your amount by 2% to 3%. If you contribute 5%, increase it to 7%.
  • Consider a Roth conversion. Your IRA account balance is likely down in value over the past couple of years which is an excellent reason to consider a Roth conversion. After you convert your IRA to a Roth and the market recovers, all your gains are tax-free. And you no longer need to take your required minimum distribution.
  • Create an emergency or opportunity fund. Consider moving money from your checking account to your savings account each pay period. Most banks allow you to transfer funds automatically between accounts, and the funds in your savings account are liquid and accessible if you need them for any reason.
  • Pay off debt. Regardless of your interest rate, consider paying off your debt, especially if you carry a balance on a credit card. Returns are fleeting, but expenses are forever. You can give yourself a raise by eliminating your debt.
  • Give. You don’t need to wait until December to give money to charities or groups you support. People are hurting now and need help, and donating to your local food bank, non-profit, or church pays enormous dividends.

Stocks eventually recover, but it may take time. Be patient and follow your plan. In the meantime, use the current holding pattern to fortify your financial foundation.

Patience, persistence, and perspiration make an unbeatable combination for success. ~ Napoleon Hill

March 4, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

What Is A Preferred Stock?

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Preferred stocks can generate significant income and are hybrid investments, similar to stocks and bonds. The dividend income is usually higher than owning shares of common stock, and you may get some price appreciation. The preferred label comes from the pecking order on the balance sheet because shareholders receive their dividends before common-stock owners. In a corporate liquidation, bondholders receive their money first, followed by preferred holders, and common-stock shareholders receive whatever is leftover.

Preferred shares are typically issued at $25 per share and can’t be called or redeemed by the issuer before five years. If a preferred does get called, it’s at $25 per share.

The price of preferred stocks hovers around $25, and they may trade to $28 or $30 per share if rates are falling. When rates rise, the price may fall to $20 or $21 per share. They’re sensitive to interest rates, like bonds, and the prices adjust up or down based on the level of interest rates. Earning an income of six percent or more from preferred stocks is possible.

Preferred stocks are rated like bonds, so invest in ones with quality ratings. Standard & Poor’s and Moody’s apply ratings from AAA to D, depending on the quality of the issue. It’s rare to find AAA-rated preferred stocks; most ratings fall between BB and B . Ratings don’t tell the whole story, as we discovered in 2008, so pay attention to corporate balance sheets. During the Great Recession, several preferred stocks fell in price to single digits. Preferred stocks are sold with a prospectus, so you can read about all the features before purchasing your shares.

On the surface, a preferred stock sounds like a solid investment; however, the devil is in the details. As I mentioned, most preferred stocks get called after five years. If you purchased one intending to get your money back after five years, and it is not redeemed, you may hold your shares for thirty, forty, or fifty years or more!

Of course, you can sell your investment anytime, but you may get more or less than your purchase price. It is a risk for investors when interest rates rise because the value of your shares can fall. You can likely sell your holdings for a gain when interest rates drop.

Barron’s has a tremendous section of preferred stocks. In the stock tables, you can look for companies by name, price, yield, etc. Once you have identified a few, you can do further research online.

I recommend allocating approximately five percent of your fixed-income portfolio to preferred stocks if you want to give it a boost,

What do you prefer? ~ 1 Corinthians 4:21

March 3, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

What is a Municipal Bond?

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We built this city; we built this city on rock’ n’ roll, built this city on rock’ n’ roll.” You undoubtedly have heard this song by Jefferson Starship, and now you are singing it out loud and can’t get it out of your head—sorry!

However, with all due respect to Jefferson Starship, tax-free municipal bonds help fund the building of most cities. Local or state agencies issue bonds to help build roads, dams, bridges, schools, and other public works, and you probably voted on a bond referendum or two over the years.

When you vote on bond issues, you’re allowing the local government to issue bonds to finance a project in your city or county. The bonds are funded by your taxes or the services you use, like a toll road.

General obligation bonds can tax you and your neighbors to pay the interest and are some of the safest tax-free bonds to own.

Revenue bonds generate income from a project, and the project’s revenue will fund the bond payment. Typical revenue bond projects include airports, public works, hospitals, and toll roads, and a portion of the money collected from the projects will go to the bond debt service.

Because municipal bonds benefit the public good, the interest you receive is tax-free. The tax-free income incentivizes investors to buy bonds to help local authorities raise money for their projects—schools, roads, etc. The interest is free from local, state, and federal taxes, called triple tax-free.

Municipal bonds are an excellent choice for high-income earners, especially if you live in a state like California or New York. The higher your taxable income, the higher the after-tax return on your investment.

The taxable equivalent yield can help you find competitive rates relative to taxable bonds. For example, a San Diego general-obligation bond paying four percent tax-free interest equates to a six percent taxable bond. To find the taxable equivalent yield, multiply the coupon rate on the tax-free bond by 1.5. In this example, a four percent coupon times 1.5 equals six percent. I use 1.5 as a quick way to find the taxable equivalent rate. The actual formula is the coupon divided by one minus your tax bracket, which looks like this: coupon divided by (1 ˗ your tax bracket). If you’re in the 35 percent tax bracket, the formula is four percent/ (1 ˗ 0.35) = 6.15 percent. If you find a taxable bond paying six percent or more for the same time frame, purchasing the taxable bond makes sense.

If you live in a state with an income tax, buy bonds issued by that state where you live because you’ll pay an income tax if you buy one from another state. For example, if you live in California and buy a Florida bond, your income is taxable at the state level. If you live in a state with no state income tax, like Texas, you can buy bonds issued by any state.

Tax-free municipal bonds may increase your after-tax income, especially compared to CDs, corporate bonds, and US Treasuries.

The hardest thing in the world to understand is the income tax. ~ Albert Einstein

March 3, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

What Is A Bond Ladder?

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An excellent strategy to protect your assets from rising or falling interest rates is to build a bond ladder—a portfolio of bonds with different maturities.

Bond maturities are similar to rungs on a ladder, and each one you climb gets you closer to your goal. Your ladder can consist of bonds maturing in thirty days or thirty years, and yours should fit your situation and time frame. You can also build multiple ladders designed to achieve several goals.

How can you create a bond ladder? Let’s look at an example. Start with five bonds with maturities ranging from one to five years with corresponding rates of 1, 2, 3, 4, and 5 percent. The average yield for this hypothetical ladder is three percent, with an average maturity of three years. At the end of year one, your first bond matures, and you’ll receive a portion of your principal. With the proceeds, you purchase a five-year bond paying five percent. The remaining bonds have now moved up by one year, and your bond ladder currently consists of bonds with original maturities of two, three, four, five, and five years, paying 2, 3, 4, 5, and 5 percent. Your average yield is now 3.8 percent, and the average maturity stays the same because you still own a portfolio of bonds maturing each year for five years.

At the end of the second year, bond two matures. With the proceeds from bond two, you buy a five-year bond paying five percent. The remaining bonds are one year closer to maturing, and your ladder consists of bonds with original maturities of three, four, five, five, and five years and paying 3, 4, 5, 5, and 5 percent, with an average rate of 4.4 percent. You can repeat this process indefinitely.

A bond ladder always has bonds maturing to provide liquidity, while longer-term bonds generate above-average income. The income from the original ladder was 3 percent; by the last example, it jumped to 4.4 percent—an increase of 46 percent. At the same time, your average maturity remained constant at three years. If interest rates rise, your maturing bonds allow you to buy new ones at higher rates. If rates fall, you generate higher income with your longer-dated bonds. Also, if rates fall, the value of your bond portfolio can rise in value to produce capital gains.

The bond ladder is flexible, allowing you to use any fixed-income investment to construct your portfolio: CDs, tax-free municipal bonds, corporate bonds, or US Treasuries. You can mix and match the fixed-income choices. For example, you can structure a ladder with US Treasuries, corporate bonds, and tax-free municipal bonds. The treasuries can be short-term—from one to two years—corporate bonds from two to ten, and municipal bonds from ten to thirty years.

Investors often have a high percentage of cash in their accounts, waiting for interest rates to rise or the stock market to crash. If you hold a significant cash position, you can use short-term US Treasuries to create your money-market fund with better results. In addition to higher rates, your investments are guaranteed, regardless of how much money you invest.

Several years ago, I helped a client construct a short-term bond ladder with US T-Bills. He inherited several million dollars and wanted to buy CDs from local banks for safety and liquidity. I informed him he’d have to contact fifteen banks to qualify for the full FDIC insurance coverage, and as a result, we built a short-term US T-Bill ladder guaranteed by the US government. It was one-stop shopping for his inherited assets with superior income, liquidity, and guarantees.

In summary, a bond ladder built for you and your family can help you achieve your financial goals without worrying about the direction of interest rates.

The ladder of success is best climbed by stepping on the rungs of opportunity. ~ Ayn Rand

March 2, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

My Daughter Bought A House

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My daughter bought a house, but that is not the story. The story started when she was born, and I opened a Uniform Transfers to Minors Act account (UTMA) to help her pay for college. A contribution to a UTMA is an irrevocable gift, and most advisors don’t like to use it because the child may turn out to be a bad seed, but I had faith that Hannah would age well, and she did.  

Spread Sheets

After she was born, I created a spreadsheet with about fifty colleges, including Harvard, Yale, Occidental, USC, UCLA, San Diego, Texas, Texas A&M, and Baylor. I updated the list often as she grew older, eliminating some colleges while adding others. Each year, the average cost increased by 5% to 10%, and paying for college would be expensive, and my goal looked daunting. I eventually widdled the list down to one school: Baylor, where she obtained her undergraduate and graduate degrees.

The Lost Decade

My daughter was born in 1998, and two years later, the market peaked and entered the lost decade, where the S&P 500 lost 24% from 2000 to 2010. During the Tech Wreck, 2000 to 2003, it fell 43% and dropped another 56% in the Great Recession from 2007 to 2009. It was the worst time to invest since the Great Depression, and from her birth to her first semester of college, the S&P 500 returned a measly 3.41% per year, less than its 97-year average annual return of 10%.

Investments

Regardless of the poor market conditions, I continued to buy stocks, acquiring ten shares here, 20 shares there, and so on, and I rarely made a significant contribution to Hannah’s account. Her great-grandparents and grandparents occasionally gave her financial gifts, which I used to purchase more companies.

I funded her account with 100 shares of Philip Morris, which generated a return of 265%. Some of the other stocks I bought were Alphabet, up 710%; Microsoft, up 511%; Apple, up 336%; Cisco, up 111%; and Pepsi, up 103%. However, Amazon provided rocket fuel for her account, which I purchased in 2001 after it crashed by 90%, for a split-adjusted cost of 82 cents. Her average gain was 6,665% and had I invested everything into Amazon, she’d be retired today.

Returns and Predictions

Paying for college is a simple financial goal because you know the inputs – the cost and timing, usually eighteen years. I fixated on accumulating enough money to pay the room, board, and tuition, and I ignored market forecasters, economists, money managers, TV personalities, and influencers. I was a net buyer of stocks regardless of the market or economic conditions, and I only sold them to pay for college. Nor did I panic during corrections. In fact, I used the selloffs to buy quality stocks at discounted prices. If I did panic, I would not have achieved my original goal.

I don’t know my returns for her college account nor care because I achieved my goal of paying for college.

Goals

By the grace of God, her account continued to rise, far exceeding my expectations. After Hannah graduated from Baylor, she had enough funds to pay for graduate school. Her account kept growing, and after she obtained her master’s degree, enough money was left to buy a house.

Moral

Focus on your goals, and don’t let market conditions or financial experts distract you on your journey. Returns matter, of course, but it is better to be a consistent investor so you can use your funds to pay for college, buy a second home, travel the world, or retire. Again, I don’t know what her returns were – 5%, 6%, 10%, I’m not sure, but it doesn’t matter because we paid for six years of college, and she now owns a home.

Start children off on the way they should go, and even when they are old, they will not turn from it. ~ Proverbs 22:6

February 27, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.

Inflation or Recission?

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Inflation is climbing, while some market indicators are predicting a recession. The market gauges are in flux, leaving investors confused and concerned about their financial future. Which battle should you fight – inflation or recession?

The current inflation rate is 6.41%. The rate is down sharply from its peak but up significantly from the low. The recent readings indicate a flattening, or, in other words, the inflation rate may hover around the current level for a while. The 6.41% inflation rate is crushing, and at that rate, the value of your dollar will drop by 46% over ten years as the value of goods and services will continue to rise. Have you purchased eggs lately?

On the other hand, a few market indicators forecast a recession. The 10-2 Year Treasury Yield Curve is inverted, where the yield on the US 10-Year Treasury is lower than the yield on the US 2-Year: the 10-year yields 3.86%, the rate on the 2-year is 4.62%, a difference of negative 0.76%. What does this mean for investors? Historically, when the yield curve inverts, a recession follows, but it’s not instantaneous, and it could be several months if one arrives, if at all.

What should you do to protect your portfolio from inflation or a recession? Let’s look at a few ideas.

  • Stocks are an excellent hedge against inflation. If a company raises its prices to combat inflation, it will eventually earn more money, and when they make money, you could also. For example, Microsoft earned $1.21 per share in 2006 and $9.21 per share in 2022, an increase of 661%. The price of Microsoft increased by 817% during that period.
  • Bonds are an excellent hedge against a recession. If a downturn arrives, then interest rates will fall. The Federal Reserve is raising interest rates now but will lower them if our economy falters, and when rates drop, bond prices rise.
  • Cash is a short-term haven. A robust cash allocation can protect your portfolio against a stock market correction, but it will hinder the growth of your portfolio. US Treasuries now offer an attractive rate of nearly 5%, allowing you to earn some interest if you decide to sell your stocks or long-term bonds.
  • Alternative investments may protect your portfolio against inflation or a market correction. A real estate investment trust can perform well when inflation rises; everybody loves real estate primarily because their homes have appreciated over time. Gold is a decent hedge against a stock market crash, but you must time it correctly. Despite popular opinion, I’m not fond of gold as an inflation hedge. The inflation rate has jumped 175% over the past three years, and gold has increased by 12%.

Owning a globally diversified portfolio will help you fight inflation and a recession. What is a globally diversified portfolio? It is one where you own US stocks, large companies, small companies, international holdings, bonds, cash, and alternative investments. Some industry experts refer to this as an all-weather portfolio. The portfolio works well because the individual components react to changing market conditions at different times, and it’s impossible to time the market or accurately predict inflation or a recession.

To fortify your portfolio, diversify your investments and follow your plan.

The is no such thing as bad weather, only different kinds of good weather. ~ John Ruskin

February 21, 2023

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. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your 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.