A Flight to Safety

This decade is off to a tough start. The Coronavirus is disrupting global trade, travel, markets, and economies. The 2020 U.S. Presidential election will also add to the uncertainty and confusion. With increasing risk, should you buy, sell, or hold your existing investments?

When forecasts are dire, and projections are bleak, selling your stock positions and moving to cash makes sense. It seems prudent to sell your investments and park the money in a bank until the storm passes, and, when it does, you can repurchase your stocks.

Let’s say, for fun, you invested $1 million in the S&P 500 in 2005 – 100% of your assets. After three years, your strategy paid off. Your account at the end of 2007 is worth $1.172 million, a gain of 17.2%![1]

Here’s where it gets interesting because, we now know, 2008 was a horrible year for the S&P 500. If you decided to hold, you lost 38.3%. Your original investment of $1 million is now worth $747,392, a loss of 25.2%.

With hindsight, you would have sold your investment on December 31, 2007, to lock in your gains. If you sold, you would’ve been a hero, admired for having the foresight and courage to sell after three years of substantial profits. However, it’s unlikely you would’ve moved from cash to stocks in January of 2009 because we were in the midst of the Great Recession. You probably would have waited two or three more years to get back in the market, missing a 40.5% return. If you reinvested in January 2009, you made 23.6% for the year. If you had the conviction to buy the dip in 2008 and 2009, you made even more when stocks recovered.

If you ignored and held your stocks during the correction of 2008, you made $2.76 million at the end of 2019, an increase of 227%. Now that your account balance is $2.76 million, what should you do -sell or hold? If you sell, you’ll pay a capital gains tax of 20%, or $455,243 – a significant number. If you hold, you may encounter another stock market correction. A repeat of 2008 would mean a loss of $1.25 million.

It’s impossible to time the market, but they’re a few strategies you can employ to protect your assets. The first is to diversify your holdings to include different asset classes like small companies, international stocks, and bonds. A globally diversified portfolio of mutual funds would have lost 20.3% in 2008, not great, but better than a loss of 38%. True, you give up some upside, but you protect your assets to the downside. A balanced portfolio of 60% stocks, 40% bonds generated an average annual return of 6.5% since 2005. Your $1 million investment grew to $2.48 million.[2]

More stock means more risk, but it also means more reward. Buy and hold investors have been rewarded for their patience, and, hopefully, this time will not be different.  If you want to find out the risk exposure in your portfolio, give us a call.

“Go out on a limb. That’s where the fruit is.” — Jimmy Carter

February 3, 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] YCharts – IVV, 1/1/2005 to 12/31/2019.

[2] Morningstar Office Hypothetical

My Gym

I work out at my local gym twice per week, mostly to lift weights. The amount I lift today is a fraction of what I used to lift while playing football in college, but it keeps me in shape.

My gym is a cross-section of men, women, young, old, fit, and almost fit. During the football offseason, members of the local high school team use our gym to supplement their school workouts. These young men are full of energy and bravado, and they have no coordinated plan for their workout regime. They lift, look in the mirror, look at their phone, talk to their friends, and repeat this process until they leave. They also say “bro” – a lot! I was probably that way in high school, too, except I didn’t have a cell phone. I know if they followed a routine, they’d see better results.

While playing football at the University of San Diego, we had two weightlifting coaches, one a former Navy Seal. They joined our program after my sophomore year and put our team on a weightlifting schedule for the entire year, including football season. I noticed a substantial improvement in my strength and endurance while following their plan.

Now that I’m older and, hopefully, wiser, I still follow their plan because it works. The formula is simple and easy to follow. It was because of their strategy and coaching that allowed me to experience better results.

A plan makes all the difference in the world for almost everything, notably investing. A financial plan can help investors improve their results by giving them a guide on how to achieve their goals. It addresses several issues, including investments, insurance, education, retirement, budgets, debt management, Social Security analysis, to name a few.

Like weightlifting, you won’t see results in a day from your financial plan. It may take months or years before your plan starts to bear fruit. And, like exercise, there will be up days followed by down days requiring you to be patient. During the down days or setbacks, it’s imperative to keep moving forward, regardless of your short-term results. If you completed your plan in October 2007, you were met with a wicked bear market where stocks fell more than 50%. I’m sure you didn’t expect to lose half your investment value within a few months, but if you followed your plan and stayed committed to it, you were able to enjoy a substantial rebound in the stock market from the lows of the Great Recession.

Exercising and investing require regular check-ups to measure your progress. Weightlifters constantly adjust their workouts depending on several factors, investors should do the same. Reviewing your strategy often is recommended based on your circumstances. At our firm, we offer quarterly reviews for our clients to make sure their plan and investments are meeting their needs. I also encourage clients to contact us during a life change – marriage, death, the birth of a child, a job promotion, retirement, etc. It’s easier to tweak your portfolio periodically than it is to do a significant restructuring.

Your plan desires action. If I have a written program for lifting weights, but I don’t follow it, I’m never going to get in shape. After you finish your written financial plan, you need to follow through with the recommendations of your advisor, don’t put it on your shelf to collect dust. Several years ago, I was working with a client who finished setting up a living trust for his family, but he didn’t transfer any assets into the trust. I told him he needed to follow through on his attorney’s recommendations to re-title his assets. He assumed, incorrectly, that since he finished the trust document, he did not need to do anything else. He needed to act on the plan.

Exercising is a lifelong pursuit, as is investing. A consistent, well thought out plan will deliver reliable results over time. Write down your goals, follow your dreams, work with a professional, and good things can happen.

What makes a weightlifting program successful? Your hard work and dedication. ~ Greg Everett

January 28, 2020

Bill Parrott, CFP® 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.

 

 

 

 

My College Tuition Experience

The student loan debt crisis is getting worse, not better. The current debt level is $1.5 trillion, and since 2003 it has increased 522% while inflation has risen 42%.  A child born today can expect to pay $655,000 in tuition to attend a private college or $323,000 for a public school.[1]

My daughter recently graduated from a private college in Texas, and, thankfully, we did not use student loans. Shortly after she was born, I opened a Uniform Transfers to Minors Accounts (UTMA) and transferred shares of Philip Morris to seed her account.

When my wife and I started saving for her college, we didn’t have the financial resources to contribute significant amounts of money, so we did what we could with what we had. We added $25 here and there, and when we were able to add more, we did. Her great-grandfather purchased a bond for her account, and her grandparents helped with supplies and books while attending college.

We started investing in her account during the late ‘90s, before one of the worst decades on record for common stocks. During the tech-wreck from 2000 to 2003, stocks fell 47%, so I sold the bond and added more stock. The asset allocation in her account for most of her pre-college years was 100% stocks. We owned JP Morgan, Disney, Pepsi, Apple, Amazon, and Google, to name a few.

When the market fell, I used it as an opportunity to buy great companies at discounted prices. A few years later, during the Great Recession, when stocks fell 53%, I added more companies. I bought the dip at every opportunity. During the first ten years of her life, the S&P 500 had a negative return; however, the next ten were much better, and the S&P 500 returned 338% from when we first started investing for her college career.

After I opened her investment account, I created a spreadsheet to track various colleges from around the country. The original list included fifty different schools, some private, some public. I updated the list annually to get an idea of what it was going to cost me to send my daughter to college. The figures were overwhelming and alarming, but we continued to save and invest.

As she got older, I culled the list. During her junior year of high school, it was cut to five, before she settled on her final choice. In my research, I noticed the smaller the school, the more beautiful the landscaping, the more expensive the tuition. I attended the University of San Diego, and my friends and I joked there were more gardeners than professors on campus.

When she was ready to attend college, I sold enough stocks to cover tuition, room, and board for one year. As we paid her expenses, I would sell more stock to replenish her cash balance. Thankfully, through the power of compounding and a rising stock market, her account kept a steady level, despite the withdrawals.

As I mentioned, when we started saving for college, we weren’t in a great financial position, but we were determined to pay for her tuition. We knew most of the inputs needed to figure out how much to save. For example, when she was born, we knew we were going to need a pile of money when she turned 18, and my spreadsheet allowed us to track the cost of fifty different colleges. As a result, we knew when and how much she would need, so it was an easy calculation.

Here are a few suggestions to help you and your family save for college.

  1. Take an inventory of your financial assets. How much money do you have in checking or savings accounts? Do you own any stocks, bonds, or mutual funds? Does your company offer an employee stock purchase plan (ESSP)? These are assets you can use to fund your child’s account.
  2. Open a 529 education account. The 529 account allows your money to grow tax-free. If you use the money for tuition and other college expenses, the distributions are also tax-free. The funds in a 529 account are invested in various mutual funds.
  3. If you want to purchase individual stocks or bonds, open a Uniform Transfer to Minor’s Account. The money you deposit into this account is considered an irrevocable gift to your child, so if they decide not to go to college and buy a Corvette instead, there’s not much you can do to stop them.
  4. Identify a few colleges and start tracking their expenses. Several websites will help you find the cost of most colleges, and some college websites will also have a tuition calculator.
  5. After identifying the school and cost, start investing. Set up an automatic draft so you can invest monthly to take advantage of the long-term compounding of the stock market.
  6. If the cost of attending a four-year university is too expensive, consider a community college. The tuition for a community college is about a third less than a public college.[2] After a year or two, you can transfer to a university.
  7. Work with a Certified Financial Planner® to help you formulate a plan for paying for college.

Unfortunately, the rate of inflation for tuition is growing at more than 7% annually.[3] At 7%, the cost of college will double every ten years – a sobering thought, so you must own stocks to help you keep up with the sharp rise in the price of tuition.

Regardless of your financial situation, saving any amount toward college will allow you to borrow less.

An investment in knowledge pays the best interest. ~ Ben Franklin.

January 26, 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] Money Guide Pro College Cost Calculator

[2] https://www.affordablecolleges.com/rankings/community-colleges/, website accessed January 25, 2020.

[3] https://www.edvisors.com/plan-for-college/saving-for-college/tuition-inflation/, website accessed January 25, 2020.

Rivers and Tributaries

The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.

The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can’t survive.

Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.

In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.

As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.

The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]

Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.

How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.

Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.

If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.

A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes

January 21, 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/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba

[2] YCharts

[3] Morningstar Office Hypothetical

Know Your Risks!

During college, my friends and I would often go skiing in Lake Tahoe. I wasn’t a good skier, but I could fight my way down a mountain. Most of the time, I didn’t realize the risk I was taking because my friends were much better skiers, and I went where they went. One afternoon we were skiing at Squaw Valley, when my former roommate, who grew up ski racing and spent one winter working with the ski patrol, decided to ski Chute 75, considered the fifth steepest run in Tahoe.[1] Not only was it steep, but it was about as wide as a hallway. I skied the run under duress and against my will, but I survived.

My family and I recently returned from a ski trip, and my risk level is much lower. I mostly ski groomed blue runs, occasionally mixing in a black diamond run or two. Now that I’m older and wiser, I’m aware of the risks I’m taking while skiing.

This past decade stocks soared 185%, outpacing bonds by 143%![2] It was also the first decade on record without a recession. As the market rises higher, investors want more risk assets, and they are willing to chase returns while abandoning safe assets like bonds.

If you owned a portfolio consisting of 60% stocks, 40% bonds ten years ago, and left it alone, your current allocation is now 80% stocks and 20% bonds.[3] Your original portfolio is now 25% riskier. During the Great Recession, a 60%/40% portfolio fell 35%, and the 80%/20% portfolio dropped 47%.[4] An unbalanced, unmanaged portfolio returned 10.5% for the decade. If you rebalanced your account annually to your original asset allocation of 60%/40%, you earned 9.6% – a good return, with less risk.

January is an ideal time to check the risk level for your investments, especially after last year’s excellent stock market performance. If your risk level is high, lower it by rebalancing your portfolio to its original allocation.

Here are a few ideas to help you make sure your risk level is in line with your goals.

  • Start with the end in mind and work backward. What is your asset target? How much money do you need to meet your financial goals? How much is enough? If you have the assets to retire, sell stocks and buy bonds. Lock in profits, take gains, reduce your risk profile.
  • Review your asset allocation. What is your current allocation to stocks and bonds? A glance at your account statements should give you all the data you need to determine your asset allocation.
  • Examine your stock positions. Do you own any stocks that account for more than 15% of your portfolio? If so, sell half and distribute the proceeds across several asset classes. Diversify your investments.
  • Stress-test your portfolio. What would happen to your investments if the market fell 20%? Are you comfortable with the results? You might be content with a 20% drop in percentage terms, but what about dollars? A $5 million portfolio will lose $1 million if stocks fall 20%. Can you manage a million-dollar loss?
  • Rebalance your accounts. Rebalancing your accounts every year will keep your risk level in check and aligned to your goals. If you participate in your company’s 401(k), you probably have a rebalancing tab that will automate this process for you, so you don’t have to think about it every year. It’s counterintuitive to sell investments doing well to buy ones that aren’t, but this strategy will allow you to maintain a consistent risk profile. And, if you’re comfortable with your investments, you’re more likely to hold them for the long haul.

A Certified Financial Planner® can assist you in reviewing your investments, determining your asset allocation, and analyzing your risk level. They can also help you create a financial plan to make sure you’re on the right trail to achieving your goals. Here’s a link to the CFP’s website to help you find an advisor in your area: https://www.letsmakeaplan.org/. Check it out and give us a call!

Cross country skiing is great if you live in a small country. ~ Steven Wright

January 7, 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] http://theliftiereport.rentskis.com/tlr/the-10-steepest-ski-runs-in-california/, Website accessed January 12, 2020

[2] Ycharts – S&P 500 Index and Vanguard’s Total Bond Fund.

[3] Morningstar Office Hypothetical – Vanguard S&P 500 Index Fund & Vanguard Total Bond Fund

[4] RiskAlyze

Ice Cream and Investing

My friends and I would ride our bikes (Schwinn’s) to Thrifty’s Store to get ice cream. Thrifty’s ice cream was the best, and it was economically priced for young kids – 5 cents for a single, 10 cents for a double, 15 cents for a triple. Thrifty’s used an ice cream gun to produce near-perfect cylinders, ideal for stacking a triple scoop in a sugar cone. My three go-to flavors were mint chip, chocolate chip, and rocky road – in that order. I had no desire for peach, strawberry, or vanilla. Thrifty’s, at the time, only had about ten flavors, so if my friends wanted more variety, we’d ride to Baskin-Robbins. I would still order my three favorites, however.

Ice cream and investing have much in common because it has something for everyone — some like vanilla, others chocolate. Individual stock pickers might spend hours doing research, reading reports, talking to companies, or listening to analysts hoping to find a unique flavor at a bargain. Or worse, they may watch an expert on TV talking about ice cream, and without any knowledge, they buy gallons of the flavor before tasting it because some guy told him it was going to be good.

Mutual fund investors rely on others to choose the ice cream for them, regardless of flavor. The investors give up the right to select peach or mocha because the flavors are handpicked by the money manager. A mutual fund ice cream owner will get the best flavors, and the worst. In addition to my three favorite flavors, I will also get ones I don’t like. However, the tasty flavors will outnumber the bad ones, and over time, the bad ones will go away.

Trying to pick individual stocks is challenging because you’re continually searching for the next big winner on a limited budget. Today if you decide to buy several ice cream cones with a dollar, you’re not going to get many, or any. And, if you’re fully invested, you must sell one stock to buy another. Do you sell vanilla to buy chocolate? Trading stocks can be expensive, and it’s not tax efficient.

Owning a globally diversified portfolio of low-cost mutual funds is a better solution for most investors because you can own several thousand stocks and, gasp, bonds. I prefer not to eat strawberry ice cream, but millions do. If my mutual fund owns strawberry ice cream, I win even if I don’t eat it. My globally diversified portfolio gives me exposure to stocks on the other side of the world that I would not have chosen myself. Chinese people like black sesame ice cream, Indians want jackfruit, and Swedes prefer ice cream with lingonberries[1]. If I didn’t own a global portfolio, I would miss out on these distinctive flavors.

Here are a few reasons to own a globally diversified portfolio of low-cost mutual funds.

  • Your investment portfolio is a function of your goals, whether you’re aggressive, conservative, or somewhere in between. If your investments match your goals, you’re more likely to hold on to them regardless of market conditions allowing you to capture the upward trend in the stock market.
  • Your costs will go down because you won’t need to trade because your account is being managed for the long haul by your fund managers.
  • Mutual fund companies are in a trade war as they compete against each other to lower their fees. Their pain is your gain. Schwab, Fidelity, Vanguard, and T.D. Ameritrade each have waived their trading commissions. Dimensional Fund Advisors is lowering fees on 77 of their funds. The cost of their U.S. Large Company Portfolio is dropping 40%![2]
  • A balanced portfolio will remove your investment bias and tendencies. I prefer buying large companies with growing dividends, but I also need to own small international growth companies that don’t pay any dividends. A global portfolio allows me to hold a variety of stocks, especially ones I would never buy on my own.

I own a globally diversified portfolio of low-cost mutual funds because it allows me to enjoy my life and focus on things I want to do, like eat ice cream.

I scream, you scream, we all scream for ice cream! ~ Howard Johnson

January 7, 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.zagat.com/b/crazy-ice-cream-flavors-around-the-world, by Linnea Covington, June 1, 2016.

[2] https://www.barrons.com/articles/dimensional-fund-advisors-enters-the-asset-management-fee-war-51577137749, by Evie Liu, December 23, 2019

New Year’s Resolutions

Lose weight. Exercise more. Save money. Take a trip. It’s that time of year again to make New Year’s Resolutions. In January, optimism is high, but by year-end, it fades. According to one study, only 8% of people achieve their goals.[1] My two main 2020 goals are to climb a 14er in Colorado and learn to play guitar. Maybe I can play the guitar on top of a 14er! What are your goals for next year?

Most goals fail because they aren’t specific. Saving money is a good goal, but how much? You’re more likely to hit, or come close, to your goal if you say, “I want to save $10,000 by December 30, 2020.” Details matter when setting goals.

Financial planning works because it requires specific data. Retiring at 65 is a tangible target, retiring someday is not.  Hoping to pay for college is not as powerful as saving $500 per month towards tuition in a 529 account.

Of course, health and wealth are important goals. But what if this year you set goals to give more, serve more, and love more? Bob Goff said, “Plans work, or they don’t. Love always works. Go with the sure thing.” He adds, “Make your life about people, and you won’t regret it.”

If you’re setting financial goals, you probably have money to give. What if you changed your focus to serve others? For example, can you give away 10% of your income to groups or organizations you support? Giving money to those in need has a multiplier effect. Your gift will benefit many, but most importantly, it will benefit you and your family.

What if you can’t give away 10% of your income? Give 5%. Give your time. Can you donate 10% of your time to serve? A Google search will yield a bounty of non-profit opportunities. Serving others is powerful. Several years ago we downsized our house, and I was feeling down because I had to give up the swimming pool. A few months after we moved, I went on a mission trip to Nicaragua and served those living in homes built with cinder blocks and plywood. I don’t miss my pool anymore.

Love always works, as Bob Goff said. Loving others sounds simple, but it’s hard to do. Jesus said in Mark 12:31, “Love your neighbor as yourself.” A simple command. Can it be quantified? Probably not, but do it anyway. Spend time with friends and family. Listen more; be present. Also, men, you don’t have to solve every problem.

Give, serve, and love are resolutions that cost you little, but they’ll pay huge dividends to those who benefit from your kindness.

Give often, serve early, and love always.

Happy New Year!

 In the same way, let your light shine before others, that they may see your good deeds and glorify your Father in heaven. ~ Matthew 5:16

December 31, 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://nypost.com/2018/12/21/new-years-resolutions-last-exactly-this-long/, Shireen Khali, December 21, 2018

The Christmas Eve Trouncing

Christmas Eve is a time of peace and joy as Christians celebrate the birth of Christ, and children of all ages anxiously await the arrival of Santa Claus. It’s a wonderful time to spread good cheer.

Pre-holiday trading days are usually benign as traders and investors leave their computers and trading desks to spend time with friends and families.  Volume and trading activity are light, and savvy traders can take advantage of price swings to profit as markets usually rise the day before a holiday.[1]

However, trading on Christmas Eve last year was a nightmare. The Dow Jones fell 1,462 points, or 6.3%, from the high on December 21 to the low on Christmas Eve, a brutal day for all. The dropped capped off a terrible fourth quarter, as the Dow Fell 12.5%.[2] Investors were worried about rising interest rates and an escalating trade war.

During the fourth quarter, investors panicked and removed $183 billion in assets from mutual funds. They ran for cover, looking for safety in money markets and U.S. Treasury investments.  The long-term U.S. Treasury ETF (TLT) rose 4.6% during the equity assault.

Market strategists were not optimistic about equities in 2019. Bank of America Merrill Lynch “…urges investors not to overlook the potential attraction of cash.”[3] Morgan Stanley was calling for “an outright earnings recession.”[4]

What happened since the Christmas Eve drubbing? Were investors wise to sell stocks? Was cash the answer? Let’s look.

From Christmas Eve of 2018, the Dow Jones has risen 31.05%. Not to be outdone, the NASDAQ rose 44.3%, the S&P 500 added 37.2%. Staggering returns.

When markets swoon, don’t panic. Fear is never beneficial for the long-term investor. If the market is cratering, do nothing. Wait for the storm to pass before you make any financial decision. Markets always recover.

If you’re a long-term investor, buy the dip. Use a market drop to add to your equity holdings. Look for quality stocks to put in your stockings as you’ll be rewarded with an excellent gift when stocks recover.

If you’re concerned about a market drop, buy bonds. Bonds perform well when stocks fall.

2019 has been an excellent year for investors as every major asset class is in positive territory.  As we close out the year, and the decade, follow your plan, celebrate your success, and enjoy the holidays.

Merry Christmas!

Happy Christmas to all, and to all a good night!” ~ A Visit from St. Nicholas, by Clement Clarke Moore

December 24, 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://school.stockcharts.com/doku.php?id=trading_strategies:the_pre-holiday_effect, website accessed 12/23/2019

[2] YCharts

[3] https://www.forbes.com/sites/johntobey/2018/12/16/barrons-2019-outlook-professionals-sense-recession-risk/#c75cb9239d85, John S. Tobey, December 16, 2018.

[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

Friends

Friends was a favorite television show of mine. Each Thursday night, I was glued to the TV to watch the eclectic mix of characters – Rachel, Phoebe, Joey, Monica, Chandler, and Ross. They made me laugh for ten years. The show worked because each character had unique and special talents. One of my favorite episodes was when Joey put on all of Chandler’s clothes while getting ready for Ross’s presentation.[1]

Friends come to us from all corners of our life. Friends from school, church, work, the neighborhood, and so on.  Depending on where we are in our life our friends enter our lives at various stations. Some are lifelong friends who see us at our best and our worst. Others are seasonal. Friends can live next door or in different towns, in different states, or distant lands. You might talk with them daily, or once a year. Regardless, a good friend is worth their weight in gold.

I have friends that I’ve known since kindergarten, others I met in junior high, high school, or college. I’ve had great work friends. Friends from mission trips and others from the states where I’ve lived.

Long-term friendships require work and patience, but it’s worth the effort. It’s challenging to maintain relationships for decades because your friends know your hot buttons. They see you on your good days and your bad ones. They’re by your side through thick and thin, celebrating your wins and consoling you in defeat. Holding stocks for a long time also takes work and patience. I’ve owned Disney, Microsoft, and Pepsi for years, and all three have caused happiness and sorrow. It’s easy to own a stock like Amazon when it’s up 17%, but how about when it’s down 94% like it was during the Tech Wreck in 2000?[2] To benefit from the upward trend in stocks, you must own them deep in the valley and at the peak.

Short-term relationships are seasonal. You might meet a friend on a mission trip or business conference. It could be a former neighbor who moved to a new state. Short-term friendships are beneficial regardless of their duration. Investments held for a limited time can enhance or protect your portfolio. Using options to generate income or protect a holding makes sense at times. Stocks can come and go, as well. You might buy a stock for a short-term trade or a seasonal trend. Stocks like Walgreens or Cisco will make occasional appearances in my portfolio, depending on their price.

And, unfortunately, some friendships turn toxic and blow up, never to return. Companies like Enron and Worldcom were friends to many during their glory days before they imploded and wiped out all their shareholder capital. For a moment in time, they were must own investments because of their meteoric returns despite their deteriorating financials.

The cast of Friends had six primary characters in front of the camera, and countless support personnel behind it. For your investment portfolio to succeed, a supporting cast is necessary. Relying on Certified Financial Planners®, attorneys, CPAs, money managers, and other professionals will pay dividends towards increasing your wealth.

Let’s review a portfolio of six different investments to see how they performed these past few years. The funds, a mix of distinct asset classes, have unique attributes designed to react differently depending on the market conditions.  The portfolio dating back to 1993 generated an average annual return of 9.63%. The portfolio’s best year was 2003, up 27.03%. The worst year was 2008, down 18.24%. This year it’s up 21.02%. During the past 16 years, it had three down years, and it rose 83% of the time.[3]

Here is the portfolio:

IVV = S&P 500 = 30%

EFA = International = 20%

TLT = Long-Term Bonds 30%

IJR = Small Caps = 10%

EEM = Emerging Markets = 5%

IYR = Real Estate = 5%

Though the portfolio performed well over the past 16 years, the returns for the individual holdings varied. For example, the small-cap, large-cap, and real estate sectors performed well over the past decade while bonds, international and emerging markets lagged. This past year, however, bonds have outperformed the other asset classes.  The leaders and laggards constantly trade the top spot, like horses in a race.

If every character of Friends were the same, the show would not have done well. The variety of actors is what made the show special. If you own similar investments, it’s not diversified, and it will not perform well over time. A diversified portfolio of low-cost funds should treat you well, like a good friend.

A friend loves at all times, and a brother is born of adversity. ~ Proverbs 17:17

December 16, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. 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://mashable.com/article/best-friends-episodes/

[2] YCharts

[3] Morningstar Office Hypothetical – 1993 to 2019.