A Billion Dollars A Year

How would you spend a billion dollars? Would you create a foundation? Would you run for President? Would you try to send a rocket to Mars? Would you purchase priceless art?

The top five hedge fund managers last year earned more than a billion dollars in salary, with an average pay of $1.48 billion. A group of fifteen hedge fund managers made more than $12 billion.[1] Hedge fund managers typically charge a 2% fee on your investment and take 20% of your profits as compensation. The S&P 500 rose 29% last year, without fees. If you invested $10,000,000 in a hedge fund and your account appreciated 29%, your manager’s compensation would have been approximately $780,000, or 7.8% of your original investment.

Last year was a phenomenal year for major asset classes, so your hedge fund manager should be compensated well for his (the top five hedge fund managers are all men) efforts. How did they perform? The five hedge fund managers, as a group, generated an average return of 24.6%, before fees.  The best of this elite group returned 41%, the worst returned 14%.[2]

On a gross basis, the top five underperformed the S&P 500 by 4.4%. Two of the five outperformed the index, and only one bettered it on a net basis. If the average return was 24.6% and their fee was 7.8%, then the net gain was 16.8%. Last year, several low-cost ETFs performed well: Real Estate returned 24.4%, Utilities 21.3%, Small Caps 21%, International Stocks 18.1%, Gold 17.9%, and Emerging Markets 16.7%.[3] An equal weighting of these ETF’s returned 19.9%.

Fees matter when it comes to investing because you can only spend net returns. How do you know what fees you’re paying? Here are a few suggestions.

  • Every publicly traded investment has a ticker symbol, and if you plug it into Yahoo! Finance, Morningstar, or any other financial site, you’ll be able to see the fees associated with your investment. Every Mutual Fund and Exchange Traded Fund has an operating expense ratio (OER). For example, the OER for Vanguard’s S&P 500 Index Fund (VOO) is .03% or $3 per $10,000 invested.
  • Registered Investment Advisors must file their Form ADV each year. The ADV outlines an advisor’s fee schedule, assets under management, and other vital information. If you work with an advisor, they’ll provide you with their form.
  • Broker sold insurance items, and other packaged products are delivered with a prospectus. The prospectus summarizes the fee schedule, including sales charges, surrender fees, 12b-1 fees, and additional fees.
  • Brokerage firms post their commission rates and schedule online.
  • Conduct a fee audit with your advisor. Your advisor should be able to review your investment holdings, account fees, and other charges to help you get a better handle on your costs.

Registered Investment Advisors must disclose their fees to you before you invest, brokers should do the same. If you’re not sure what fees you’re paying, ask. It’s your money. I’ve noticed firms that charge high fees say they’re adding value to their clients. If you’re working with one of these firms, ask them how they’re adding value. If they can’t explain it to you, maybe it’s time to hire a new advisor.

One of the best ways to add value to your bottom line is to work with a Certified Financial Planner™ who invests your money in a globally diversified portfolio of low-cost funds and offers financial planning.

Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. ~ Romans 13:7

February 17, 2020.

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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.

[1] https://markets.businessinsider.com/news/stocks/hedge-fund-managers-earned-more-than-billion-last-year-highest-2020-2-1028894639, by Ben Wick, February 11, 2020

[2] Ibid

[3] YCharts: VNQ, VPU, IJR, EFA, GLD, & VWO 2019.

China and Emerging Markets

China is closed. The world’s second-largest economy is shut down due to the Coronavirus, and life is at a standstill. According to several news reports, the number of deaths from the virus has now surpassed the number of deaths from SARS – a frightening thought, and the uncertainty is making the situation worse.

China’s idleness will have, at some point, an impact on global economies and stock markets. The Chinese stock market is down .5% for the year, but this can change quickly.

Emerging markets and China are linked. Chinese stocks are 33% of the MSCI Emerging Market Index, so when China moves, so does the index. The index invests across five regions, 26 countries, and 1,100 securities.[1] Dimensional Funds, Fidelity, and Oppenheimer manage sizeable emerging market mutual funds, while Vanguard, Blackrock, and Schwab have substantial assets in their exchange-traded funds. The top holdings for most of these funds include Alibaba, Tencent, Taiwan Semiconductor, and PingAn Insurance Group.

The Matthews China Investor Fund (MCHFX) has produced an average annual return of 11.51% for the past twenty years, and it has a current asset allocation of 95% stocks, 5% cash. Most of their assets, 89%, are invested in Asian emerging markets.

Chinese stocks account for 3% of the global equity market capitalization, the same level as France and Canada.[2]  We recommend an allocation of 5% to emerging markets, so if Chinese stocks account for 33% of the index, our exposure to China is 1.65%. If Chinese stocks fall, the index will too. However, I’m willing to commit 1.65% of capital to the world’s second-largest economy.

During the AIDS epidemic from 1987 to 1995, the emerging markets index fell 6.7%, Chinese stocks dropped 40%, and the S&P 500 rose 34.9%.

Emerging markets rose 13.8% during the Bird Flu outbreak from 1997 to 2004. Chinese stocks plunged 65.6%, the S&P 500 rose 63.6%.

The emerging markets index rose 122% during the SARS epidemic from 2002 to 2005, while Chinese stocks climbed 74%, and the S&P 500 index grew 8.7%.

During the Swine Flu outbreak from 2009 to 2010, emerging markets soared 103.1%, Chinese stocks increased by 62.5%, and the S&P 500 was up 39.2%.

The Ebola outbreak occurred from 2013 to 2016. During this outbreak, emerging markets fell by 18.2%, Chinese stocks dropped 6.8%, and the S&P 500 rose 57%.

The United States stock market is massive, efficient, and developed, but it’s not immune to extended periods of poor performance. During the ‘70s, a 10,000 investment grew to $11,570, generating an average annual return of 1.47%. If you invested $10,000 in the S&P 500 on January 1, 2000, you had to wait thirteen years before you were profitable. But, if you held on to your original $10,000 investment from 1970, it’s now worth $357,820, producing an average annual return of 7.35%.[3]  For the past two decades, the S&P 500 and MSCI Emerging Markets Index produced similar returns.

Emerging markets have always been volatile – a feast or famine mentality. In 2006, Chinese stocks rose 82.9%. in 2008, they fell by 50.8%. Turkey rose 253% in 1999, and fell 45.8% in 2000, 32.8% in 2001, and 35.8% in 2002.[4] Volatility is the central theme for investors in emerging markets.

Does it make sense to sell all your emerging market holdings? My recommendation is to stay committed to this sector. Another reason to remain long emerging markets is demographics. China, India, Indonesia, Pakistan, Brazil, Russia, and Mexico account for 49% of the world’s population – and growing![5]

Rather than selling your emerging market stocks, invest in a globally diversified portfolio of low-cost funds, investing in an assortment of stocks and bonds based on your financial goals and time horizon.

What should you do if emerging markets fall? Buy more!

Nevertheless, I will bring health and healing to it; I will heal my people and will let them enjoy abundant peace and security. ~ Jeremiah 33:6 

February 10, 2020.

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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.

 

 

 

[1] https://www.msci.com/emerging-markets

[2] Dimensional Fund Advisors 2019 Matrix Book

[3] YCharts.

[4] Dimensional Fund Advisors 2019 Matrix Book

[5] https://www.internetworldstats.com/stats8.htm

I Missed Tesla

Tesla’s stock performance has been electrifying, rising 20% yesterday, 15% today, and 86% for the year. Since June, it’s soared 415%. On August 7, 2018, Elon Musk tweeted, “Am considering taking Tesla private at $420. Funding secured.”[1] Tesla’s stock is up 142% from this now infamous tweet.

Initially, I missed several “obvious” winners over the past three decades, like Apple, Google, Microsoft, Amazon, and so on. I did, however, eventually buy these stocks. In 1993 I purchased DELL Computer in my IRA and quickly doubled my money. After it doubled, I sold it so I wouldn’t lose my profit. DELL would rise another 20,000% or so over the next several years, a valuable lesson to let your winners run.

I’m not worried I missed Tesla, because I own it indirectly through several funds. Who knows what’s ahead for Tesla, but if it follows the path of previous highfliers, I may get another opportunity to buy it at a lower price. When I started in the business as a stockbroker, I recommended Coca Cola stock to clients, despite the fact it went public in 1919, 71 years before I started. Coke stock has risen over 1,000% since January of 1990[2], so investors still made money despite its strong performance during the previous seven decades.

Missing a winning stock doesn’t cause me any regret because I’ve also passed on losers like Enron, Worldcom, Global Crossing, Gamestop, and several others. In a diversified portfolio of individual stocks, you’ll probably own a few winners, a few losers, and numerous also-rans. A winning stock like Amazon or Tesla can have a significant impact on your portfolio. A losing stock, likewise, will be an anchor, dragging your performance down.

Tesla is a popular stock, getting most of the headlines and screen time on CNBC, but other stocks are performing better this year. Nanoviricides is up 331%, LMP Automotive Holdings Inc is up 114%, and Interups is up 110%.[3] Owning mutual funds will give you exposure to companies not on your radar screen.

What should you do if you’ve missed a highflying stock that everybody else appears to own? Here are a few suggestions.

  • Be patient. What goes up will come down. Amazon stock fell 92% in 2001 and 60% in 2008. Apple fell 85% in 1985, 82% in 1997, 79% in 2003, and 56% in 2008. Facebook fell 54% in 2012 and 38% in 2018.[4] Stocks fluctuate and oscillate between over and undervalued.
  • Buy fewer shares. If your goal is to buy 100 shares, start with 50 or 25.
  • Buy a fixed dollar amount. Rather than focusing on shares, start with dollars. A prudent allocation is 3% to 5% of your account balance.
  • Set a limit. Enter a buy-limit to purchase the stock at a specific price. You can set any price you want, but you must buy the stock if it trades at or below your limit price; however, you’re not guaranteed to get the stock at the price you set.
  • Sell a put option. Selling a put option obligates you to buy shares at a specific price. Because you’re a seller, you’ll collect a premium. The premium is yours to keep, regardless of what happens to the price of the stock. For example, Tesla’s April 2020 $500 put option is currently selling for $6.75, meaning, for every contract you sell, you’ll collect $675, before fees. One option contract equals 100 shares of stock, so if you sold one contract at $500, you’re obligated to buy it at that price if the stock trades at or below the strike price when the contract expires in April – 100 shares of Tesla at $500 is a $50,000 purchase. If you’re going to pursue this strategy, please work with an advisor who understands option trading, because options involve risk, and they’re not suitable for every investor.
  • Buy a mutual fund. The following mutual funds own shares of Tesla: Baron Partners (BPTUX), Harbor Capital Appreciation (HRCAX), Vanguard Extended Market (VEXMX) and Invesco QQQ Trust (QQQ)

Chasing a high-flying stock is a risky proposition, so develop a trading plan and tread lightly. Don’t over commit capital and avoid leverage. Be patient, and work your plan.

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” ~ Peter Lynch

February 4, 2020.

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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.

 

 

 

 

 

 

 

[1] https://www.cnbc.com/2019/08/08/teslas-chaotic-year-after-musks-funding-secured-tweet.html, By Michael Wayland, August 8, 2019.

[2] YCharts: January 1, 1990 – February 3, 2020.

[3] YCharts

[4] Ibid

If, Then

In college, I learned the if, then command while studying the BASIC computer language. BASIC is a conditional language that relied on the if command. If X is true, then Y is false, and so.

Financial planners rely on if, then statements regularly. It’s common for planners to include a statement like, “If you invested X amount in stock Y, then you’d have Z dollars today.” The examples show investors the advantage of long-term investing, despite the stock market’s gyrations. Some of the examples are outrageous, but we still use them anyway. For example, if you invested $100,000 in the stock market in 1926, you’d be worth more than $700 million today. This example is ridiculous on many levels. First, $100,000 in 1926 is equivalent to $1.5 million today. Second, would you have held on to your investment through the Great Depression? Doubtful. Third, it assumes you didn’t pay any taxes on your investment or spend any money for 93 years.

Despite the crazy claims, advisors use these examples religiously, including me.

Here are a few if, then statements.

If you invested $100,000 in Amazon in 1997, you’d have $92 million today.[1]

If you invested $92 million in Enron, you’d have zero dollars today.

If you sold stocks last December because the market was down 15%, you missed a 36% return in the S&P 500 this year.

If you sold bonds last year because you expected the Federal Reserve to raise interest rates this year, you missed a 13.7% return in long-term bonds through the iShares 20+ Year Treasury Bond ETF (TLT).

If you create a budget, it will help you with your spending.

If you spend less than you earn, you’ll save money.

If you save money, your assets will grow.

If you try to keep up with the Joneses, you’ll end up in the poor house.

If you make a Will or a Trust, you’ll protect your family.

If you own life insurance, you’ll also protect your family.

If you own long-term care insurance, you’ll protect your assets if you move into an assisted living facility.

If you participate in a high deductible health insurance program, consider opening a Health Savings Account to offset the cost of healthcare.

If you’re going to live in your city for five years or more, buy a home.

If you have a mortgage, add a few dollars to your monthly payment so you can pay it off early.

If you move often, rent a home.

If you have children, invest early and often so you can pay for some, if not all, of their college education.

If you work for a company that offers a retirement plan, contribute as much as possible so you can eventually enjoy your retirement.

If you have financial assets to meet your spending needs, defer your Social Security benefits until age 70 so you can qualify for the maximum benefit allowed.

If you have any assets, consider donating to a charity or causes you and your family support.

If you own an IRA or workplace retirement plan, check your beneficiaries to make sure they’re current.

If you complete a financial plan, you’ll have three times more assets than those people who do little or no planning.[2]

If you work with a Certified Financial Planner®, they will put your interest first.

If you finished reading this blog, thank you and Merry Christmas!

“First, solve the problem. Then, write the code.” – John Johnson

December 17, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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.

 

 

 

 

 

 

[1] Morningstar Office Hypothetical

[2] http://www.nber.org/papers/w17078

Why I Started My Business

Starting a business is a crazy idea and a daunting task. Each month, about 540,000 individuals launch new businesses and half of them will fail within the first five years.[1] I took a leap of faith a few years ago to start my firm when I turned fifty and so far, so good.

The primary reason I started my business was to remove confusion, complexity, and worry from the financial planning and investment management process. I wanted to offer people an alternative to firms that sold products with exuberant fees. As Jeff Bezos said, “Your margin is my opportunity.” I also noticed that individuals didn’t know what they owned, the risk they were taking, or the fees they were being charged. My goal was to bring these issues into the light.

First, I was tired of hearing stories from people who bought products and services they did not need or want. The products were complicated and expensive, and most of them did not fit in with a client’s financial plan if they had one. The products were sold by brokers earning massive commissions and fees. I wanted to recommend low-cost investments to individuals based on their financial plan.

Second, I wanted to offer a competitive fee.  A lot of advisors charge 1% or more to manage a client’s assets, or require a high-fee retainer, or demand exuberant hourly rates. Also, advisors and brokers charge thousands of dollars for a financial plan. Our fee is .5% of assets ($5 per $1,000) to manage investments and a flat fee of $800 for planning. I like to say we’re twice the service at half the price!

Third, I wanted to help individuals with their financial needs regardless of their level of assets. It’s common for investment firms and advisors to have asset minimums of $1,000,000 or more. We work with clients at all asset levels from several million to several thousand.  We don’t have asset minimums, and we will work with anyone who wants or needs our help.

Industry experts and advisors tell me my fees are too low, and I need to set an asset minimum. They also encourage me to focus on a niche like attorneys. I disagree. If my firm sets an asset minimum of $1,000,000, what happens if I meet an individual with $750,000? Do I tell them I’m sorry I can’t work with you because you “only” have $750,000? If I only work with lawyers, do I say no to the doctor, teacher, or pilot?

Because my fee schedule is low and I don’t have an asset minimum, industry experts question if my clients are profitable. I have no idea. I don’t treat individual clients as profit centers. My firm, however, is profitable, allowing me to continue to serve clients.

When I’m told to raise fees or asset levels or focus on a niche, I think of the Coca-Cola Company. Coke has been selling beverages to individuals since 1892, and, to my knowledge, they don’t have a niche. Coke products are sold to billionaires like Warren Buffett and Bill Gates, as well as young children around the world. If you’re thirsty, you can buy a Coke product to quench your thirst regardless of your economic standing. Also, Coke products aren’t complicated or expensive.

My model works, and I look forward to helping all those who want or need financial guidance.

Work willingly at whatever you do, as though you were working for the Lord rather than for people. ~ Colossians 3:23

December 10, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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.

 

 

 

 

[1] https://learn.g2.com/small-business-statistics, By Bianca Pasare, website accessed December 8, 2019.

You’re Hired!

While working at Morgan Stanley, I hired scores of individuals for the firm’s financial advisor training program. Directly or indirectly, I talked to hundreds of individuals about our firm. To hire hundreds, I reviewed thousands of resumes.

Finding individuals to work at Morgan Stanley was not hard, especially during the late ‘90s. The blue-blood, white-shoe firm attracted superior talent, and working for the firm was a status symbol, especially for recent college graduates.

I enjoyed the process, and I met some fantastic people. Of all the people I hired, a few of them stand out. Here are four individuals (not their real names) who made a strong impression.

Andy wanted an opportunity to improve the quality of life for his family. He worked for a big-box retailer at the time I hired him, and on his first day of work, Andy walked into our office dressed like Gordon Gekko. He traded his vest for a blazer. Andy looked the part. But, more importantly, he changed his mindset now that he worked for a prestigious Wall Street firm. He did well, and every few years, he calls to thank me for giving him a shot at a new career and a better life.

June graduated from Yale University and she was a native of South Korea. She was a quick study and eager to learn. She wanted to know how to succeed in the business, so I told her to meet with as many people as possible and open two new accounts per week. June followed the script, and she was one of my most successful hires.

Larry was a former professional tennis player who played at Wimbledon. He walked into my office unannounced and said he wanted to work for Morgan Stanley. We talked for some time, and I offered him a job. Like most professional athletes, he was focused and disciplined.

Bob was a former Marine, full of energy. After a few months on the job, I walked into his office, and he had numerous spreadsheets lining his wall. The categories included contacts, appointments, new accounts, and assets. I told him he would make it in the business, and he wanted to know how I knew. I told him his goal-setting and drive would take him to new heights. He’s still going strong, twenty-five years later.

Recruiting for a large Wall Street firm like Morgan Stanley is easy. Hiring for a small firm is challenging. My firm is growing, so I posted a job opening for a new advisor or financial planner. It was a three-month ordeal, a dreadful experience. It was so bad that I’m reluctant to go through the process again, despite the growth of my firm.

After a decade of hiring, I learned a few things. Here are a few suggestions to help you improve your recruiting process.

  1. If the person you’re interviewing arrives on-time for their first interview, don’t hire them. To arrive on time is to arrive late. Look for individuals who arrive early, and the earlier, the better. People who arrive on time for their initial interview will show up late to the office once they start working for your firm.
  2. Set up multiple interviews for your candidate, don’t rely on one person to make the hiring decision. After interviewing an applicant at Morgan Stanley, the receptionist told me he was rude and disrespectful. On paper, and in my interview, he was the ideal candidate. I didn’t hire him, and after the experience, I had candidates meet with several people in the office. We would then gather to review our notes before I made an offer.
  3. Invite your candidate to breakfast, lunch, or dinner. You’ll learn much by the way they eat their food and hold their utensils. Do they know the proper way to use a knife or fork? One candidate held his fork like a flare, and when he’d talk, he’d wave it around like he was trying to signal an aircraft. Do they wait for others to be served, or do they dive in without a care in the world? Walt Bettinger, the CEO of Charles Schwab, invites candidates to lunch and purposely messes up their order to see how they react.[1] Do they roll with the punches, or do they get upset?
  4. Saying ‘please’ and ‘thank you’ are paramount for a new hire. A candidate who’s not polite will not make a good employee.
  5. Did they send you a thank-you email after they completed the interview? An email is okay; a handwritten note is better. In a world of electronic communication, a thank you letter will allow the candidate to stand out from the crowd.
  6. Once hired, how do they set up their office? Do they personalize their space? Do they hang pictures? Do they have photos of their family? If not, they won’t stay at your firm long.

Once your new employee is on board, you owe them a duty of care. It’s your responsibility to make sure your new hire feels welcomed. Here are a few ideas to make them feel appreciated.

  1. The first 48 hours are crucial. Let them know you care about them by introducing them to your staff. If possible, walk them around your office so they can meet the others. Show them the entire office, including the restroom and breakroom. Check in with them often during the first few days to make sure they feel comfortable.
  2. Send a welcome email to your employees so they can get to know their new colleague. Include a bio, picture, job description, etc.
  3. Send a welcome gift to the individual’s family, so they know they’re also part of the team.
  4. Post an ad in your local paper or magazine so their friends, family, and neighbors can see they have a new job.
  5. Set up their office, so when they start on day one, it’s ready to go. Is the computer working? Is the printer connected? Do they have business cards? Is their office stocked with paper, paper clips, pens, pencils, folders, and sticky notes? Is it clean? When I left Morgan Stanley to join A.G. Edwards, my new office was a temporary storage closet. I had to clean it myself, and nothing worked. I was not impressed with their preparation and did not feel welcomed.
  6. Give them some swag – hats, shirts, pens, mugs, whatever you got. They now ride for the brand.
  7. Keep the employee busy. Have them work on special projects. Include them on calls and visits so they can meet the firm’s clients.
  8. Be flexible. Be patient. It will take them time to get up and running. Give them grace so that they know you care about their long-term success.

Hiring successful people takes time. Be firm in your commitment to finding the best candidates. Be authentic and humble, and most importantly, trust your instincts.

Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. ~ Warren Buffett 

November 7, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ 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.

 

 

 

 

 

 

 

 

[1] https://www.businessinsider.com/charles-schwab-ceo-takes-job-candidates-to-breakfast-messes-up-their-order-2016-2, Jacquelyn Smith, February 18, 2016

Are Zero Commission Rates Good?

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

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

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

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

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

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

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

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

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

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

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

October 3, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

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

 

A Few Ways to Lose Money in The Stock Market

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

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

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

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

^DJI_chart

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

^DJI_chart (1)

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

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

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

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

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

Stay the course, my friends.

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

August 23, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

[1] YCharts. Website Accessed August 23, 2019

[2] Dimensional Fund Advisors, Investment Principles

Headwinds

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

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

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

Here are a few facts.

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

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

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

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

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

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

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

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

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

August 15, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

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

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

[3] Morningstar Office Hypothetical.

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

Trifecta

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

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

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

Let’s look at the three components.

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

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

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

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

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

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

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

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

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

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

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

August 13, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

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