Are You Behind The 8-Ball?

Several years ago, I met with a couple in their mid-fifties who reached out to me because they needed help with their budgeting. I had known them for a few years, and it appeared they were doing well based on our past conversations and their Facebook posts. Looks can be deceiving, however.

As I reviewed their financial situation, I was shocked at what I saw. They didn’t own their home and they had a mountain of debt.  Their only asset was a small checking account. If they attacked their debt aggressively, it would have taken them more than fifteen years to become debt free. This assumes they were willing to curtail their spending, which was going to be a tall order. Their high debt level was robbing them of their ability to establish an emergency fund or save for retirement.

It will be challenging for this couple to make ends meet, especially in retirement. With zero assets saved for retirement, they’ll have to rely on Social Security. The average Social Security check is $1,400.[1] If they both received this same amount their annual retirement income would be $33,600 – before taxes.

In addition, one of the spouses was reluctant to go back to work because most of the jobs being offered were beneath his skill set and level of training.

During my career I’ve met with about a half-dozen families who were in similar financial situations. It’s heartbreaking. As a financial planner, I never want to tell anybody bankruptcy is their best option, but, on occasion, it is.

What should you do if you’re behind the financial 8-ball? Here are a few suggestions.

  1. If you’re in a financial hole, stop digging. Reduce your expenses. Stop spending. Create a budget. Cut up your credit cards. After analyzing your spending habits create a needs-based budget. What are needs? Food, clothing and shelter. Until your financial situation improves put your wants and wishes on hold.
  2. Reduce your financial footprint. Rent a smaller home. Sell one of your cars. Bring your lunch to work. Brew your own coffee. Get rid of cable. Play board games with your family. Visit a National Park for vacation.
  3. Contact your bank or credit card companies to negotiate better terms. They might reduce your interest payment or waive late fees. According to Credit Karma they may offer you a hardship plan due to a job loss or illness.[2]
  4. Find a non-profit or credit-counseling company to help you reign in your debt. These organizations will help you with budgeting and debt consolidation.
  5. Get a job. Any income is better than no income. As I mentioned, the husband in this article was reluctant to get a job that was beneath his social status. The current unemployment rate is 3.8% so finding a job shouldn’t be too difficult. At my local Home Depot, they have scores of orange signs screaming: “We’re hiring.” A sales associate at Home Depot can make between $11 to $14 per hour.[3]
  6. Cut your kids loose? Is it time for your adult child to support themselves? Are they ready to leave the nest? According to a recent Barron’s article, parents are spending $500 billion per year supporting adult children and their families.[4] This money is a drain on the parent’s resources forcing many to continue working well beyond their golden years. Chris Hogan, author of Everyday Millionaires, reports that 71% of millionaires do not provide monthly support to children over the age of 25. I love my daughter dearly, but after college she’ll need to start working.

Life is hard and balancing financial resources is difficult. I’m currently teaching a financial class at my church and one of the biggest benefits from the people attending has been identifying how their money is being spent. If you know where your money is going, you can make life changing decisions today. I know you can do it!

The rich rule over the poor, and the borrower is slave to the lender. ~ Proverbs 22:7

March 23, 2019

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

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

 

 

[1] https://www.fool.com/retirement/2018/10/16/heres-the-average-social-security-benefit-for-2019.aspx, Maurie Backman, October 16, 2008

[2] https://www.creditkarma.com/advice/i/negotiate-debt-credit-card-company/, Satta Sarma Hightower, December 4, 2018

[3] https://www.payscale.com/research/US/Employer=The_Home_Depot_Inc./Hourly_Rate

[4] https://www.barrons.com/articles/how-to-protect-your-retirement-from-your-kids-51553285595, Reshma Kapadia, March 23, 2019

Free Solo

Free Solo is a remarkable movie about Alex Honnold’s ascent of El Capitain. It was a masterpiece of a movie and the voters agreed as it won an Academy Award® for best documentary feature. The New York Times said, “Alex Honnold’s Free Solo climb should be celebrated as one of the great athletic feats of any kind, ever.” I concur.

My palms are still sweating thinking about his climb, especially when he successfully completed his karate kick maneuver near “The Boulder Problem.” He climbed the Freerider route that has 30 pitches and “it was newsworthy when a climber was able to summit using ropes for safety.”[1]

El Capitain is a beast and it dominates the Yosemite Valley. It’s 3,000 feet from base to top, an imposing vertical wall of granite.

Mr. Honnold didn’t wake up one morning and decide to free solo El Capitain. He spent years planning his route, working with his team, and taking copious notes. He was singularly fixated on achieving his mission.

Investors can learn much from Mr. Honnold’s incredible achievement.  Here are a few ideas that you can employ today.

Team. Mr. Honnold did the climbing, but he was surrounded by a team of elite climbers including his long-time climbing partner, Jimmy Chin. Mr. Chin and his team not only filmed the climb, but they helped him plan much of his ascent. Mr. Honnold consulted his team constantly. He and his team climbed El Capitain often exploring routes, holds, angles, nooks, and so on.

A team of advisors can help you achieve your goals. Working with a financial planner, CPA, and estate planning attorney will provide you with insight and data to make sure you’re making the best decisions for you and your family. Surrounding yourself with wise counsel is, well, wise.

Plan. He journaled often, taking notes whenever he had the opportunity. His notebook was filled with detailed notes and figures about his route.

Committing your plans to paper and taking notes about your progress can improve your investment and planning results. A quick review of your notes to make sure you’re on the right track is recommended. Your plan and journal will be your financial guide.

Live. He lived (lives) frugally and well below his means. In fact, he lived in a van down by the river during much of the shoot and it had everything he needed to live. When he and his girlfriend bought a home in Las Vegas he looked uncomfortable and even more uncomfortable shopping for a refrigerator. He finally settled on a small refrigerator, one too small for the space in his house. His house looked like the Taj Mahal compared to his van.

Living below your means is paramount if you want to obtain financial success. Controlling your expenses and watching your bottom line will allow you to live a stress-free financial life. Lowering your expenses will help build margin in your life allowing you to do the things you love.

Patience. It took him nearly 4 hours to complete the climb. And, prior to his amazing climb, he abandoned his first attempt. He was patient and deliberate with each move. At times he moved quick, others slow – his moves were calculated. At one point during his climb, he had to descend before he could ascend.

Investing success takes time – years, so don’t worry about the short-term moves in the market. Concentrate building wealth slowly, over time. Avoid quick-rich schemes and other promises of short-term profits.

Give. Mr. Honnold has established the Honnold Foundation (www.honnoldfoundation.org). Its mission is to reduce environmental impact and address inequality by supporting solar energy initiatives worldwide.

You can follow his lead by establishing your own foundation, contributing to a donor advised fund, or donating to organizations you support. Using your resources to help others will benefit many, including yourself.

You may not want to free solo El Capitain, or any other rock for that matter, but his techniques and tactics may help you improve your investment results. Focus on your long-term goals, follow your plan, save often, live below your means, and give to those you support.

Happy climbing!

Trust in the Lord forever, for the Lord God is an everlasting rock. ~  Isaiah 26:4

March 8, 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 went rock climbing once in Joshua Tree and it was a blast. I used a rope.

 

 

 

 

 

 

[1] https://www.nationalgeographic.com/adventure/features/athletes/alex-honnold/most-dangerous-free-solo-climb-yosemite-national-park-el-capitan/ Mark Synnott, October 3, 2018.

A Watched Pot

A watched pot never boils, or so I’m told. When I was much younger, I put this theory to test and, to my surprise, the water did boil as I kept my eyes glued to the pot.

Watching water boiling, grass growing, or paint drying is boring and a waste of time. Similarly, watching your investment accounts daily is not productive. Your investments will rise or fall whether you watch them or not. In fact, they may perform better if you don’t watch them at all.

In a study by Greg B. Davies and Arnaud de Servigny the authors discuss 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.[1]

Last December stocks gyrated dramatically. If you looked at the stock market on Christmas Eve, it was down 3%. Had you waited until the day after Christmas to check in on the stock market, it climbed 5%. The Dow Jones averaged a 9.4% average annual return for the past five years. A $10,000 investment in the Dow Jones Industrial ETF (DIA) five years ago is now worth $17,798. However, during this impressive run, the market experienced several down days. The Dow had 107 down days of 200 points or more and two days where it fell over 1,000 points. And, 45% of the time, the index closed in negative territory. If you were micro-managing your portfolio, your urge to sell may have been high during these down days.

Trying to time the market is near to impossible. Rather than focusing on the daily moves in the market, pay attention to those things you can control. Here’s a list of items you should be watching.

  • Focus on your long-term goals and review them annually. Your goals will help guide your financial decisions.
  • Review your accounts quarterly or semi-annually. If they are allocated properly, you won’t need to make daily adjustments.
  • Review your fees often. Read the small print to make sure your fees are inline, and you’re not being over charged for services you didn’t agree to.
  • Check your credit reports annually. Credit Karma also recommends checking them before a major purchase or applying for a new job.[2]
  • Credit card and bank statements should be viewed monthly. A scan of your statements is wise to make sure your debits and credits are being applied correctly.
  • Utility bills and other household statements should be checked semi-annually. Your statements may be delivered electronically, and your payments deducted automatically from your bank account, so checking these accounts for additional fees and balances is recommended.
  • Your asset allocation should be reviewed annually. Over the course of a year, your accounts may move substantially. If your account balances are not in line with your risk profile, rebalance them to your original asset allocation.
  • Your financial plan should be reviewed every two to three years.
  • If you have a family will or trust (and you should), it should be reviewed every five years unless you have a major lifestyle change.
  • Your insurance policies – home, life, auto, should be reviewed annually.

Keeping a watchful eye on your household metrics is paramount. It’s important to be on guard and vigilant when watching your finances and other items that are important to your family, so you don’t get boiled accidentally.

Be alert and of sober mind. Your enemy the devil prowls around like a roaring lion looking for someone to devour. ~ 1 Peter 5:8

March 5, 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] 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.

[2] https://www.creditkarma.com/credit-cards/i/how-often-check-credit-reports/, by Christy Rakoczy Bieber, 12/4/2018.

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.