Are You Too Frugal?

The person who dies with the most toys – loses!

John Bogle, the founder of Vanguard, recently passed away with a net worth of $80 million. By Wall Street standards $80 million is pocket change, especially for someone who founded one of the largest investment and asset management firms in the world.  Vanguard has about $5.3 Trillion in assets under management.[1]  By comparison, Stephen A. Schwarzman, the CEO of The Blackstone Group, has a net worth of $12.4 billion. Blackstone’s assets under management are $427 billion, or 8.5% of Vanguard’s total.

Mr. Bogle is known for being frugal, probably to a fault. He once said, “I don’t like going into stores, I don’t like the whole process of buying things.” He didn’t like spending money on himself, but he did donate to charities and schools including The John C. Bogle Center for Financial Literacy, Blair Academy and Princeton.

Mr. Bogle could have sprinkled his assets to individuals or groups he supported, including himself, without risk of running out of money.

It’s good to be frugal and watch your budget, but is it possible to be too frugal? I think it is. For example, if you drop your daily Starbucks habit, you could save $152,000 over the next 30 years, but would you be happy? I’ve seen individuals who look to save a dollar or two on small ticket items but hold 100% of their assets in cash, CDs or T-Bills. Rather than trying to save a few nickels by kicking your coffee habit, move your assets to stocks so you have an opportunity to make more money. Since 1945 stocks have averaged 11.3% per year while T-Bills have returned 3.9%, a difference of 7.4% per year! With the money you make from stocks you can now afford multiple lattes!

Mr. Bogle followed an asset allocation of 60% stocks, 40% bonds in his retirement accounts. His taxable allocation was more aggressive with 80% stocks, 20% bonds.[2]

Here are a few suggestions for you to spend more money and be less frugal.

Spend. The goal is not to die with the most assets but to use your net worth to live and enjoy life. Cash is a use asset, so use it accordingly. If you’re concerned about spending money on things, spend it on experiences. A family trip to a national park is not only a great experience, it’s also economical.

Give. If your assets are burning a hole in your pocket, give them away. Donate your resources to charities or organizations you support. Your gift will bless the organization and you’ll benefit from a tax write off.

Retire. Retiring early will give you an opportunity to travel to distant lands, spend more time with your loved ones, or volunteer your time. If you retire early, you’ll spend your money sooner rather than later. In addition, you can use your resources while you’re young and mobile. A former client saved his money to travel with his wife, but she died one month after his retirement. Don’t wait to enjoy your resources because you don’t know when you’ll leave God’s green earth.

What if you’re not blessed with a net worth of $80 million? How do you know how much money you can spend before you run out of money? A financial plan will help you create a spending plan based on your current assets. It will also recommend an appropriate asset allocation and risk tolerance level in hopes of maximizing your return.

So, go ahead, buy the latte and enjoy your life!

A nickel ain’t worth a dime anymore. –Yogi Berra

February 14, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Happy Valentine’s Day!

 

 

 

[1] http://fortune.com/2019/01/16/john-bogle-vanguard-founder-created-index-funds-dies-89/, by Kevin Kelleher, 1/17/2019

[2] https://www.investopedia.com/articles/financial-advisors/012716/where-does-john-c-bogle-keep-his-money.asp, Richard Best, 4/26/2018

Better Off Dead?

Dr. Daniel Crosby is the author of The Behavioral Investor. In his book he highlights a story about Fidelity Investments and their attempt to identify their best performing retail accounts. They found that the individuals who owned these accounts had forgotten they existed, or the original account owner had passed away.[1] Fidelity was probably looking for an investment theme to duplicate. However, they discovered that these accounts weren’t being traded or tainted by human hands – living or deceased.

He tells of another story from the book Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory written by Greg B. Davies and Arnaud de Servigny. The authors discuss a study about how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[2]

Stocks have never lost money during a rolling 20-year period according to multiple studies. From 1926 to 2018 there have been 74 rolling 20-year periods and stocks have made money 100% of the time.[3] The most recent period, 1998-2018, finished with a positive return. An investment in the SPDR S&P 500 ETF (SPY) on 1/1/1998 generated an average annual return of 7.10% through 1/1/2018. However, during this 20-year period you would’ve experienced significant losses on several occasions. From 2000 to 2002 the market fell 43.07% and in 2008 it dropped 36.81%. As I mentioned, if you checked your balances daily, your chance of a realized loss was high.[4]

It’s hard to ignore your accounts especially if you’re connected to Twitter, Facebook, and other social media sites. Custodians and brokerage firms also have apps allowing you to check your accounts 24/7. Investment firms offer trading alerts and other notices to keep you in the know. It’s a fast-paced world and reacting to headline news stories may wreak havoc to your long-term wealth.

To protect your wealth from irrational reactions turnoff your account alerts and notices. Rather than reviewing your balances daily, try extending it to a month, then three months, and so on. Extending the time frame for reviewing your accounts will reduce your anxiety and potentially increase your returns.

You don’t have to die to generate solid returns. Rather, incorporate a buy and hold investment strategy with a balanced portfolio of low-cost investments. A diversified portfolio of low-cost mutual funds will reduce your dependence to constantly check your accounts. In doing so you’ll be able to enjoy your life while you’re living.

And lead us not into temptation, but deliver us from the evil one. ~ Matthew 6:13

February 11, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 2673, accessed 2/10/19.

[2] Greg B. Davies, Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory (McGraw-Hill, 2012), p. 53. The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 1423, accessed 2/10/19.

[3] Ibbotson® SBBI® 2015 Classic Yearbook

[4] Morningstar Office Hypothetical – SPY, 1/01/1198 to 1/1/2018.

The Hallmark Channel

The Hallmark Channel has hit the motherlode with their romantic holiday themed movies.  Women of all ages are attracted to their shows, especially women between the ages of 25 to 54. My wife is a huge fan of their movies, especially during the Christmas season. She says, “I love a good love story, they make me laugh and feel good.” She adds, “The women are often portrayed as positive female role models in the workplace and the men are nice guys who respect women.”

Their movies follow a predictable pattern. A snowstorm or some other event brings a man and woman together in a bucolic setting straight from a Norman Rockwell painting.  At first, there’s no connection between the two, but through a series of events the couple gets together and fall in love at the end of the movie – usually in the last 5 minutes.  In addition to being predictable, the movies are safe to watch with the entire family without any hidden surprises. It’s wholesome entertainment and they have no desire to lower the bar by adding R-rated material or foul language. They know their target audience well.

One of their more popular shows was Christmas Under Wraps starring Candace Cameron Bure. She was about to receive a prestigious fellowship before taking a job as a doctor in a small Alaskan village. Ms. Bure has appeared in several Hallmark movies, as have many of their cast members including Meghan Markle, the Duchess of Sussex.

But does their model work? In 2017 they generated $390 million in ad revenue from the Hallmark Channel. The movies and mysteries added another $146 million – that’s a lot of love! The HBO channel spends about $10 million to $15 million to produce one of their shows; Hallmark spends about $2 million. In 2017 they were expected to draw 85 million viewers and since 2008 they have made 136 original movies.[1] The shows are economical to produce, and they generate a lot of revenue

Investors would be wise to follow Hallmark’s blueprint for success. They focus on predictable content, steady actors, minimal locations, and sensible budgets.

How can you write an investment script to stand the test of time? Here are few thoughts.

  • Develop a financial plan. Your financial plan will direct your investments, asset allocation, risk tolerance, goals, timeline, etc. It will be your guide.
  • Diversify your portfolio with a basket of low-cost mutual funds or exchange traded funds. Funds managed by Blackrock, Dimensional or Vanguard are solid candidates for your portfolio. A portfolio of large, small and international stocks will give you global exposure. Adding bonds to your account will reduce your risk.
  • Stay invested. The less you trade, the better. If you trade often, you’ll end up paying excess fees and missing key market moves. For example, traders who moved to cash in December because of the drop in the stock market, missed the surge in January. A buy and hold strategy will allow you to create wealth over time.
  • Rebalance your accounts once or twice per year. Keeping your asset allocation and risk tolerance intact is key to your long-term success as an investor. If you start the year with 60% stocks, 40% bonds and by the end of the year your allocation is 70% stocks, 30% bonds, then sell 10% of your stock holdings and buy bonds.
  • Work with an advisor. A registered investment advisor (RIA) who holds the Certified Financial Planners designation can work with you to develop your financial plan, implement your investment strategy, and keep you focused on your financial goals.

A buy and hold strategy with low cost investment funds based on your financial plan and asset allocation is safe and predictable. It’s a G-Rated strategy that’s appropriate for investors. And, who knows, you may fall in love with your long-term results!

Do everything in love. ~ 1 Corinthians 16:14

February 4, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. I like the Hallmark Channel too – but don’t tell anybody.

 

[1] https://www.marketplace.org/2017/12/27/life/christmas-movies-netflix-hallmark-channel-prince-numbers, by  Jana Kasperkevic, 12/27/2017

Capitalism Wins

Henry Ford is credited with revolutionizing the auto industry and was on the forefront of innovation by creating the assembly line. He paid his employees $5 per day so they could purchase the cars they were manufacturing. He once said, “If I had asked people what they wanted, they would have said faster horses.” Mr. Ford’s net worth was about $200 billion. Capitalism allowed him to create great wealth.

Billionaires and the uber-wealthy are under attack by Elizabeth Warren, Bernie Sanders, and Alexandria Ocasio-Cortez.  Ms. Warren is calling for a tax of 2% on wealth from $50 million to $1 billion and 1% above $1 billion.  Ms. Ocasio-Cortez is suggesting a top tax rate of 70%.  Mr. Sanders wants an estate tax of 77% for estates north of $1 billion. He’s also proposing a 45% tax for estates with assets more than $3.5 million. When fisherman cast a wide net, they catch big and small fish.

Apple, Amazon, Ford, Facebook, Google, McDonalds, Microsoft, Nike, Starbucks, and Walmart were all founded by one or two people. These ten companies started with an idea from their founding fathers who weren’t billionaires at the time. Today these ten companies employ 3.7 million people.

Let’s do a deeper dive into these 3.7 million people. I’m assuming 75% of them are married and half the couples have two children. I arrive at 10.1 million people with my math. I’m also going to assume half of this population works and earns $100,000 per year. So, as a group, they’ll earn $506 billion per year. The average tax rate for this cohort is 22%. At 22%, they’ll pay $111 billion in taxes! Over the course of a decade they’ll pay more than $1 trillion in taxes. I’m not sure how many people Ms. Warren employs, but I’m positive they don’t pay $111 billion in taxes.

Furthermore, these 10.1 million people need services. They need teachers, doctors, real estate agents, insurance agents, bankers, grocers, plumbers, gardeners, bus drivers, electricians, painters, roofers, veterinarians, nurses, dentists, lawyers, accountants, dry cleaners, mechanics, architects, builders, engineers, librarians, florists, morticians, police officers, fire fighters, ambulance drivers, paramedics, military personnel, pilots, travel agents, butchers, bakers, and candlestick makers.

These billionaire’s employ thousandaire’s. On a recent Mad Money episode with Jim Cramer, Ms. Warren called for billionaires to “Stop being freeloaders.” Bill Gates doesn’t fit the description of a freeloader to me, but I could be wrong.

I’m not opposed to paying taxes and I believe everybody should pay their fair share. In fact, so does Jesus. Mark 12:17 says, “Give to Caesar what is Caesar’s and to God what is God’s.”

The individuals who founded these ten companies are also philanthropically oriented and they’ve established the following organizations: Bill and Melinda Gates Foundation, Bezos Family Foundation, The Brin Wojcicki Foundation, Carl Victor Page Memorial Foundation, Chan Zuckerberg Initiative, Emerson Collective, Ford Foundation, The Joan B. Kroc Foundation, Knight Foundation, Schultz Family Foundation and the Walton Family Foundation. These charitable organizations are armed with billions of dollars to make our world better by focusing on education, healthcare, the environment, and several more causes. They also employ thousands of people.

Our capitalist structure gives everybody an opportunity to succeed. People living in Afghanistan, Haiti, and Venezuela will never have this experience.  Socialists suck resources out of their citizen’s pockets. Margaret Thatcher said, “The trouble with Socialism is that eventually you run out of other people’s money.”

Animals are hypersensitive to danger and activate their fight or flight response often. The gazelle knows when the cheetah is lurking.  Billionaires and other wealthy individuals will defend their wealth by moving money overseas, changing residences, or creating trusts. On paper, they’ll look like paupers. They won’t wait around to be eaten by the government if the attack on their wealth begins. When the wealthy move and take their business with them what will be left? Venezuela? Ayn Rand captures this sentiment in her best-selling novel Atlas Shrugged.

If you want to protect your wealth or help others, here are a few strategies you can employ.

  • Charitable Remainder Trust (CRT)
  • Annual Gift Exclusion
  • Charitable Lead Trust
  • Donor Advised Fund
  • Family Limited Partnership
  • Grantor Retained Annuity Trust (GRAT)
  • Life Insurance Trust (ILIT)
  • Private Annuity
  • Revocable Family Trust

My great-grandparents migrated to Los Angeles from Mexico in the early 1900s. My grandfather told me repeatedly they didn’t have a pot to piss in, they were poorer than poor. He came of age during the Great Depression. He was a good student and wanted to attend Stanford, but his family couldn’t afford it, so he went to work instead. When he was 50 years old, he started his own business and was financially successful. If you’ve ever eaten at a fast food restaurant or enjoyed a bag of chips, you’ve benefited from his handywork. At his death, he gave his wealth to two colleges in Southern California for perpetual scholarships. His gift allows students without resources to obtain a college degree, one of the few things missing from his resume.  Capitalism allowed my grandfather to create great wealth.

Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler. ~ Proverbs 6:5

February 1, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

What is the S&P 500?

What did the market do today? Was it up? Down? When people refer to the “the market” it’s usually the S&P 500® Index. But what is it? It’s a key benchmark money managers, mutual funds, and other professionals use to measure performance.

The S&P 500® Index is a collection of the 500 largest publicly traded U.S. corporations. It’s a market weighted index meaning the largest companies have the greatest impact on performance – good and bad.  The largest company in the index is Microsoft; the smallest is News Corp. When Microsoft moves, so will the index. The 10 largest companies in the index are Microsoft, Apple, Amazon, Berkshire Hathaway, Facebook, Johnson & Johnson, JP Morgan Chase, Alphabet, Exxon Mobil, and Bank of America. The largest sectors are Information Technology, Healthcare and Financials.

Standard & Poor’s launched the now famous index on March 4, 1957. It’s a better gauge of the market because of the breadth of its holdings especially when compared to the Dow Jones Industrial Average which only holds 30 companies.[1] The Dow Jones index was founded in May 1896.

Because of the breadth and consistency over time there are currently $9.9 trillion in assets linked to this index. The most popular one is the Vanguard S&P 500 Index Fund founded by Mr. John Bogle. Mr. Bogle recently passed away and this put a spotlight on this popular category. Mr. Bogle started the fund in 1976 to a less than stellar opening. His goal was to raise $150 million but he only received $11.4 million – a rounding error on Wall Street.[2] The fund currently has assets of $400 billion! If you had invested $10,000 in this fund when it opened, your account balance would be worth $744,951 today. It has generated an average annual return of 10.71% since its feeble beginning.

Wall Street was not a fan of Mr. Bogle’s fund because of its low fee structure and average returns. What investor would want to own a fund generating average returns when active fund managers and stock pickers could do so much better? Makes sense. However, active stock pickers rarely outperform the S&P 500® Index. In fact, 91% of active fund managers failed to outperform the S&P 500® over a 10-year period and 95% of funds with high fees lagged this key benchmark. The active managers were below average, well below.[3]

Rather than average returns consider market returns. If you can generate market returns over time, your wealth should grow despite the occasional drop in value or spike in volatility. A low cost, diversified investment like the Vanguard S&P 500® Index Fund is a great candidate for most investors.

As a side note, the S&P 500 owns 505 companies!

Happy Investing.

“The two greatest enemies of the equity fund investor are expenses and emotions.” ~ John C. Bogle

February 1, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] file:///C:/Users/Bill%20Parrott/Downloads/fs-sp-500.pdf

[2] https://www.inc.com/magazine/201210/eric-schurenberg/how-i-did-it-john-bogle-the-vanguard-group.html, B Eric Schurenberg, 9/25/2012

[3] https://office.morningstar.com/research/doc/Aug%2023%202018_Active_vs_Passively_Managed_Funds_Takeaways_from_Our_Mid-Year_Report__880196, Ben Johnson, August 23, 2018

The Shutdown

As you watch the Super Bowl you may hear the term “shutdown corner.” A shutdown corner is the best defensive back on the team and they’re usually left on their own to cover the other team’s best receiver.  Some of the best shutdown corners have been Deion Sanders, Lester Hayes and Charles Woodson. A shutdown corner is a good thing, a government shutdown is not.

The shutdown lasted 35 days, removed $11 billion from the Gross Domestic Product, and impacted 800,000 federal workers.[1] The government reopened to a temporary deal, but it could grind to a halt again on February 15th. At the end of the day, it appears not much has changed.

Since 1980 there have been 10 government shutdowns, most lasting 1 to 5 days, so the financial impact on federal employees was minimal. However, this shutdown lasted 35 days forcing some employees to rely on food stamps, handouts, and other stopgap measures to keep their households afloat.

It was heartbreaking to read stories about workers struggling to make ends meet. The circus in Washington exposed a dark side to our economy in that numerous families live paycheck to paycheck with little, to no savings, in the bank.  When the tide goes out, rocks are exposed, or as Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

What can you do to fortify your resources so you’re not dependent on the government to bail you out of an unfortunate situation?

Stop spending. If you’re spending money on nonessential items – stop. Rather than spending money on items you don’t need, redirect your money to your savings account.  “Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also. ~ Matthew 6:19-21

Reduce your debt. Paying down your debt will pay big dividends in the future. Credit cards, auto loans, and student loans will divert good assets to pay for bad ones.  Start with your lowest balance and work your way to the largest. Dave Ramsey refers to this as the debt snowball. As you payoff one debt, apply the previous payment to your next obligation.  The rich rule over the poor, and the borrower is slave to the lender. ~ Proverbs 22:7

Sell your stuff. Do you have items in the attic or stuff in a storage unit? If so, sell them on EBay, Etsy, or Craig’s List.  If you have things in your house that you haven’t touched in years, sell them so you can raise cash or payoff debt.

Raise cash. During hard economic times cash is king.  According to a Forbes article “63% of Americans don’t have enough savings to cover a $500 emergency.”[2] One way to increase your savings is to set up an automatic draft between your checking account and savings account. Eating out less often or drinking coffee at home will also help you save a few dollars.

Create a spending plan. A budget will keep your spending inline. There are several online services to help you get a handle on your money. Services like Mint, NerdWallet or Every Dollar can help you track your income and expenses. Knowing where your money is going is half the battle.

Give. Giving money away seems counterintuitive to saving money but it will help you free your dependence on hoarding assets. Also, there’s never a bad time to do some good. “Love your neighbor as yourself” ~ Mark 12:31

You can control your spending and your savings. If you reduce spending and increase savings, then you can free yourself from financial stress and worry. Keep your lives free from the love of money and be content with what you have, because God has said, “Never will I leave you; never will I forsake you.” ~ Hebrews 13:5

Life is hard and things happen, so while things are good, store up savings so you can survive the next storm. Little actions today will have big consequences tomorrow – good and bad.

“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.” ~ Will Rogers

January 30, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] https://www.nolabels.org/blog/five-facts-on-the-economic-consequences-of-the-government-shutdown/, 1/29/2019

[2] https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-cover-a-500-emergency/#340aeead4e0d, Maggie McGrath 1/6/2016

What if I’m Wrong?

Being wrong is no fun just ask the referees from the recent NFC playoff game between the Los Angeles Rams and New Orleans Saints.

Timing is everything and sometimes the difference between right and wrong is a split-second decision. Of course, no one wants to be wrong, but it’s a part of life.

I believe stocks will generate wealth for years to come, but what if I’m wrong? What if you invest at the wrong time and lose money? Can you recover from a sharp sell off? Since 1926 stocks have risen about three quarters of the time and generated an average annual return of 10%. They’ve created wealth for legions of investors but what if it’s different this time?

Let’s look back at four difficult times for investors: 1929, 1973, 2000 and 2008.

1929

On January 1, 1929 an investor who started with $1,000,000 and allocated their holdings to 60% stocks, 40% bonds lost money for six straight years before recovering in 1935 with a value of $1,018,082. The stock component of $600,000 fell 65% to $207,961 by the end of 1932. The bond portfolio never dipped below $400,000. The returns weren’t great, but over 20 years the portfolio generated an average annual return of 3.8%.  From 1929 to 1949 stocks rose 50% of the time, bonds 85%.  At the end of 1949 the portfolio was worth $2,188,086, a gain of $1,188,086.

1973

An investor with a $1,000,000 portfolio and an allocation of 60% stocks, 40% bonds in 1973 had to wait until 1976 before their account was profitable. The combined portfolio generated an average annual return of 7.05% from 1973 to 1983. Stocks fell 37% in the first two years, but they made money 63% of the time, bonds made money 54%. The $1,000,000 portfolio was worth $2,114,774 at the end of 1983, a gain of $1,114,774.

2000

An investor with $1,000,000 and an allocation of 60% stocks, 40% bonds had to wait until 2003 before their portfolio recovered. Stocks fell 37% from 2000 to 2002 and their bonds never lost money. In fact, from 2000 to 2018 bonds outperformed stocks by a wide margin. Stocks averaged 4.65% annually while bonds returned 6.87%. The combined portfolio turned $1,000,000 into $2,834,987 at the end of 2018, a gain of $1,834,987. Stocks rose 74% of the time, bonds 79%.  The combined portfolio generated an average annual return of 5.64%.

2008

An investor with $1,000,000 and an allocation of 60% stocks, 40% bonds had to wait two years before their portfolio recovered. In 2008 stocks fell 37% and bonds rose 26%. Stocks rose 81% of the time, bonds 63%. The combined portfolio returned 6.44% per year and the portfolio grew to $1,987,575 at the end of 2018, a gain of $987,575.

Despite investing during some of the worst times in history, these portfolios still generated positive returns over time. A courageous investor made money by staying the course. Trying to time the market and panicking during downturns will do more harm than good. If you’re a long-term investor, ignore the short-term ripples in the market.

Now faith is confidence in what we hope for and assurance about what we do not see. ~ Hebrews 11:1

January 23, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.  The returns were calculated based on the data from the 2015 Ibbotson® SBBI® Classic Year Book.

 

Happy Anniversary to Me!

This year marks my 30th year in the investment business and what a long strange trip it’s been.

My last semester at the University of San Diego I took an investment course with a young, energetic, and entertaining investment professor. His knowledge about investing was second to none and he taught our class how to apply our learning to the real world of investing. His course changed my career trajectory.

I was living the good life as a college student. I lived in Mission Beach with the beach on one side and the bay on the other. My roommate at the time was in the same investment class.

After graduation I was working for Bank of America in downtown San Diego processing loans for residents of Orange County. My roommate took a job as a stockbroker with a penny stock firm. The stock market closed at 1:00 and on most days he’d call my office to let me know he was going to the beach.  He was going to the beach at 1:30 and I wasn’t getting home until 7:30. I asked, “Jim, did you make any money today?” His response, “Bill, I’m always making money!”

The thought of making money and going to the beach at 1:30 was too much to pass up so I called a former roommate whose dad was managing a small office for Spelman & Company in Rancho Bernardo. His dad told me if I passed the series 7, he’d hire me as a stockbroker. I borrowed some old series 7 training manuals and studied for a couple of months. I passed the exam with a score of 70.3! I was later told that the lower your score on the series 7, the better your odds of succeeding in the business.

Once I received my results, I resigned from Bank of America. My first official day on the job was May 8, 1989. My friend’s dad was an incredible mentor and it was an honor to work at his side. To get clients I spent most of my day cold calling with municipal bonds.

A few months later I moved back to Los Angeles to start working with Dean Witter in Pasadena. I went through their training program in April 1990. Like my job in San Diego I spent most of my day cold calling for new business. In addition to municipal bonds I added preferred stocks to the mix, and I’d dial the phone morning, noon and night – about 300 to 400 times a day, including Saturdays. My source of leads was the Criss Cross Directory. The early 90s was a great time to cold call because there was no caller ID, cell phones, or internet to interfere with my mission. To increase my odds of success I’d find a local bond paying 7% or more – tax free! My standard script went something like this: “Hello Mrs. Jones, My name is Bill Parrott and I’m calling from Dean Witter in Pasadena. The reason for my call today is that the City of Arcadia has just issued a new tax-free bond paying 7%. Would you like to hear more about it?” I repeated this process throughout the day. For a moment in time, I was the number one trainee in my class.

At Dean Witter I was blessed to work with another incredible mentor, a gentleman who’s been on the Barron’s 100 list of top advisors each year it’s been published. After hours we were often the only two left in the office and we’d go to lunch on several occasions.  I’d pick his brain about the business at every opportunity.

My mentors taught me more than investments, however. They taught me how to treat clients with respect and to put their interests above mine. I learned much by watching and listening to how they conducted themselves daily. Their wisdom, teachings and examples are still with me today.

On May 8, 1989 the Dow Jones Industrial Average closed at 2,376. It has since risen 933% to 24,553, averaging 8.17% per year – before dividends for the past 30 years! Despite the long-term success of stocks, each year, including this one, forecasters have called for the market to drop because it’s overvalued. In fact, the first year I started in the business one large producer told me to sell stocks and buy silver. I didn’t take his advice, thankfully.

During my career I worked in California, Connecticut and Texas. After Morgan Stanley and Dean Witter merged, I joined the management pool; managing offices in New Haven, CT and Austin, TX.  A few years after leaving Morgan Stanley I joined a large discount brokerage firm to work with executives, attorneys, pilots and doctors across the country. I spent a good deal of time in hotels and airports.

When I turned 50, I started my own company. My daughter was leaving for college and I thought if I don’t start my company now, I never will. It was a leap of faith. We live by faith, not by sight ~ 2 Corinthians 5:7.    

My firm is doing well and growing. I’ve had the benefit of working as an independent advisor, a wire-house broker, and an order taker. The independent channel is, by far, the best of them all. The relationships I have with clients are much deeper and more authentic than the other channels.

It’s been a great run and I’ve been blessed beyond measure.  Here are a few tips I’ve learned over the past three decades.

  1. Family and friends come first. I’ve been blessed with an amazing wife, a beautiful daughter, loving parents, and incredible sisters.
  2. Time in the market trumps timing the market. The long-term trend in the market will give you an opportunity to create wealth for you and those you love. Don’t try to trade the market daily because you’ll lose more often than you’ll win.
  3. Turn out the noise. As I mentioned, every year, for the past 30 years, “experts” have been telling me the stock market is overvalued. If I listened to any of these individuals, I’d have missed the historic rise in stocks.
  4. Diversify your portfolio. Diversification is the only free lunch on Wall Street. Stocks, bonds and cash will help you grow and protect your assets over time. All three will play a part in your wealth journey at some point.
  5. Invest internationally. About half of the global stock market capitalization is found in companies outside of our borders.
  6. Have a plan. Financial planning will help you create wealth. Your plan will quantify and prioritize your financial goals.
  7. Rebalance your accounts. At the beginning of each calendar year, review your asset allocation. If it’s out of whack with your risk level, adjust your portfolio.
  8. Eliminate your debt. Debt is a four-letter word and it’s a killer. Too much debt will keep you from reaching your financial dreams.
  9. Giving money away to help others has multiple benefits. It will make you happier, reduce your taxes, and assist those who receive your gift. It’s a win-win-win.
  10. We live on a beautiful planet with amazing things to see and do. Get outside and enjoy your life.

Thirty years have gone by in a blink of an eye. Between classes and jobs, my friends and I would sit on the beach and ponder our future. I’m happy to report we’ve all done well, and, more importantly we’re still friends. Life is good.

May He give you the desires of your heart and make all your plans succeed. ~ Psalm 20:4

January 22, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

Is 300 A Perfect FICO Score?

The FICO score ranges from 850 to 300 – exceptional to very poor. Of course, if you tried to get a loan from a bank with a credit score of 300, you’d be laughed out of the lobby. So why is 300 a perfect credit score? Let’s look at some data to answer this question.

First, this is how your credit score is calculated.[1]

  • 35% = Your debt history.
  • 30% = Your debt level.
  • 15% = The numbers of years you’ve been in debt.
  • 10% = Your new debt.
  • 10% = Your debt type.

Do you notice a theme? A key word? Debt! Your debt drives your credit score. It has nothing to do with your income, savings rate, asset level, or net worth.

Consumer debt is staggering and growing.[2] Banks, credit card companies, and other lenders have little incentive for you to pay off your debt because the more you owe, the more they make. According to Credit Karma the average credit card rate is 15.96%![3] With an interest nearing 16%, why would they want you to stop borrowing money?

  • Total Household Debt = $13.5 Trillion.
  • Mortgage Debt = $9.14 Trillion.
  • Auto Debt = $1.65 Trillion.
  • Student Loan Debt = $1.44 Trillion.
  • Credit Card Debt = $844 Billion.

Debt is a four-letter word and it will hold you back from reaching your dreams. The Bible taught us this centuries ago: The borrow is slave to the lender. ~ Proverbs 22:7.

Rather than trying to increase your credit score by going into debt, why not use your resources to eliminate it? Reducing or eliminating your debt will be freeing. A monthly payment for a $30,000 auto loan with a rate of 4.5% is $684. If you invested this same amount at 5%, your balance would be worth $46,516 after five years.

Here are a few suggestions to help you reduce your debt:

  • Use your debit card instead of a credit card. Your payment will be deducted directly from your checking account. If your checking account balance is $500, then your spending limit is $500.
  • Buy a used car, with cash. The moment you drive your new car off the dealer’s lot it starts depreciating. A new Land Rover Range Rover Sport costs about $67,000. A 2015 model costs about $40,000 – a difference of 40%!
  • Attend a community college for two years and then transfer to a state school. The annual tuition to attend SMU is $52,500, so two years of study will cost you, before room and board, $105,000.[4] Attending Austin Community College costs $5,100 – a difference of 95%!
  • Buying a home with 100% cash is challenging. If you buy a home with debt, limit your mortgage payment to 28% of your income. For example, if your monthly pay is $10,000, then your payment should be $2,800, or less. Of course, if you have resources to pay cash, then pay cash. Who’s going to lend you money if you don’t have a credit score? Dave Ramsey says you can request a manual underwriting from your bank.[5]

Once you stop using credit cards and other debt tools your credit score will start to disappear. It will take about six months for this process to occur. No debt. No FICO.

If you can’t afford it, don’t buy it. However, we, as a nation, no longer adhere to this philosophy. If we want it, we buy it – regardless of the cost. Before you decide to buy, calculate the cost. If you have the money, then buy it. If you fall short, save until you have the resources to do so.

Good luck and happy saving!

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? ~ Luke 14:28

January 11, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.daveramsey.com/blog/the-truth-about-your-credit-score, website accessed 1/11/19.

[2] YCharts

[3] https://www.creditkarma.com/credit-cards/i/average-apr-on-credit-card/, Janet Berry- Johnson, 1/2/2019

[4] Money Guide Pro

[5] https://www.daveramsey.com/blog/the-truth-about-your-credit-score

Optimists Rule

Optimists and visionaries have built our great country. Railroads, autos, airlines, rockets, and computers were created by individuals who focused on changing the world. They didn’t let “experts” tell them their ideas were a waste of time or their inventions wouldn’t work. The Wright Brothers, Henry Ford, Amelia Earhart, Andrew Carnegie, John D. Rockefeller, Katharine Graham, Thomas Edison, Steve Jobs, and other luminaries obsessed about success. They were tenacious and resolute as they pursued their goals. They were bold. Thomas Edison said, “I have not failed, I’ve just found 10,000 ways that won’t work.” Amelia Earhart added, “Courage is the price that life exacts for granting peace.”

One study of self-made millionaires found that “67% said their optimism was critical to their success.” The same study reported that “78% of the poor admitted to being pessimists.”[1]

The fourth quarter of 2018 was a difficult time to own stocks as the Dow Jones Industrial Average fell 12.5%. Pessimists and naysayers are coming out of the woodwork saying this is the beginning of the end. Several market pontificators are calling for stocks to fall further because of our country’s debt level, the bubble in junk bonds, the inverted yield curve, the Federal Reserve, Bitcoin, the trade war, the wall, etc. More than a few analysts believe the stock market could crater 50% or more and one analyst believes it “could fall by 70%.”[2] Will their predictions come true? Who knows? Maybe.

During the Great Recession (10/15/2007 – 3/2/2009) the S&P 500 fell 53.1%. If you invested all your assets in the Vanguard S&P 500 Index Fund (VFINX) on the day the downturn started, you would’ve made 109%, or 6.8% per year if you still owned the fund today despite the 53% drop. By comparison, if you owned the Vanguard Short-Term Bond Fund you would’ve made 5.29%, or .45% per year. Stocks significantly outperformed bonds despite one of the worst market corrections in history.[3]

Warren Buffett is worth $84 billion. His company, Berkshire Hathaway, has treated him, and his shareholders, well. From 1965 to 2017 it generated an average annual return of 20.9%. During this historic run the stock suffered a few significant setbacks. From March 1973 to January 1975 it dropped 59.1%; 10/2/1987 to 10/27/1987, 37.1%; 6/19/1998 to 3/10/2000, 48.9%; 9/19/08 to 3/5/2009, 50.7%.[4] If Mr. Buffett panicked and sold his holdings during these down drafts, he wouldn’t have the net worth he has today.

Bill Gates is worth $90 billion. From 1986 to 2018 Microsoft stock generated an average annual return of 25.2%. It dropped 62.9% in 2000, 22% in 2002, and 44.4% in 2008. For 16 years the stock didn’t move; it traded flat from January 2000 to April 2016.[5] If Mr. Gates sold his stock and parked it in cash until conditions were better, his wealth would be less than it is today.

Amazon stock has made Jeff Bezos the richest man in the world (before his divorce) with a net worth of $112 billion. Amazon stock has been a rocket ship averaging 35.9% from 1997 to 2018. It, too, has suffered significant corrections. In 2000 it dropped 79.6%, 30.5% in 2001, 15.8% in 2004, 16.3% in 2006, 44.7% in 2008, and 22.2% in 2014[6]. If he sold his stock in these down years, he wouldn’t be the richest person in the world. He’d be another book peddler.

In addition to creating great wealth for their families, these modern-day optimists have donated billions of dollars to philanthropic causes. Like Rockefeller, Carnegie, Ford, Vanderbilt, and Morgan these billionaires are using their resources for good.

When I peruse the Forbes 400 list of the richest people in the world, I’m reminded that the optimists win in the end. To my knowledge there are no analyst, reporters or pessimist on the list.

I will continue to follow the lead of those who have produced great wealth through owning stocks by holding them forever. Stay invested my friends.

Where there is no vision, the people perish. ~ Proverbs 29:18

January 10, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.businessinsider.com/studying-millionaires-showed-me-the-importance-of-optimism-2016-2, Thomas C. Corley, 4/21/2016

[2] https://admiralmarkets.com/analytics/traders-blog/2019-market-crash. January 4, 2019

[3] YCharts

[4] Berkshire Hathaway Inc. 2017 Annual Report.

[5] YCharts

[6] Morningstar Office Hypothetical.